‘Lean and Mean’ Is the Secret to Junior Mining Equity Success: Thibaut Lepouttre

The Gold Report: In January, you told The Gold Report that the price of gold is driven by market panic and inflation, neither of which looks imminent. If investors can’t expect higher gold prices in the near term, why should they be in this space?

Thibaut Lepouttre: I’ve never been a goldbug but I see gold as a form of asset diversification. There’s nothing wrong with having some exposure to precious metals in a portfolio, both in the physical form and in the form of precious metals mining equities. Mining companies are much like any other company. You should find the ones that have free cash flow or have set their sights on positive cash flow, even when the gold price is range bound. It’s up to investors to make sure that they know what they own and understand the financial situation of those companies.

TGR: How are you playing this space?

TL: I want reliable, low-cost precious metals producers and some companies with development-ready projects. I try to identify companies with projects that are viable at the current gold price and that should be able to get financing because their projects’ internal rates of return (IRR) are still acceptable at $1,200/ounce ($1,200/oz) gold or lower. I avoid companies with projects with high capital costs because the markets want companies that are small, lean and mean. I’m not investing in companies that need gold at $1,500/oz or $2,000/oz to make a project work.

TGR: You’re based in Belgium. Greece recently made a $224 million ($224M) payment to the International Monetary Fund (IMF). Essentially, that’s an interest payment on its European “credit card,” but the country is still negotiating with the IMF, the European Central Bank and the European Commission on its next bailout. How do you expect these negotiations to unfold?

Cancana Resources Corp. has the highest-grade manganese ore in the world.

TL: It was really the European Union’s (EU) credit card that was used to make the payment because Greece asked all its public services to wire cash to Athens as an emergency measure. The big question is where will Greece get the money for its next payment? The treasury in Athens is running on fumes. Greece has to repay about €6–7 billion (€6–7B) over the next two months. It’s a tricky situation, but Greece is probably in the driver’s seat because the EU clearly does not want Greece to leave the Eurozone (for now).

But would Greece be willing to leave the euro and go back to the drachma? It would in a heartbeat. That would once again give Athens a sovereign currency. The drachma would be weak but that would boost exports and attract more tourists, especially from Russia. European leaders are trying to make it sound as if Greece has to stay, but Greece doesn’t have to do anything. If Greece leaves the Eurozone, it would be an important catalyst for gold because that would increase uncertainty in the markets.

TGR: Which countries in the Eurozone are closely watching these negotiations with Greece?

TL: The southern countries are really following the negotiations closely because if Greece exits, there’s no reason for these countries to stay in the Eurozone; it’s much easier for them to go their own way. It’s the idea of a unified European Union that is causing the governments in the western and northern countries in the Eurozone to make sure that a solution is found because they would lose face if the EU failed.

TGR: There is a critical IMF meeting in about a month. Could that be pivotal for gold?

TL: You’re alluding to the IMF meeting that will decide the compilation of the Special Drawing Rights (SDR) basket. The Chinese have requested that its currency be included in the SDR basket, which currently consists of the Japanese yen, U.S. dollar, euro and British pound. Gold could also potentially be included in the basket but I don’t think the yuan nor gold will be included, at least not yet. It will be interesting to hear the Chinese arguments. China has not updated its gold reserves in a long time. It wouldn’t surprise me to see China update its official gold reserves just before that meeting. If China chooses to disclose its gold reserves, it will show that China is serious about getting the yuan included in the SDR basket. It might be the main factor that the IMF considers.

Columbus Gold Corp. will release a PEA on its Paul Isnard project in the next few weeks.

TGR: What range do you expect gold to trade in through the end of this year?

TL: It depends whether Greece collapses or not. We’re still in the same range where we saw strong support at $1,175–1,180/oz, but we also saw strong resistance at $1,220–1,225/oz. The range is definitely narrowing. Once we break out of that range, either in a positive or negative way, we will see a big move in the gold price.

TGR: Which elements of junior developers are you most focused on with gold around $1,200/oz and financing still at a premium?

TL: Investors should try to focus on high-margin projects with low capital and operating costs because the financing environment remains difficult. Mining projects with high IRR numbers will attract the necessary financing to move ahead and will always command a premium over other assets. The second priority is low geopolitical risk. I’m avoiding high-risk countries like the Democratic Republic of the Congo and South Africa.

TGR: Do the essentials change for the smaller companies like the explorers?

TL: It’s a good time to be an exploration company with cash because diamond-drilling costs are the cheapest they have been in almost a decade. The all-in cost for diamond drilling is less than $100/meter ($100/m) in North America. The cost was $250–270/m four years ago. On the negative side, the explorers operating in remote areas will have a tougher time because it will cost them three or four times as much to drill the same hole.

TGR: What are some companies you are following among the developers?

Integra Gold Corp.’s recent drill results indicate that the Triangle zone could be much larger than originally thought.

TL: The first one is Integra Gold Corp. (ICG:TSX.V; ICGQF:OTCQX), which is advancing the Lamaque gold project in Quebec. You can’t get any safer than Quebec. It’s a high-grade gold deposit with 1.1 million ounces (1.1 Moz) gold at about 10 grams per ton (10 g/t), but there is potential for much more. Recent drill results indicate that the Triangle zone could be much larger than originally thought. Drilling intersected about several meters in excess of 0.5 oz/t gold, which is much better than the average grade at Lamaque. That prompted Integra to increase this year’s drill program to 50,000–75,000m. The after-tax IRR in its updated preliminary economic assessment (PEA), which includes the new mill, is 59% based on a gold price of $1,175/oz. Those are numbers that get any mid-tier or senior producer drooling.

TGR: Do you think Integra is going to have any trouble raising the capital it needs to continue development?

TL: In the past 11 months the company has raised about $30M, including an oversubscribed $13M financing a few weeks ago. It shows that good companies with good projects can still get their hands on cash. This will continue as Integra builds value at Lamaque.

TGR: What are some other companies you’re following?

TL: I recently visited Red Eagle Mining Corp.’s (RD:TSX.V) Santa Rosa project in Colombia and I liked what I saw. There were paved roads from Medellin to close to Red Eagle’s camp, about 8 kilometers (8km) away, with a decent dirt road connecting the base camp with the paved road. The team at Santa Rosa has worked hard to gain approval from the local community. About half of the capital requirements and 90% of the operating expenditures for Santa Rosa are in Colombian pesos, which have lost about 20% of their value versus the U.S. dollar since the feasibility study was published. That should allow Red Eagle to shave off about $5M from its initial capital requirements, and its all-in sustaining costs at Santa Rosa could be less than $700/oz. Orion Mine Finance put $65M into the project on the condition that Red Eagle raises another $15M. I expect that to happen in the next few weeks. The company is eager to start building its processing plant.

Pilot Gold Inc. is a well-financed group that seems to be hitting the right targets.

TGR: You have noted the importance of jurisdiction. What are your thoughts on Colombia?

TL: Red Eagle has all the community support it needs and is fully permitted. It’s going to be an underground mine. That means there won’t be any scars on the landscape because this is not your typical low-grade, open-pit copper-gold project in Colombia. The impact will be minimal. It’s also a case study for the Colombian government because it wants to show its foreign investors that mining works in Colombia. The country was a net oil exporter before the oil price collapsed, so it needs to find another revenue stream to compensate for the lower oil revenues.

TGR: What are some other developers that you are following?

TL: I’m keen on Columbus Gold Corp. (CGT:TSX.V; CBGDF:OTCQX). It will release a PEA on its Paul Isnard project in the next few weeks. The outcome should be quite positive because in a recently updated resource estimate Columbus announced that it had almost 5 Moz gold at an average grade of 1.5 g/t, which is good for an open pit. And the euro has depreciated against the U.S. dollar, so it has become cheaper for Columbus Gold to mine in French Guiana, which uses the euro as its currency. It will cost $350–400M to build and I expect it to have a net present value (NPV) north of $500M. That’s based on the 5 Moz in-pit resource, but that’s based on about half the strike length of the mineralization. I am confident that several million ounces ultimately will be added into the mine plan.

TGR: It has a big partner there in NordGold N.V. (NORD:LSE). What is French Guiana like as a mining jurisdiction?

TL: Mining has been going on in French Guiana for several hundred years. A few years ago, the French government issued a new map of the area that states where underground mining is allowed and where open-pit mining is allowed. France is trying to create a framework to attract modern mining companies to French Guiana. Columbus Gold’s Paul Isnard project is located in the zone where open-pit mining is permitted, and about a month ago the company hosted officials from French Guiana and Paris to make sure that they really understand its project.

Red Eagle Mining Corp.’s all-in sustaining costs at Santa Rosa could be less than $700/oz.

TGR: What are some companies that you are following among the explorers?

TL: I recently spent two days with Rye Patch Gold Corp. (RPM:TSX.V; RPMGF:OTCQX) CEO Bill Howald in Nevada. I was most surprised by the Lincoln Hill project, which is located just 3km from Coeur Mining Inc.’s (CDM:TSX; CDE:NYSE) Rochester gold-silver mine. The Lincoln Hill economics look good on paper but there is potential to improve those numbers. Metal recoveries are much higher at the nearby Rochester mine, which is processing essentially the same ore. Rye Patch believes that by adding crushers to the processing circuit it could boost gold recovery rates to 90% and to 60–65% for silver. That would immediately add $25–30M to the Lincoln Hill NPV. That’s something that the market hasn’t realized yet.

The company also has a heap-leach project in Nevada called Wilco that’s next to Interstate 80. It has an NI-43-101-compliant resource of 1.3 Moz gold in the Measured and Indicated category, and an additional 0.5 Moz in the Inferred category. Newmont Mining Corp. (NEM:NYSE) has a back-in right on Wilco once Rye Patch completes a feasibility study. But instead of spending $10–15M to finish the study, Rye Patch will probably go back to Newmont and try to negotiate a better deal to make sure that it’s a win-win for everyone. If Rye Patch is successful, it could change the company overnight.

TGR: Some people believe Coeur Mining will eventually buy out Rye Patch to extend the life of its Rochester mine. Is that your view?

TL: It’s a possibility, but I think Coeur would prefer to first see a more advanced study on Lincoln Hill. I think it would make sense for Coeur to buy Lincoln Hill but not the entire company.

TGR: What about other companies in Nevada?

TL: Pilot Gold Inc. (PLG:TSX) is a favorite in Nevada. What I like most about Pilot is that it has about $17M, or about CA$0.20/share, in working capital. It’s a well-financed group that seems to be hitting the right targets. It owns 79% of the Kinsley Mountain gold project in Nevada. This year Pilot will explore the northern part of Kinsley Mountain in order to find more high-grade, Carlin-style mineralization. It has budgeted $2–2.5M for about 11km of drilling. We should see a maiden resource estimate early next year and my calculations suggest there should be about 1.1–1.3 Moz gold there.

Adding crushers to the processing circuit would add $25–30M to Rye Patch Gold Corp.’s Lincoln Hill NPV.

TGR: In a better gold market, would we have seen some more interest in Pilot Gold’s assets in Turkey?

TL: Absolutely. Pilot Gold’s assets in Turkey are great but they are in a joint venture with Teck Resources Ltd. (TCK:TSX; TCK:NYSE), which limits some possibilities. Even though Pilot Gold has made a major silver discovery and has a lot of copper and gold there, it could prevent a potential suitor from acquiring Pilot Gold because it could not own the project outright. Perhaps a third party will buy both Pilot Gold and Teck’s interests or maybe Teck will consolidate the area.

TGR: What other explorers have your attention?

TL: Farther up north is TerraX Minerals Inc. (TXR:TSX.V), which is operating the Yellowknife City gold project, about 4km outside Yellowknife in Canada’s Northwest Territories. It’s one of the last undeveloped high-grade gold camps and TerraX has a 100-square-km land package there. The summer drill program will start in June and we should see more results from the winter drilling program soon. The company was drilling the Barney Shear zone where one intercept yielded 22m of 6 g/t gold, which is phenomenal. I like that management owns about 20% of the company.

TGR: TerraX is working on a gold system that once hosted two significant mines. How did it get these assets?

TL: TerraX picked them out of a bankruptcy procedure for next to nothing. Now TerraX CEO Joe Campbell has the right people to advance the Yellowknife City project. TerraX could have the next high-grade gold deposit in Canada. I hope to see a resource estimate by the end of 2015.

TGR: You recently started following some gold toll-milling companies. Why do you like that model?

TL: These businesses work because it does not make sense for small-scale and artisanal miners to build mills; they only produce 20 or 30 oz/month. Moreover, toll-milling businesses are semi-independent from the gold price because revenue per ton is more or less fixed, depending on the tonnage versus the gold price. Compared with gold miners, these service providers are less subject to market sentiment.

TGR: What are some companies you’re following in that space?

TL: The first one is Dynacor Gold Mines Inc. (DNG:TSX). It operates a 250 ton per day (250 tpd) mill in Huanca, Peru. It recently announced that it has the permits to increase capacity to 300 tpd. It also received a permit to build a new plant in Chala, Peru. Dynacor also has an exploration project called Tumipampa. I hope that Dynacor monetizes that asset in the next 18–24 months because Dynacor should not develop Tumipampa alone.

TerraX Minerals Inc. could have the next high-grade gold deposit in Canada.

The other one is Inca One Gold Corp. (IO:TSX.V), which operates a 100 tpd mill in Chala, almost next door to where Dynacor will build its new mill. I visited Inca One’s mill in December. The company is ramping up to 100 tpd from about 70–75 tpd right now. At the current throughput rate, Inca One should already be cash flow positive. Inca One has started to increase ore deliveries to the mill in order to continue to incrementally ramp up throughput. The company is now sourcing high-grade ore from Bolivia, which is not far away. The ore from Bolivia runs about 1 oz/t, probably with a substantial silver credit. Once the mill ramps up to 100 tpd sometime this summer it can start looking to either expand again or buy another mill somewhere else. There is a lot of demand from small-scale and artisanal miners for toll milling.

TGR: If Dynacor and Inca One have mills next to each other, wouldn’t that competition for mill feed drive down margins?

TL: The average grade of the ore that the toll millers are processing is high enough that it makes sense to truck ore from up to 1,000km away. It’s common to see trucks traveling up to 12 hours from all parts of Peru to deliver ore to the mill. There’s sufficient ore available in a 1,000km radius around both mills to ensure that both companies can successfully coexist.

TGR: Finally, what are some junior mining stories that you’re following outside of the precious metals space?

TL: Let’s start with copper. I recently visited Nevada Copper Corp.’s (NCU:TSX) Pumpkin Hollow copper project in Nevada, where the company has completed its production shaft for the underground portion of the deposit. It is now working toward an integrated feasibility study, which would see the company combine its open-pit and underground mine plans into one big plan. The results should be published by the end of May. Pumpkin Hollow is one of the last huge copper resources in North America. It contains about 5 billion pounds (5 Blb) copper, and more copper is found every day. Nevada is mining friendly. The nearby Anaconda copper mine produced almost 2 Blb copper over 30 years beginning in 1952. Nevada Copper is going to attract some senior producers.

TGR: Nevada Copper was courting suitors five years ago. What is the stumbling block?

