Gold Stocks, It's This Bad Because It's a Bottom
Commodities / Gold and Silver 2012 May 08, 2012 - 04:45 AM GMTBy: The_Gold_Report
Eric Coffin, editor and publisher of the Hard Rock Analyst newsletter, has never heard so much negativity from investors. "Everybody thinks the world is coming to an end," he tells The Gold Report. As a contrarian, all the doom and gloom tells him the market is about to pull out of its tailspin. In this exclusive interview, Coffin talks about the hard-hit juniors in the Yukon and why it's an area play he still believes in.
The Gold Report: Eric, the gold bears recently outnumbered the gold bulls in Bloomberg's weekly Gold Bull/Gold Bear Sentiment Survey for the fourth time in a year. Are you a bull or a bear?
Eric Coffin: I think the gold price is going to end the year higher, so I guess that makes me bullish, but I think of myself as agnostic.
There needs to be a return of calm to Europe for the gold price to move much higher. The currency pair trade between the euro and the dollar is going to be a big determinant to the gold price. There's been more noise about the EU providing stimulus funds to offset all the government budget cuts in Europe. All of those countries have to deal with their debt loads. But it's not realistic to think that they can cut their deficit and 3% off their gross domestic product year after year and realistically get any net growth.
The other side of that equation is that the U.S. has slowed down. That'll help the gold price because a lot of goldbugs are riding on there being another round of quantitative easing. I'm not sure it's going to happen. But as long as Federal Reserve Chairman Ben Bernanke keeps saying it might happen, that's good enough.
TGR: Stagnant gold prices are translating to equities. Canaccord reports that "sector weakness in the gold equities over the last six years has typically ended with 'V'-shaped corrections to the upside." Do you believe that's what will happen this time?
EC: I sure hope so because I'm on the buy side, not the sell side. I'm going to feel pretty dumb if it doesn't happen. We're still in a bull market for gold. In a secular bull market, generally speaking, coming out of a dip tends to be an impressive move.
TGR: Many Yukon junior mining companies are starting their 2012 exploration programs after completing off-season financing on buyers' terms. What types of companies are getting financing?
EC: The only financings I've seen in the past five months are either relatively new deals where investors have a lot of respect for management—which is a roundabout way of saying that investors figure management will figure out a way to make money regardless—or companies that have something pretty definitive with a bunch of drill holes. Companies that didn't take the opportunity to raise money last year are going to have to pull a rabbit out of their hat. The Yukon is an expensive place. There's no getting around it.
Outside of companies with discoveries, like Kaminak Gold Corp. (KAM:TSX.V), ATAC Resources Ltd. (ATC:TSX.V) and Golden Predator Corp. (GPD:TSX), nobody's really done large financings and that's going to be tough. About 60% of the companies are going to have a hard time undertaking any significant programs this year. If the market gets better, which I think is going to happen, they still have a shot, but it's at buyers' terms.
I suspect a lot of companies are going to say, "Let's just wait and see if next year is better." You haven't seen many announcements. Quite a few of those companies that were talking last year about doing $4, $6, $8 million exploration programs—many of those programs aren't going to happen.
TGR: Desjardins Capital reports that 26 mergers and acquisitions worth a combined $30 billion (B) took place during 2010 and 2011. There are about 120 more companies operating in the Yukon. Are other junior explorers going to be forced to merge?
EC: I think there will be merger activity at the junior level. There are a lot of companies with decent but not spectacular projects where they haven't done enough work and are not in a position to raise money. A merger is one way out for them.
TGR: What did you think of the recently announced merger between Prosperity Goldfields Corp. (PPG:TSX.V) and Smash Minerals Corp. (SSH:TSX.V), which both have projects in the Yukon?
EC: It was our idea, so we liked it. It's a really good combination of management teams and a good-looking project. The first set of results from this year's drilling at the Kiyuk project should be out any time. I'm expecting good things from it.
