The Gold Report: Eric, what do you look for in mining companies?
Eric Lemieux: I focus on the technical aspects such as geology, the geological models, the history of the projects and the general location. The devil is in the details. Successful mineral exploration projects are based on discovery; good management and good project generation can enhance that.
TGR: What are some tangible ways that good management manifests itself?
EL: By focusing on the business plan. I always appreciate when management is focused on leading one company; not one project, one company. I have a hard time with a president who wears two or more hats. I truly appreciate focus.
TGR: You also pay close attention to the size of the share float—the smaller, the better, generally speaking. What's a reasonable size share float?
EL: There's a whole range. I have to understand the history of the company, which is sometimes not immediately evident. My thesis is that a low share count leverages a company to discovery. If there is a discovery, the stock will move significantly.
A healthy share structure is something like a human body. You don't want to be overweight; you don't want to be too thin. There's a balance. I always appreciate management that tries to keep the share structure as tight as possible through smart and well timed equity raisings.
TGR: Do you pay a lot of attention to things like burn rate?
"Low share count leverages a company to discovery."
EL: Yes. In a market where financing opportunities are difficult, investors have to put an emphasis on the burn rate. There are certainly costs in running a company, but we've all heard stories about exaggerated corporate administrative fees. For example, I always cringe when I see companies that have two to three investor relations firms. It's overpaying and overkill—even more so when the investor relations firms are paid in shares for that service. Good management should be able to sell the story of their company.
TGR: Do you like to see a geo at the helm?
EL: Ideally, but not necessarily. There are some people who are able to surround themselves with able competent geological teams; they know enough to find somebody who will support them with that technical knowledge base. I appreciate a company with a vice president of exploration who is a geo, but it's not necessarily always an equation for success. That person has to be surrounded by professionals that have that background.
TGR: What if it's just a money guy?
EL: This is an industry where there are not only technical aspects; financing can be just as important. It's part of the recipe of success. It takes a combination of expertise: finance, technical, lawyers. Finance people can run the boat very well provided they have a team.
TGR: Plan Nord is a strategy to support economic development by building more roads and infrastructure in far northern Quebec. There's been an election not long ago and the Parti Quebecois (PQ) won. Is the new provincial government publically supporting Plan Nord?
EL: There have been some advances and then some steps back. It's hard to say that it is really supporting it. I think the PQ wants to disassociate itself from the past government, but I'm optimistic. It should support this project in the long term because this is a plan that could provide many benefits and wealth creation opportunities.
The best example is the hydroelectric complex that Hydro-Quebec has in the James Bay. Back in the 1970s, some people were against it, but we took the risk and made the investment. I've gone to the Hydro-Quebec complex and felt pride and awe. It will be here for another 100 years or more. We're leaving a legacy.
TGR: If Plan Nord is delayed, will companies be left in the lurch? Some companies are directly depending on those roads in their feasibility studies.
EL: One of the more recent instances is Stornoway Diamond Corp. (SWY:TSX), rated Buy with a $2.75 target price. Last fall, the government pulled away the credits for the total completion of Route 167 Extension. The company agreed to finance and complete the final 97 kilometers (97km).
Many companies—from iron ore developers in the Labrador Trough, some rare earth plays, lithium explorers and developers, and a slew of others—would truly benefit from the road/rail infrastructure and hydroelectric availability of Plan Nord.
TGR: Is Eastmain Resources Inc. (ER:TSX) affected?
EL: A little, because it has projects in the James Bay. However, it can actually get to within 1km of the heart of its Eau Claire property because of Hydro-Quebec's road infrastructure. Conversely, the Eastmain mine property is accessible by the new Route 167 Extension.
"In a market where financing opportunities are difficult, investors have to put an emphasis on the burn rate."
Eastmain remains well positioned in the James Bay area with important land acreage and four key projects, Clearwater, Eastmain mine, Éléonore South and Reservoir. The Eau Claire deposit at Clearwater has a resource estimate from October 2012 that has total gold resource of 1.8 million ounces (1.8 Moz), up from 0.2 Moz in April 2011. The 2012 drilling at Clearwater has clearly increased the gold footprint. We hope to have mining scenarios implemented to bring the project to the next stage, a scoping study is planned and we take comfort in management's indication to do this. We continue to rate Eastmain a Buy (Speculative) with $2.40 target price.
TGR: What impact are large low-grade mines having on exploration in northwestern Quebec and northeastern Ontario?
EL: Detour Gold Corp. (DGC:TSX) recently poured its first gold bar at its Detour Lake mine in northeastern Ontario, almost two years after Osisko Mining Corp. (OSK:TSX) did the same at its Malartic gold project on the other side of the border in Quebec. In theory, these projects should be stimulating more exploration and development of large, low-grade mesothermal gold deposits, but the general market conditions are making these targets a little bit less attractive. Focus I believe is now on grade, not only size. It's the grade—grade is king and bigger is not always better. It's easier to obtain a profitability ratio when the target is small and it's a high-grade deposit.