TL: It finished the initial feasibility study three years ago and decided to start construction on its own and keep the underground deposit for itself, while potentially seeking a partner to develop the open pit. The plan changed when some potential partners demanded an integrated feasibility study. We could see a completely new mine plan where both zones are mined simultaneously but it will cost more than $1B to get the open pit into production. These aren’t decisions you make overnight.

TGR: What are some other non-gold names?

TL: I also follow two tungsten companies. The first is Blackheath Resources Inc. (BHR:TSX.V). It recently released a maiden NI 43-101 resource estimate at the Covas project in Portugal, which contains about 1.2 million metric ton units (1.2 Mmtu) at almost 0.4% tungsten. That’s a capped grade and a capped resource. If you go through the data and ignore the capping, I see at least 1.5 Mmtu of tungsten at an even higher grade. The 0.4% grade sounds low, but the Hemerdon tungsten project in the U.K. will have a production cost of about $160/mtu at a grade of just 0.19%. Blackheath has four other tungsten projects, one of which is Borralha, where a drill intercepted almost 120m of 0.29% tungsten. Blackheath is in the right place with the right people and is advancing its projects.

The second tungsten company is Carbine Tungsten Ltd. (CNQ:ASX) in Australia. It recently signed a deal with Mitsubishi Corp. (MSBSHY:OTCPK) whereby Mitsubishi would arrange financing and sign an offtake agreement for tungsten from Carbine’s flagship Mount Carbine tungsten project in North Queensland. Mount Carbine should be in production by Q2/16. It’s going to be a fairly small operation producing 70,000–75,000 metric ton units (70–75 Kmtu) annually. That’s about $20M in revenue. It doesn’t sound like much, but operating costs will be extremely low as it’s a stockpile project. Carbine should generate at least $6–7M in cash flow—not bad for a company with a $40M market cap. It’s probably going to be the world’s next best tungsten producer, along with Wolf Minerals (WLF:ASX).

TGR: Perhaps one more?

TL: I was recently introduced to Cancana Resources Corp. (CNY:TSX.V), which is producing manganese in Rondonia, Brazil. It has the highest-grade manganese ore in the world at 54%, whereas most competitors are producing at grades of 40–46%. Because it is such high grade, the manganese will be used as fertilizer. Brazil has a huge agricultural sector and these farmlands need additional nutrition. The company is backed by the Sentient Group, which owns about 50% of Cancana and a stake in the project. The project produced less than 5,000 tons (5 Kt) agricultural grade manganese last year. The total capacity is 20 Kt/year. Cancana should increase output this year, and next month it will launch the first ever drill program on the property. Once Cancana puts out an NI 43-101-compliant resource estimate, the market should start to appreciate Cancana. Cancana’s target is to produce between 1 and 2 million tons/year of manganese.

TGR: What is agricultural manganese?

TL: Basically, it’s used to correct a manganese-deficient situation in the topsoil. Over time, the manganese layer gets eroded and especially soybean plants have a hard time growing on manganese-deficient farmland. By adding manganese to the soil, this problem gets corrected. Cancana Resources is also quite lucky to have its mine relatively close to some soybean plantations. I would expect those plantations to be the most important potential customers of Cancana.

TGR: How do you maintain your optimism in this space?

TL: You always need to make sure that you understand the markets. I strongly believe that should gold go back to $1,000/oz, it will not stay there. It is going to be one of those V-shaped corrections as we saw in 2007–2008, and then it will move back up again. China and Russia are still buying gold and they will buy even more if the gold price goes as low as $900/oz. But I wouldn’t be unhappy if gold were to stay at near current prices.

TGR: Thank you for your insights, Thibaut.

Thibaut Lepouttre is the editor of the Caesars Report, a newsletter and mining portal based in Belgium that covers several junior mining companies with a special focus on precious metals and base metals. Lepouttre has a Bachelor of Law degree and two economics masters degrees that have forged his analytical approach to the mining sector. Considered a number cruncher, Lepouttre focuses on the valuations of companies and is consistently on the lookout for the next undervalued mining company.

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DISCLOSURE:
1) Brian Sylvester conducted this interview for Streetwise Reports LLC, publisher of The Gold Report, The Energy Report and The Life Sciences Report, and provides services to Streetwise Reports as an independent contractor. He owns, or his family owns, shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of Streetwise Reports: Columbus Gold Corp., Cancana Resources Corp., Integra Gold Corp., Pilot Gold Inc., Red Eagle Mining Corp., Rye Patch Gold Corp. and TerraX Minerals Inc. I The companies mentioned in this interview were not involved in any aspect of the interview preparation or post-interview editing so the expert could speak independently about the sector. Streetwise Reports does not accept stock in exchange for its services.
3) Thibaut Lepouttre: I own, or my family owns, shares of the following companies mentioned in this interview: Integra Gold Corp., Red Eagle Mining Corp., Columbus Gold Corp., Pilot Gold Inc., Rye Patch Gold Corp., Cancana Resources Corp., Blackheath Resources Inc., Nevada Copper Corp. and Inca One Gold Corp. I personally am, or my family is, paid by the following companies mentioned in this interview: None. My company has a financial relationship with the following companies mentioned in this interview: Integra Gold Corp., Red Eagle Mining Corp., Cancana Resources Corp., Blackheath Resources Inc., Inca One Gold Corp., Columbus Gold Corp. and Nevada Copper Corp. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I determined and had final say over which companies would be included in the interview based on my research, understanding of the sector and interview theme. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.
4) Interviews are edited for clarity. Streetwise Reports does not make editorial comments or change experts’ statements without their consent.
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( Companies Mentioned: BHR:TSX.V,
CNY:TSX.V,
CNQ:ASX,
CGT:TSX.V; CBGDF:OTCQX,
DNG:TSX,
IO:TSX.V,
ICG:TSX.V; ICGQF:OTCQX,
NCU:TSX,
PLG:TSX,
RD:TSX.V,
RPM:TSX.V; RPMGF:OTCQX,
TXR:TSX.V,
)

Now Is the Time to Own the Oil & Gas Leaders: Keith Schaefer

The Energy Report: Keith, the first U.S. grassroots refinery in nearly 40 years just began operation in North Dakota. Is the growth in U.S. oil production going to catalyze refinery construction?

Keith Schaefer: I’m going to say no. U.S. production has peaked and we’re doing just fine, so I don’t see any great need for more refineries right now.

There was talk a couple of years ago, particularly in 2012–2013, that with unbridled shale oil growth we would need more refineries. But the producers have been more disciplined than anybody expected in the last three months, with the rig count declining sharply and then staying down. I think we’re going to see a drop in U.S. production, so I don’t see the need for any new refineries right now. The only thing that could change would be even more demand growth, which we’re seeing because of lower prices. Somebody might get the idea that we need another refinery to meet that demand.

Right now, refinery crack spreads are actually very good. They’re $20–25 per barrel ($20–25/bbl), which for this time of year is fantastic. But I don’t know if that’s good enough to warrant somebody spending tens of billions of dollars to build something new. The other thing is that the refinery industry has been pretty good at incrementally adding light oil capacity around the country. A thousand barrels a day (1 Mbbl/d) here, 2 Mbbl/d there—that has added up over the last two or three years. I don’t know what the exact number is, but certainly there’s been no problem in getting gasoline to market, as you can tell by the big drop we’ve had in gasoline prices over the last six months.

TER: Is the gasoline price going lower?

KS: No, I don’t think the price is going lower. We’ve had a nice little rally in the last month, with oil prices back to about $60/bbl on the WTI (West Texas Intermediate) and almost $70/bbl on Brent.

I think it’s important that investors realize the gasoline price is based on Brent pricing, not on WTI. We’re exporting more gasoline-refined products out of the U.S., so we’re competing with foreign buyers for our own energy. I think that’s why gas prices are a bit higher than people think they should be; they keep thinking about WTI, not Brent.

TER: The new U.S. production is lighter than what U.S. refineries were designed for. Are the U.S. refiners retooling?

KS: Well, a bit. Like I said, you’re getting 1 Mbbl/d here, 1 Mbbl/d there, of light oil capacity. Refiners are also trying to increase the amount of distillates they produce, because generally that’s a more profitable product—jet fuel and diesel fuel, which is what Asia uses. Asia runs on diesel. That’s definitely Brent pricing, so there’s more margin in that. Everybody’s been trying to reduce heavy oil. The big exception would be BP Plc’s (BP:NYSE; BP:LSE) Whiting, Indiana, refinery, which just went from mostly light oil to mostly heavy oil.

TER: How has the delay in approval of the Keystone XL pipeline and resistance to Canadian pipelines going both east and west affected Canadian oil sands producers?

KS: So far there is not much impact. The heavy oil discount is quite tight right now because the Gulf Coast is getting a lot of Canadian oil that it never used to get. Enbridge Inc. (ENB:NYSE) has got the Flanagan South Pipeline moving, so it’s able to bring 300–350 Mbbl/d more Canadian crude straight to the Gulf Coast than it used to. That’s not quite as big as Keystone, but between what rail has done in the last two years, going from zero to just under 200 Mbbl/d, the incremental oil sands production has been able to find a way down to the Gulf Coast. There’s actually more Canadian oil now going to the U.S. than ever before. That’s great news for Canadian producers.

“There’s a strong argument the oil price is going to pick up over the next eight weeks.”

As you said, most of the refineries down there are geared toward heavy oil. Keystone probably will start to be important next year or the year after. Rail and the Enbridge Flanagan South line bought Canadian producers one to two years’ grace on their growth in production. It’s going to hit the wall again very quickly because oil sands production is going to rise anywhere between 50 Mbbl/d and 120 Mbbl/d every year for the next five or six years. Keystone will come back into importance fairly quickly.

TER: Is refinery construction on the table in Canada?

KS: Oh yes. The Alberta government is building a refinery, the North West Upgrader. I think it’s relatively small—somewhere around 75 Mbbl/d. But from private industry, there is just no appetite for a refinery in Canada. You need a big petrochemical complex surrounding your refinery complex, and you just don’t have that in Canada. The refineries are either in Edmonton, Alberta, or in Sarnia, Ontario. Sarnia has a petrochemical complex, but with the government there now, you’re never going to see another refinery in Ontario. You might see one in Alberta, but, again, it’s not going be as economic because it would just be producing gasoline, and not as many petrochemical products.

TER: Speaking of Alberta, how will the election results there affect refiners and oil sands producers?

KS: I don’t know if it’s going to affect oil sands or refineries that much. Because of the dirty oil moniker, if there’s one thing the New Democratic Party (NDP) government might go after, it’s trying to get the image of the oil sands in better shape. I think stronger environmental rules could really help the industry in the long run. That’s going to cost some money, and potentially put a crimp into some cash flows. The producers don’t want to disturb their tailings; they just want to plant poplar trees over them and let them go back to nature. I don’t know if the NDP is going to allow that.

From a tax point of view, I don’t think the elections are going to make much difference. There is talk about raising corporate income taxes, but the reality is that most, if not all, the producers lose money every year on an accounting basis. There’s not going to be much impact for the oil patch. Royalties could go a little higher, but I don’t see them going much higher. Honestly, the fear is greater than what the reality will be. The bark is worse than the bite.

TER: Has the price of oil found its new level?

KS: I think there’s a strong argument the price is going to actually pick up over the next eight weeks. The harsh drop in the rig count in the U.S. should now translate into a pretty significant drop in U.S. production, which we’ll see each Wednesday when the U.S. Energy Information Administration (EIA) numbers come out. The EIA numbers for the next 6–10 weeks have the potential to drop quite a bit. The Street is very short-term-oriented right now. I think the market could take oil a lot higher than people would suspect because of the emotion that will follow the drop in U.S. oil production in the next 6–10 weeks.

Here’s what I tell my subscribers: Right now there are many crosscurrents in the market, but two things have happened that were a bit of a surprise to the market so far this calendar this year, and both of them were bullish.

One was that demand has picked up way more than anybody expected, way sooner than anybody expected. Before the oil price crash in late 2014, the market was seeing lots of stories about how oil demand was inelastic to price. It didn’t matter what the price of oil was, demand didn’t change much at all. You can throw that idea out the window. Even by January that had been completely debunked, and we were seeing 300–500 Mbbl/d or more increase in demand in the States. Right now, we are seeing 700–800 Mbbl/d more demand in the U.S. over last year. When you consider that production is up 1 MMbbl/d, the surplus doesn’t look like such a big deal anymore.

Internationally, we’re starting to see some big stats as well. China’s up 250 Mbbl/d. Japan’s up. Korea’s up 110 Mbbl/d. They haven’t been able to see the same benefit in the drop of oil that we have because the rising U.S. dollar has taken a lot of that away. Demand has been a big surprise.

“Refiners are trying to increase the amount of distillates they produce, because generally that’s a more profitable product.”

Second, as I said, nobody thought the U.S. producers would have the level of discipline that they’ve had in dropping the rig counts through this calendar year. The market has been stunned that we’re continuing to see rig drops week after week. We had that one big month—February—with 90 rigs a week getting dropped. Even now, it’s at least 20 rigs. In Canada, for example, there are only 16 oil rigs working—in all of Canada! That’s stunning to me.

So when we talk about where the oil price is going, nobody knows. When you canvass the analysts, the smartest guys on the Street, the numbers are all over the map. The oil price has jumped 50%, from $40/bbl to $60/bbl. Is it over? I don’t know, but I would say that demand’s been higher, and it looks like supply is going to be a little bit lower than what everybody thought in January.

I think we’re going to have relatively bullish production numbers and inventory numbers in the States by the end of Q2/15. The numbers could be bullish enough that companies might start to bring rigs back. It’s only going to take one or two weeks of the U.S. adding 30 to 50 rigs to put a big stop in the oil price rise.

I think in the short term—really short term, toward the end of Q2/15 and in early Q3/15—oil can go higher. The U.S. industry has shown that it is so flexible and so adaptable it can bring rigs off and on like flipping a light switch. It’s just amazing. Any opportunity these guys have to lock in good margins on their hedging programs at $65–70/bbl oil—if it gets that high—they’re going to do it, and rigs are going to come out.

TER: What are you forecasting on the oil price for this year?

KS: This is going to be one of the choppiest years for oil we’ve seen in a long time. Everyone had such confidence in the Saudis’ massaging and managing the oil price for the last four years, and the Saudis did do that. We had a very, very tight range for oil from 2010 through to the end of 2014. That’s out the window now. It’s going to be a lot more volatile.

I think you’re going to see a lot of head fakes, both bullish and bearish, this year. If you talk about whether the price could find a level late this year, I’m going to guess that’s somewhere between $60 and $65 per barrel WTI. At that price the big guys have the scale—they can make money. And little guys can’t. The high producing core areas of the big plays make money, and the fringe areas don’t, so these prices don’t warrant spending a lot of money on the fringe.

TER: Let’s talk about some of the companies that you are most familiar with.

KS: Rock Energy Inc. (RE:TSX) had a great year last year because of its big light oil discovery. The only problem was that the company spent a lot of money in Q4/14 drilling that up as the oil price was collapsing, so its debt levels got pretty high. But it has just figured out a key component to increasing production out of its wells. The company has been adding a lot more sand and getting much better results.

Rock had to raise money at the bottom, but it still only has 50 million (50M) shares out. You know you’re investing in a company that has lots of leverage when it has 50M shares out. The company has been able to hold production steady at 5 Mbbl/d, and actually makes good positive cash flow on that. With Rock, you’ve got great positive cash flow at these prices, and a real turbo charge in its light oil play if oil prices come back up.

