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-- Posted Wednesday, 4 August 2010 | | Source: GoldSeek.com

Union Securities Analyst Brian Mok gets excited about gold companies with prospects for big-time growth. But then again, who doesn't? In this exclusive interview with The Gold Report, Brian discusses the gold market at length.

The Gold Report: Tell me how a strong gold price is changing the companies that you cover.

Brian Mok: Obviously, a strong gold price bodes well, but really, it's a double-edged sword. You have the nice, high gold price, but the companies I'm currently looking at have functional currencies that inversely correlate to the U.S. dollar. You get the rise in the gold price, but unfortunately, you also get a rise in costs that offsets some of the impact the strong gold price brings to cash flow. That's what I'm finding right now.

TGR: But have you seen a change in the type of company you're covering? It's not so much the explorers now. Almost all the companies you cover seem to be either near-term producers or producers. A lot of them are high-cash-cost operations. I was wondering if that has become something of a trend.

BM: Yes, there is a trend. If you go back to 2006 and 2007, explorers found it quite easy to raise money. It was easier for explorers to get traction with investors. However, during the financial crisis, maybe investors got burned and became a little bit more risk-averse. Now, they're looking at companies where cash flow is imminent, or at least it's in the foreseeable future, where there is a lower risk profile. To satisfy that need, companies may be considering gold projects that were marginal two years ago but are now in favor, given where the gold price is. This partially explains the migration toward the group of companies I currently cover.

TGR: But whenever you have fairly high-cost operations, that reduces your margins. These types of companies have to be well managed in order to maximize profits.

BM: An early stage explorer has nothing in the ground per se when it gets started, very much like a lottery ticket. Which company is going to make a hit? Which company is not going to hit? When you move up into the more advanced explorers, developers and emerging producers, there's a known quantity of gold in the ground, which offers some comfort. But then it's a matter of executing a plan to get it out of the ground.

I believe, you can always find people to execute that plan, to help mitigate that risk. In exploration, you can have all the tools in the world and some of the brightest minds building these geologic models, but at the end of the day, you won't know until you start drilling. Even then, it may just be a one-hole wonder.

TGR: Is there a chance that the gold price could be threatened by small producers bringing their gold to market?

BM: I don't think so. Not in the short to medium term. In the last six or seven years, global gold production actually declined, from about 83 million ounces to 75 million now. I think there's a bit of a gap that needs to be filled. You've got the large projects that will be coming into production. But a lot of other projects coming into production are small. In aggregate, they won't be able to tip that supply and demand balance to the extent that you would start to see a fall in the price of gold. Gold is also used as a hedge against inflation and those themes still play out.

TGR: What does Union look for in small-cap producers?

BM: With small caps, it's the potential to rapidly expand production. If you've got an established resource and plans for 100,000 ounces annually, can you bring it up to 200,000? Are you able to double the mine life, given what you know is in the ground? There is also the upside in exploration. Is there the potential to expand the known resource, or improve the confidence in that resource and eventually bring it into reserves? You can look at a small producer, but you have to go beyond the current production levels and ask, "What else can be done here?"

TGR: But when you're building your models, how much weight do you allot to management? How much weight do you put on cash flow?

BM: Essentially the biggest one is cash flow. I build my model to see when the gold project will be spitting out cash and when the project will hit its stride. Then I look at exploration upside. Given the setup of the operation, is there potential to easily expand production from the current plan? Some of the management teams with these emerging junior producers don't have a lot of experience bringing new projects into production. This all plays a role in my decisions. However, I tend to focus more on the technical aspects, because I believe that if a project has merit, you'll be able to bring people on board with the skills needed to get the project into production. You can always add to your management team, but what you have in the ground is what you have in the ground.

TGR: What gold price are you using in your models, short term and medium term?

BM: In the short term, I'm using $1,200, basically where it's been the last few weeks. I've been conservative in my gold outlook. Next year it's $1,100, and in 2012 it's $1,000. Perhaps this is more of an optimistic view on the economy and the ability of central banks and governments to get their act together; that is, ease nerves around the issue of sovereign debt, and manage inflation using the tools available. It may be a conservative view on the gold price, but if a project passes muster at $1,200 per ounce, then at $1,500 gold, you know it's going to be a really good project.

TGR: Thanks, Brian. We appreciate your insights.

Brian Mok is senior mining analyst at Union Securities. Previously he worked at Research Capital as a mining analyst, and as an associate as part of Scotia Capital's Mining and Metals Research Team. Brian began his career as an engineer with a mining contractor working at various projects and operations in Saskatchewan and Nevada. He is a member of Professional Engineers Ontario. Brian holds a Bachelor's degree in Mining Engineering and an MBA from Queen's University, Kingston, Canada.

Streetwise - The Gold Report is Copyright © 2010 by Streetwise Reports LLC. All rights are reserved. Streetwise Reports LLC hereby grants an unrestricted license to use or disseminate this copyrighted material (i) only in whole (and always including this disclaimer), but (ii) never in part.

The GOLD Report does not render general or specific investment advice and does not endorse or recommend the business, products, services or securities of any industry or company mentioned in this report.

From time to time, Streetwise Reports LLC and its  directors, officers, employees or members of their families, as well as persons interviewed for articles on the site, may have a long or short position in securities mentioned and may make purchases and/or sales of those securities in the open market or otherwise.

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-- Posted Wednesday, 4 August 2010 | Digg This Article | Source: GoldSeek.com




 



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