The Gold Report: Jocelyn, I'm looking at a portfolio of junior precious metals mining stocks, and all I can see is red ink. With the exception of MAG Silver Corp. (MAG:TSX; MVG:NYSE), all in that group are underwater for the past 52 weeks. We are currently in a down-trending precious metals market, and I'm interested to know if catalysts matter anymore.
Jocelyn August: Catalysts absolutely do matter right now. We may see a catalyst occur in a company followed by a 2% uptick in its stock, on the same day the sector as a whole may be down 2–5%. We may see that even in this price environment. If you were aware of that catalyst and you bet on it, you would actually have fared better than the sector on that day. By comparison it actually did help the stock price.
"Catalysts absolutely do matter right now."
Conversely, we also see a fair amount of catalysts that might have a negative consequence to the stock price, particularly when it comes to permit approval decisions that may go the wrong way for the company. You could get pretty badly burned. For example, back in early October 2012, Pacific Booker Minerals Inc. (BKM:TSX.V; PBM:NYSE.A) announced that the environmental assessment permit for its Morrison project in central British Columbia was denied. The stock dropped 66% in one day and then dropped even further in the week. A month after that event, Pacific Booker was down 75% from the day before the announcement. So, catalysts do matter.
TGR: In this kind of depressed gold and silver market, it appears that the effect of negative news is magnified. Is that in fact the case?
JA: I'd definitely say so. If it's a negative event for the company and the overall sector is down, you're going to experience magnified effect there.
TGR: The old thinking was that the juniors could perform independently of markets on their own merits as exploration and production companies. Can they indeed perform independently?
JA: Juniors can perform well on their own merits. But obviously, the spot price does have an impact on the company itself. That's because a lot more companies can invest in higher-risk, higher-cost projects when the spot price of the metal is at a higher price. So if you're looking at a spot price of $1,750/ounce ($1,750/oz) for the price of gold, that's a lot different than a spot price a couple of years ago when it was in the $1,200s/oz.
TGR: In essence, all of these stocks, whether large or small, are being held hostage right now by the underlying metal price. Is that what you're saying?
JA: I would say so. Looking at the environment several months ago or in the last year compared to right now, we were seeing a lot more positive price action in these stocks than we are seeing now.
TGR: Jocelyn, on Friday, Feb. 15, we read that Soros Fund Management had cut its stake in two exchange-traded funds (ETFs)— SPDR Gold Shares ETF (GLD:NYSE) and Market Vectors Gold Miners ETF (GDX:NYSE.A). The Dow Jones Industrial Average is close to 14,000 and near an all-time high. The NASDAQ is at a 12-year high. With such strong industrial and technology performance, can investors be expected to return to gold shares with this kind of news permeating the markets?
JA: If you didn't expect gold to go down at some point compared to the overall market, then you probably weren't thinking too far into the future. Those Feb. 15 events as well as a potential for gold markets to continue their current trends mean simply that an investor can't just throw a dart at any gold stock and see success. In this type of market, investors need to do their homework to identify gold companies that look to have better prospects than some of the others. Particularly with gold prices dropping, it's important to examine the potential costs of the mining projects that the company is involved in. You can have success with gold in the long term.
TGR: People who invest in juniors don't invest for slow growth, and they tend to be impatient. But your long-term success scenario suggests that you believe patience is important, even with juniors. Is that right?
JA: You definitely need to have patience in order to have success in them.
TGR: Can good catalyst news at the company level propel gold and silver stocks up in this kind of environment? Are you seeing it happen?
JA: I definitely think that it is possible. I'll give you an example. Augusta Resource Corp. (AZC:TSX; AZC:NYSE.MKT), which is developing the Rosemont project in Arizona, a gold-silver-copper-molybdenum project, finally received its air quality permit at the end of January. The stock was up almost 15% the day after this catalyst occurred and up a little bit more, 17%, the week after, despite this turmoil going on in the gold and silver market. This is an example of a situation in which you can have good news and it can make the company stock go up.