TER: Can you mention another company?

KS: This is a year for small bets. With the uncertainty and volatility around commodity prices, there’s no point in making any big bets this year. Legacy Oil + Gas Inc. (LEG:TSX) is a Tier 2 producer in Canada that has just enough debt to be outside the market’s comfort zone, but if oil goes back to $80/bbl, its debt levels actually come in line. In addition, the company has an activist investor group with quite a track record of creating value.

TER: FrontFour Master Fund Ltd. is nominating a slate of directors for Legacy. Is that something that investors should be worried about?

KS: No, they should be excited about it. Last year, this investor group ousted the Renegade Petroleum board, sold Renegade to Spartan Energy Corp. (SPE:TSX), and Spartan took that asset and improved production so fast its stock doubled in about three months.

The team at Legacy has lost the Street a bit. For a couple of years, Legacy’s reserve reports didn’t keep up with spending, and so the Street has slowly abandoned the team. The straw that broke the camel’s back for FrontFour, and a few of the other investors in the company, was when the board decided to guarantee CEO Trent Yanko’s personal loan for some stock.

Would the company be able to perform better with a different management team? I don’t know. But I would say that the market has great respect for the asset base, particularly in Saskatchewan. Even the Turner Valley asset in Alberta is a very low-decline asset, which is what the Street likes right now. I think it’s a case where the sum of the parts is greater than the whole. Because of the anticipation of what FrontFour and the other investors might be able to do with the company, Legacy should have an extra bid under it this year.

TER: With the uncertainty in renewable fuel policy and the question of using a food crop for energy, is ethanol a smart investment?

KS: The reality is that ethanol right now makes sense. Even if the renewable fuel standard (RFS) didn’t exist, there would still be an ethanol industry. It might not be quite as big as we’ve got right now, but there would definitely still be an industry, because ethanol produces octane cheaper than anything else.

“There’s more Canadian oil now going to the U.S. than ever before.”

Valero Energy Corp. (VLO:NYSE) is invested in corn ethanol in 11 plants. Ethanol didn’t make any money for Valero last quarter, and the stock still had a fantastic run-up to pretty much all-time highs. The crush spread for ethanol through the rest of this year is actually pretty good. It’s in the mid-$0.40 per gallon range. Valero produces more than 1 billion (1B) gallons of ethanol per year. Going forward, ethanol should actually be quite a positive contributor to Valero’s top line, and especially to the bottom line. Not only that, Valero has shown that it actually gets better margins and pricing than most of the pure ethanol producers. It’s a pretty smart cookie in that division. I think ethanol is going to be a big positive for Valero for the next three quarters.

TER: Can ethanol compete with crude at current prices without mandates?

KS: It absolutely can. But the reality is that it’s a political issue. If the renewable portfolio standard were withdrawn, there would be a large contingent that would just stop using ethanol altogether. Certainly the integrated refinery companies would have no incentive to use it; they should use their own oil. But groups like Valero, which aren’t as integrated, or the independents, like Marathon Oil Corp. (MRO:NYSE), Northern Tier Energy LP (NTI:NYSE) or Alon USA (ALJ:NYSE), would continue to use ethanol as much as possible because it makes economic sense right now. If we ever went back to a situation like 2012, where there was a drought, corn prices spiked, and it made no economic sense to use ethanol, these companies would drop ethanol like a dirty shirt and go straight with oil. That would absolutely have a big impact on the industry. The RFS really only kicks in when corn prices are high. The ethanol market works on market-based economics when corn is this low in price.

TER: Valero’s share price since February has been at its highest 52-week level. What’s driven that performance?

KS: A couple of things. Ethanol last year did great. And now Valero and all the other refiners are seeing the pipeline stocks in the last 3-4 years do really well. Those stocks have the best charts in the industry. And there’s almost no volatility in them. They have been the best-performing stocks you could ask for in an energy portfolio. The multiples are very high because the Street likes a steady tolling charge. It doesn’t like revenue based on commodity risk.

What we’re seeing now is refiners saying, “Hey, we want to have those bigger cash flow multiples, like the pipeline stocks. They’re stealing our lunch. We’re going to integrate our own logistics into a separate company. We’re going to take every bit of revenue we get that’s not commodity-related and put it into a master limited partnership (MLP) structure, which gets a much higher multiple like midstream or pipeline companies.”

Valero, in particular, has a lot of assets. It’s one of the biggest refineries in the States. It figures it’s going to be able to add almost $1B/year in assets in the next five years to put into these higher-multiple MLPs, where the cash-flow multiple is going to be a lot greater. That’s a great extra uplift underneath the stock for the next three or four years.

TER: Has Northern Tier Energy done better or worse since Western Refining Inc. (WNR:NYSE) bought out its managing partner share?

KS: In some ways, better. Fundamentally, the company has outperformed. Northern Tier is a one-refinery company in Minnesota. Before Western Refining took it over, it always underperformed financially against the bigger industry benchmark for that area, which is called PADD 2. Since the Western Refining guys have taken it over, the company has done a much better job at running the business and has been able to outperform the benchmark. I say kudos, because the stock value increase for Western Refining over the last five years is $5/share to $45/share. I’m so excited to have that team at the helm of Northern Tier. I think it’s going to do fantastic.

TER: What is the major trend in your advice to your newsletter subscribers now?

KS: Caution and small positions. Pretty much everything we bought in 2015 is up, simply because the commodity prices have done better than I expected on both the oil and gas. Now is a time when I think we need to be very cautious, stay in lots of cash. A fat pitch, as Warren Buffett says, will come into the market that we should be able to latch onto. Right now that’s hard to see. Just stay in cash. Stay in small positions, and only own the leaders. They always have a higher valuation, but you always buy up in a down market. Buy the leaders and have patience.

TER: Thank you very much for your time.

Keith Schaefer is editor and publisher of the Oil & Gas Investments Bulletin, which finds, researches and profiles the growing oil and gas companies that Schaefer buys himself, so Bulletin subscribers know he has his own money on the line. He identifies oil and gas companies that have high or potentially high growth rates and that are covered by several research analysts. He has a degree in journalism and has worked for several Canadian dailies, but for more than 15 years has assisted public resource companies in raising exploration and expansion capital.

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DISCLOSURE:

1) Tom Armistead conducted this interview for Streetwise Reports LLC, publisher of The Gold Report, The Energy Report, The Life Sciences Report and The Mining Report, and provides services to Streetwise Reports as an independent contractor. He owns, or his family owns, shares of the following companies mentioned in this interview: None.

2) The following companies mentioned in the interview are sponsors of Streetwise Reports: None. The companies mentioned in this interview were not involved in any aspect of the interview preparation or post-interview editing so the expert could speak independently about the sector. Streetwise Reports does not accept stock in exchange for its services.
3) Keith Schaefer: I own, or my family owns, shares of the following companies mentioned in this interview: Rock Energy Inc., Legacy Oil + Gas Inc. I personally am, or my family is, paid by the following companies mentioned in this interview: None. My company has a financial relationship with the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I determined and had final say over which companies would be included in the interview based on my research, understanding of the sector and interview theme. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.
4) Interviews are edited for clarity. Streetwise Reports does not make editorial comments or change experts’ statements without their consent.
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Why Ricardo Carrión and Alberto Arispe Are Optimistic About Mining in Peru

The Gold Report: Canadian and Australian miners have realized a 25–30% premium due to the strong U.S. dollar. How has the U.S. dollar affected Peruvian miners?

Ricardo Carrión: Peruvian miners have realized a similar benefit due to currency exchange. This factor has resulted in lower costs for the Peruvian industry. In addition, miners have also benefited from lower prices in oil. But the question is has this cost reduction offset lower metal prices, and the answer is no. Lots of companies are still struggling with current market conditions.

TGR: How has the mining industry fared since President Ollanta Humala was elected in 2011?

Alberto Arispe: Humala ran in 2011 on a radical, antimarket platform. Presidential elections in Peru use the runoff system, so in order to win a majority in the second round of voting, he had to moderate his tone and make alliances with more moderate parties.

He then raised royalties and taxes on the mining industry. These were modest increases, however, made after much consultation with the industry. Given how radical Humala seemed at first, the industry was relieved. Since 2013, Humala’s administration has become openly market friendly and has worked to solve the problems faced by, for instance, Newmont Mining Corp. (NMC:TSX; NEM:NYSE) over its Conga project.

TGR: The Peruvian government is more mining friendly, but what about the Peruvian people? Last month, several protestors were wounded and one was killed in the dispute over Southern Copper Corp.’s (SCCO:NYSE) Tia Maria mine.

AA: This is not a national problem. It is a more localized problem fomented by some NGOs, radicals and some politicians. Two or three big projects are having local difficulties, but many big projects are moving quickly to production without these difficulties. HudBay Minerals Inc.’s (HBM:TSX; HBM:NYSE) $1.8 billion ($1.8B) Constancia mine is almost finished. Next door, Las Bambas, a $5.2B project that MMG Ltd. (1208:HKSE) bought from Xstrata Plc (XTA:LSE), should be producing in 2016. Freeport-McMorRan Copper & Gold Inc.’s (FCX:NYSE) Cerro Verde copper mine is basically doubling its capacity. Peru’s copper production will soon double from what it was in 2014.

TGR: President Humala is not eligible to run again in 2016. Is this a cause for concern?

AA: It’s too early to worry about that. Let’s see what the polls are saying at the start of next year. Right now, the leading candidates are very market friendly.

The main worries that Peruvian mining faces are lower gold, silver and copper prices and the collapse of financing for projects owned by juniors.

TGR: Will the dearth of financing lead to an increase in mergers and acquisitions?

RC: I already mentioned the Las Bambas takeover. It is rumored that Southern Peru Copper will make a move on Anglo American Plc’s (AAUK:NASDAQ) large Quellaveco project. But this is only a rumor that was later denied by Southern Peru Copper.

We expect an updated feasibility on Bear Creek Mining Corp.’s Corani real soon; it will show a lower capex.

Among the juniors, Indico Resources Ltd. (IDI:TSX.V) just got into an agreement for 70% of its Ocaña copper project to a private concern, Aruntani S.A.C., for $18.6 million ($18.6M). This is an interesting deal, which we have valued at about $0.10 per pound ($0.10/lb) of copper, which is high given current market conditions.

TGR: Which Canadian juniors are having legal problems with the Peruvian government?

RC: Bear Creek Mining Corp. (BCM:TSX.V) is running an arbitration process with the government of Peru over the license to operate the Santa Ana project, its 47 million ounce (47 Moz) silver project. Just to clarify, the government did not expropriate the project but revoked the license to operate in a border zone. All foreign companies need this permit to start a project. Barring a resolution, this dispute will be adjudicated in Washington, D.C., in September 2016. The legal experts will testify in favor of Bear Creek, but the decision to seize Santa Ana was a political one, and a decision to give it back would have political consequences.

I expect a good result for Bear Creek, perhaps by the end of 2015, which would be a good omen for the mining community in Peru. Santa Ana is an excellent project, with an after-tax net present value (NPV) of $80.2M and an internal rate of return (IRR) of 24.9%. Its capital expenditure (capex) is low, only $70.8M, and can start production very quickly.

TGR: How much of an overhang does Bear Creek suffer as a result of Santa Ana?

RC: When you analyze junior companies, you give higher valuations to those with good assets ready to start construction. In late 2010, Bear Creek shares were trading around $12. After the expropriation and the market crisis, shares fell to $1.05. Obviously the collapse in the silver price also affected Bear Creak heavily, along with many other companies in the industry.

TGR: Bear Creek has another Peruvian silver project, Corani. When will we get a feasibility study of that?

RC: Real soon. This will be an update of the 2011 feasibility. That showed a resource of 270 Moz silver, 3.1 billion pounds lead and 1.7 billion pounds zinc. It showed an initial capex of $574M, an after-tax NPV of $463 and a 17.6% IRR. The updated feasibility will adapt Corani to current market conditions and lower the capex.

TGR: Will Corani get financing?

RC: Bear Creek is talking to several parties and examining several strategies. There are various alternatives: streaming and offtake agreements, joint ventures (JVs). I’m pretty sure a combination of these will finance Corani.

TGR: Bear Creek’s market cap is $112M. Is it a takeover target?

RC: Any small company with well-advanced projects—meaning good assets—could face hostile takeover attempts. Bear Creek is one example, Panoro Minerals Ltd. (PML:TSX.V: PZM:FSE; PML:BVL) is another.

TGR: Explain how the Peruvian government has regulated artisanal mining.

RC: There are two types of artisanal mining in Peru. There is flat-out illegal mining, which is often harmful to the environment. And there is also “informal” mining, which refers to miners seeking to fully regularize. The government has worked diligently to eliminate illegal mining and establish a process whereby all ore is processed by regulated mills. Progress is being made, but this will take some time.

TGR: Assuming that all or most of artisanal mining was regularized, how much bigger would the official mining industry become?

RC: We don’t know exactly how large artisanal mining is, but it is big. I’ll give you an example. Peru’s main gold producer is not a company. It’s a region called Madre de Dios where most of the gold produced comes from illegal and informal mining.

TGR: Has this new regulatory regime resulted in many companies processing artisanal ore on a tolling basis?

RC: Toll mining is growing everywhere in the world, not just in Peru. Mining companies are seeking lower risk, and processing ore presents lower risks than exploration and mining. Here in Peru, we have five or six TSX Venture-listed companies in tolling. Dynacor Gold Mines Inc. (DNG:TSX) has been doing this for a while, and it has been doing pretty well. The company has a market cap of $77M and processes in the range of 250–350 tons per day (250-350 tpd). Dynacor has one plant at Huanca and another on the way at Chala.

Trevali Mining Corp. is one of our favorite zinc producers in Peru.

TGR: How much bigger will its operations be after Chala goes online?

RC: Dynacor is seeking to achieve 1,000 tpd and will become a very important player.

TGR: Dynacor also has a copper-gold exploration project, Tumipampa.

RC: When a tolling company reaches 1,000 tpd, it needs to secure a consistent supply of ore. This is Dynacor’s plan for Tumipampa.

TGR: What are the margins for toll miners in Peru?

RC: It depends on where you are in Peru and what the grade is. Also, in order to keep the ore coming, toll miners must be fair with small miners. The industry standard is about 40–50% now, but that will probably fall over time to 35–40%.

TGR: What can you tell us about the other Peruvian toll miners?

RC: Inca One Gold Corp. (IO:TSX.V) has a good model and has built a 100 tpd plant. Equity financing was a problem, so the company elected to go with debentures and notes. It has $7–8M in debt, which it should be able to restructure in the near future. Inca One is in the middle now of a $1.5M convertible-loan financing, which will give it working capital. This is crucial for toll miners, because in order to build market share with small miners, you need to pay them quickly.

Standard Tolling Co. (TON:TSX.V) plans to achieve production in June with a plant processing 100–150 tpd. The company is fully financed and progressing very well. This story is similar to Inca One.

Anthem United Inc. (AFY:TSX.V) plans to begin processing this year. Its plant will cost around $10M. It’s a big project, and the company intends to go immediately to 350 tpd. Processing above that level requires additional permitting. Anthem is also financing with debt.