TGR: Is it still fair to call the Yukon an area play when the shares of most of the juniors operating there have declined considerably, often by more than half? Even good results often don't tangibly move share prices.
EC: It still is an area play. This is a fairly common path even for a successful area play. The easy money has been made or, as is the case here, the market's just lousy and there is a lot of consolidation. The Yukon is getting to that point. The few companies that have done well will have the ability to pick up a lot of projects. In any area play, anywhere from a third to a half of the companies involved are piggybacking on the play to help raise money. Those companies tend to disappear quickly if they don't find something large right away or if the financing environment gets difficult. The bad market has exacerbated things but a large number of drop outs from an area play at this stage is not an unexpected development.
TGR: Let's talk about some of the contenders. What would be some of the biggest exploration programs in the Yukon this summer?
EC: Contenders will be the big spenders. ATAC is probably going to be the biggest up there at around $30M. Kaminak isn't very far behind. Both of those are funded new discoveries.
ATAC is particularly interesting because it looks like it could have a camp. It's Carlin, which is something new to the Yukon. There's not a lot of doubt that it will have a lot of ounces to work with, especially if they have some luck with new drill targets.
Kaminak's Coffee project is the same model as the original 1.5 million ounce (Moz) White Gold discovery, but it'll probably be larger. Kaminak is probably past that already, although it won't have a number out until early next year.
Both of those companies will probably get resources out at the end of the season.
Silver Range Resources Ltd. (SNG:TSX.V) has projects all around the old Faro mine. It has a very large land position and is drilling large bulk tonnage silver base metals zone. It also made a couple of high-grade silver vein discoveries late last year with similar mineralization to Keno Hill.
Ethos Gold Corp. (ECC:TSX.V; ETHOF:OTCQX) has about $7 million budgeted for its Betty project, which is adjacent to Kaminak's Coffee project. This will be the first drill test at Betty that has generated some good high-grade numbers from trenching and test pitting, so that will be closely watched. Ethos is fully funded for that program with quite a bit to spare.
TGR: Since we last talked, your brother David, your best friend and co-editor, passed away. He was a very fine geologist and a great human being. Our condolences for your loss.
EC: Thank you. We are going to hold a dinner and fundraiser for the University of British Columbia geology department in honor of Dave on June 4 after the Cambridge Conference in Vancouver. Everyone can get together, have a meal and a few drinks, and tell stories about Dave.
TGR: David often spent more than 200 days a year traveling to mining projects around the world. He helped start a new mining company before he passed away. Can you tell us about that?
EC: We were meeting with Strategic Metals Ltd. (SMD:TSX.V) about its projects. Doug Eaton, who runs Strategic, showed us a different project set that got our attention. Precipitate Gold Corp. (PRG:TSX.V–pending) was formed to explore 15 projects optioned from Strategic in the southeastern Yukon and northeastern British Columbia plus four other 100%-owned projects. After the initial public offering, which should be later this month, Strategic will become a significant shareholder and Precipitate gets 100% of the projects.
The lead project is the Reef project, north of Northern Tiger Resources Inc.'s (NTR:TSX.V) 3Ace project. A couple of large gold arsenic anomalies have been found at Reef, but they have not been drilled yet. There's some hard rock numbers there, but it will take drilling to figure out what it is. It's quite early stage.
Dave also picked and staked four other projects. We got a nice cluster of fairly high gold in silt numbers on the Gemini project in British Columbia. Part of the reason Dave liked this area was because it has very little exploration history, but that's actually what makes it interesting. It's not an area that's been written off. It just hasn't been looked at. And the logistics are pretty good by Yukon standards. The property is fairly flat, which makes it easier to work in the winter and it's a short hop from the Alaska Highway.
