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Junior Miners’ Management Makes All the Difference

The Mining Report: A recent article on, “The Great Divide: Inequality in Gold Juniors Means Opportunity,” said: “It’s clear we’ve reached a new level of separation between the wheat and the chaff.” What does that mean for investors?

Jeff Desjardins: As the bear market has progressed, many companies have struggled to raise the necessary funds to advance their projects. Even for those that have been more fortunate, it has often come in the form of dilutive financings.

Cayden Resources Inc. was just taken out by Agnico Eagle Mines for $205M at a premium of 42.5%.”

On the other hand, quality management teams have found ways to continue to move projects forward. We’re starting to see a big separation in metrics such as cash, general and administrative expenses (G&A), news flow and, ultimately, the creation of shareholder value. For example, we cover 22 exploration companies working in Ontario and 82% of those had less than $400,000 in cash in Q1/14, up from 65% in Q3/13. Our top three exploration companies in Ontario hold an average cash position of $2.2 million ($2.2M) each. The other 19 average only a mere $150,000 per company. Furthermore, the G&A expense ratio for the bottom 19 companies is a hefty 76%, which means that $0.76 of every dollar is not going into the ground.

We are looking at a great divide between the rich and the poor. The funny thing is that even though the rich companies have great management teams and cash to continue to develop their projects — key things that you want in a junior name — they are still trading at great valuations.

TMR: In which mining subsector — producer, developer, explorer — is an investor likely to get the most bang for the buck?

JD: All those types of companies have their advantages. It depends on an investor’s portfolio, strategy and risk tolerance. Right now, we’re focusing on developers. We published a report in early September that lists some promising companies in this stage. We believe developers with high-quality assets will be subject to merger and acquisition (M&A) activity once they are sufficiently derisked because larger companies want to buy proven resources at rock-bottom prices.

Clifton Star Resources Inc. ranks in the top third of our Quebec development companies.”

Investors should look for developers with a resource of at least 3 million ounces (3 Moz) with high grade and in a safe jurisdiction. A takeover offer is rarely made before a company publishes a preliminary economic assessment (PEA) so investors should look for a PEA or feasibility study with a high net present value (NPV), low capital costs (sub-$700M) and a high internal rate of return (IRR).

TMR: What jurisdictions should investors be taking a closer look at right now?

James Fraser: Certainly anything in North America — Mexico, Nevada, British Columbia and Ontario.

TMR: Are companies in those jurisdictions trading at a premium to the companies that aren’t?

JF: Yes. Assets in certain countries in Africa and other places like Russia trade at a significant discount to a similarly sized asset in a safe jurisdiction.

TMR: maintains a database of 450 companies that is constantly updated based on financials, management, stock performance and mining projects. What are the weightings for each of those elements and do those weightings change over time?

JD: They definitely change over time because the weightings are based on macro market conditions. In November 2013, the weightings of those factors were: financials, 54%; management, 20%; stock performance, 4%; and the project, 22%. Right now exploration companies are 43% for financials, 17% for management, 4% for stock performance and 36% for the project.

TMR: What accounts for the greater weighting in projects?

Columbus Gold Corp. is partnered with a major producer, Nordgold, on the Paul Isnard project in French Guiana.”

JD: The biggest reason for the jump in the project weighting is based on an improvement we have made over the last year, which is adding in a drill score economic analysis. We’re looking at the economics of all drill holes for each exploration company, and comparing them against other companies in the same jurisdiction. We didn’t do that before.

TMR: How do you go about analyzing drill results?

JF: In the drill hole analysis, we always compare companies in similar regions to each other. In British Columbia, for example, we would be comparing companies that are typically exploring for gold and copper together. We look at how many holes a company has drilled on the property and then take a company’s best drill results to date and calculate a “gram meter” score. If an interval is 200 meters (200m) of 1 gram per ton (1 g/t), that’s a score of 200. Or if it’s 100 g/t over 2m, that’s also 200. Once we have the results for a region, we will then rank them.

TMR: So as much as possible you are trying to compare apples to apples?

JD: By keeping as many variables as possible the same, it makes it easier to understand the key differences between two companies. We also provide “Power Rankings” to help investors sift through companies. If something jumps out to us, we make note of it there.

TMR: What are the top three or four catalysts that move the score for explorers, developers and producers?

Marlin Gold Mining Ltd. was featured in our most recent Top 10 report.”

JF: It’s still a tough climate for exploration companies. The first thing we look at is cash position. A company needs money to do work. A significant financing or a well-funded joint venture partner would dramatically move a Tickerscore right now. As Jeff said, the higher quality names are outperforming while the majority of other companies are running very low on working capital. We don’t expect the latter ones to survive the next 6 to 12 months. After cash, solid exploration drill results will certainly move a stock’s Tickerscore.