The market is changing its perception. Five years ago, when Malartic started, it was something new. Detour and Osisko should pay off, but there will be challenges, and one of those challenges is this current type of market.
TGR: Those two mines are past producers. They went from exploration to production in about six years. Are there any current explorers that are on similar paths?
EL: They got to production so quickly because the general market was conducive and they had good people in place. Right now, even if a company has a good project, it's a challenge. But there are probably a few that could obtain success within that timetable or little longer.
TGR: Detour and Osisko are in the same greenstone belt?
EL: They're in the Abitibi, but not directly on the same fault structure. Detour is on the Detour Trend, which is much less explored because it's further north.
TGR: Which projects in that area could benefit from the proximity?
EL: Balmoral Resources Ltd.'s (BAR:TSX.V; BAMLF:OTCQX) portfolio of properties positions it dominantly in the Sunday/Detour Lake Deformation Zone, along with Midland Exploration Inc. (MD:TSX.V) and Adventure Gold Inc. (AGE:TSX.V). They're not necessarily lookalikes—some are early stage, others are being reworked—but I think there will be some successes.
Adventure Gold Inc. is also in the Val-d'Or camp and has a project in the Timmins area near Lake Shore Gold Corp. (LSG:TSX). Midland Exploration is focused in Quebec with projects also along the Destor-Porcupine and Cadillac faults. Virginia Mines Inc. (VGQ:TSX), Midland and Eastmain are also focused on the James Bay.
TGR: Can you give us an update on Virginia?
EL: Virginia is still my top pick based on the value of the Éléonore royalty, which will garner interest and value as time progresses. The Éléonore mine is being built by Goldcorp Inc. (G:TSX; GG:NYSE). My understanding is that things are going very well. The ramp is progressing (2,500m) and the production shaft is being sinked. Goldcorp didn't come out with new reserve/resources numbers, but it's just a question of time as we understand that substantial underground drilling is planned in 2013–2014. We highlight that Éléonore is going into production by the end of 2014.
"A project should have good geology and a strong technical team, which increase the probability of discovery."
Apart from that development royalty, Virginia has a strong pipeline that may lead to more discoveries. I'm particularly interested in the Wabamisk winter drilling program. It's not another Éléonore, but there are some similarities. We'll have to see how things pan out.
Virginia is also drilling Coulon. Last year, it had some success finding new lenses and perhaps even more enriched gold, which bodes well.
All in all, Virginia is very active, has a low share count, good technical team and good management, so it's justified as my top pick for 2013 with a $17.15 target price.
TGR: Coulon is a volcanogenic massive sulfide (VMS) deposit, but lacks scale.
EL: It lacks scale at this stage, but we know that VMS deposits come in clusters. If it can find other clusters, it perhaps can find the big mother. It's a good card to have in your back pocket. Virginia has no pressure because it has a whole slew of other projects, $40 million ($40M) in cash and the liberty to advance this 100%-owned 14 million tonne Coulon project with no royalties at its leisure.
TGR: Would it joint venture Coulon to another company?
EL: Perhaps, but not likely. Virginia CEO Andre Gaumond always said that he would not be a developer or producer per se. It's only a question of time for him to find a buyer to advance it to the next level.
TGR: Would you tell us about another company that could provide some good news for Quebec?
EL: There are a few companies working on the Quebec side of the Detour Gold Trend that might hold some pleasant surprises. I like that sector of Detour.
I have a Speculative Buy and $1.20 target price based on Adventure Gold's extensive portfolio of projects within the Abitibi. Adventure has a maiden quality resource estimate on the Val-d'Or East project, which is very well located in the Val-d'Or camp. Adventure is well positioned within the main structural breaks with projects that it staked and continues to bring them to the drill stage. Key projects along the Detour Gold Trend could attract interest.
Azimut Exploration Inc. (AZM:TSX.V) is rated a Speculative Buy and has a $1 target price based on it being the Northern Quebec project generator looking for a world-class deposit. Azimut must find a strategic partner as exploration programs in Nunavik are very expensive.
Balmoral Resources's portfolio of properties positions it squarely in the Sunday/Detour Lake Deformation Zone. The company is very active on the Martiniere project. It is winter drilling and has completed more than 7,000 meters (7,000m) since the beginning of the year. It's onto something. It's got good management and technical teams. I feel very comfortable with Balmoral and have a $1.50 target price.
Also in that sector of Detour is Midland Exploration, which is rated a Speculative Buy with a $2.75 target price based on it being an active, quality project generator with quality partnerships. It should be active on the Casault project east of Detour Lake with Osisko through an ongoing 2,500m drill program. Midland could potentially be another Virginia Mines because of its business model, tight share structure and focus.
TGR: Will drill results on the Casault property move Midland's share price?
EL: Midland and Osisko have completed thorough surface and aerial geophysical work that should lay the foundation for an interesting 2013 winter drill program on Casault. If it's able to hit, it will light up and have positive indications for Midland.