Montan Mining Corp. (MNY:TSX.V) has an agreement to buy an already producing 150 tpd plant. It’s a manageable deal in a nice location. Unlike its rivals, this company will have the capacity to process copper as well. This could be an excellent play.

Duran Ventures Inc. (DRV:TSX.V; DRV:BVL) has a location and basic permits but needs to invest $1–1.5M to build its plant from scratch. Construction is five to eight months away.

TGR: Duran has five exploration projects. Are they all on the back burner?

RC: Duran’s long-term plan is to develop these projects, but first it needs cash flow, which is why it is going into tolling. Once cash flow is achieved, that money can be leveraged to pay for exploration.

TGR: Which Peruvian zinc producers are your favorites?

RC: There are two. The first is Trevali Mining Corp. (TV:TSX; TV:BVL; TREVF:OTCQX). It has the producing Santander mine in Peru and advanced-stage projects, Caribou and Stratmat, in New Brunswick in Canada. This is the only publicly traded zinc junior.

Caribou will begin production this quarter. Stepout assays from this project released in April included 5.08% zinc, 1.76% lead, 0.37% copper, 59 grams per ton (59 g/t) silver and 1.63 g/t gold over 50.9 meters. Canada will reveal Trevali’s real value. In Peru, Trevali has an offtake agreement with Glencore International Plc (GLEN:LSE) but no such obligations in Canada.

TGR: And what is the other Peruvian zinc play you like?

RC: Sierra Metals Inc. (SMT:TSX) has Yauricocha in Peru, an extremely nice asset generating good cash flow. The company has two very good prospects in Mexico. Sierra has been flying under the radar because of liquidity problems, but I’m pretty sure the company will solve those problems. It published Mexico silver assays over 300 g/t in December, but few investors noticed that. It’s hard to buy Sierra Metal shares, but it has good properties and also pays a divided.

TGR: Let’s talk about other junior gold producers in the region.

RC: Luna Gold Corp. (LGC:TSX; LGC:BVL) has its asset in Brazil, but has many Peruvian investors. It was forced to suspend its Aurizona gold mine in Brazil because it was running out of mixed soft and hard saprolite ore. On May 8, the company announced a $30M financing with a fund called Pacific Road Resources, $20M debt, $10M equity. Luna also renegotiated its contract with Sandstorm Gold Ltd. (SSL:TSX.V), which previously held a streaming contract for the life of the mine: 17% of production at $400 per ounce ($400/oz). This has been replaced with a 3–5% net smelter royalty (NSR).

This is an excellent deal for the company as this will trigger more exploration work to improve the reserve calculation and restart the plant. There’s still a big challenge to finance the expansion of the plant, but it is important to understand that there is already a sunk cost and it is only a matter of finding the necessary funding to have Luna up and running again—under a much better financial structure: the new deal with Sandstorm, a solid equity position and a debt with a better structure.

TGR: Which near-term junior gold producer do you follow?

RC: Lupaka Gold Corp. (LPK:TSX.V; LPK:BVL). It has the Invicta project, which is ready to produce gold at 10–15 g/t. This is a well-known asset in an excellent location near Lima. Lupaka does need a mill, however. It makes sense for it to get an agreement with an existing plant to process its ore while evaluating the construction of its own plant.

TGR: Let’s discuss some other companies you follow.

RC: Minera IRL Ltd. (IRL:TSX; MIRL:LSE) invested over $40M in a project in Argentina. The company sold it for $10M, but given the conditions in Argentina, this was the best of a bad deal. In Peru, it has the 1 Moz Ollachea project. It’s ready, but the capex is $164.7M, and that will be tough to raise for a company with a market cap of $20M. Doing it with equity would result in a tremendous dilution. Several financial institutions have told me they like Ollachea, so perhaps it will go ahead with a combination of equity, plus debt, plus a JV.

Panoro Minerals released a preliminary economic assessment (PEA) for its Cotabambas project last month. It forecasts annual production over 19 years of 143 Mlb copper, 88,000 oz (88 Koz) gold and 967 Koz silver at a cost of $1.26/lb copper, with credits. The after-tax NPV is $627.5M, and the initial capex is $1.38B. What is interesting about this is that there are nine targets, but the PEA focused on only one. I think this was a wise decision. From here on in, Cotabambas can only look better. But this is another company with a small market cap: $34M. This project needs about $40–50M to get to bankable feasibility.

TGR: Does it make sense for Panoro to bring on a JV partner or partners?

RC: It’s a matter of valuation. It makes sense to bring in a JV partner based on the value of Cotabambas, not on Panoro’s current market cap. It also matters who the JV partner is. If it’s a well-known company with sufficient funding to develop a $1.38B project, that would be good.

TGR: What’s the final company you wanted to discuss?

RC: Candente Copper Corp. (DNT:TSX; DNT:BVL) has the Cañariaco Norte deposit. This is another example of a company that is fighting with the market. Cañariaco is one of the most advanced junior copper projects in Peru. It’s a big project, with a capex of $1.6B. Candente ran out of cash a year ago and is stuck in the middle of the feasibility study. The challenge for it is to go to the market to get $10M to complete it. I think the best way forward is to find a JV partner or sign a streaming contract. This project has faced social problems in the past, but we know that this region is not as difficult as it once was. Cañariaco is a nice project.

TGR: Despite the current financing problems for juniors, are you optimistic about their prospects in Peru for the rest of the decade?

RC: Absolutely. We are near the end of a cycle. I believe we will see a real recovery in the market starting in 2016.

TGR: Ricardo and Alberto, thank you for your time and your insights.

Ricardo Carrión is the managing director for capital markets and corporate finance for Kallpa Securities in Lima, Peru. He served as a senior analyst of Banco de Credito in the areas of corporate banking, corporate finance and capital markets and was an adviser to Lima’s Stock Exchange. Carrión holds a bachelor’s degree in business administration from Universidad de Lima with specialization in finance and capital markets.

Alberto Arispe is CEO of Kallpa Securities SAB, a Peruvian brokerage and boutique investment house. Previously, he was a vice president of emerging markets institutional equity sales at Fox-Pitt Kelton. Arispe has more than 18 years of experience in capital markets. He has a Master of Business Administration from the Stern School of Business at New York University and a bachelor’s degree in economics from the Universidad Catolica del Peru. He is a professor of finance at Universidad de Lima.

Read what other experts are saying about:

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DISCLOSURE:
1) Kevin Michael Grace conducted this interview for Streetwise Reports LLC, publisher of The Gold Report, The Energy Report and The Life Sciences Report, and provides services to Streetwise Reports as an independent contractor. He owns, or his family owns, shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of Streetwise Reports: Bear Creek Mining Corp. and Trevali Mining Corp. Streetwise Reports does not accept stock in exchange for its services.
3) Ricardo Carrión: I own, or my family owns, shares of the following companies mentioned in this interview: None. I personally am, or my family is, paid by the following companies mentioned in this interview: None. My company has a financial relationship with the following companies mentioned in this interview: Luna Gold Corp., Panoro Minerals Ltd., Duran Ventures Inc., Sierra Metals Inc., Candente Copper Corp., Lupaka Gold Corp., Minera IRL Ltd., Trevali Mining Corp. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I determined and had final say over which companies would be included in the interview based on my research, understanding of the sector and interview theme. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.
4) Alberto Arispe: I own, or my family owns, shares of the following companies mentioned in this interview: None. I personally am, or my family is, paid by the following companies mentioned in this interview: None. My company has a financial relationship with the following companies mentioned in this interview: Luna Gold Corp., Panoro Minerals Ltd., Duran Ventures Inc., Sierra Metals Inc., Candente Copper Corp., Lupaka Gold Corp., Minera IRL Ltd., Trevali Mining Corp. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I determined and had final say over which companies would be included in the interview based on my research, understanding of the sector and interview theme. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.
5) Interviews are edited for clarity. Streetwise Reports does not make editorial comments or change experts’ statements without their consent.
6) The interview does not constitute investment advice. Each reader is encouraged to consult with his or her individual financial professional and any action a reader takes as a result of information presented here is his or her own responsibility. By opening this page, each reader accepts and agrees to Streetwise Reports’ terms of use and full legal disclaimer.
7) From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles and interviews on the site, may have a long or short position in securities mentioned. Directors, officers, employees or members of their families are prohibited from making purchases and/or sales of those securities in the open market or otherwise during the up-to-four-week interval from the time of the interview until after it publishes.

( Companies Mentioned: AFY:TSX.V,
BCM:TSX.V,
DNT:TSX; DNT:BVL,
DRV:TSX.V; DRV:BVL,
DNG:TSX,
IO:TSX.V,
LGC:TSX; LGC:BVL,
LPK:TSX.V; LPK:BVL,
IRL:TSX; MIRL:LSE,
MNY:TSX.V,
PML:TSX.V: PZM:FSE; PML:BVL,
SMT:TSX,
TON:TSX.V,
TV:TSX; TV:BVL; TREVF:OTCQX,
)

The Next Gold Bull Market Starts Before October

caseyresearch

The Next Gold Bull Market Starts Before October By Jeff Clark I’m going out on a limb: I think the next bull phase in the gold market gets underway before October. Why? China. But not due to runaway demand… At an International Monetary Fund (IMF) forum last month, China’s central bank governor, Zhou Xiaochuan, made it clear he believes the renminbi is “ready for reserve status.” It would be a huge step for the Chinese currency, starting with the fact that it would be added to the basket of currencies IMF member countries can include in their official reserves. Billions would be invested in it. What was the IMF’s reaction? “We welcome and share this objective,” said IMF Managing Director Christine Lagarde. “We are now working closely with the Chinese authorities in this regard,” added Director of Communications Gerry Rice. They didn’t say they would accept it, but then again, … Continue reading

Eric Coffin Pinpoints the Mining Companies with Resources that Are Right for Today’s Market

Chart 1

The Gold Report: At the subscriber investment summit in Toronto in March 2015, you had a talk titled “Life in a Zero Yield World.” What is wrong with that world?

Eric Coffin: A zero yield world is the result of four or five years of central banks essentially buying the hell out of the bond market, which is what the European Central Bank (ECB) is doing right now. And buying those bonds, also known as quantitative easing (QE), drives down yields. QE has helped the U.S. and will probably help the European economies but it creates a lot of distortions. We tend to see a lot of money driven into high-risk areas, like heavily leveraged commodity and exchange-traded funds (ETF) bets and things like art and collectibles, because there are these large money pools that can raise capital at close to zero rates, and that tends to make people take greater risks. How that ends remains to be seen, but central bankers realize that they need to start weaning economies off of QE because when you generate that much risk capital and start creating that many distortions, it quite often doesn’t end well.

TGR: Can these economies successfully be weaned off QE?

EC: Maybe. On one side there is the “wealth effect,” which is the positive impact on the economy from people seeing their portfolios get larger. And that was always part of the plan. Most economists describe the wealth effect as a side effect of QE, but I don’t think policy makers at the U.S. Federal Reserve or the ECB think that way. The problem with the wealth effect is it mainly benefits—you guessed it—the already wealthy. I think that is why it hasn’t generated higher growth yet or higher inflation except in “one percenter playgrounds” like the fine art market. The U.S. economy is not doing that great overall and the ECB is trying to climb out of its fourth recession in the last five or six years. In both cases much of the money driving these economies is washing in and out of the equity markets and traders are focused on what central bankers are going to do.

In the last few months we have seen huge market swings based on things said by either U.S. Federal Reserve Chairman Janet Yellen or ECB President Mario Draghi. It’s not healthy. If we step back and take a 10,000-foot view of the markets, anybody with a finance background knows that an ECB rate cut or for that matter a Fed rate boost of 25 or 50 basis points is not going to make any difference in the real world. But with so much of the money chasing bureaucratic decisions, it is creating distortions and now the Fed has got to find a way to carefully ease out of QE. But if the Fed surprises the markets, the markets are going to get clobbered. It’s a tightrope walk for Yellen.

TGR: Throughout these last few years your job has been to clear up some of the market distortion for mining investors. What are some macro indicators that mining investors should follow and why?

EC: It’s a good idea to keep your eye on inflation indicators because metal prices are heavily influenced by inflation expectations. I follow the Treasury Inflation Protection Securities (TIPS). TIPS are basically inflation-indexed securities and there are ETFs for these that are heavily traded. These get bought as inflation protection; the way the price of those mutual funds and ETFs swings up and down gives us a read on traders’ inflation expectations. In the last few months, with collapsing oil prices, the bugaboo in the market has been deflation. But in the last little while we have seen a massive flow of funds into these inflation-protected mutual funds and ETFs. It’s a bit of a head scratcher because consumer price index numbers still look flat.

Eric Coffin will be speaking at the Metal Investor Forum,
May 30 in Vancouver

Click here for free tickets

When it comes to the U.S., obviously everybody watches the jobs report. That has a big impact. One thing I’ve been watching closely is real wage gains. Even though the U.S. has seen its unemployment rate drop from about 12% to 5.5%, wage gains for average American workers—80% of the workforce—remain at around 2% before inflation, so after inflation it was next to nothing. People on Wall Street predict that the economy is going to accelerate by 3–5% but I don’t see how that happens unless we start seeing real wage gains because 70% of the U.S. economy is consumer spending. You have to pay people money before they can spend it.

I watch currencies, too, because part of the gold trade is currencies, and until recently, gold has followed the euro fairly closely.

TGR: Yellen recently said U.S. equity markets look “frothy” and recent U.S. dollar weakness seems to back that view. How do you expect gold to perform through the end of the year and perhaps beyond that?

EC: I’ve been a bit disappointed that gold hasn’t traded better in the last few sessions but it seems that gold traders are particularly focused on the Fed raising rates. The consensus seems to be that it is going to raise rates in June and that will not help the gold price. But I was one of the few people who didn’t expect the euro to go to U.S. dollar parity or below earlier this year. The euro has instead had a nice bounce and that’s largely because many international investors have decided that European stock indexes are the next big thing, so there’s been huge fund flows into Europe.

Columbus Gold Corp. put out a new resource estimate on its flagship Paul Isnard gold project.

It’s market gospel right now that if the U.S. starts raising interest rates, the U.S. dollar has to go higher and higher, and that’s seen as negative for gold. In a recent edition of Hard Rock Analyst (HRA) there was a chart (reproduced below) that showed the trace of the U.S. Dollar Index through the last four tightening cycles when the Fed went from cutting rates or neutral to raising rates. In all four cases the U.S. dollar dropped once rate increases started. It was a “buy on rumor, sell on news” situation. In a couple of cases it fell about 10% within four months of the start of tightening. The ECB and Bank of Japan trying to hold their currencies down may complicate things this time but still we may get better action on the currency side than people expect. It’s quite conceivable that gold could get through $1,300 per ounce ($1,300/oz) relatively quickly once it dawns on people that the dollar index isn’t going to the moon.

We also may see stronger gold demand in China if there is a significant correction in the Shanghai market, which has more than doubled in the previous 12 months. If we look at a long-term chart of the Shanghai exchange going back about 30 years, these big bull runs have happened four or five times, closely followed by equally big drops. I don’t know when the top is going to be in, but it looks pretty parabolic; moves like that tend to end badly.

TGR: Against that backdrop, where do you see the light at the end of the tunnel in the junior mining equities market?

