The Gold Report interviews Gwen Preston, founder and editor of Resource Maven.
The Gold Report: You have doubled down on your declaration that “Nov. 5 was the bottom for gold and gold equities.” What makes you so certain?
Gwen Preston: The primary reason is fundamental: supply and demand. Demand for gold remains strong despite headlines about exchange-traded funds liquidating their holdings. Physical buyers are buying a lot of gold. These include the central banks of China and Russia, countries pushing for an alternative to the U.S. dollar for international trade, and individual buyers in India and China, people who have long believed in gold as a store of value. The latter buy when it’s cheap, which has resulted in $1,200 per ounce ($1,200/oz) becoming a real bottom for gold. Every time the price falls toward $1,200/oz, the Shanghai premium—the extra amount that buyers in China are willing to pay at that moment to get their hands on an ounce of gold—spikes.
“Pilot Gold Inc. has been able to keep its treasury pretty full.”
Meanwhile, gold supply is starting to shrink. Producers let costs climb out of control during gold’s bull market. When the bear market came, they then had to cut costs. New mines and mine expansions were deferred or canceled and output from higher-cost operations was cut back. We have reached peak gold—we will never again produce as much gold as we’re producing now.
TGR: What are the other reasons in support of your argument?
GP: The second reason is that, even after expenditures were reined in, the all-in sustaining cost to produce an ounce of gold sits at a global average of about $1,200/oz. So the market must be willing to pay at least that much.
The third reason is gold’s intangibles: currency concerns, global debt worries and geopolitical risk. Gold is the only currency that exists outside the world of government manipulation.
TGR: With regard to the increasing importance of gold bullion to Asia, is it possible that the Chinese could tell the world that the gold price will now be determined in Shanghai rather than in London?
“Precipitate Gold Corp. has experienced geologists and a driven management team.”
GP: That shift is already underway. I don’t believe China will come out and say it because China is more calculating than that. For example, China hasn’t said it is promoting the renminbi as a real alternative to the U.S. dollar, but it has inked 25 different currency-swap agreements with countries all over the world, including some in the Middle East in the heart of petrodollar land.
Having said that, there are rumors circulating about China establishing its own gold fix. The London gold has been abandoned and there is active talk of an alternate being set up in China.
TGR: Where do you see the price of gold going this year?
GP: I see a slow steady climb: $1,400–1,500/oz by the end of the year. We won’t have a proper bull market in 2015, but we are past the worst of the bear market.
TGR: How will the mining juniors as a class do in 2015?
GP: It’s difficult to talk about the mining juniors as a class because in periods like this the market is going sideways, and a sideways market is made up of companies going up and companies going down. Gold companies are more likely going to be on the rising side. And within that group there are certain companies with projects very appealing to the majors. Those takeout candidates will be some of the best-performing stocks this year.
TGR: How close to production must projects be in order for their owners to be likely takeout candidates?
GP: Projects across the entire spectrum have potential, but my favorites for the best leverage are what I call the predevelopment projects with good economic metrics. By this I mean proof that the metallurgy works, the infrastructure is there, the engineering is straightforward and the resource makes sense, whether for open-pit or underground mining. In other words, all the boxes have been ticked and these projects demonstrate very good potential to be high margin. Projects with high-margin opportunities will be taken out first.
TGR: We heard last year that $200 million ($200M) to $300M was the sweet spot for takeovers. In January, Goldcorp Inc. (USA) (NYSE:GG) bought Probe Mines Ltd (OTCMKTS:PROBF) for $440M. Is that higher figure a new baseline?
GP: The Probe takeout highlighted the importance of jurisdiction. Goldcorp could have paid less per ounce for a project of perhaps similar size and geologic potential in a less-favorable jurisdiction, but instead it was willing to pay a bit more for a project in Ontario, an area where it already had existing operations, an area with infrastructure left, right and center.
“Silver Wheaton Corp. provides exposure to rising gold and silver prices without the risks inherent in exploration and development.”
