-- Posted Wednesday, 2 February 2011 | | Source: GoldSeek.com
PI Financial Institutional Sales VP David Goguen, in this Gold Report exclusive, sees real potential for share price appreciation in select mining companies with expandable resources. Through their quantitative research report Select Golds, Dave's team, including Associate Brodie Dunlop, are focused on Latin American explorers and producers.
The Gold Report: When you spoke with The Gold Report last November, you said you were looking for undervalued plays. Valued by what measure? The value unrecognized by the Street, or value that has yet to be developed and driven out of the ground in the form of ounces?
David Goguen: I think it's a combination of both of those things. It will be defined differently depending what category you're examining. In the case of advanced explorers, it could be a rapidly growing resource where the full scale and potential are not yet fully recognized in the marketplace. For emerging producers, value will be found very classically in that time period when the company is two-thirds of the way through a project build and not generating a lot of catalyst-rich news. That results in a bit of a sleepy period when oftentimes we see the share price drift to levels that represent very good value.
TGR: Gold has pulled back a bit. Are you currently telling your clientele this is a good time to buy gold mining stocks?
DG: Absolutely. We feel the gold price is going to be very well supported above the $1,100/oz. level, and we feel that the margins being afforded to gold producers in this $1,200–$1,300 gold environment have not been properly reflected in the valuations for these companies. There's still a sense that the gold price isn't sustainable at these levels, so there's a hesitation in the valuations being afforded to these junior producers. Therefore, they're trading at 3x–5x cash flow when, in fact, higher valuations are merited. These juniors are generating strong cash flow.
TGR: If gold did go down to that $1,100 support level, could the producers still maintain earnings growth to satisfy investors?
DG: Given the average cash cost of the eight junior producers we track is $478 an ounce, it would leave a very healthy margin on which to generate free operating cash flow.
TGR: Would it support quarter-over-quarter or year-over-year growth?
DG: In the instance of these junior producers, they're still ramping up production, so you're getting unit volumes that, in most cases, are growing quarter over quarter. Whether we're delivering 50% more production into a $1,300 or $1,100 gold price, I don't think it's going to make a tremendous amount of difference. It's still going to have a positive impact on the bottom line and result in growing cash balances that can be plowed back into production expansion or the development of new projects.
TGR: Your initial stock screen is enterprise value (EV) divided by ounces in the ground (EV/Oz. Au) as estimated by the NI 43-101 resource estimates. Where do you go from that point?
DG: Certainly in the junior producer category, in addition to the EV/Oz. Au, we're going to be looking at cash costs and operating margins, and we're going to be looking at price to cash flow.
TGR: I imagine that the multiple of EV per ounces in the ground is most important in the advanced explorers and less important as you come up the scale to emerging and junior producers.
DG: I would agree with that in large part, certainly in the case of the junior producers. Not all ounces in the ground have the same economic impact. Different ounces have different margins depending on mining methodology, grade or extraction costs. So, from a financial modeling point of view and company valuation standpoint, the differences in those ounces and the methodologies to extract them are going to have an impact on valuation.
In the advanced explorers' category, I think the economics and engineering are less defined; it's more about developing as large an in situ resource as possible. There'll be differences in the valuations that the market ascribes to these companies; but, generally speaking, we're looking to provide a primary screen that will highlight undervalued and overvalued in situ ounces in advanced explorers.
TGR: Does a company have to reach a certain level of development in its most advanced project before it becomes interesting to you or relevant to your investment strategy?
DG: We believe that being early in situations is critical to the ultimate investment return we're going to achieve for our clients. So, if we see 500,000 ounces (Koz.) in the ground growing to 1.5–2 million ounces (Moz.), we'll start presenting that situation to our clients in the belief that the geology and execution capabilities of management will be sufficient to bring it up to size.
TGR: Under what level does the EV per ounce have to be for you to look at it as a great value play?
DG: Well, I don't think we can look at that particular metric in isolation. We have to look at it in the context of the grade and style of the resource. But certainly, we're going to be attentive to anything that's below $50/oz. and we're going to question and look to justify valuations above $200/oz. in enterprise value.
TGR: Thank you, Dave. We appreciate your time.
David Goguen, CFA, vice president, Institutional Sales, has been focused on the mining sector at PI Financial for 13 years. David has 18 years of investment experience servicing institutional and private client portfolios. David earned a BA in economics from Carleton University and holds the Chartered Financial Analyst designation.
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-- Posted Wednesday, 2 February 2011 | Digg This Article
| Source: GoldSeek.com