EC: A few companies on my list have performed better recently and they all have one thing in common: a specific event—a resource number, a new economic study or discovery—that was significant enough that it allowed the market to rerate the stock. It feels as if we are finally seeing the wheat get separated from the chaff—and that has to happen. Seeing an increased focus on the relatively small percentage of companies that have good projects and good management is not going to give us the mother of all bull markets, but it will give us a decent market with room for gains—in that subset of companies.

We all should focus on the small set of companies that really know what they’re doing because until we see a large move in commodity prices, that’s the only place where we’re going to see gains. This is not one of those markets where it’s a matter of who has the biggest copper or gold resource; it’s about who has a resource that makes sense or has the discovery potential for one. The other performer has been producers that, after three years of putting up crappy numbers, are finally starting to see their numbers improve. Three years of cost cutting and focusing on margin per ton seems to finally be starting to pay off. If they can do this with a flat gold or copper price, what happens when the commodity prices go up 20–30%? They’re going to blow the doors off.

TGR: The Market Vectors Junior Gold Miners ETF (GDXJ:NYSEArca), as a proxy for junior miners, hit a $21.29/share low just after the Prospectors and Developers Association of Canada (PDAC) conference, but has been trending higher since. Would you consider that a leading indicator?

EC: I think so. Most of the companies on the Market Vectors Junior Gold Miners ETF are small producers and a bunch of these companies seem to be turning the corner. One is Claude Resources Inc. (CRJ:TSX), which went through three or four pretty horrible years but has since drilled off larger zones of high-grade material. The company is mining that now and putting up better numbers. That attention to the bottom line is evident across the space and it’s starting to pay off for companies like Claude.

The other thing we have seen recently is more merger and acquisition activity and that feeds into the index too. For example, AuRico Gold Inc. (AUQ:TSX; AUQ:NYSE) receives a takeover offer from Alamos Gold Inc. (AGI:TSX; AGI:NYSE) and the share price moves up 20–30% percent the minute the offer becomes public, which helps lift the index. So in that sense the Market Vectors Junior Gold Miners ETF is a leading indicator. We’re not at the point where any company with the word gold in its name is going to go up, but the performers are getting some traction again.

TGR: In several HRA posts you’ve talked about the all-important funding season for junior miners. How is it shaping up?

EC: It hasn’t been great. A few companies on my list have done sizable placements and most of the companies that I follow aren’t running on fumes anyway; that’s part of the reason I’m following them. In general, the end of May is seen as the end of the financing window until October. We don’t have a lot of it left. It would be nice to see even a small move in the gold price to help free up a little cash.

TGR: Several companies that you follow closely have published either revised preliminary economic assessments (PEAs) or resource estimates. Please tell us about some.

EC: Columbus Gold Corp. (CGT:TSX.V; CBGDF:OTCQX) put out a new resource estimate on its flagship Paul Isnard gold project in French Guiana. It didn’t have a huge impact but it brought the grade up to 1.44 grams per ton (1.44 g/t) in a 4.5 million ounce (4.5 Moz) resource, and moved about 75% of that resource from the Inferred to the Indicated category. That’s important because if a company is doing feasibility-level studies, the engineers can’t configure anything below Indicated. All of that Inferred material may be quite real and eventually become part of a mine but it can’t be included in a feasibility study. I expect Columbus to put out a PEA in less than a month.

TGR: How is Columbus Gold going to finance further development? Will it sell or option assets in Nevada?

EC: I don’t think management has decided yet. Columbus has an option agreement on Paul Isnard with Nordgold N.V. (NORD:LSE), a successful, mid-sized Russian gold miner. In order to get 50.01%, Nordgold has to bring Paul Isnard to feasibility and spend $30 million ($30M). It will probably spend $30M to finish the feasibility study, but once that’s done there is a fairly complex formula to determine who pays what; Columbus could end up with as much as a 20–30% carried interest.

If the feasibility economics are strong enough, I wouldn’t be shocked to see Nordgold make an offer to buy Columbus. That may turn out to be a cheaper option for Nord if it wants 100% of Paul Isnard. Columbus certainly has a lot of projects in Nevada and management wants to option some of them, but it has raised money and is waiting on drill permits for a large, yearlong drill program on its Eastside property in Nevada. Andy Wallace, a former director, stepped aside to run that drill campaign. He is credited with the discovery of several gold deposits there. He obviously rates Eastside very highly.

TGR: What are some other companies with news?

EC: Another company that just put out a PEA is GoldQuest Mining Corp. (GQC:TSX.V). As my readers know, I’ve been pounding the table on that one over the last few months because I really like the project and have known GoldQuest Chairman Bill Fisher and CEO Julio Espaillat for about 14 years. I saw them take the Cerro de Maimón copper-gold volcanogenic massive sulfide project in the Dominican Republic and improve it to the point where it went into production and got taken out by Australia-listed Perilya Ltd. (PEM:ASX) for about $190M. Cerro de Maimón is still in production and remains profitable.

GoldQuest discovered Romero a few years ago, quickly proved up 3 Moz gold equivalent and put out a PEA last year that the market basically dumped on. But what the company is doing now at Romero is exactly what I saw Fisher and Espaillat do at Cerro de Maimón. The company put out a new PEA in late April that focuses on mining the higher-grade material. The deposit is kind of a blob and well suited to highly efficient, low-cost underground mining. The capital cost is under $150M, including $20M in contingencies. The after tax internal rate of return is 34%; the after tax net present value is about $220M. GoldQuest was a $0.06/share stock three weeks ago. It’s $0.17/share now. With a decent gold market it will probably go higher because it looks financeable.

TGR: What’s the next step for GoldQuest?

EC: The company will move to the prefeasibility stage. The Romero resource is fairly closely drilled so most of the resource in the mine plan is already in the Indicated category. The company would only need a few holes of resource drilling to have enough for a prefeasibility study. That means it can get through the prefeasibility for perhaps $2M and probably get it done before the end of the year. At some point GoldQuest will want to raise money because it wants to keep working the rest of the Tireo Belt. Precipitate Gold Corp. (PRG:TSX.V), a company I helped found, is next door, and it has a new discovery that’s the same model. The Tireo Belt has never really been fully explored there.

TGR: You follow a handful of companies with projects in the Yukon. What are some newsworthy stories there?

EC: Kaminak Gold Corp. (KAM:TSX.V) put out a PEA last year on the Coffee project, and it is a pretty impressive document, a lot stronger than many people expected because when you think Yukon, you think high capital and operating costs. The key to that project is good metallurgy and near surface geometry. In early May, Kaminak published an extensive metallurgical study that’s being done as part of its feasibility study. The numbers are very good with average recoveries in the range of 85–95%. For something north of 60 degrees, the metallurgy is quite amazing.

TGR: If Kaminak could heap leach the Coffee ore, how would that change the economics?

EC: Even coarse material has 90%+ gold recoveries. If you have to do less crushing, you need less equipment and require less power, which is big because power costs are not cheap in the Yukon. And if you can get 90% recoveries instead of 70%, that’s going to massively improve the bottom line.

TGR: Are there other stories you’re following there?

EC: The other main one that I’m following in the Yukon is Rockhaven Resources Ltd. (RK:TSX.V). I visited its Klaza property last year and quite like it. You can drive to it without a big 4×4, and there is little tree cover where the company is drilling. Late in 2014 Rockhaven announced a 1.3 Moz gold equivalent resource at a cutoff grade of 1.5 g/t gold on its Klaza property. It’s still open at depth and is now considered a “carbonate-base metal” style deposit. This deposit type often has big dip lengths, so you can go fairly deep and still stay in the bonanza zone. Continental Gold Ltd.’s (CNL:TSX; CGOOF:OTCQX) Buriticá project in Colombia and the Porgera mine in Papua New Guinea are the same model. I think Rockhaven still has a lot of room to expand Klaza.

TGR: Rockhaven raised $4.4M via a placement from Strategic Metals Ltd. (SMD:TSX.V). What did you make of that deal?

EC: Strategic Metals is the main holding company for the group that’s backed by Archer Cathro, the premier exploration consultants in the Yukon. If somebody had shown up with a really good financing offer this spring, Rockhaven probably would have taken it. But it’s my sense that the people behind Archer Cathro aren’t willing to let this one go too cheaply. Doug Eaton, managing director of Archer Cathro and the second biggest shareholder of Rockhaven, was the person who convinced me to visit Klaza. Eaton has put a lot of his money into it and really believes in the project.

TGR: Are there any other stories you would like to share with our readers?

EC: One other company I’ve followed for a while is a company called Lion One Metals Ltd. (LIO:TSX.V). Lion One has a high-grade gold vein deposit in Fiji called Tuvatu. Tuvatu has about 800,000 oz but the grade is 9–10 g/t. It’s open in just about every direction and there are many veins on the property that haven’t been sufficiently tested. I’ll be fairly surprised if at the end of the day that isn’t a 2–3 Moz resource.

Lion One is run by Chairman and CEO Wally Berukoff, a well-known mining promoter who has had a lot of success. He helped found Miramar Mining, Northern Orion Resources and La Mancha Resources Inc.—all three of which sold for more than $500M. Berukoff is committed to getting Lion One into production. The cheapest financing it has done since it went public was CA$1/share. It’s trading at around CA$0.45 with $5M in the bank. I’m expecting a PEA very soon from Lion One. Like some of the examples above, I think it will focus on high-grade ounces and should generate some impressive numbers. Importantly, Tuvatu has all required permits for mining in place.

TGR: Please give us one bulletproof call.

EC: Ha! Piece of cake! If you want something bigger and safer, I would look pretty hard at Nevsun Resources Ltd. (NSU:TSX; NSU:NYSE.MKT). You want to buy it on weakness, if you can, but it’s a well-run and profitable company. Bisha’s a fabulous deposit in Eritrea. Nevsun started production at Bisha when gold was near its all-time high and gold dominated production for almost two years. As gold prices started falling the copper grades were coming up and Bisha has been primarily a copper mine for the last two years, and will be for another 1.5. Then it will shift to being predominantly a zinc operation, which should be just about in time for a couple of large zinc mines to cease production and zinc prices to rise.

The company has over $500M in cash and is generating about $20M/quarter in cash flow. Nevsun is drilling to expand Bisha at depth but also drilling out a nearby deposit called Harena, where it recently had some really nice drill holes. It’s one of those companies where either there is some kind of deal to become a multi-mine company or a bigger company is going to make a takeover bid. One of those two things will happen by the end of 2016.

TGR: On May 30 you’ll be speaking at the Metals Investor Forum in Vancouver, Canada. The theme of the event is that after a four-year bear, mining markets are poised to rebound. What should attendees expect?

EC: There are four of us speaking: Gwen Preston, Brien Lundin, John Kaiser and myself. For my part, I’m going to focus on companies that are advancing, even in a difficult market. Those are the deals that I think will get the most attention when markets start to improve. There will be presentations by all of the companies in attendance including some of the companies we just talked about. It’s a daylong event with a catered lunch break and couple of long coffee breaks. That will give attendees a chance to talk to management one-on-one and ask follow-up questions. Subscribers love it.

TGR: Thank you for your time and insights, Eric.

Eric Coffin is the editor of the HRA (Hard Rock Analyst) family of publications. Responsible for the “financial analysis” side of HRA, Coffin has a degree in corporate and investment finance. He has extensive experience in merger and acquisitions and small-company financing and promotion. For many years, he tracked the financial performance and funding of all exchange-listed Canadian mining companies and has helped with the formation of several successful exploration ventures. Coffin was one of the first analysts to point out the disastrous effects of gold hedging and gold loan-capital financing in 1997. He also predicted the start of the current secular bull market in commodities based on the movement of the U.S. dollar in 2001 and the acceleration of growth in Asia and India. Coffin can be reached at hra@publishers-mgmt.com or the website www.hraadvisory.com.

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DISCLOSURE:
1) Brian Sylvester conducted this interview for Streetwise Reports LLC, publisher of The Gold Report, The Energy Report and The Life Sciences Report, and provides services to Streetwise Reports as an independent contractor. He owns, or his family owns, shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of Streetwise Reports: Columbus Gold Corp. and Continental Gold Ltd. I The companies mentioned in this interview were not involved in any aspect of the interview preparation or post-interview editing so the expert could speak independently about the sector. Streetwise Reports does not accept stock in exchange for its services.
3) Eric Coffin: I own, or my family owns, shares of the following companies mentioned in this interview: GoldQuest Mining Corp., Lion One Metals Ltd., Precipitate Gold Corp., Columbus Gold Corp. and Kaminak Gold Corp. I personally am, or my family is, paid by the following companies mentioned in this interview: None. My company has a financial relationship with the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I determined and had final say over which companies would be included in the interview based on my research, understanding of the sector and interview theme. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.
4) Interviews are edited for clarity. Streetwise Reports does not make editorial comments or change experts’ statements without their consent.
5) The interview does not constitute investment advice. Each reader is encouraged to consult with his or her individual financial professional and any action a reader takes as a result of information presented here is his or her own responsibility. By opening this page, each reader accepts and agrees to Streetwise Reports’ terms of use and full legal disclaimer.
6) From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles and interviews on the site, may have a long or short position in securities mentioned. Directors, officers, employees or members of their families are prohibited from making purchases and/or sales of those securities in the open market or otherwise during the up-to-four-week interval from the time of the interview until after it publishes.

( Companies Mentioned: CRJ:TSX,
CGT:TSX.V; CBGDF:OTCQX,
GQC:TSX.V,
KAM:TSX.V,
LIO:TSX.V,
NSU:TSX; NSU:NYSE.MKT,
PRG:TSX.V,
RK:TSX.V,
SMD:TSX.V,
)

Gold Is Going To Start A New Bull Market

By Mike Swanson on Tue, 05/12/2015 – 06:43 Topics: Gold Investing and Gold Stocks All markets go through cycles and gold is going to start a new bull market before anyone realizes it. And right now everyone is asleep when it comes to gold. Gold last made a peak in 2011 and then had a crash drop in 2013 while the mining stocks had a big decline last year. Those losses have made gold bugs give up. I know markets can be hard for people. I got in gold and mining stocks last summer and had to get in and out for some losses. But if you were interested in gold in the past or own some you cannot give up now when something big is around the corner now. Almost no one is bullish on gold and despite talking about gold a lot I hardly ever even get emails about it. … Continue reading

Buy Silver or You Will Die!

caseyresearch

Buy Silver or You Will Die! By Jeff Clark It’s the news everyone dreads—a call from the hospital. And it’s about one of the most important people in the world… Your mother. [Every ALL-CAPS ITEM below contains silver or is required in its use.] You hear the nurse talking urgently through your TELEPHONE and you realize it’s serious… You grab your REMOTE CONTROL and turn down the volume on your PLASMA TV that’s playing your favorite DVD movie. You push the BUTTON and the SPEAKERS go mute. You press “save” on the KEYBOARD of your COMPUTER. “Yes, she’s okay,” the nurse tells you. “But you need to come to the HOSPITAL right away.” That’s all you need to hear. You yell to your spouse and grab your CELLPHONE to call your siblings. “Is she alright?” your wife asks frantically. She was using the VACUUM CLEANER and WASHING MACHINE and didn’t … Continue reading

Four Canadian Juniors Poised to Gain in the Oil and Gas Recovery: Angelos Damaskos

damaskoschart

The Energy Report: The prices of West Texas Intermediate (WTI) and Brent have recently rebounded to about $60 per barrel ($60/bbl) and $65/bbl, respectively. Where do you see them going for the rest of the year?