Probe’s Borden gold project is an example of the predevelopment project I noted above. Probe hadn’t published an economic assessment of Borden, but undoubtedly Goldcorp ran its own numbers and was persuaded that Borden has the potential to become a very strong mine economically.
TGR: What’s your opinion of the gold majors?
GP: I’m impressed by how cheap they are. They were even cheaper two months ago, but they’re still trading at historic lows. This has resulted in incredible opportunities for investors willing to be patient while gold rises. The question is, of course, which companies. You want a company with an entry point that’s still low relative to its one to three year chart. You want a company with a good handle on costs. You want a company that has a manageable balance of debt and cash—and certainly enough cash to be able to act on acquisitions now while projects are cheap.
TGR: Which company in particular ticks those boxes?
GP: I recommended Iamgold Corp (USA) (NYSE:IAG) in November. It has cut its gold production cost notably over the last two years. It has sold high-cost operations and reduced general and administrative costs. It has definitely improved existing mines. It has a manageable debt, a healthy bank account, and we know that it is actively seeking an acquisition. The market has noticed this and rewarded Iamgold with a nice price rise.
TGR: How important is it for juniors to get significant support from new investors?
GP: Very important, especially as generalist investors have largely abandoned mining because the sector did not give their shareholders enough return when gold prices went from $800/oz to $1,900/oz. So miners now fight for support from a smaller group of investors. Within that smaller group, there are some serious contrarian investors looking to get in now while stocks are dirt cheap. Any companies that can attract interest from those people really distinguish themselves from the pack.
One such contrarian is Ross Beaty, who made significant investments in Kaminak Gold Corp (OTCMKTS:KMKGF) in August and Dalradian Resources Inc (OTCMKTS:DRLDF) in January. His investments send a clear message to the market that these projects have true potential, and have what it takes to either go into production or be taken out.
Beaty is not infallible. He went into geothermal energy aggressively a few years ago and those investments did not work out. In the mining sector, however, he is called “the broken slot machine” because everything he touches pays out.
After Beaty and another mining market guru, Lukas Lundin, put money into Kaminak, its shares jumped. After Beaty invested in Dalradian, its shares rose something on the order of 20% in two weeks.
TGR: Let’s talk about Kaminak and its Coffee gold project in the Yukon.
GP: I love Kaminak. I’ve visited Coffee several times. It has a lot of gold—4.2 million ounces (4.2 Moz) Indicated and Inferred—and importantly the majority of the gold is easy to recover. Coffee is in a part of the Yukon that was not glaciated and as a result the oxidation horizon is very deep. That means most of the resource is soft rocks with leachable gold—the ore can simply be scooped up, crushed and put on a leach pad.
Coffee is also in a great location in the Yukon. It’s on quite a gentle hillside. It’s easy to get around. The Yukon River is close, so the site can be accessed by barge. That really keeps exploration costs down. For actual development, a road must be built, but that won’t be too difficult. Land claims are largely settled in this part of the Yukon. Kaminak has put a lot of effort into establishing good relations with the local First Nations, so political risk is quite low.
TGR: Now let’s talk about Dalradian and its Curraghinalt gold project. Unlike Kaminak, it doesn’t have a lot of gold, but what it has is exceedingly high grade, correct?
GP: Exactly. And, like Coffee, it’s in a great location. Mining in Northern Ireland is established, accepted and desirable, actually. People there want the jobs. Unlike Coffee, Curraghinalt would be underground. In the last bull run, the market fell in love with large, open-pit projects, but what’s really important is economic ounces. Really high grades can make underground ounces very economic and Curraghinalt’s resource has an average grade of 10.4 grams per ton (10.4 g/t) gold.
Because of the high grade and the fact that the mine already has a partially driven adit from a previous operator, the initial capital expenditure is only $249M. It will produce gold at $485/oz and offers a 36.2% after-tax internal rate of return (IRR). These are strong economics.