We see the most change in developers as they advance to the next stage, such as moving from an NI 43-101 to a PEA, or when a resource gets significantly bigger. If a company receives an important environmental certificate or mining permit, that will really move a Tickerscore.

For producers it all comes down to making money. Were they profitable at the end of the quarter? Are their all-in cash costs increasing or decreasing? How do these metrics compare to previous quarters?

TMR: Traditional mining equity analysts use discounted cash flow (DCF) models or other proven metrics like NAV or enterprise value to determine how companies ought to be valued. How do you think your methodology stacks up?

JF: The higher-scoring companies in our database — the companies scoring over 60 — are consistently outperforming the Toronto Stock Exchange and the Market Vectors Junior Gold Miners ETF (GDXJ).

It’s also worth mentioning that in the Tickerscores Top 10 list we published in January, our top picks for the year are up 34% year-to-date.

Mart Resources Inc. has too much potential to ignore.”

Discounted cash flow models are generally used for producers and have limitations. The DCF model is static and does not account well for changing metal prices, increasing or declining production, or grade variability. We update our producers at least once each quarter based on their latest quarterly reports. We determine if the mine is high-grading (a process by which higher-grade ore is mined first); we also look at all-in cash costs and other variables. We use 20 different metrics to determine a Tickerscore for each company.

TMR: Could you give our readers some names that have done well from the last Tickerscores Top 10 list?

JF: Two companies from the April Top 10 report, both of which are up over 50%, are Seabridge Gold (SA) and Garibaldi Resources (GGIFF).

TMR: When Seabridge had its Kerr-Sulphurates-Mitchell (KSM) project approved by the British Columbia government, how did that influence the Tickerscore?

JF: That made a huge difference. Without that permit, the company would have to revisit the permitting process. KSM still requires approval from the federal government and that decision could come in the fall.

TMR: Are there near-term catalysts that will continue to move Garibaldi shares higher?

JF: Yes. Garibaldi hit an intercept of high-grade silver at surface in Mexico, which moved the share price considerably higher. Now, the company is conducting follow-up drilling. Investors should look to see if the next holes return similar or better grades than the initial high-grade silver drill hole. Garibaldi is going to start work on its British Columbia projects in the next couple of weeks and, hopefully, drill a couple of holes before the snow falls.

TMR: Please tell us about some companies in the most recent report that was published at the beginning of September.

“One thing we really like about Rye Patch Gold Corp. is that it has cash flow coming from a quarterly royalty.”

JD: In our Autumn 2014 report we have a mixture of exploration, development and producing companies. The companies that made this edition are some of the highest-scoring firms in our database. Each company has top-notch management, a solid balance sheet, and a promising project or mine. We also provide some near-term catalysts that investors need to watch closely.

Interestingly, the first company that we highlighted in our report was Cayden Resources (CDKNF), which was just taken out by Agnico Eagle Mines (AEM) for $205M at a premium of 42.5%.

Our latest report went out a week before that happened, so any subscribers that were able to act quickly have already gotten a great return. Another company that we featured in our most recent Top 10 report is Marlin Gold Mining (MLNGF).

Marlin operates La Trinidad, a small heap-leach gold mine in Mexico that went into production in late February. The mine is still ramping up and, after several hiccups, is producing roughly 50 ounces (50 oz) per day. Marlin management is top-notch, led by CEO John Brownlie, who brought the El Chanate gold mine in Mexico into production. That mine was later sold to AuRico Gold (AUQ) and is still operating.

Another thing we really like about Marlin is it created a subsidiary company called Sailfish Royalty, which will be spun out to shareholders at some point. This is an early-stage chance for investors to get in on a royalty company, which we’re big fans of. Marlin shares are tightly held with Wexford Capital owning 80% of the outstanding float. The next catalyst is commercial production, which should happen in the next several weeks.

TMR: Did Marlin’s acquisition of the San Albino gold stream change its score?

JF: No. Our focus is on La Trinidad but we do mention San Albino in our Power Rankings section to our subscribers.

TMR: Cayden’s key projects are also in Mexico. Tell us about that name.

JD: In our Tickerscores database, we independently cover 29 exploration companies that have their primary projects located in Mexico. In August, we had Cayden with the top score of 80 overall, which is actually the best exploration score in our entire database. Cayden has everything we look for in an exploration company.

For us, the key is its management team, which has a proven track record. President and CEO Ivan Bebek found a multimillion-ounce gold deposit in Ghana as a cofounder of Keegan Resources. With the agreement to sell the company to Agnico Eagle at a 42.5% premium, he has done it again for Cayden shareholders.

The company also has a solid balance sheet and exciting exploration results. Cayden’s El Barqueño gold project in Mexico looks as if it has potential to be 3-5 Moz. Cayden is one of the best-performing stocks year-to-date on the TSX Venture Exchange and now with the recent deal, we believe shareholders will be very satisfied.

