Jeff Killeen: C is for Cash and Catalysts in a Chaotic Market
Brian Sylvester of The Gold Report (6/28/13)
Resource equities remain under siege and Jeff Killeen, an analyst with CIBC World Markets in Toronto, preaches the importance of the two Cs, cash and catalysts, to investors in this shaky market. In this interview with The Gold Report, Killeen discusses what fundamentals he looks for and names some companies that have strong balance sheets and potentially market-moving news on the horizon.
The Gold Report: Resource equities have been rejected, beaten up and ignored. Make your case for small- and mid-cap gold stocks.
Jeff Killeen: It’s true that investment dollars have been moving out of the resource sector over the last year and gold exploration companies in particular have seen a drastic decline in market value over the last 12 months.
However, the space cannot be ignored. These commodity sectors are cyclical and putting investment dollars to work strategically in the space when equities are at such low valuations makes sense, but patience is required.
My recommendation is that investors focus on the fundamentals when looking at junior exploration equities. Does the management team have a proven track record? Does the company’s asset or assets have strong grades relative to the proposed extraction method, which can secure healthy margins, even at lower commodity prices? Does the company have balance sheet strength to significantly derisk and advance these projects?
TGR: What gold price are you using in your models?
JK: Our current long-term price is $1,500/ounce ($1,500/oz). The price deck would start at $1,700/oz for 2013, $1,800/oz for 2014, and then falling back to $1,500/oz from 2015 onward.
Most of the companies that I cover are junior exploration companies with production slated to occur in 2016 or later, so they are based on that $1,500/oz price.
TGR: With companies mining lower grades at deeper depths, they are often spending money to stand still. Is it sustainable to mine in the current price range?
JK: It is for some operations. There’s no question that the current gold price, given how much cost inflation has crept into the market in the past five years, will put a strain on many balance sheets and the profitability of some projects. We have seen some companies, in particular here in northern Canada, closing operations explicitly due to squeezed margins.
TGR: Many junior companies are expanding known resources via the drill bit, finding fresh zones of mineralization and publishing positive economic studies, yet their respective share prices continue to underperform. What’s it going to take to move these stocks?
JK: The lack of performance, despite positive news flow, has been prevalent in the last year, but it won’t become the new normal. This is a period where investment dollars have exited the space and the remaining capital is largely focused on stable, producing companies with positive earnings.
In a more bullish market, the potential for gain on investment is typically greater with the junior miners as they can more quickly add value through exploration. That value often translates into stronger share price performance.
If the gold price starts moving upward on a continuing basis, and I believe that will happen within the next year, the performance of junior exploration equities will revert.
TGR: How are institutional investors playing “best of breed” precious metals juniors?
JK: A company has to check off a number of boxes to be considered by institutional investors: good management, good jurisdiction, a strong balance sheet that will allow a company to further derisk its flagship assets without risk of dilution, a strong likelihood for significant resource expansion and achieving meaningful derisk points, such as completing a feasibility study.
TGR: The market is valuing small gold producers at around $75/oz to $150/oz. Companies are ridiculously cheap. Could the rerating of ounces on the balance sheets of larger companies be enough to spur a fresh round of mergers and acquisitions (M&A)?
JK: It’s possible. M&A of junior non-producers has been quite limited despite valuations. A suite of non-producers that we currently track have average valuations of $15–25/oz on an enterprise-value-per-ounce basis. Companies looking for acquisitions are in the driver’s seat to buy growth on the cheap. A rerating of producing companies upward would make such a scenario even more compelling.
However, I suspect that many midtier producers are being very cautious when considering buying growth at this time. The sentiment from institutional clients is that there’s a push for companies to focus on current assets, rein in cost inflation, curb capital spending and show profitability of core projects before looking at M&A.
TGR: Rainy River Resources Ltd. (RR:TSX.V), an exploration play in northwestern Ontario, received a $310 million cash-and-share bid by New Gold Inc. (NGD:TSX; NGD:NYSE.MKT). Did New Gold overpay for Rainy River?
