-- Posted Friday, 28 June 2013 | | Disqus
Source: Brian Sylvester of The Gold Report
Resource equities remain under siege and Jeff Killeen, an analyst with CIBC World Markets in Toronto, preaches the importance of the two Cs, cash and catalysts, to investors in this shaky market. In this interview with The Gold Report, Killeen discusses what fundamentals he looks for.
The Gold Report: Resource equities have been rejected, beaten up and ignored. Make your case for small- and mid-cap gold stocks.
Jeff Killeen: It's true that investment dollars have been moving out of the resource sector over the last year and gold exploration companies in particular have seen a drastic decline in market value over the last 12 months.
However, the space cannot be ignored. These commodity sectors are cyclical and putting investment dollars to work strategically in the space when equities are at such low valuations makes sense, but patience is required.
My recommendation is that investors focus on the fundamentals when looking at junior exploration equities. Does the management team have a proven track record? Does the company's asset or assets have strong grades relative to the proposed extraction method, which can secure healthy margins, even at lower commodity prices? Does the company have balance sheet strength to significantly derisk and advance these projects?
TGR: What gold price are you using in your models?
JK: Our current long-term price is $1,500/ounce ($1,500/oz). The price deck would start at $1,700/oz for 2013, $1,800/oz for 2014, and then falling back to $1,500/oz from 2015 onward.
Most of the companies that I cover are junior exploration companies with production slated to occur in 2016 or later, so they are based on that $1,500/oz price.
TGR: With companies mining lower grades at deeper depths, they are often spending money to stand still. Is it sustainable to mine in the current price range?
JK: It is for some operations. There's no question that the current gold price, given how much cost inflation has crept into the market in the past five years, will put a strain on many balance sheets and the profitability of some projects. We have seen some companies, in particular here in northern Canada, closing operations explicitly due to squeezed margins.
TGR: Many junior companies are expanding known resources via the drill bit, finding fresh zones of mineralization and publishing positive economic studies, yet their respective share prices continue to underperform. What's it going to take to move these stocks?
JK: The lack of performance, despite positive news flow, has been prevalent in the last year, but it won't become the new normal. This is a period where investment dollars have exited the space and the remaining capital is largely focused on stable, producing companies with positive earnings.
In a more bullish market, the potential for gain on investment is typically greater with the junior miners as they can more quickly add value through exploration. That value often translates into stronger share price performance.
If the gold price starts moving upward on a continuing basis, and I believe that will happen within the next year, the performance of junior exploration equities will revert.
TGR: How are institutional investors playing "best of breed" precious metals juniors?
JK: A company has to check off a number of boxes to be considered by institutional investors: good management, good jurisdiction, a strong balance sheet that will allow a company to further derisk its flagship assets without risk of dilution, a strong likelihood for significant resource expansion and achieving meaningful derisk points, such as completing a feasibility study.
TGR: The market is valuing small gold producers at around $75/oz to $150/oz. Companies are ridiculously cheap. Could the rerating of ounces on the balance sheets of larger companies be enough to spur a fresh round of mergers and acquisitions (M&A)?
JK: It's possible. M&A of junior non-producers has been quite limited despite valuations. A suite of non-producers that we currently track have average valuations of $15–25/oz on an enterprise-value-per-ounce basis. Companies looking for acquisitions are in the driver's seat to buy growth on the cheap. A rerating of producing companies upward would make such a scenario even more compelling.
However, I suspect that many midtier producers are being very cautious when considering buying growth at this time. The sentiment from institutional clients is that there's a push for companies to focus on current assets, rein in cost inflation, curb capital spending and show profitability of core projects before looking at M&A.
TGR: How do you like Turkey as a gold mining jurisdiction?
JK: I'm very positive. At the most recent PDAC conference in Toronto, an entire day was devoted to Turkey. The Turkish Ambassador and the Minister of Mines gave presentations noting how positive the country is toward mining. It has experienced phenomenal GDP growth over the last decade, in large part due to mining.
Location is important to investors in making decisions, especially given what we've seen in places like Ecuador. We can't tie what happened in Ecuador directly to any other country because they're each so different. Even different regions within a country can have different approaches to permitting and development. It no doubt highlights the importance in understanding the process in a given location that much more.
TGR: What do you think about Colombia?
JK: It certainly is less established than other countries, like Chile, Argentina or Brazil. Colombia has a lot of small-scale artisanal mine operations, but has yet to see a world-class mine developed in-country.
That does present some challenges for developers given the lack of a track record to judge progression of a project. No established supply chains for mining companies exist. Nonetheless, I expect quality resources will continue to move forward along the development path in Colombia.
TGR: Do you have some parting thoughts for us?
JK: I've been harking on the two Cs recently—cash and catalysts. Given the bearish tone of the market, investors need to look at companies that have enough cash on their balance sheets to keep moving projects forward, that they're not going to go completely into hibernation, and that there are a number of meaningful catalysts, like a resource update or feasibility study, on the near-term horizon.
If you can find a company with a combination of cash and catalysts, that's the type of companies that will outperform, even in a softer market.
TGR: Thanks, Jeff.
Jeff Killeen has been with the CIBC Mining research team since early 2011. He covers and provides technical assessment of junior exploration and mining companies worldwide. Prior to joining CIBC, Killeen worked as an exploration and mine geologist in several major mining camps, including the Sudbury basin and the Kirkland Lake region. Killeen earned his Bachelor of Science degree from Carleton University and is an executive committee member of the Toronto Geological Discussion Group.
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-- Posted Friday, 28 June 2013 | Digg This Article
| Source: GoldSeek.com