We went around and tapped on the shoulders of some really good people to work on this. Adrian Fleming, who was running Underworld Resources before it was taken over by Kinross Gold Corp. (K:TSX; KGC:NYSE), is the chairman. Quinton Hennigh, who was largely responsible for turning 600,000 ounces into 5 Moz at Gold Canyon Resources Inc. (GCU:TSX.V), is the geologist. Gary Freeman, who was president of Pediment Gold Corp. until it merged with Argonaut Gold Inc. (AR:TSX) and who is a really good market person, is on the board. Darryl Cardey, who was the chairman of Underworld Resources [acquired by Kinross], is on the board. Darcy Krohman, who has exploration and regulatory experience, has come in to be the CEO. Mike Moore has come on as vice president of exploration.
Like most early-stage stories, it's a management story. We might trip over something amazing on one of the properties right away, but we've got the right guys—that's the important thing. Strong management is the best Plan B you can have with an early stage company.
TGR: It's a compelling story with all those names involved, Eric. You follow companies all over the world, not just those in the Yukon. What are some of your favorite stories outside of the Yukon?
EC: I like Prosperity Goldfields, which is run by Adrian Fleming and Quinton Henning. The project is in really good hands and has a fair amount of room to grow. Results from the spring drill campaign should start arriving any time now.
Columbus Gold Corp. (CGT:TSX.V) picked up the Paul Isnard project, which was drilled about 20 years ago in French Guiana. It's got about 1.9 Moz on it. Columbus is fairly comfortable that it can double the ounces, and based on the drill results it's had so far, I'd say it probably can. As a company that has a 4 Moz deposit with a $60M market cap, it's fairly cheap.
Another one that we like is Riverstone Resources Inc. (RVS:TSX.V). It's got very good management and projects. The last resource was 3 Moz and it's still expanding. It's got a good bank account. It optioned the Yaramoko project to Roxgold Inc. (ROG:TSX.V) and sold the remaining 40% for $17M and 17M Roxgold shares.
TGR: What are your thoughts on Riverstone's Karma project?
EC: Karma probably has room to get to 4–5 Moz. It is still open and has gotten a lot bigger than we thought it would. The ounces are in several separate areas, but none of them are very far apart. It even has several trends that haven't been drilled much yet.
I'm very interested to see what happens with its Ligidi project. It is a really large target—one of the biggest I've ever seen in West Africa. What are the grades going to be when it starts putting holes in it? There are a lot of investors who have owned that stock for five years waiting to see Ligidi get drilled. It's one of the reasons Dave and I wrote it up. The company hasn't been able to work on it until now because of arguments with the vendor from whom Riverstone acquired the property. They've made peace now. It's just a matter of getting the exploration permits.
TGR: Majescor Resources Inc. (MJX:TSX.V) hit some interesting results recently on its Blondin project in Haiti. What do you know about that?
EC: We started following Majescor for its diamond mining a long time ago and kept it on the list. The project in Haiti looks pretty interesting. It has nice copper grades of a good width and a supergene zone. Supergene is the oxide just above the water table. Recirculating water creates blankets of high-grade material, be it copper, gold or whatever. In this case, it appears to be silver. Majescor doesn't have a lot of holes in that yet so it's hard to get our arms around it. However, the few holes it has drilled were getting 10–20 meters of 5–10 ounces silver. It's got potential.
Of course, Haiti is Haiti. The country is a mess; that's not a secret. However, it's a place that wants to get this industry going. Resources are probably one of the shortest routes to Haiti getting foreign currency reserves and direct investment. There are a few companies there now, including Eurasian Minerals Inc. (EMX:TSX.V) and Newmont Mining Corp. (NEM:NYSE).
TGR: Bear Creek Mining Corp. (BCM:TSX.V) in Peru has had some permitting issues. It seemed to be an up-and-coming company until the new government came into power and changed the landscape. What are your thoughts on what's happening in Peru and on companies like Bear Creek that are being affected?