TGR: Can we talk about some other gold juniors with strong institutional support?
GP: This is important because, in tough markets, companies with widely floated stock are hurt much more than those that are tightly held. And when companies need to raise money in these tough times, those with tightly held shares have an easier time because they know their investors. One good example of such a company is Pilot Gold Inc (OTCMKTS:PLGTF). It is exploring three large projects: Kinsley Mountain in Nevada, which is gold, and Halilaga and TV Tower in Turkey, which are copper-gold.
It takes a lot of money to advance three projects and Pilot, despite the four-year bear market, has been able to keep its treasury pretty full. That’s largely because it’s part of the Oxygen Capital group of companies, which includes True Gold Mining (OTCMKTS:RVREF) and Pure Gold Mining (OTCMKTS:LRTNF).
TGR: What do you like about Oxygen Capital?
GP: It’s headed up by Mark O’Dea. He and his group used to run Fronteer Gold, which was taken out for $2.6 billion ($2.6B) by Newmont Mining Corp (NYSE:NEM), so clearly a track record of success. They’re a technical, science-driven team, but because of their track record of success and the way they have interacted with and treated shareholders in the market, they have real access to capital. Pilot, True Gold and Pure Gold all have been able to raise money and keep their projects moving forward through a bear market. That shows the importance of strong support.
Another example of strong support is Rockhaven Resources (OTCMKTS:RKHNF), an Archer Cathro company. Archer Cathro is a very well established geologic consulting company in the Yukon. It is a project incubator run by a group of really smart geologists who know the Yukon well. It identifies projects with opportunities and these go into a public company called Strategic Metals Ltd (OTCMKTS:SMDZF), which has a large portfolio of early-stage projects. When one of those projects is sufficiently advanced, it is spun out. This is essentially the process that created Rockhaven and ATAC Resources Ltd. (OTCMKTS:ATADF).
These companies own shares in each other and share costs. Archer Cathro’s principal is Doug Eaton; together, he and Strategic own almost half of Rockhaven’s float, which provides strong support for Rockhaven’s share price. We saw the value of this kind of support last summer when Eaton and Strategic exercised Rockhaven warrants above market value to put a few million dollars into Rockhaven’s treasury. That enabled Rockhaven to add a few thousand meters to its drill program, which in turn supplied important data to the Jan. 26 initial resource estimate of its Klaza project in the Yukon.
TGR: Were you impressed by this resource estimate?
GP: I was. It was precisely what I expected: just shy of 1 Moz gold with an average grade of 4.2 g/t, plus almost 22 Moz silver at 92 g/t. The market’s expectations were lower than mine. Many analysts had expected 600,000 to 700,000 oz gold (600–700 Koz). Perhaps they hadn’t been to the project or spent enough time talking to CEO Matt Turner or Jared Tarswell, the project geologist. Klaza is very exciting.
TGR: Were you also impressed by Pilot’s Jan. 29 preliminary economic assessment (PEA) of Halilaga?
GP: What I love about that PEA is that it is shows Pilot and its partner at Halilaga, Teck Resources Ltd (USA) (NYSE:TCK), responding to economic reality. The previous PEA for Halilaga, done in 2012, had an initial capital requirement of $1.2B. As the bear market set in, the partners realized this no longer made sense. So they cut the mine in half: 25,000 tons per day (25 Ktpd) instead of 50 Ktpd. They added a carbon and leach circuit to boost gold recoveries by 12%. They switched to contract mine operations from operator-owned operations. All this reduced the initial capex by half, while keeping the net present value exactly the same. And it boosted the after-tax IRR from 20%, not sufficient to attract interest, to 43%, a fantastic number. Halilaga is now exactly the type of project the majors want.
TGR: What’s your opinion of the gold explorers?
GP: Explorers are a harder bet right now. They are always the last to respond to a rising gold price and the last to respond to the turnaround from a bear market. But there are definitely some really good ones out there.
TGR: Such as?