TGR: I'm looking at the Market Vectors Junior Gold Miners ETF (GDXJ:NYSE.ARCA) versus Augusta Resource over one year, six months, three months and one month. Augusta has been significantly stronger, in double-digits, during all periods over the past 52 weeks. It's even up 10% over the past four weeks, a period when both juniors and large caps are down double-digits. Why is it experiencing such high relative strength versus its peers?
JA: People probably have been waiting for these permits to come through for a while. I know the company is waiting for another permit, too. But Augusta is going to be able to get metal from this project regardless of what the gold or silver price is. It can still make money when this project actually comes to production, of course.
TGR: Do you believe that juniors can access capital to move their programs forward in this kind of market? Do they have to explore their lowest-risk plays in this environment?
"In this type of market, investors need to do their homework to identify gold companies that look to have better prospects than some of the others."
JA: To some extent, they do need to focus on their lowest-risk plays in this environment. Even Barrick Gold Corp. (ABX:TSX; ABX:NYSE), with its $31 billion market cap, announced in its earnings release that it was not going to be looking at any new exploration projects while it got its costs under control. With gold spot prices going up over the last couple of years, companies were looking to develop the higher-cost, higher-risk plays because the economics allowed them to, and they could afford it. But now these companies probably should be looking at lower-risk and lower-cost prospects, but that's not to say they can't get access to financing. One of the companies that we're probably going to discuss later is Silver Bull Resources Inc. (SVB:TSX; SVBL:NYSE.MKT). It just raised over $9 million ($9M) at the beginning of February for preparation of a resource update, metallurgical studies and commencement of its preliminary economic assessment (PEA) on its Sierra Mojada silver project. Some companies do have access to financing.
TGR: What are you looking for in junior precious metals miners? What factors give investors an edge right now in this kind of market?
JA: For catalysts, we look for projects that have positive resource estimates and positive updates as well as positive dealings with the appropriate regulatory authorities. Augusta Resource is a good example of a project that has been held up by permitting for quite some time. That kind of holdup can certainly add to the capital costs and prolong the start of production and delay the start of revenue. So we're looking for positive regulatory filings, deadlines being met and we're looking for those companies that consistently keep the market updated as to their progress. There are some junior miners that are really good about giving updates—even if they're not quite meeting the deadlines they've set. They are making sure that they are transparent in what they are divulging. But there are some that maybe aren't quite as transparent. I tend to believe no news isn't necessarily good news. We're looking for that kind of transparency in those miners.
TGR: Augusta Resource has a $373M market cap. Are you positive on this company?
JA: Getting the air permit is definitely a good sign for Augusta. We're just waiting for the final clean water permit as well as an environmental impact study record of decision, the final hurdles for it for starting construction. Once it clears those hurdles, I think I'd be positive on it.
TGR: Can I get you to tell me your best idea?
JA: One we talk about in our "Early 2013 CatalystTracker Natural Resources Outlook Report" is Alexco Resource Corp. (AXR:TSX; AXU:NYSE.MKT). It is currently a producer of silver at the Bellekeno silver mine, but it is also working on two new projects, the Lucky Queen and Onek. Those are in Keno Hill District of the Yukon Territory in Canada, and they are in the same general area as the Bellekeno mine. Alexco is looking at the final hurdle to the start of production, regulatory authorization. The quartz mining license was approved on Jan. 25. Now we're looking for a decision on the Water Use License, which is needed to regulate the miner's use and discharge of water at the Lucky Queen and Onek mines. A Water Board hearing is scheduled for Feb. 26–28, so we expect to hear some news regarding the permit imminently. With that approval decision it will be able to start production at both of those mines. The company has not given any guidance for production of those mines.
TGR: That's an interesting idea. It looks like Alexco has actually has its head above water for the past 52 weeks. Do you have another one?
JA: We're also looking at Timberline Resources Corp. (TLR:NYSE.MKT). The PEA is expected by April for Lookout Mountain, its flagship property in Nevada, and it's a gold project. The company is moving toward a formal production decision, but it needs an updated resource estimate as well as a PEA. So we're looking for that in early 2013. The other interesting thing about Timberline is that it also has the Butte Highlands project in Montana where it has a joint venture (JV) partnership. The JV partner is 50/50, but it's actually completely funding this project, which is expected to start production in mid-2013. We think that once Timberline draws revenue from Butte Highlands, it will be able to funnel a lot of that revenue toward the Lookout Mountain development.