JK: I don’t believe New Gold is overpaying for Rainy River. New Gold has offered about 0.4 times, or 5%, discounted net asset value (NAV) for Rainy River. Its offer is about $77/oz for current reserves and about $53/oz for total resources. That’s gold only. There is also a fairly significant silver resource and reserve at the project.
TGR: How does the Rainy River acquisition fit into New Gold’s growth profile?
JK: It is another asset in a stable location that can help secure that growth profile for New Gold into the future. It’s an advanced-stage project with a complete feasibility study. It’s in a good location in northwestern Ontario. It has easy topography. It has easy access to provincial roadways. It has positive agreements with the local First Nation groups. Strong grades for the proposed open pit over the first 10 years of production could make it profitable, even if commodity prices sag.
TGR: Are other companies on your coverage list likely to become “tuck-in” acquisition targets?
JK: A company like Belo Sun Mining Corp. (BSX:TSX.V), which has a large open-pit resource with strong grades in Brazil, is one possibility. The company has completed a prefeasibility study and is working to complete a fully bankable feasibility study by early 2014. The flagship asset, Volta Grande, has the potential to produce more than 300,000 oz (300 Koz) annually for more than a decade. This type of asset would add materially to many operators’ production profiles.
TGR: What are your thoughts on Belo Sun’s management?
JK: Management has steered the company and the project very well. It has been able to continually raise funds to keep the project moving forward despite choppy markets. There’s been a number of resource updates during the last two years, which continually realized resource growth in total ounces and maintained or improved grades.
TGR: What about some other names under coverage that fit into that tuck-in category?
JK: Pretium Resources Inc. (PVG:TSX; PVG:NYSE) could be a very attractive asset for many producers. The company has just completed a bankable feasibility study on the Brucejack project in northern British Columbia and is underway to completing an underground bulk sample from the Valley of the Kings zone, which constitutes the majority of resources at Brucejack.
Many people are awaiting the results of this bulk sample test to see how well it reconciles to the reserves listed in the feasibility study. If the sample and reserves reconcile well, Brucejack could be high on the list of many producers. It could be one of the highest grade mines in Canada in the future.
Premier Gold Mines Ltd. (PG:TSX) has an attractive portfolio of assets in stable locations and with good infrastructure. The company’s Red Lake Gold joint-venture project with Goldcorp Inc. (G:TSX; GG:NYSE)lies directly between Goldcorp’s Red Lake and Cochenour mines. If resource expansion continues at the project, Goldcorp may be compelled to own 100% of this ground.
Also, Premier’s Hardrock project in northern Ontario is about to complete a preliminary economic assessment (PEA). The project is located near the Trans-Canada Highway. It’s a high-grade resource with expansion potential. It definitely could become attractive to producers as the project gets further derisked.
TGR: Premier recently got its plan of operations for the Cove project in Nevada. What does that mean for the company?
JK: It will allow more exploration freedom and potential for quicker expansion of resources. The plan of operations will give the company the ability to expand its disturbance beyond 5 acres to 100 acres. It will also give it the ability to develop underground in the Helen zone.
TGR: Premier has a lot going on for a junior company. Where should investors focus?
JK: The focus for the company is certainly the Hardrock project in northern Ontario.
TGR: CEO Ewan Downie is the man behind Premier; he built it from nothing. I can’t think that he would graciously accept a takeover bid at this point.
JK: No, but a takeover bid isn’t necessarily what we’d be looking for. It could be as simple as a monetary transaction for the joint venture interest, provided Premier feels the value is appropriate.
For example, Kirkland Lake Gold Inc. (KGI:TSX) offered Queenston Mining Inc. $60 million ($60M) for the remaining 50% of its joint venture. We could see a similar transaction in Red Lake with Premier and Goldcorp.
TGR: One more tuck-in idea before we move on?
JK: Asanko Gold Inc. (AKG:TSX; AKG:NYSE.MKT) has a project in Ghana, with about 5 million ounces of open-pittable material with resource grades at about 1.75 grams per tonne (1.75 g/t). The company has a strong balance sheet with just less than $200M in the bank. Its asset is getting close to a construction decision.
