-- Posted Monday, 16 January 2012 | | Disqus

Mining analysts at Ocean Equities spend more time at mining sites than at the natural resource brokerage's London headquarters. In fact, Christopher Welch, a mining analyst with Ocean Equities, has been crisscrossing the Atlantic for most of the last year, he tells The Gold Report in this exclusive interview. Recent trips to Africa have bolstered his conviction that mining plays in Africa are being overlooked, but it's not too late for investors to get in on the ground floor.

The Gold Report: Most of your coverage universe at Ocean Equities consists of precious metals juniors with exploration- or development-stage projects. Why do you cover these types of companies?

Christopher Welch: It's the end of the market where our expertise has the biggest effect, particularly since my colleagues and I are either geologists or experienced industry professionals. We can look at ground where we know it's going to be prospective. We can look at the very early-stage exploration results and know if they are encouraging.

We still cover some big, producing companies. But we've had such an effect on the junior exploration end because that's where our strengths lie.

TGR: Most of your companies have sub-$100 million (M) market caps with gold and/or copper projects based in Africa, Canada or Nicaragua. What criteria do you use to choose these small-cap companies?

CW: We look at management, the ore body, exploration results, the geology of the region and country risk. We don't have a mandate to follow specific parts of the world, although we know where we feel comfortable operating. If it's a country where one of the research teams feels quite happy jumping on a plane, spending a few days in a tent on the ground and looking at the grassroots exploration data, that's a country we wouldn't mind doing business in.

TGR: You regularly go and visit these projects?

CW: Taking a job as a mining analyst is essentially getting a ticket on a plane somewhere. I've been crisscrossing the Atlantic for most of the last year. Our technical expertise and professional experience mean that when we get to the ground, we know what to look for. It's not a case of taking drilling results on trust. We look at the drill core and can see what's good. It's a lot of gut instinct and knowing what feels right. You can look at the lay of the land and say, "Yes, I can see the deposits here. I can see that this could be an open pit or the plant could go here, and there are no environmental or social issues." You have to get in and kick the tires to add value.

TGR: Do you believe that African mining stories are underrepresented in investors' portfolios?

CW: Yes. Over the last 10 years, contemporary exploration techniques have been applied to parts of Africa that were considered high risk, like Eritrea, Ethiopia and Liberia. However, there have been large-scale risk profile changes in these countries. Liberia is one of the best countries in Africa because of its transparency. There is now a combination of overlooked resources with safer governments, so it's just another scramble to get into these countries and establish companies that can turn natural resources into profits for both the company and the host country. If you're not exposed to the African mining story, you haven't missed the boat, but it's something you should look at quickly.

TGR: Are you concerned about another Charles Taylor, the former president of Liberia accused of war crimes, coming to power in these countries after you've invested heavily in them?

CW: Charles Taylor's regime was definitely a product of ignorance of the Western world to what was going on in that part of Africa. Now there is more free press in Africa and there are a lot of African businesspeople who are involved in making their countries better. I know that all the issues across Africa aren't solved, but we won't go to a country where we think there could be a risk. We have a very good understanding of what's going on across Africa. African risk can't be painted with a broad brush. Every region globally has its drawbacks. Some might say that laws in British Columbia are perhaps overly onerous on environmental licensing, for example.

TGR: A lot of investors still perceive Ethiopia as a risk. Does it give you a measure of confidence given that a number of larger mining companies are coming into that country?

CW: Yes, it does. The Internal Finance Corp. (IFC) of the World Bank has been a shareholder in one Ethiopian-based company for a long time, and the IFC has perhaps one of the most rigorous sets of due-diligence tests for its investments. Ethiopia has a good future ahead of it. It acknowledges its natural resources could be a key for developing and expanding its growth prospects. Personally, I don't think the risk in Ethiopia is that high.

TGR: What are your preferred countries in Africa for mining development?

CW: Ethiopia, Eritrea and parts of Sudan are the most overlooked for ease of operation. Mali and Burkina Faso are developing into good countries to operate in, but my pick of the bunch is Liberia.

Just to give due respect to Ellen Johnson Sirleaf, the president of Liberia, she's done an awful lot to clean up the country. In particular, the Extractive Industries Transparency Initiative that she's taken on board in Liberia has really set the country up to benefit from iron-ore price growth. It has potential to be the largest iron-ore producer on the continent.

TGR: That really is fascinating given that country's history.

CW: It just proves the point that the opportunities come up when you have on-the-ground, grassroots operating knowledge from people who go into the country and say, "Look, I know what you think about Liberia, but honestly, go, see, look. Go to the country, visit it and when you get there, you'll see that it's open for business."
TGR: Looking at the small-cap mining sector into 2012, do you expect a rebound or are we going to see more headwinds?

CW: We're going to get an overall flight to quality. There are a lot of projects out there that are going to stand out from the crowd. We'll see some re-ratings and some heads pop out from the parapet to show themselves to be above-average mining plays.

The pullback in mining shares and mine management becoming more cautious are going to pay dividends for the mining companies in the mid term. One thing we know is that resources are scarce. It's getting harder and harder to find the projects, particularly good gold and copper projects. We've lost another field season in 2011 and a lot of people brought their drill rigs home rather than overspend during a downturn, so it's going to be harder to find the projects in the development pipeline that can fill the metal supply gaps that develop.

When demand comes back to Asia or North America, there won't be a sufficient number of projects in the development pipeline to feed that demand.

TGR: Thanks for your insights.

Christopher Welch holds a master's in international business management and a Bachelor of Science (Honors) in geology from University College London and an Advanced Certificate in economics from Birkbeck University. Before joining Ocean Equities, Welch spent four years with Bloomsbury Minerals Economics as a copper analyst, prior to which he worked as a geologist in Lesotho.

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-- Posted Monday, 16 January 2012 | Digg This Article | Source: GoldSeek.com

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