TGR: Interesting that Butte Highlands is funded by the partner, but Timberline is a true penny stock with an $11M market cap, and it's down 70% over the past 52 weeks. Isn't this the kind of stock that investors typically flee from?
JA: Obviously, it's down quite a bit, but I think if you're looking to make meaningful, quick cash and if you know what catalysts are coming up and have an idea of how they're expected to go, you can make some money based on that catalyst. It does have the upcoming catalysts in the spring.
TGR: Got it. Go ahead with another idea, please.
JA: The final one that we had in our Outlook Report was for Luna Gold Corp. (LGC:TSX.V), and we're looking for an updated resource estimate at its Aurizona project in Q1/13. Previously, it had announced a resource estimate in December 2011, which showed an increase of almost 250% of Measured and Indicated resources. We would like to look at its revised economic open-pit estimate, and we're looking to see whether or not Aurizona will deliver within its production estimates. The company is expected to produce over 74,000 ounces (74 Koz) gold in 2012 and over 100 Koz in 2013. Its cash costs are really low due to its increased gold production levels, according to its Q3/12 results.
TGR: Can you talk about some interesting micro-cap and small-cap names?
"You can have success with gold in the long term."
JA: Brazil Resources Inc. (BRI:TSX.V; BRIZF:OTCQX) is an interesting one. We recently started covering it because of its acquisition of the Cachoeira gold project from Luna Gold. We're waiting for the results of a 5,000 meter drill program there in early 2013. This drill program is going to be used to determine its updated mineral resources. Brazil Resources is an interesting company because of its strategy of acquiring more advanced-stage exploration properties to reduce its exploration risk. Its management team has a proven track record of success. We're looking forward to following this company.
TGR: This is a very unusual company, with a tiny $40–45M market cap. Brazil Resources has held up extremely well against the pressures of the market, even with a micro-cap valuation of $40–45M. It's flat over the last three months and over the last month when everything is down double digits, it's down only 8%. This stock is small enough that catalysts could really move these shares.
JA: Definitely.
TGR: You mentioned Silver Bull Resources earlier. Would you like to talk about it?
JA: Silver Bull's main project is the Sierra Mojada project, and we're looking for an updated resource estimate by the end of March. Silver Bull is particularly fortunate with its capital needs because it's partially owned—12.7%—by Coeur d'Alene Mines Corp. (CDM:TSX; CDE:NYSE). As we mentioned previously, it just raised over $9M for its resource estimate and PEA. This company has catalysts upcoming and it is definitely able to fund that project for the time being.
TGR: Why has Silver Bull been so weak over the past month relative to its peers?
JA: It could potentially be because of the public offering back on Feb. 6. I would think that that would be the issue here.
TGR: Do you have other companies to talk about?
JA: For Paramount Gold and Silver Corp. (PZG:NYSE.MKT; PZG:TSX), we are looking at a PEA announcement at San Miguel in the very near future. The company said in early February that it expected to announce results from its PEA at San Miguel in late February.
TGR: Could it be a share-moving event?
JA: I would think so. It depends on how much the PEA changes what investors previously thought about the project. In September of last year, Paramount announced a resource estimate update for San Miguel, and actually its shares were up almost 10% from that resource update. So depending on what the results of the PEA are, it could definitely be a share-moving event.
TGR: Do you have another company to discuss?
JA: Richmont Mines Inc. (RIC:TSX; RIC:NYSE.MKT) is an interesting one also. We're interested in seeing what it does with the Island Gold Mine project, which is currently producing, and it is also looking at the deep drilling potential it has there. We're looking for a preliminary resource estimate at Island in Q1/13, but it will be for the deep drilling. Richmont is currently trading at only about $2.80/share, and it's down from a high of $12.50/share in the past year. In November, the company announced the closure of its Francoeur mine not too long after the start of production there because of high operating costs and it not being financially feasible to keep running the project. Because of the size of the Island project, it will be interesting to see what it is able to do.