TMR: What are some other companies with exceptional Tickerscores?

JF: Some other names with high scores in our database include Pretium Resources (PVG), Lake Shore Gold (LSG), Balmoral Resources (BALMF), Rio Alto Mining (RIOM) and Kirkland Lake Gold (KGILF).

TMR: What are some examples of companies that have underperformed to date but could be poised for a turnaround?

JF: A couple of development companies are Rye Patch Gold (RPMGF) and Clifton Star Resources (CFMSF).

Rye Patch Gold’s stock price hasn’t done much lately, but it scores 62 in our Nevada development section. Rye Patch has several properties in Nevada, one of the best mining jurisdictions in the world. One thing we really like about the company is that it has cash flow coming from a quarterly royalty so it won’t have to go back to the market anytime soon. As of our last update, Rye Patch had $7M in cash, which was second out of 11 development companies we cover in Nevada. Insiders own roughly 5% of the stock so they are well aligned with shareholders.

TMR: What are your thoughts on Rye Patch’s Lincoln Hill gold-silver project PEA?

JF: Lincoln Hill is a smaller project, but it has robust economics. The IRR comes in at 53%, which is the highest of any Nevada developer we cover. The share price hasn’t done much, but all around Rye Patch is a solid company.

TMR: And Clifton Star?

JF: Clifton Star scores just over 50, which is in the top third of our Quebec development companies. Clifton is a very high-risk/high-reward stock. In April, Clifton Star published a prefeasibility study on its Duparquet gold project in northwestern Quebec. At $1,300/oz gold, the after-tax NPV is $135M and the IRR is 12.1% (at a 5% discount rate). For the Duparquet mine to be built, gold will need to be at least $1,500/oz. That means that Clifton Star is one of the most leveraged stocks in our database to the price of gold. Its market cap is only $7M with a deposit that’s over 4 Moz, which makes it very cheap. Clifton has $50.2M in payments between December 2014 and December 2017 to own 100% of Duparquet.

TMR: How does the Tickerscore typically react when a junior brings in a big joint venture partner?

JF: When a junior company brings in a major partner, it generally reflects well on the Tickerscore because that partner will likely cover the majority of costs. One example is Columbus Gold (CBGDF). It is partnered with a major producer, Nordgold N.V., on the Paul Isnard project in French Guiana. The project currently hosts an NI-43-101-compliant resource of 4.3 Moz and three drill rigs are currently trying to outline more ounces.

Nordgold is earning 50% of the project, but it is covering all the development costs — that frees up Columbus to do other things with its money. Columbus also has the Eastside project in Nevada that it hopes to drill in the fall. Nordgold can advance the Paul Isnard project much more quickly than Columbus could on its own. Mining is a capital-intensive business so any help smaller companies get from larger companies is extremely beneficial.

TMR: Perhaps one more name to share with our readers before we let you go.

JF: One name that was featured in our April Top 10 report is an energy stock. We usually don’t cover energy stocks but we believe Mart Resources (MAUXF) has too much potential to ignore. It’s a small oil producer in Nigeria that pays a dividend and has several catalysts in the next six months. The big catalyst for Mart is the new Umugini pipeline. Mart could double its cash flow once the pipeline is complete.

The CEO owns just over 8M shares and it is rumored that Mart could make an acquisition during the next couple of months. If Mart can deliver on its catalysts, we should see a significant re-rating of the stock price. The stock has gone from $0.10 per share all the way up to $2. Now it’s at $1.25 per share as investors wait for that pipeline to come on-line. Investors should be cautious, though, because its main assets are in Nigeria.

TMR: What should mining investors expect in the final quarter of 2014?

JD: As we move into the fall, we expect to see more separation between the better companies and the weaker ones, or what we call “The Great Divide.” It’s all about the capacity to create shareholder value. The companies with no cash have severely limited capabilities to do this — and the quality names with world-class assets are going to be sought out by majors that need to replenish gold reserves.

TMR: Thank you for talking with us today, Jeff and James.

Jeff Desjardins founded, a universal, independent and comprehensive stock scoring system that gives investors access to investment research on mining stocks. Tickerscores has coverage of over 450 precious metals companies on the TSX and TSX.V and compares them head-to-head to make due diligence easier for investors. Each quarter, Tickerscores also puts out an in-depth Top 10 report of the highest scoring stocks in the system and other analyst picks.

James Fraser, mining analyst at, is passionate about the mining sector and mining stocks. His passion led to co-authoring the book “Mining Stocks Investor Guide: a guide to investing in mining companies.” He has a finance background and has completed his Canadian Securities Course (CSC) and Conduct and Practices Handbook (CPH). When Fraser is not “digging” up the latest mining stock, he can be found enjoying a wide variety of sports or travelling the world.

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