Carlin: Wall Street Owns Washington

The world’s biggest gold miners could be targeting select junior gold stocks


From The Gold Report:

Senior producers seeking to replenish depleted gold reserves will be looking to promising juniors to provide needed ounces, suggests Dave Goguen, director of institutional sales for PI Financial Corp. In this exclusive interview with The Gold Report, Goguen provides his views on where senior gold producers will be hunting and which companies will meet newly stringent criteria in the risk-averse but increasingly gold-hungry world marketplace of today — and tomorrow.

… TGR: It’s been a tumultuous year in the mining space. Maybe gold prices haven’t hit the highs that we saw in 2011, but with prices hovering around $1,700/oz, most gold producers can make a profit. On the other hand, equities — particularly the mid caps, small caps and micro caps — have been decimated by summer doldrums or investor disinterest. PI Financial obviously sees opportunity in the mining sector.

DG: A very good proxy for the senior gold companies is the Van Eck Market Vectors Gold Miners ETF (GDX). Going back 12 months from today, this ETF is down 23%. Over the same period, the Market Vectors Junior Miners ETF (GDXJ) is down considerably more, by 39%.

I think a key reason for the underperformance is due to the recent challenges that juniors have had to face in raising capital to fund continuing exploration and development. Historically, smaller and less liquid mining companies are hardest hit in a risk-averse, “risk-off” market. The junior mining sector is delivering a lot of technical studies that have been underway for the last year. These studies will provide the insights by which investors will choose certain development projects over others as they assess capital cost of construction and project rates of return. This process will see investors supporting companies that they expect will lead the way in the next cycle.

TGR: You’ve predicted that some of these junior miners will have a recovery in the fall. Could senior producers that need to replace reserves be shopping for mid-size junior companies with promising projects to acquire? Do you see merger and acquisition (M&A) activity in the fall and going into 2013?

DG: I agree that there will be mergers and acquisitions, driven by poor returns on some senior gold producers’ larger capital development projects. Looking back on the second quarter reporting season, which just ended, commentary reflects management and shareholder displeasure with the rate of return on some of the larger capital development projects. Unanticipated project cost escalation due to increased capital expenditures (capex), schedule extensions and geopolitical risk has meant that the cost of executing on these construction programs exceeded what was originally factored into budgets by a very wide margin.

Barrick Gold’s (NYSE: ABX) statement that “returns drive production instead of production driving returns” has become a new mantra echoing among senior gold companies. Projects are going to be assessed with a more critical evaluation of risk-adjusted returns, and capital allocation discipline is really going to be stressed.

We would expect…

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