Midland has a diversified portfolio. It's actively looking for partners and has a solid cash position of $6M. It has an established track record. That all bodes well for its shareholders.
TGR: Balmoral Resources recently released some drill results from the Northshore property on the Afric gold zone in Ontario.
EL: GTA Resources and Mining Inc. (GTA:TSX.V), which is earning an interest on the Northshore property, is working on the third drill phase. It's important to apply these new geological concepts to projects that were worked in the 1970s and 1980s. I'm always open to new teams looking at projects from a different angle. That's what's going on at Northshore.
TGR: It looks as if it is fairly high grade. Is this becoming a grade story?
EL: There are some high-grade shoots. How this story will pan out is difficult to say. The gold at the intersection seemed very homogenous. Maybe that justifies a lower-grade outlook, but there are very high-grade intersections that indicate that it may be above-average low grade.
It's still very early in the exploration phase. GTA/Balmoral haven't defined a target per se. I have an open mind. We'll see how things evolve with the continuation of drilling.
TGR: You said the mineralization is homogenous. That generally indicates that it could be a mineable deposit, right?
EL: What I meant is there are high-grade intersections, but between them there's gold. It's not just one zone and then nothing and then another zone. That's comforting.
TGR: How far does it extend to depth so far?
EL: It hasn't been drilled at great depths. The deepest hole is maybe 275m. It could be considered open, but then again, depending on the targets, an open pit at 500m depth is not feasible.
TGR: You definitely sound more focused on Martiniere.
EL: The value I put on Balmoral is 95% based on the Martiniere play.
TGR: What's the next catalyst for Balmoral there?
EL: There should be news flow this year from Balmoral's substantial drilling program. The company expects to do about 40,000m of drilling, so it's going to be very dynamic. It could have a first resource estimate for the Martiniere by year-end.
TGR: What is looking promising in Ontario?
EL: Premier Gold Mines Ltd. (PG:TSX), rated a Speculative Buy with a $7.50 target price, just made a strategic acquisition in the Red Lake district, increasing the footprint of the Rahill-Bonanza joint venture property. The Broulan Reef is prime real estate—in line with the underground trend and west of the underground tram.
I won't say it has an immediate benefit, because we should have a long-term perspective. I see this as a long-term investment, a testament to Premier's financial strength and acumen.
Note that Goldcorp did exercise its right to acquire a 51% interest. I see that as logical and it highlights the good technical relations between Premier and Goldcorp in Red Lake camp.
Land is everything and this is a very strategic acquisition. It's a buyer's market right now. Companies with cash can react. Companies with a tight share structure are permitted that flexibility.
TGR: What are your thoughts on Premier Gold's Trans-Canada project near Geraldton, Ontario?
EL: I take comfort that Premier has the will and capacity to advance the Trans-Canada project. The next key catalyst is the scoping study. I believe the gold is there, but the rake of the gold zones may pose a challenge.
TGR: What message would you like to deliver to retail investors still seeking homeruns in this market?
EL: You have to try to fingerprint the next winner. A project should have good geology and a strong technical team, which increase the probability of discovery. There will be winners. Last year, there was GoldQuest Mining Corp. (GQC:TSX.V) and Unigold Inc. (UGD:TSX.V) in the Dominican Republic. But there are still some discoveries to be made. Quebec, which hasn't had a discovery since 2004, needs one. I'm sure there are some other winners out there.
Again, I highlight that our everyday lives require materials that are mined with risk to workers and financial challenges to mining companies. I hope the Parti Quebecois takes measure; society cannot take full measure of the value of the resources if they are not found, developed or mined profitably.
TGR: I've enjoyed speaking with you. Thanks, Eric.
Eric Lemieux is a mining analyst who joined Laurentian Bank Securities in 2008. He worked for nine years as a consultant responsible for applying Regulation NI 43-101. He has worked at the Montreal Exchange, and prior to that managed exploration projects for Cambior, Noranda and Soquem. He holds two master's degrees, in mineral economics from Colorado School of Mines and in metamorphic-structural geology from Laval University.
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DISCLOSURE:
1) Brian Sylvester conducted this interview for The Gold Report and provides services to The Gold Report as an employee or 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: Balmoral Resources Ltd., Goldcorp. Inc., Detour Gold Corp., Midland Exploration Inc., Premier Gold Mines Ltd. and Unigold Inc. Streetwise Reports does not accept stock in exchange for its services or as sponsorship payment.
3) Eric Lemieux: I or my family own shares of the following companies mentioned in this interview: Virginia Mines Inc., Midland Exploration Inc., Eastmain Resources Inc., Adventure Gold Inc., Stornoway Diamond Corp., Azimut Exploration Inc., as well as Lake Shore Gold Corp., Goldcorp Inc., GoldQuest Mining Corp. and Unigold Inc. I personally or my family am 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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