GP: I’ll name two. The first is Guerrero Ventures (OTCMKTS:GVXNF). Its Biricu project is in the Guerrero Gold Belt in Mexico, surrounded by multimillion-ounce gold deposits. This is elephant country, and Biricu is on a land package that’s never been drilled. But it has the right kinds of alteration, the right kind of geophysical and geochemical anomalies, the right topography.
And Guerrero has the right people. Its head geologist is Siegfried Weidner, a Mexico-focused geologist with several discoveries to his credit. David Jones, an adviser to the company, is the world’s expert on the Guerrero Gold Belt. I had a long conversation with him recently about the results from Guerrero’s first round of drilling. The market wasn’t super excited, but Jones was ecstatic. The company hit mineralization. It wasn’t super long width or super high grade, but it takes time to home in on these in the belt. I think that Guerrero has a very good chance of discovering gold there.
TGR: And the second?
GP: Precipitate Gold (OTCMKTS:PREIF), which is exploring the Juan de Herrera project in the Dominican Republic. Again, this is a story of location and people. The location is highly prospective, with recent good gold discoveries. The company has experienced geologists and a driven management team that has managed to keep the project going during a very tough market.
Precipitate has put only four drill holes into its project, but one was a true hit. The initial holes were targeted based on a geophysical anomaly. The discovery hole was right on the edge of this anomaly and Precipitate has since extended the anomaly substantially. It is getting bigger and stronger and coming closer to surface. I’m really interested to see what the next round of drilling will produce.
TGR: Are there any “boutique” or specialty gold juniors you follow?
GP: Yes. Inca One Gold (OTCMKTS:INCAF). Peru is home to many artisanal miners who tap into some high-grade gold deposits. That ore was taken to toll mills but many were illegal, which meant that the Peruvian government wasn’t realizing any tax revenue from it. So the government passed legislation that standardized the industry.
This created an opportunity for Inca One. Artisanal miners must now take their ore to regulated mills, but because many mill owners could not improve their operations enough to meet standards there are fewer mills in operation. Of those operating, some are better and some are worse, in terms of how much and how quickly they pay miners for their rocks.
Inca One is working to be one of the best. The company purchased a mill in Peru and then raised debt to upgrade and expand it. It’s now milling 100 tons per day of ore that it buys from miners. This doesn’t sound like a lot, but the reason I like this company is that it offers similar advantages to a royalty company. Royalty companies such as Silver Wheaton Corp. (USA) (NYSE:SLW) and Franco-Nevada Corporation (NYSE:FNV) excite investors because they provide exposure to rising gold and silver prices without the risks inherent in exploration and development. Inca One also sidesteps exploration and development.
Inca One’s economics are pretty fantastic. Based on a conservative estimate of incoming ore grades, the company produces almost $1M per month in operating revenue. Its costs are one-quarter of that, so that’s annual net cash flow of about $8M, and the grades coming in the door are averaging well above the conservative estimate. And the fact that Inca One relied on debt as opposed to equity to expand the mill means its share structure has remained very tight.
TGR: Final question. If there were a Junior Gold Investors Happiness Index and at the end of 2014 it stood at 2 on a scale of 1 to 10, where it will stand at the end of 2015?
GP: I would say something in the range of 3 or 3.5. Investors starting in the market now will be quite happy because they are starting at a bottom. However, those who have been invested in the market for many years have a lot of lost ground to recover. It’s going to take a while. It’s going to take a big rebound before that lost ground is recovered, and portfolios are back in the black again. I think that the Happiness Index will start to rise, but it will take a year or two or three before the big run up.
TGR: Gwen, thank you for your time and your insights.
Gwen Preston is the founder and editor of Resource Maven. Preston watches the wires, talks to her network and analyzes economics to identify those companies from which investors can profit. She has been interviewed by the CBC and Financial Post. A former senior writer at The Northern Miner, she holds a Bachelor of Science from McGill University and a Master of Journalism from the University of British Columbia.
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