Angelos Damaskos: The oil industry expects oil to recover to $75/bbl in the near term because this is the global marginal cost of production. The longer oil trades below that price level, we lose supply not only from the North American shale industry, but also from the longer-term producing projects: the Canadian tar sands and the Brazilian offshore basins.

The oil price has recovered by 20–25% from January’s lows but remains 50% lower than last year’s highs. As a result, there has been a dramatic drop in income and earnings, which has been met with big cutbacks in capital expenditure (capex) and development drilling. The length of time oil trades below $75/bbl is a clue to how strong the recovery might be once a supply-demand balance is again achieved.

TER: With regard to shale oil, some believe that the oil price collapse has broken that industry for the foreseeable future. Do you agree?

AD: I do not. Shale oil technology has advanced tremendously over the last few years, which is why production has advanced so rapidly. It is now far easier to map and understand the geotechnical characteristics of shale reserves. It’s purely a matter of spending the capex necessary to develop as many wells as possible to increase production. The minute oil prices recover to $70–75/bbl, or perhaps a little higher, shale drilling will recommence almost immediately.

TER: Some blame the oil price collapse on lack of demand. How much do we know about oil consumption?

AD: It’s not clear what caused the collapse. We believe it might have been a demand shock resulting from a slowdown of the Chinese economy or in some of the emerging markets. This, combined with a rapid growth in production, particularly from North America, might have tipped the balance to oversupply and sparked the initial price drop. Then the momentum traders and the hedge funds got involved and pushed prices down to the $40–45/bbl we saw in January.

Royal Dutch Shell Plc got BG at a very attractive price.

The International Energy Agency (IEA) and other reputable bodies indicate that oil demand remains steady and might have actually grown in 2014. The IEA projects slight growth in 2015. If we accept that global economic growth has stabilized, demand for oil should remain fairly firm and might actually be further stimulated by today’s lower prices.

TER: In contrast to the price of oil, there has been no rebound in the price of natural gas. Why not?

AD: We have been fairly bearish on U.S. natural gas for some time given the oversupply from shale projects. Gas production growth has exceeded 30% over the past five years. Until the very large liquefied natural gas (LNG) export facilities planned in Western Canada come onstream, low prices will likely prevail.

European gas prices trade much closer to the equivalent per-crude-barrel price because European uses of natural gas have evolved over a much longer period of time and do not suffer from infrastructure constraints, legislative tariffs or bans on trade flows.

TER: Elite opinion in Western Canada is strongly against new pipelines and energy export facilities. Is it possible these facilities could be prevented for political reasons?

AD: We believe that economics will prevail eventually, and persuade the people and their legislatures to permit the infrastructure necessary to Western Canada’s energy resources. Keep in mind that large-scale natural gas production is a relatively recent development in British Columbia (B.C.), so it will take some time for the population to resolve the political issues engendered by this development.

TER: How bad do you expect the Q1/15 earnings reports from the majors will be?

AD: The latest reports across the board for major producers have reflected the sharp drop in oil prices. In a few cases, short-term hedging may have provided some insulation, but the reality of the scale of lost income is likely to be shown in the Q2/15 reports.

TER: Will this lead to an increase in M&As?

AD: The proposed takeover of BG Group Plc (BRGYY:OTCQX; BG:LSE) by Royal Dutch Shell Plc (RDS.A:NYSE; RDS.B:NYSE) illustrates the opportunity available to cash-rich companies. Shell, like other supermajor, integrated companies, has been suffering from declining reserve life and insufficient production replacement for years. Its 2014 reserves replacement ratio was 49%, of which only 17% came from exploration. Meanwhile, its 2014 reserves life index declined to 11 years from 12.3 years in 2013.

TER: Do you believe that Shell’s takeover of British Gas was a good decision?

“The length of time oil trades below $75/bbl is a clue to how strong the recovery might be once a supply-demand balance is achieved.”

AD: In the present environment, it is cheaper to buy proven reserves than pursue expensive and risky exploration. British Gas carries substantial debt and had to take huge writedowns as a result of the price drop because many of its assets have been impaired. Nevertheless, BG offers Shell very large proven reserves and production in a global portfolio, as well as attractive development projects in emerging regions such as Australia and Brazil. Shell got BG at a very attractive price, and this deal sorts out its declining reserves problem. Shell also gains a much-larger global presence and will likely realize savings deriving from the elimination of duplicated functions.

Shell expects the oil price to recover to $90/bbl by 2018. So the industry is fairly bullish on long-term oil prices, and we expect the pace of M&A to accelerate.

TER: What do you make of the rumors of a possible takeover of BP Plc (BP:NYSE; BP:LSE)?

AD: I don’t think anyone would be interested in taking over BP, frankly. This company still suffers from a huge overhang from the Macondo disaster in the Gulf of Mexico, with the potential of a huge liability settlement with U.S. authorities. BP also has large exposure in Russia with its TNK joint venture, which, given the sanctions against that country, would preclude any majors touching BP. In any event, there are far more attractive targets than BP.

TER: You have said your investment philosophy in energy is based on the idea that “smaller oil and gas exploration and production (E&P) companies tend to outperform their larger counterparts.” Can we expect these smaller companies to do even better vis-à-vis the larger companies in the near future?

AD: Generally, smaller oil E&Ps can outperform on the upside. They can, however, also underperform in a bear market, with small caps dropping by more than 50% in the last six to nine months. It is well understood that when oil markets are in a crisis, investors tend to sell the smaller caps first.

These selloffs have historically produced great buying opportunities. The majors have suffered less due to their diversification in storage, transportation, refining and retail operations, but they will also be less responsive when prices rise. As oil prices recover, the recoveries in small caps could be startling, but investors must exercise extreme caution, as not all boats will rise with the tide.

TER: What are the attributes of bargain energy juniors?

AD: The main attribute of an energy junior is that it is primarily E&P-focused. The full spectrum of its operations is focused on buying acreage, proving up, and producing oil and gas. That gives the junior much higher operational leverage to the oil price. For instance, a junior U.S. E&P with a $45/bbl marginal cost of production now makes about $8–9/bbl in profit. So if oil rises to $65/bbl, its profitability more than doubles.

“The minute oil prices recover to $70–75/bbl, shale drilling will recommence.”

Unfortunately, leverage can be manifested financially as well. E&Ps reliant on the public market for funding are likely to suffer for long periods in this environment. Investors will be unwilling to pay for risky exploration given the apparent oversupply, even if it is understood to be short-term. Over-indebted operations will be forced to battle with bondholders and bankers, in the meantime paying high fees and costs that could have very detrimental effects on their operations.

TER: Many of the juniors hammered by the markets in the last six to nine months boasted low costs of production, healthy margins and good management. Will such companies need to wait for oil to reach $75/bbl before their shares recover?

AD: Investors tend to sell indiscriminately in times of panic. However, as we have seen oil prices rebound in the last three months by 20% or so from January’s lows, some of the better small caps have seen their share prices double.

TER: How has the weak Canadian dollar affected Canadian oil and gas producers?

AD: It has been a bonus to domestic producers. The Canadian dollar has depreciated 22% against the U.S. dollar since 2012. This has reduced labor and other supply costs for producers and increased the value of U.S. dollar-denominated sales.

More important is that the oil-price collapse has resulted in a great deal of idle capacity in drilling and other service companies. As exploration and drilling have fallen dramatically, service providers have been compelled to lower prices. Drilling costs have decreased by 25% as a result, and could fall a lot further.

TER: Will Canadian producers benefit from the “dollar discount” long-term?

AD: We strongly believe that the Canadian dollar has been oversold. Global investors have preferred U.S. dollar assets because of the perceived security and safety of the U.S. economy. However, the multitrillion-dollar debt that the Fed carries on its balance sheet is unlikely to ever be repaid given the U.S.’ current and projected economic growth rates. As a result, the Fed is likely to favor depreciation of the U.S. dollar.

In addition, the Canadian dollar historically has been closely correlated to the oil price because the Canadian economy is so reliant on oil exports. Therefore, an oil price recovery should strengthen the Canadian dollar.

TER: Let’s get into specifics. Which are your favorite Alberta oil and gas juniors?

AD: We have taken advantage of recent weak equity values to strategically deploy cash reserves in our portfolios. One of our latest and largest holdings is in Yangarra Resources Ltd. (YGR:TSX.V), which operates in the Cardium, one of Western Canada’s most economic oil regions. The company recently announced a 114% increase in its 2014 reserves while keeping finding and development costs of developed producing reserves at $26.36/bbl, with a recycling ratio of 1.6 times. Its 2014 production/replacement ratio was 179%, while its Proven and Probable reserves life index increased to 34 years. These are exceptional results. Companies such as Yangarra are not only able to survive in a low-price environment—they also have long-term viability and the long-term potential, if prices recover, to grow production dramatically over the next couple of years.

TER: Yangarra announced a $20 million ($20M) bought-deal financing on April 28. How strong is its balance sheet?

AD: This is a prudent company. It has low debt, but it likes to boost its reserves. Its share price is up 100% since January. It took advantage of this recovery to raise some equity to have more firepower to do deals. It is best positioned in its territory to consolidate and buy weaker competitors, enhancing its acreage position and making it even better positioned to grow reserves and production when oil prices increase. In this environment, the best approach is to raise equity rather than debt.

TER: Which other Alberta juniors has the Junior Oils Trust invested in?

AD: Two. The first is RMP Energy Inc. (RMP:TSX), which produces approximately 44% oil/56% gas in west-central Alberta. Even though it has cut its capex program by half, RMP still expects to grow its production by 10–20% in 2015. Like Yangarra, it has little debt, and its debt-to-cash flow ratio is well under 1:1, meaning it could pay debt back in less than a year. It expects to generate 2015 free cash flow of more than $100M at $50/bbl. RMP is another company that will live to prosper when the price of oil recovers.

TER: RMP shares lost 50% of their value from February to March, falling from $5.50 to $2.75/share. Shares have since risen to about $3. Is this a company that must await oil rising to $70-75/bbl for its share price to recover?

AD: Some companies become more attractive to investors at different times. Once RMP further confirms its position with the publication of its quarterly reports, investors will realize that the company offers extremely attractive fundamentals compared to its low gearing and its growth in reserves, despite a capex cut.

“As oil prices recover, the recoveries in small caps could be startling, but investors must exercise extreme caution.”

What we like about companies such as RMP is that they are sensible. They trim capex very quickly to adjust to their free cash-flow-generating capacity, and will not overspend just to increase revenues. RMP wants to make profits and increase its value for the benefit of its shareholders. It will wait until the oil price recovers before increasing capex. This goes back to the point I made earlier about the remarkable operational flexibility of the North American shale oil industry.

TER: And the third Alberta junior you’ve invested in is?

AD: Tamarack Valley Energy Ltd. (TVE:TSX.V). Even though it carries more debt than Yangarra and RMP at two times forecast cash flow, it has recently made some very attractive acreage deals that should expand its reserves dramatically. It has a reputation for very tight cost control and some of the most productive wells in the Wilson Creek region. This is another company that stands to benefit as the oil price recovers.

TER: Tamarack announced a 78% increase to reserves and record Q4/14 production on March 12. How big could it become?

AD: The company has a huge acreage position, so it’s a matter of how much capex it can mobilize and in what manner. This is another sensible company that didn’t leverage operations too quickly based on what turned out to be overly optimistic projections of the short-term oil price.

TER: Tamarack is on track to reduce its net debt to less than $118M by the end of Q2/15. Does that lessen your concern about its balance sheet?

AD: Because this company has done some recent deals to greatly expand its acreage, we think its bankers will be pretty relaxed concerning loan coverage issues. Tamarack is in a secure position going forward.

TER: Which B.C. natural gas junior do you like?

AD: Despite low natural gas prices, a few companies have managed to thrive regardless. Our favorite is Painted Pony Petroleum Ltd. (PPY.A:TSX.V), which operates in the Montney Formation in northeast B.C. It announced in March that it has increased its reserves by 68% to 2.9 trillion cubic feet equivalent with a recycling ratio of 5.1 times. This is an enormous base on which to build production.

As mentioned above, a typical hurdle for B.C. shale gas producers has been infrastructure. They need processing plants and pipelines to help bring production to market and build cash flow. Painted Pony has recently consolidated its position in this regard with a very large processing plant deal to be completed this year. This will increase its production and access to market and grow its cash flow. This company’s balance sheet is very strong and is thus able to support successful growth. Furthermore, we believe that Painted Pony’s acreage position and its resource base make it a very attractive takeover target. It is quite viable even at low gas prices, and presents many other attributes of attractive valuation that could deliver much higher value to shareholders.

TER: Are there any other companies in your portfolio you could mention?

AD: Two of our larger earlier-stage holdings are FAR Ltd. (FAR:ASX) and Carnarvon Petroleum Ltd. (CVN:ASX). Both companies are listed in Australia. They have been fortunate enough to have made extensive oil discoveries last year, opening up new districts with great potential. In both cases, their farm-in partners have confirmed plans for follow-on drilling to prove up the resource of their finds, and early indications are quite positive.

With the dearth of E&P funding caused by the low oil price, some positions are very advantageous because the budgets of even the major integrated companies are directed to the lowest-risk and higher-reward projects. Both companies probably have many years to go before they ever deliver oil to the market, but as their partners continue drilling and proving up resource size, their valuations will likely rise by comparable amounts.

TER: When I spoke to you last, you noted that Carnarvon was trying to divest its Thailand operations. Has there been any movement on that front?

AD: Those operations have been divested, and Carnarvon has been paid. As a result, the company now has in excess of AU$100M in cash compared to its market cap of about AU$124M. It can easily fund its share of future development drilling of its offshore Australia assets, and it is also carried for up to $75M in drilling by its partner, Apache Corp. (APA:NYSE), whose Australian operations were recently taken over by a private equity consortium.

In addition to the cash generated by the Thailand sale, the company has retained a 20% royalty and will receive cash flow from this growing asset for years to come. It also holds several very attractive and highly prospective exploration assets that it is negotiating with other parties to drill.

TER: FAR has properties in both West and East Africa. How has it advanced them?

AD: As you can imagine, farm-in deals in this price environment are rare and difficult. So we can, for the time being, discount FAR’s East African assets in Kenya.

The jewel in this company’s crown is in Senegal, where its partners, Cairn Energy Plc (CNE:LSE) and ConocoPhillips (COP:NYSE), have found a potentially extremely attractive new oil region. Cairn, which is cash-rich and exploration-hungry, has confirmed its intention to drill another two holes and is currently mobilizing the rigs. As it moves forward with this program, we might see a share price appreciation in anticipation of good drilling results. Typically, with such a frontier find, petroleum engineers tend to err on the side of caution, so the probability is heavily skewed on an increase of potential reserves rather than a decrease.

TER: A final word: What is your advice for energy investors?

AD: They should invest in top-tier management teams at an attractive valuation with good potential to grow, even at lower prices, based on solid balance sheets. Should oil prices rise faster, these companies will also be best placed to benefit, as well as consolidate with other participants in their regions.

Investors should avoid overleveraged and oversold operations even though they might seem potentially undervalued. Many companies have fallen 90% or more from their highs because of their great indebtedness. These look tempting, but they could be the classic value trap, where you buy into a potential recovery that never occurs because the fees and expenses associated with deleveraging force these companies to their knees.

