Ryan Walker: Tweet Retreat Hasn't Changed Gold's Story
Interview

The Gold Report: Casimir Capital adjusted its metal price forecasts after the recent drop in metals prices. What are your near-term numbers for gold and silver?

Ryan Walker: For the remainder of this year, we're forecasting $1,600/ounce ($1,600/oz) gold, then $1,700/oz next year and $1,800/oz for the subsequent two years. Long term, our price assumption is $1,400/oz.

For silver, we forecast $28/oz for this year, $30/oz next year and $33/oz for the subsequent two years. Our long-term price is $26/oz. Unfortunately, we put these out before the big crash in gold and silver. We missed that event in our forecast.

TGR: What's underpinning that bullishness?

RW: According to some reports, there's been some $6 trillion in quantitative easing over the past few years. At some point, inflation is in a real way going to kick in. It's been kept at bay so far, but inflation has got to send gold higher. While mechanisms exist to fight that, it is hard to see inflation not happening at some point. The big question is when, not if. We're bullish on gold, but we've tempered our expectations to reflect the current market.

TGR: Many precious metals investors are still reeling after that dramatic drop in the price of gold in mid-April. What happened there?

RW: It was a confluence of events. There were reports Cyprus would be required to sell gold as part of its bailout package. Some members of the Federal Reserve were hinting that it might be time to end or slow down the pace of quantitative easing. A couple of the major banks in the U.S. recommended going short gold. It all came together to spook an already jittery market. Exchange-traded funds are so easily traded that things start to trade through stop losses and cascade and feed on themselves and become a self-fulfilling prophecy.

As an example of how quickly things can move nowadays, the Dow Jones Industrial Average recently dropped 130 points in the span of about a minute on a false Twitter headline from the Associated Press that there were explosions at the White House. Then it popped right back up to where it was—all in less than five minutes. That's the kind of world we're in.

TGR: Should investors expect similar price shocks in the near and medium term?

RW: The potential is out there for it. Can you call the kind of thing that happened to the Dow recently? I don't think so. Have the fundamentals for gold changed? I don't think so.

TGR: Did what happened make you more of a conspiracy theorist about gold price manipulation?

RW: No, but you can definitely see where conspiracy theorists are coming from. Maybe it does make you wonder a little bit longer about some of those theories. But I think it was just the confluence of a number of factors that got things rolling, and then electronic trading just created a cascade effect.

TGR: Your coverage involves small-cap precious metals, mostly in the developer space. What's the essential investment thesis for those types of names?

RW: For the most part, I'm dealing with the explorers, emerging producers and developers. I look for something that's got potential to get big, an asset that would be attractive as a merger and acquisition (M&A) target. But if that doesn't happen, I look for something that could feasibly be put into production by a smaller company. With producers you look for the low-cost companies with solid balance sheets, but also companies that have some real legs to them, preferably somewhere in a safe jurisdiction.

TGR: What's your preferred valuation metric for junior explorers?

RW: A lot of people use Enterprise Value per ounce as an initial filter, which is fine for that purpose. Not all ounces are created equal, however. Generally, an ounce of sulphide gold requires more work to recover compared with oxide ounces, where recoveries can be easier and sometimes you don't need to go and build a big mill. Do you really value both those types of ounces the same way? You have to look at the whole picture—jurisdiction, management deposit type, metallurgy, etc.—there is no one magic bullet.

TGR: Has the recent dive in precious metals prices put further financing pressures on the explorers?

RW: Sure, but it is always an issue for them. I like to look for big deposits that can help self-finance, that might have by-product credits that could be sold forward. If a gold deposit has some silver, a company can sell forward the silver to fund the gold part of the deposit.

TGR: What are three strong narratives in the developer space?

RW: I like to look for projects that can get big and that have legs, scalability, development options and by-product credits, if possible. A good example and the one I am most excited about right now is Probe Mines Limited (PRB:TSX.V). The company's Borden Gold deposit in Ontario has had success pretty quickly. It was discovered in late 2010 and it is already up to 4–6 million ounces (4–6 Moz) gold, depending on the cutoff grade you apply.

"Investors should not just read the headline numbers – read through press releases and the actual tables of drill results."