TGR: You often get a firsthand look at exploration plays. What are some recent visits?
JK: I went to see Pilot Gold Inc.’s (PLG:TSX) assets in Turkey this spring. The company has two joint ventures there with Teck Resources Ltd. (TCK:NYSE; TCK.A:TSX): the Halilaga and TV Tower projects.
I find TV Tower very interesting in that it sits in the right location, geological speaking. One can stand on top of TV Tower and see Kirazli, which is owned by Alamos Gold Inc. (AGI:TSX); Kucukdag, the most advanced Pilot target with drilling intersecting high-grade gold; Sarp; Kayali; and Columbaz targets. The prospect for a significant resource to be defined at TV Tower in the near term and then expanded over time is quite likely.
TGR: How do you like Turkey as a gold mining jurisdiction?
JK: I’m very positive. At the most recent PDAC conference in Toronto, an entire day was devoted to Turkey. The Turkish Ambassador and the Minister of Mines gave presentations noting how positive the country is toward mining. It has experienced phenomenal GDP growth over the last decade, in large part due to mining.
TGR: We recently learned that Kinross Gold Corp. (K:TSX; KGC:NYSE) had walked away from one of the world’s biggest undeveloped gold deposits, Fruta del Norte in Ecuador. Does that cast a pall over other large gold deposits?
JK: Location is important to investors in making decisions, especially given what we’ve seen in places like Ecuador. We can’t tie what happened in Ecuador directly to any other country because they’re each so different. Even different regions within a country can have different approaches to permitting and development. It no doubt highlights the importance in understanding the process in a given location that much more.
TGR: What do you think about Colombia?
JK: It certainly is less established than other countries, like Chile, Argentina or Brazil. Colombia has a lot of small-scale artisanal mine operations, but has yet to see a world-class mine developed in-country.
That does present some challenges for developers given the lack of a track record to judge progression of a project. No established supply chains for mining companies exist. Nonetheless, I expect quality resources will continue to move forward along the development path in Colombia.
TGR: Orezone Gold Corporation (ORE:TSX) recently updated Bomboré’s resource. How does that change the economics of its project?
JK: There was an improvement in the economics largely driven by a slight expansion in the amount of oxide ounces. The oxide component’s estimated processing cost is cheaper. The greater amount of expansion in oxides definitely improves the overall economics. It was a meaningful step for the company. It also increased the total amount of Measured and Indicated ounces at the project.
It is suffering from its location in some respects, being in West Africa. There is a heightened sense of investment risk in regions like Burkina Faso, which is where its project is.
TGR: Do you have some parting thoughts for us?
JK: I’ve been harking on the two Cs recently—cash and catalysts. Given the bearish tone of the market, investors need to look at companies that have enough cash on their balance sheets to keep moving projects forward, that they’re not going to go completely into hibernation, and that there are a number of meaningful catalysts, like a resource update or feasibility study, on the near-term horizon.
If you can find a company with a combination of cash and catalysts, that’s the type of companies that will outperform, even in a softer market.
TGR: Thanks, Jeff.
Jeff Killeen has been with the CIBC Mining research team since early 2011. He covers and provides technical assessment of junior exploration and mining companies worldwide. Prior to joining CIBC, Killeen worked as an exploration and mine geologist in several major mining camps, including the Sudbury basin and the Kirkland Lake region. Killeen earned his Bachelor of Science degree from Carleton University and is an executive committee member of the Toronto Geological Discussion Group.
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1) Brian Sylvester conducted this interview for The Gold Report and provides services to The Gold Report 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 The Gold Report: Pretium Resources Inc., Premier Gold Mines Ltd., Goldcorp Inc., Pilot Gold Inc. and Orezone Gold Corp. Streetwise Reports does not accept stock in exchange for its services or as sponsorship payment.
3) Jeff Killeen: I or my family own 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. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. 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.
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