TER: Angelos, thank you for your time and insights.

Angelos Damaskos is the founder and CEO of Sector Investment Managers Ltd. of London, a regulated investment advisory company. He is the principal adviser of the Junior Oils Trust and the Junior Gold Fund. The Junior Oils Trust focuses its investments in smaller oil and gas exploration and production companies. An investment banker, Damaskos worked a decade for the European Bank for Reconstruction and Development. He holds a bachelor’s degree in mechanical engineering from the University of Glasgow and a master’s degree in business administration from the University of Sheffield.

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DISCLOSURE:
1) Kevin Michael Grace conducted this interview for Streetwise Reports LLC, publisher of The Gold Report, The Energy Report, The Life Sciences Report and The Mining Report, and provides services to Streetwise Reports as an independent contractor. He owns, or his family owns, shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of Streetwise Reports: None. The companies mentioned in this interview were not involved in any aspect of the interview preparation or post-interview editing so the expert could speak independently about the sector. Streetwise Reports does not accept stock in exchange for its services.
3) Angelos Damaskos: I own, or my family owns, shares of the following companies mentioned in this interview: None. I personally am, or my family is, paid by the following companies mentioned in this interview: None. My company has a financial relationship with the following companies mentioned in this interview: None. My Junior Oils Trusts holds shares in Carnarvon Petroleum Ltd., FAR Ltd., Painted Pony Petroleum Ltd., RMP Energy Inc., Tamarack Valley Energy Ltd. and Yangarra Resources Ltd. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I determined and had final say over which companies would be included in the interview based on my research, understanding of the sector and interview theme. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.
4) Interviews are edited for clarity. Streetwise Reports does not make editorial comments or change experts’ statements without their consent.
5) The interview does not constitute investment advice. Each reader is encouraged to consult with his or her individual financial professional and any action a reader takes as a result of information presented here is his or her own responsibility. By opening this page, each reader accepts and agrees to Streetwise Reports’ terms of use and full legal disclaimer.
6) From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles and interviews on the site, may have a long or short position in securities mentioned. Directors, officers, employees or members of their families are prohibited from making purchases and/or sales of those securities in the open market or otherwise during the up-to-four-week interval from the time of the interview until after it publishes.

( Companies Mentioned: CVN:ASX,
FAR:ASX,
PPY.A:TSX.V,
RMP:TSX,
RDS.A:NYSE; RDS.B:NYSE,
TVE:TSX.V,
YGR:TSX.V,
)

Auryn’s Management Finds Success in the Prudent, Measured Approach

The Gold Report: Please give us an overview of Auryn Resources and its genesis.

Shawn Wallace: Auryn Resources Inc. (AUG:TSX.V) is the third company that Auryn chairman Ivan Bebek and I have started. Previously we founded Keegan Resources and later Cayden Resources. Keegan became Asanko Gold Inc. (AKG:NYSE.MKT; AKG:TSX; ) and it merged with its neighbor, PMI Gold. While working with Asanko in Ghana, we met Auryn COO Michael Henrichsen, a brilliant structural geologist with Newmont Mining Corp. (NEM:NYSE).

After Cayden was bought by Agnico Eagle Mines Ltd. (AEM:TSX; AEM:NYSE), our team began a global search for an asset with three key attributes: it had to be a district-scale opportunity, which means a land package where multiple deposits could be developed in the same geological setting; it had to be situated in a stable jurisdiction where people get mining permits in a reasonable timeframe; and it had to be high grade because it’s only in times like these when you can economically acquire high-grade assets. We searched in a bunch of countries but Committee Bay ticked off all the boxes.

“The key to our success is that we’re a disciplined group with skilled people.”

Auryn has people from Cayden and Keegan on the board, which has made the integration of a new company into the group almost seamless. We had about $9 million ($9M) in cash at the start of this year but it is about $7M now because we have started spending money on Committee Bay. And a lot of that money came from us. We invest in our company.

TGR: Why has your group had so much success, even in difficult markets?

SW: The key to our success is that we’re a disciplined group with skilled people. We know what we’re good at and what we want to achieve. Ivan and I get a lot of the pats on the back, but frankly, it’s our technical people—the geologists and geoscientists who go into the field and create value for our shareholders. I was with the Hunter Dickinson Group for 15 years before Ivan and I formed this group about 10 years ago. That is where I learned how to do things.

Our ability to adapt and be flexible to changing times and not getting too hung up on the things that we can’t control and trying to mitigate the risk of the things we can control has helped us in these difficult markets. We’re not going to issue shares just to keep the lights on. Many companies have fallen into that trap. We’re not going to let that happen.

TGR: What are some examples of how you have mitigated risk?

SW: It’s about picking where and how we spend our capital. For example, with Keegan in 2008 when the markets crashed and our share price went from about $4 to $0.50, we had about $7M in the treasury when Ivan and I sat down and said, “We have to stop drilling in order to preserve our capital,” whereas a lot of companies continued to drill. Why would you drill holes and put results into a market that could not care less? But because we ceased drilling we didn’t have to raise money until the markets had recovered. That sort of prudence kept dilution to a minimum. If a company has too much cheap stock, it usually can’t recover.

TGR: What are some ways that you are creating value with less money?

SW: Right now we are preserving value, rather than creating it, by being prudent. But we are also in acquisition mode. We’re creating value by purchasing or getting involved with high-quality assets that would not be available in a better market. The Committee Bay Joint Venture is one example. We will spend $6M over 18 months to earn a 51% stake in Committee Bay. We have a top technical team that will make its decisions using a precise, science-based approach to exploration. We’re not drilling for the market.

The best way to add value is to either acquire gold through transactions or discover more gold. We’d rather spend more time exploring the land package because, frankly, that’s what we do. Cayden is an excellent example. Agnico is going to build it and carry on but because of the share rollover, if people want to continue to have exposure to the El Barqueño asset that we were developing in Cayden, they can remain Agnico shareholders and get paid a dividend along the way.

TGR: Pitch me on Committee Bay.

SW: It’s really simple. It’s a 300-kilometer (300km) greenstone belt where $100M was spent on exploration over the last 20 years. The Three Bluffs deposit has a 1.1 million ounce gold resource with a grade of over 8 grams per ton (8 g/t) gold. The deposit holds together beautifully and we’re going to make it even bigger. But the even bigger opportunity is the potential of the belt. Every stepout hole that has been drilled has met with success, but then it wasn’t followed up. That’s very exciting.

“Right now we are preserving value, rather than creating it, by being prudent.”

I mentioned that we wanted a project in a good jurisdiction. Well, this is a good jurisdiction. You can permit mines in Nunavut. Agnico is there. Privately held TMAC Resources Inc. is there. This part of Canada is challenging because it’s remote but you can permit and finance projects there and, frankly, the price was right. This is an asset that’s had $100M spent on it and probably three-quarters of that is scientific data that we can use to strategically explore this asset.

TGR: Are you the operator?

SW: We are the operator right now and when it turns into a joint venture we’ll still be the operator. North Country Gold Corp. (NCG:TSX.V) has been working there for 20 years so we’re leveraging its experience. There are five drills turning at Committee Bay. The company did a fantastic job making discoveries from outcrops, and there are not many mineralized outcrops. It speaks to the endowment of this particular mineral belt. Without using induced-polarization surveys and other forms of geophysics, it’s difficult to find targets on this type of belt.

TGR: Cayden was working on the Guerrero Gold Belt in Mexico. Your team is certainly familiar with that type of geological setting.

SW: When we went out to make acquisitions with the Hunter Dickinson Group, they always had to be significant. With Auryn we did not want a postage stamp somewhere that would produce 45,000 ounces (45 Koz) a year. That’s not for us. We’re going for large scale. It’s all about getting that critical mass because that’s the only way we’re going to get a major mining company interested in making a transaction.

TGR: What are your biggest challenges with Committee Bay?

SW: Certainly the remote location is a challenge but it’s not as remote as it is perceived to be. One of our challenges is properly communicating to people that we can mitigate those costs and risks through proper planning and execution. There is an old Italian tailor’s adage that says measure twice, cut once. We’re going to measure three times here because if you get it wrong, it’s expensive. Good execution is really important.

TGR: How far away is Agnico Eagle Mines’ Meadowbank open-pit mine in Nunavut?

SW: From the southern part of our project, the West Plains target, where we have 15 g/t gold over 10 meters (10m) in some drill holes, Agnico-Eagle is only 60km away. In that part of the word that’s next door. It’s exciting that the company is there and having success but it shouldn’t imply anything just because Agnico bought Cayden. This is almost coincidental. We both happen to like these types of jurisdictions. Agnico brings a lot of credibility to the idea that the Arctic is a good place to be.

TGR: What are your near- and long-term goals with Auryn?

SW: The near-term goal is to execute on an exploration program this summer at Committee Bay. Our team of geoscientists has reprocessed older drilling and exploration data and will head to Committee Bay to do some more geophysics and mapping. We’re going to bring in a rotary air blast drill in July and drill 3,000–5,000m. These drills only go down about 100m, but we don’t think prospecting with diamond drills is capital efficient. We won’t be able to drill 500m deep holes, but we’re trying to make new discoveries. If we can’t get the imprint of a new discovery in the top 100m, then it’s probably not going to be something that we want to pursue. We’re pretty excited about what’s coming this summer.

The other near-term goal is to acquire additional assets. You can expect that; it can take months or even years to make an acquisition. It’s not important how long it takes. It’s important that we get the right deal on the right asset.

“We want to be the people making the wave, not the people riding it.”

Our long-term goal is to develop a company that is full of high-grade, high-quality gold assets because that’s where we can create the most value. We want to use our currency that we have with our shares, with our ability to raise capital thanks to recent successes, and make these acquisitions at a time when others are financially challenged.

TGR: Are you looking at properties in the vicinity of Committee Bay or are you looking in different jurisdictions?

SW: It would be good for us to get something farther south but Canada is definitely a good theme. But it’s all about the right asset. We could easily see us doing something in Nevada or Ontario or even Mexico again.

TGR: Is there a risk of spreading your resources too thin?

SW: No. We won’t do that. The Committee Bay project is fully staffed. We brought in the team from our joint-venture partner, so we’re not stretched. From a cash perspective, however, we would certainly need to raise additional capital if we found what we believed was an accretive transaction.

TGR: You and other members of your management team have made considerable money in previous deals. Why not just walk away?

SW: If it were about money I could have stopped doing this 20 years ago. It’s not been about the money for a long time. Money is the trophy but we’re a pretty young group. I’m only 45 years old. Ivan is 37. We just spent 20 years getting good at it and we continue to improve. There’s no way we’re going to stop now. We want to be the people making the wave, not the people riding it.

TGR: Your team has a following among investors. How does that change how you do business?

SW: We do have a following. I’ve lacked the perspective of what it’s like not to have a following. That’s not to say that we haven’t had our lean times. That just comes with being in this business. We are very respectful of our following and we don’t take it for granted. Capital is fickle. The most important thing is that we continue to take a science-based approach to exploration and properly communicate what we are doing to the market. Everybody knows that the odds of crossing the goal line the way we did with Cayden are not high, but there are ways you can increase your odds. We make every effort to make that happen.

TGR: How much capital will you end the year with?

SW: Over the next four months we’re going to spend about $4M as part of our earn-in agreement. Our current budget has us coming to the end of 2015 with about $2.5M and then spending some cash on general and administrative (G&A) expenses. We’ve kept our G&A down. We’re in a B-class building off the beaten path in Vancouver. We ran Keegan and Cayden from here. Capital efficiency is a big theme for us.

TGR: Roughly what percentage of Auryn does management own?

SW: About 30–35%, with another 35% owned by people close to us—even family members are in Auryn.

TGR: Does that concentration of ownership pose liquidity issues?

SW: Auryn is certainly not the most liquid stock. We have to weigh that against how tightly held the stock is. I’d rather be tightly held and have some liquidity issues as opposed to be being very sloppy. We try to strike a balance. One of the reasons that Ivan and I are successful business partners is that we share certain principles and one of them is to be antidilutive.

TGR: When will you have to go back to the market?

SW: We will probably do that sometime between now and the end of the year. We’ll wait for a window. We have some things that we want to get out to the market before we would contemplate a financing. We recently returned from a marketing trip in Toronto and New York. Our story was very well received. I think you’re going to see some analysts initiate coverage.

TGR: Auryn is not a well-known name in the junior mining space. What are three or four things that you believe are going to change that?

SW: There are very few others in the space competing for attention. Three things would be continuing to make accretive acquisitions, having some exploration success and spending money prudently on marketing efforts. That’s important. We have an adage here: If you’re spending money on the ground, you need to be spending money on marketing. Those are things that are going to help us be better known.

TGR: What are some things that this market has taught you that perhaps a bull market would not?

SW: I’ve been through a few of these so this one isn’t anything special. But I’m glad it’s here because now we can buy things in a rational manner. Patience is probably the most important skill that anyone who tries to do what we do needs to have because people tend to make more impetuous decisions in a bull market, both technical and financial. Now those people have to live with those decisions. To be patient and measured in everything you do is important.

TGR: You now have merger and acquisition (M&A) experience. What are some specific project attributes that make them more likely to be takeover targets than others?

SW: One type of project that is going to trigger more M&A would be district-scale projects. Major gold producers want assets significant enough to impact their balance sheets. That means a potential takeover target has to be something where a major could get in and produce a significant amount of metal at a proper margin for years and years. That’s why we were so adamant that we wanted a project with district-scale potential. If a project has good grade in a significant land package in the right jurisdiction, it is only a matter of time before suitors take notice.

TGR: Please tell our readers some things they can look forward to before the end of 2015.

SW: People can look forward to seeing Auryn continue to make accretive acquisitions for the company, and we will launch our first exploration program at Committee Bay. We should generate a fair bit of excitement with the kind of results that we’re expecting. This is an exciting time in the markets. I’m looking forward to the next three to five years.

TGR: Thank you for talking with us today, Shawn.

Shawn Wallace is president, CEO and director of Auryn Resources. He has been involved in all aspects of the mining industry, from mineral exploration and project management, to financing, mergers and acquisitions, and corporate development. For more than two decades Wallace has been instrumental in building numerous high-quality mineral exploration, development and production stage companies. He also serves as a director of Asanko Gold (formerly Keegan Resources) and a director of Stratton Resources, and was chairman and a director of Cayden Resources prior to its acquisition by Agnico Eagle in September 2014.

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DISCLOSURE:
1) Brian Sylvester conducted this interview for Streetwise Reports LLC, publisher of The Gold Report, The Energy Report and The Life Sciences Report, and provides services to Streetwise Reports as an independent contractor. He owns, or his family owns, shares of the following companies mentioned in this interview: None.
2) Auryn Resources Inc. paid Streetwise Reports to conduct, produce and distribute the interview.
3) Shawn Wallace had final approval of the content and is wholly responsible for the validity of the statements. Opinions expressed are the opinions of Shawn Wallace and not of Streetwise Reports or its officers.
4) The interview does not constitute investment advice. Each reader is encouraged to consult with his or her individual financial professional and any action a reader takes as a result of information presented here is his or her own responsibility. By opening this page, each reader accepts and agrees to Streetwise Reports’ terms of use and full legal disclaimer.
5) From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles and interviews on the site, may have a long or short position in securities mentioned. Directors, officers, employees or members of their families are prohibited from making purchases and/or sales of those securities in the open market or otherwise during the up-to-four-week interval from the time of the interview until after it publishes.