Some say these big, low-grade deposits are out of favor right now—that's quite true—but Probe has a couple of characteristics that help it stand out. The deposit has a higher-grade core that runs right down the middle. The bulk of the deposit is running at around 1 gram per tonne gold (1 g/t). The higher-grade core is up around 1.6 g/t. That gives Probe a bit of flexibility to go after the higher-grade core first and then stockpile the lower-grade material for processing toward the end of the mine life.

The really exciting thing is that late last year, drilling to extend the deposit toward the southeast returned the type of hole I can't say I've seen in some time—51 meters (51m) of 10.3 g/t. And, that was NOT influenced by, say, a 1m section of 800 g/t—it wasn't a case of grade smearing. Probe more recently did some follow-up drilling and the first two holes—and mind you this is a 500m stepout from that initial hole—boom! Drill results came back just shy of 13m at 7.4 g/t and another at 10.2m of 12.5 g/t. Those are fantastic results!

The market shrugged it off on the back of the declining gold price and some warrant overhang holding the stock back. It was ignored wholeheartedly.

TGR: Explain grade smearing and how investors can identify it.

RW: I would encourage investors to not just read the headline numbers, but go down and read through press releases and the actual table of drill results. That headline might say 150m at some flashy high-grade number, but more often than not there are smaller subintervals included containing much higher grades, disproportionately influencing the overall average. When they're averaged, it makes the whole story sound good.

When I first saw that Probe hole I mentioned earlier, I thought, "That's crazy! That can't be." But the drill result table showed it WASN'T being influenced by a single narrow, very high-grade interval.

TGR: Those stepout drill results would seem to indicate further exploration potential. How important is that to a potential suitor?

RW: The deposit has 4–6 Moz, so you know it's a big plumbing system to be able to pile up that much gold. The bulk-tonnage target and high-grade core have shown good continuity. We're waiting on results from additional ice-based holes sunk this winter further southeast and they could be the game changers. It looks as if Probe has tapped into a high-grade feeder system toward the southeast. That changes the complexion of the story from bulk-tonnage and low-grade to high-grade, and, importantly, so far over some nice wide intervals. All that, and the company still has a large little-explored land package.

Probe is worth a look. With $30 million ($30M) on the balance sheet, the company should at least be funded through the end of this year. No jeopardy of running dry on funds.

TGR: What's another story you are following?

RW: Atacama Pacific Gold Corp. (ATM:TSX.V) has a nice large oxide gold deposit in Chile. The processing is much easier. It is an open-pit, heap-leach opportunity with 3.5 Moz in pit. It is low grade at about 0.5 g/t, but the key is its oxide gold.

"The plunge happened in the blink of an eye, but I don't expect the recovery to do the same thing."

Atacama came out with a preliminary economic assessment earlier this year with robust numbers. In the first five years, the company will produce about 300,000 oz gold/year. Its after-tax net asset value is $531M at a 5% discount rate. It has a 26% internal rate of return, which is above the benchmark of around 20% that most companies are looking for in a M&A scenario.

The key issue for this one is water, because it's situated in Chile's Atacama desert. Atacama has drilled some aquifers and hit some water. The initial flow rates look good. Once that gets settled, it should help the story.

TGR: There are a few majors in the area. Kinross Gold Corp. (K:TSX; KGC:NYSE) has projects nearby, but things aren't going so well for it right now. Do you see Atacama as a takeover target?

RW: It's certainly on the radar screen, but the big hitch is the water. I don't think it will be touched until that is sorted out.

TGR: Are the locals on board at its Cerro Maricunga project in Chile?

RW: There really aren't any locals to speak of. It's a pretty remote region that is not agricultural by any means.

TGR: How much cash does Atacama have?

RW: At the beginning of the year, the company had $20M. It's nicely situated to keep going for quite a while. It's doing in-fill drilling, some engineering studies and metallurgical work.

TGR: Are any other companies interesting right now?

RW: Treasury Metals Inc. (TML:TSX) outside of Dryden, Ontario, is one I initiated coverage on recently. I've been to a lot of sites over the last 15 years and the infrastructure here couldn't be better. It's literally a stone's throw off the Trans-Canada Highway, a former government tree nursery left several useable buildings on site, and there's high-capacity hydro-wires crossing near the planned pit area. Also, a natural gas pipeline cuts across the property. You couldn't ask for a better set-up.