TGR: You've discussed Brigus Gold Corp. (BRD:NYSE.MKT; BRD:TSX) with us in the past. Could you address it?
JA: Brigus' Black Fox project is the only project it currently has in production. But, its year-over-year (YOY) growth in production is 39%, as well as a YOY decline of cash costs by 38%. The Black Fox project is doing really well for the company, generating a lot of revenue and probably enabling Brigus to look at other projects. For catalysts, we're looking at a feasibility study completion at the Grey Fox area in H2/13.
TGR: Do you have others to discuss on your catalyst list?
JA: Almaden Minerals Ltd. (AMM:TSX; AAU:NYSE) recently announced a maiden resource estimate for the Ixtaca project at the end of January. To me, it looked as if there was a pretty big run-up on the stock prior to this announcement, and so by the time the resource estimate was actually announced, there wasn't really much movement in the shares. But Almaden has a positive reputation, and a lot of people are looking forward to seeing what else it's going to do with Ixtaca. The company is planning a further drill program this year to get more results and more information about what's there. We're looking to see what kind of results it comes up with and potentially another resource estimate update.
TGR: As mentioned earlier, one of the very few junior precious metals companies that has its head above water versus one year ago is MAG Silver. Can you address it?
JA: MAG Silver is one that I have particularly liked in the past. It has a lot of catalysts upcoming in the near term—basically in March or April. A lot is going on. For MAG Silver's Cinco de Mayo project we'll have potentially a permit approval by the end of Q1/13, and for its Juanicipio property, potential permit approval by the end of April.
TGR: MAG Silver's Almaden has so much going on, even just at Cinco de Mayo—silver, gold and zinc just in that one project—but the company also has other properties. Is this the reason the company has held up so well, being so well diversified in its properties and metals?
JA: I would think that has definitely had an impact. That's one of the reasons that I have particularly liked MAG Silver, simply because it's much diversified. If gold continues to go down, it's not going to be as affected as another company that might be pure gold.
TGR: MAG Silver has a near $600M market cap. Could it be an acquisition target by a larger company?
JA: That is definitely a good potential.
TGR: Is there any other company on your list to talk about?
JA: Great Panther Silver Ltd. (GPR:TSX; GPL:NYSE.MKT) is a particularly interesting company. It has a couple of projects producing right now in silver and gold. Topia and Guanajuato are in production, but it is also working on the San Ignacio mine in Mexico, which is gold and silver. We're actually looking at a near-term, Q1/13 catalyst which is another permit completion. We've seen that the permit completion or permit approval-type catalysts are pretty big movers on average.
TGR: Right now, are these permit approvals the biggest catalysts for moving share price?
JA: Permit approvals are not at the very top, but they are in the top three movers—on both a positive and a negative basis.
TGR: I've enjoyed speaking with you, as always. Thank you.
JA: I look forward to speaking with you again.
Jocelyn August is currently the senior analyst and product manager for CatalystTracker, a proprietary research product focused on identifying and analyzing the future events that will materially impact publicly traded companies. In her five years at Sagient, she has developed expertise in the highly event-driven medical device and diagnostic sector. In addition, she spearheaded the development of a new Natural Resource Industry product within the CatalystTracker product line with the publication of the "Catalyst Impact Study: Natural Resources Sector." Outside of Sagient, August was named the director of communications for the San Diego Professional Chapter of MBA Women International. August received a Master of Business Administration from the Rady School of Management at University of California, San Diego and graduated cum laude from the University of California, San Diego, with a Bachelor of Arts degree in sociology.
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DISCLOSURE:
1) George S. Mack 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: MAG Silver Corp., Silver Bull Resources Inc., Brazil Resources Inc., Paramount Gold and Silver Corp., Richmont Mines Inc., Brigus Gold Corp., Almaden Minerals Ltd. and Great Panther Silver Ltd. Streetwise Reports does not accept stock in exchange for its services or as sponsorship payment.
3) Jocelyn August: I or my family own shares of the following companies mentioned in this interview: None. 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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