( Companies Mentioned: AUG:TSX.V,
)

Five Mining Companies Joe Reagor Believes Are Ahead of the Curve

The Gold Report: What’s your gold price forecast for the rest of 2015?

Joe Reagor: For the full year, our average price is $1,260 per ounce ($1,260/oz). If the U.S. dollar were to remain steady and not strengthen, gold could reach $1,300/oz by year-end.

TGR: Gold was sold off heavily in the last week of April based on an anticipated interest rate hike by the Federal Reserve. Should the Fed actually raise the rate, how much of a negative effect will that have on gold and for how long?

Integra Gold Corp.’s Lamaque is a near-term production opportunity with a minimal capital budget and an after-tax IRR of over 50%.

JR: It is commonly believed that rates will rise because the U.S. economy is improving, but we keep getting mixed signals. The most recent jobless claims were exceptionally good, but the Q1/15 GDP increase was only 0.2%. If we see a stiff rate increase because the Fed thinks the economy is strengthening, that could be bad for gold. Should the Fed choose to raise rates slowly over time, giving it the option to lower rates again if need be, I don’t think that’s bad for gold.

TGR: Some people believe that a stiff rate hike would spook the market and cause an equities crash. What do you think?

JR: I doubt the Fed would move on that without first providing a cushion to the markets. Should a rate hike spook the market and force the Fed to quickly lower rates again, I think gold would move higher quickly.

TGR: Is it possible an interest rate hike has already been priced in to the price of gold?

JR: The expectation of rate hikes is definitely priced into gold inherently through the strength of the U.S. dollar, as compared to, say, Europe, which has been forced to introduce further quantitative easing.

TGR: The World Gold Council (WGC) 2014 survey showed continuing strong demand for physical gold both from Asian consumers and central banks. Do you think this trend will continue?

JR: Definitely. The WGC’s Q1/15 survey demonstrates that this trend is continuing. We believe that China will maintain its position as the world’s largest consumer of gold as a store of value, with India as the largest consumer of gold for jewelry.

TGR: Over the past year Russia has bought more than $7 billion ($7B) worth of gold bullion. Its total gold holdings of 1,208 tons are worth $49B, making it the world’s fifth-largest holder. Some suggest that Russia and China are working in concert to use gold as part of a strategy to shift economic power from the U.S. to this rival axis. Is there any credence to this?

JR: I believe Russia and China would prefer that the U.S. dollar not remain the world’s reserve currency, which would shift the dynamics of the pricing of many commodities, not just gold. Exactly how they intend to accomplish this is not certain, but there’s no question that this pushback against the U.S. dollar has the support of many countries.

TGR: Shouldn’t rising physical gold demand force higher gold prices?

JR: The contract (or paper) gold market is significantly larger than the physical gold market. So an increase in physical demand doesn’t necessarily result in enough of a total increase in gold demand to force higher prices in U.S. dollars.

Part of the reason we like Pretium Resources Inc. so much is that it is now so close to the finish line.

Outside the U.S., the value of gold in other currencies is up almost 20% already this year, which should result in better margins for non-U.S. producers. Should the U.S. dollar weaken by, say, 10%, that would move the gold price up to around the $1,300/oz we’re predicting for year-end 2015. Beyond that, we believe that rising marginal production costs could drive gold to $1,450/oz.

TGR: What are your forecasts for the prices of silver and zinc for the rest of 2015?

JR: We expect a gold-silver price ratio of 70. Based on $1,300/oz gold, that would mean a silver price of about $18.50/oz.

Our zinc forecast is a conservative $1.15 per pound by year-end. We believe there could be a serious zinc shortage by 2016. MMG Inc.’s (1208:HK) Century mine in Australia, which alone produces 4% of world zinc, will close shortly. Already, the London Metals Exchange (LME) zinc inventory has fallen from 1.2 million tons two years ago to under 500,000 tons (500 Kt) today.

TGR: Given that silver is easier to buy and store than gold, could a decline in confidence in the U.S. dollar lead to the gold-silver ratio falling toward lower historic norms?

JR: Perhaps over time the ratio will move to 65 or 60, but I doubt that we will see a return of 2010–2012, when it was below 50. The recoverable ratio of silver to gold in the average deposit discovered today is now closer to 80. This is due to significant recent improvements in silver recovery rates that have not been matched by gold recovery rate improvements, which came decades earlier.

TGR: Can we expect an increase in the number of pure-play silver companies?

JR: Not without sustained higher gold and silver prices. Miners generally are moving away from pure plays in order to lessen the impacts of swings in the prices of precious metals. In recent years, a number of big silver producers have made gold asset purchases and have built mines with strong base metals components so they can operate even in down markets.

TGR: Which Canadian juniors with near-term gold projects are your favorites?

JR: There are two: Pretium Resources Inc. (PVG:TSX; PVG:NYSE) and Integra Gold Corp. (ICG:TSX.V; ICGQF:OTCQX). Pretium’s more of a mid cap, but because it is in the development stage and doesn’t have revenues, we put it in the junior basket.

TGR: Pretium has reached two milestones this year: permitting approval of the Brucejack project by the British Columbia government and the signing of a cooperation and benefits agreement with the Nisga’a Indian band. How do these events affect their valuation?

JR: Pretium has derisked its asset but still has two hurdles remaining. The company needs federal permitting, which is expected to take 150 days from the receipt of the environmental permits, and it needs to complete the financing process. Part of the reason we like this company so much is that it is now so close to the finish line.

There has been an overhang on Pretium’s valuation since Strathcona Mineral Services stepped away during bulk sampling in October 2013.

TGR: The Brucejack deposit has been characterized as “nuggety,” which is often hard to understand. Has Pretium demonstrated greater confidence in the quality of its resource since 2013?

JR: When Strathcona stepped away, Pretium was only 2 Kt into a 10 Kt bulk sample. The remaining 8 Kt came in above expectations and demonstrated that Brucejack does have significant gold-production capabilities. Pretium got 5,800 oz gold out of 10 Kt, and its target was only 4,000 oz.

Brucejack is not “nuggety” in the sense of how we understand that term in the U.S. and Canada. The deposit structure is more similar to that which we see in islands in the Pacific Ocean, which makes sense because geologists tell us that part of British Columbia was an island before it joined the mainland. Brucejack has high-grade veinlets and thus manifests quite variable gold grades. There will be pockets with a low-grade halo and then a spike of visible gold will appear.

TGR: How does Pretium propose to deal with this variability?

JR: By employing large-scale bulk mining in order to capture all the gold.

TGR: Brucejack will require a capital expenditure (capex) of $747 million ($747M). How does Pretium intend to raise it?

JR: The company raised CA$81M in equity in January. We expect that the rest will be raised through a combination of bank debt and a gold-streaming agreement, perhaps 50% bank debt and 25% gold streaming, which wouldn’t leave much in the form of equity to be raised. We’re pretty confident that we’ll see that in the next two to three months.

We would also note that because of the weakness of the Canadian dollar, the capex might be reduced by as much as 20% in U.S. dollar terms.

TGR: When do you expect Brucejack to begin construction and then production?

JR: Should Pretium break ground in July, that would put it on a timeframe of Q1/17 for first production.

TGR: Is Pretium a takeover target?

JR: We don’t really expect this unless it was to happen before financing is completed, and that’s expected pretty soon. To buy Pretium and develop Brucejack would cost about $1.5–1.8B all told, and that would be a big risk for a major to take on in this environment.

TGR: Let’s talk about Integra’s Lamaque gold project in Quebec. How does it compare to Brucejack?

JR: Lamaque is a much smaller project. Brucejack has 10+ million ounce (10+ Moz) gold, while Lamaque has about 1 Moz gold Indicated and Inferred. We like Lamaque because it’s a small, very simple project with an average grade of over 9 grams per ton gold. There is an existing mill, and the preproduction capex is only $62M. Integra already has permits for three of the four potential production site ore bodies. So this is a near-term production opportunity with a minimal capital budget and an after-tax internal rate of return of over 50%. It could be very interesting to some of the other mid-cap gold and silver producers.

TGR: Integra closed a $13M bought-deal private placement May 1. How does it stand for financing?

JR: Integra wasn’t cash poor to begin with, and this money provides the additional means to get Lamaque shovel ready over the next six to nine months and develop the underground deposits. Integra is not in a rush, from a production standpoint. I think it wants to optimize the asset a little bit first, which could result in an even higher potential rate of return on the project.

There remains the possibility that Lamaque could be financed via a larger company earning in to the project, which would still maintain a significant portion of the upside for shareholders.

TGR: When do you anticipate first production at Lamaque?

JR: It’s tough to say because the company hasn’t really given a solid timeline, but we expect it could be in 24 to 36 months. The mill is already built and just needs some refurbishment. If Integra decides to spend more time on exploration, it will be closer to three years than two.

TGR: Which U.S. junior with a near-term gold project is your favorite?

JR: We really like Solitario Exploration & Royalty Corp. (SLR:TSX), mainly because its Mt. Hamilton project in Nevada is effectively shovel ready. The company needs one last permit. My sense is that it may actually look to sell this asset. Solitario was initially a project generator, and Mt Hamilton was its first attempt to bring a project all the way to production.

Capex is $91M, and it would be tough for a company this small to finance it on its own. It would be much easier for a mid- to larger-cap gold producer to see it as an opportunity to enter the Nevada market with a simple project in a great jurisdiction that would produce gold at $558/oz.

Whether Solitario owns it or not, Mt. Hamilton should begin construction this year, with production beginning in early- to mid-2017.

TGR: Solitario’s market cap is only $35M. This suggests a great deal of potential leverage, does it not?

JR: Mt. Hamilton alone probably justifies the market cap. The company has other assets in South America that are carried either to production or to feasibility study. One in particular, the Bongará zinc project in Peru, has significant upside. This is a joint venture (JV). Brazil’s Votorantim Group is earning in through one of its subsidiaries. If Votorantim brings it to production, it would have a 70% interest, and Solitario would retain 30%. Solitario would have to repay the cost of construction to Votorantim but would retain 50% of its share of cash flow generated by the mine.

TGR: Given what you said about a future zinc shortage, isn’t this is a timely asset to have?

JR: It is. We anticipate 2019 production. However, its asset value could rise sharply should the price of zinc spike, and that could force Votorantim to buy Solotario out. So Solitario could have, within less than two years, two opportunities to sell assets and return value to shareholders.

TGR: Would you name a mid-tier gold producer you think is underappreciated by the market?

JR: IAMGOLD Corp. (IMG:TSX; IAG:NYSE) has not gotten credit for its improvements.

TGR: How specifically has the company improved?

JR: First, IAMGOLD sold a niobium mine for $500M. This put the company in a net cash position for the first time since 2013. There is no longer any worry it could be forced into bankruptcy when its debt came due assuming the cash is used to repay debt. The company is considering using some of this capital to finance acquisitions or potentially to buy out some partners on smaller-scale assets. Our preference would be that IAMGOLD uses the majority of the half-billion dollars to repay debt, and I expect it to make a decision to do so by the end of 2015 or early 2016. This would fundamentally strengthen the company.

The second way the company has improved is by reducing costs at the majority of its mines. That puts IAMGOLD in a much better position to be sustainable at low gold prices, but because it is also somewhat of a higher-cost producer, it still has significant leverage in a gold price recovery.

TGR: What are its prospects for growth?

JR: Mostly through the expansion of existing assets over the next two to three years.

TGR: Do you see IAMGOLD as a takeover target?

JR: I don’t think the company is a takeout target because its management team is a bit different from the norm. They’re more from the energy sector and so they don’t have the usual personal connections with other companies in this sector.

I think IAMGOLD’s management is more concerned with delivering value to shareholders. On the acquisition side, I think a smaller-scale buy would be viewed as a positive by the market. There has been some speculation about larger asset purchases, but I think that’s a bit more than the company can afford to bite off at this time. And I think IAMGOLD knows this.

TGR: Agnico Eagle Mines Ltd. (AEM:TSX; AEM:NYSE) has bought three companies in the last two years at very attractive prices. Should miners strike while the iron is hot, and valuations are low?

JR: Some of the smarter companies with very strong balance sheets—and Agnico falls into that category—are buying up earlier-stage assets that are far enough along so that there is a vision of how long it will take to get them into production and what their potential returns are.

The vast majority of people expect that over the next two to three years there should be a substantial recovery in gold prices. So Agnico is trying to be ahead of that curve, as are some other mid caps. I don’t see this sort of thing coming as much from the majors, however. A lot of them did their buying at the top, and their balance sheets aren’t as clean as they once were.

TGR: A great many investors in gold equities fled after the price of gold fell from over $1,900/oz to almost $1,100/oz. Does this smaller market mean more bargain companies with greater leverage?

JR: Yes, there are some bargains out there. But I think it will take a catalyst of some sort for investors to return to the market. I’ve heard repeatedly that many investors believe certain spaces are a bit frothy now, and if we see a pullback in some of them, capital would be freed up to invest in mining as an alternative in longer-term portfolios.

TGR: Joe, thank you for your time and your insights.

Joe Reagor is a research analyst with ROTH Capital Partners, providing equity research coverage of the natural resources sector. Prior to ROTH, he worked in equity research at Global Hunter Securities and at Very Independent Research, covering a wide array of resources companies including metals (steel and aluminum), mining (gold, silver and base metals) and forest products (containerboard, OCC, UFS and pulp). Reagor earned a Bachelor of Arts in economics and mathematics from Monmouth University.

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DISCLOSURE:
1) Kevin Michael Grace conducted this interview for Streetwise Reports LLC, publisher of The Gold Report, The Energy Report and The Life Sciences Report and provides services to Streetwise Reports as an independent contractor. He or his family own shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of Streetwise Reports: Pretium Resources Inc. and Integra Gold Corp. The companies mentioned in this interview were not involved in any aspect of the interview preparation or post-interview editing so the expert could speak independently about the sector. Streetwise Reports does not accept stock in exchange for its services.
3) Joe Reagor: I own, or my family owns, shares of the following companies mentioned in this interview: Agnico-Eagle Mines Ltd. I personally am, or my family is, paid by the following companies mentioned in this interview: None. My company has a financial relationship with the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I determined and had final say over which companies would be included in the interview based on my research, understanding of the sector and interview theme. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.
4) Interviews are edited for clarity. Streetwise Reports does not make editorial comments or change experts’ statements without their consent.
5) The interview does not constitute investment advice. Each reader is encouraged to consult with his or her individual financial professional and any action a reader takes as a result of information presented here is his or her own responsibility. By opening this page, each reader accepts and agrees to Streetwise Reports’ terms of use and full legal disclaimer.
6) From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles and interviews on the site, may have a long or short position in securities mentioned. Directors, officers, employees or members of their families are prohibited from making purchases and/or sales of those securities in the open market or otherwise during the up-to-four-week interval from the time of the interview until after it publishes.

( Companies Mentioned: AEM:TSX; AEM:NYSE,
IMG:TSX; IAG:NYSE,
ICG:TSX.V; ICGQF:OTCQX,
PVG:TSX; PVG:NYSE,
SLR:TSX,
)