A lot of people up there looking for jobs would love to see this mine up and running.

This project doesn't yet have the size that some deposits have—it is about 1.7 Moz gold equivalent—but it does have some silver. Treasury can't totally fund the project on the back of the silver, but it could sell the silver stream and reduce the equity portion of the capital expenditure (capex). It is a nice story with very good exploration potential.

Treasury recently enlarged the land package. It's done some regional drilling that generated some whiffs of smoke, but no real barn burner of a hole yet.

The pushback on this one would be the strip ratio, the ratio of waste to ore taken during open-pit mining, which is pretty high. Drilling has been hitting a second, parallel zone. The more it hits that and can flesh that out, it will help reduce the overall strip ratio.

The deposit has a manageable capex for the open pit at just more than $92M.

TGR: Is that realistic? I mean $92M sounds really low.

RW: It's not a huge operation and it's got a head start with the infrastructure, so I think it's a reasonable number. The plan is to get the open pit running and cash flow going, and then fund the underground development out of cash flow. You can make good money off of this and use it as a springboard.

TGR: We've seen some of the bigger players make strategic investments in a number of these smaller companies: Agnico-Eagle Mines Ltd. (AEM:TSX; AEM:NYSE) and Sulliden Gold Corp. (SUE:TSX; SDDDF:OTCQX; SUE:BVL). Does Treasury have any major investors with a significant slice?

RW: No, it doesn't. It's really interesting how Agnico is taking these toe holds at bargain basement prices. It is locking in a 10% stake now—maybe it will miss a little bit on the downside if the gold price goes any lower, but it is locking in these interests and can either consolidate ownership later on or make a nice little profit down the road.

One that I don't officially cover but have been keeping an eye on is WCB Resources Ltd. (WCB:TSX.V). This one goes back to looking for something that can get really big. The company has the old Placer Dome Misima mine in Papua New Guinea, which produced about 4 Moz. It is working on putting out a resource estimate by the end of next month. I think we'll see the 1 Moz mark to start with, but it looks as if that could just be the tip of the iceberg. The deposit has leftover gold that wasn't produced because gold was at $300/oz back then, so the company just shut it down.

The real blue-sky here is what's the underlying heat engine for the gold deposit? The project has some nice large-scale coincident geochemical and geophysical anomalies. It looks as if there's a big gold-copper porphyry below and some magnetite is associated with it. The magnetite is important because gold-rich porphyry copper deposits can be linked to elevated magnetite content.

I'm definitely keeping an eye out for the resource estimate—it may catch some people by surprise.

TGR: Not a bad place to do a site visit either.

RW: You are in the land of the giants there. Not to sound cliché, but that is elephant country. You've got Grasberg, Porgera, Ok Tedi, Lihir and several others—and WBC is right in the trend with those.

TGR: How does a little company get an asset like this?

RW: The chief executive officer, Cameron Switzer, has been involved in the project for quite some time, brought it to Pan Pacific Copper Co. Ltd. and they partnered up after Placer Dome left it in the early 2000s.

TGR: How are the locals with regard to development? The Grasberg district certainly had some problems in the last few years.

RW: There are no immediate local villages, but the company is still trying to do the right thing by employing locals.

TGR: The precious metals space is generally quieter in the summer. What should investors expect this year?

RW: I wish I knew. The plunge heading into summer is an interesting set-up. I don't expect a massive rebound over the summer; the plunge happened in the blink of an eye, but I don't expect the recovery to do the same thing. It will be a slow and steady rise back up. Ultimately, I have to believe this massive money printing campaign that's been going on has got to come home to roost in the form of inflation. That's got to send gold higher.

Ryan Walker joined Casimir Capital as a mining equity analyst in October 2012; he previously served in a similar position at Jennings Capital and as a research associate at Wellington West Capital Markets. Prior to that, Walker has seven years of experience reporting on the mining industry for a well-respected trade publication. He holds a masters degree in geology from the University of Windsor.

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DISCLOSURE:
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: Probe Mines Ltd. and Sulliden Gold Corp. Streetwise Reports does not accept stock in exchange for its services or as sponsorship payment.
3) Ryan Walker: 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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