EC: The political landscape has shifted a lot in Peru. It's made it very difficult for anybody outside of Peru—and maybe even inside Peru—to get a handle on what's a good spot and what isn't. There are a lot of South American countries where mining companies just shouldn't go because they're bound to face a political or indigenous population problem and they won't get permitting. Bear Creek has been there a long time and knew the good and bad areas and followed the laws. It stuck to areas where it didn't expect any problems and we didn't think it would encounter any either. Now no one seems to know what the good areas and the bad areas are. That's going to make it tough for everybody in Peru until this stuff gets clarified.
TGR: The problem is with a mining permit at Santa Ana, which isn't its primary project. The world-class Corani silver project is its main project, but it can't develop that without getting the cash flow from developing Santa Ana.
EC: Santa Ana was always going to be the lower capital expenditure (capex) project that would start spinning cash flow and increase the company's valuation in order to raise money for Corani. This has messed up its whole pipeline.
TGR: Is it too late to modify that game plan?
EC: The locals don't want the company there. Unless Bear Creek can go back into Santa Ana, it has to go back to square one and develop Corani first. That probably means bringing in a partner because it's a big capex project. There are Asian companies that are pretty active in Peru and Chile that may have enough political clout to be able to sit down with the government and say, "Look, we can come in and spend $1 billion to build this thing, but we've got to know now. No surprises."
TGR: The Chinese don't tend to be all that interested in silver though.
EC: They would be more interested in the base metals, which Corani has a lot of. There's a lot of zinc and lead. Lead is not a politically correct metal and it's got environmental issues, which doesn't make it an easy sell. However, it still gets used in a lot of areas, one of them being China.
If a company can deal with the base metals, Corani could be a very big silver producer by world standards for a long time.
TGR: Do you have some parting thoughts for us on the market and how it translates to the retail investor?
EC: I'm fairly comfortable that the U.S. is going to do OK over the next couple of years. It's going to have another political fight at the end of the year when tax cuts die. Europe has the capability to pull itself out of its problems. In a large measure, it's political decision-making. I certainly appreciate northern Europeans and Germans that don't really see why they should be footing the bill, but they can afford to foot the bill.
We're not particularly worried about China. It's trying to rebalance its economy. China's in a different boat from Europe or the U.S. in that it's got $3 trillion in reserves and can open the taps anytime it wants. China will increase the growth rate when it feels it's the right time to do it.
The world economy will do OK as well. I know it feels like the end of the world for investors that own a lot of resource stocks as I do. The secular bull market hasn't ended. Ironically, all the political problems in different producing regions are going to extend that secular bull market in metals because it's that much harder to grow production to a point that knocks metal prices down.
I'll just leave you with a contrarian thought: Everybody's so negative right now because this is what bottoms look like. Everybody thinks the world is coming to an end. Everybody thinks it's the worst market they've ever been in. Everybody thinks nothing is ever going to go up. That's what a bottom looks like. It's not fun to go through. There's so much negativity everywhere that it's telling me as a contrarian that there's probably not a lot more pain to go through before things start getting better.
If readers would like to download HRA's new company report on Precipitate Gold Corp., HRA has set up a special free report offer for a limited time. Simply click here and they will send you the report.
Eric Coffin is the editor of the HRA (Hard Rock Analyst) family of publications. Responsible for the "financial analysis" side of HRA, Coffin has a degree in corporate and investment finance. He has extensive experience in merger and acquisitions and small-company financing and promotion. For many years, he tracked the financial performance and funding of all exchange-listed Canadian mining companies and has helped with the formation of several successful exploration ventures. Coffin was one of the first analysts to point out the disastrous effects of gold hedging and gold loan-capital financing in 1997. He also predicted the start of the current secular bull market in commodities based on the movement of the U.S. dollar in 2001 and the acceleration of growth in Asia and India. Coffin can be reached at hra@publishers-mgmt.com or the website www.hraadvisory.com.
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DISCLOSURE:
1) Brian Sylvester of The Gold Report conducted this interview. He personally and/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: Ethos Capital Corp., Argonaut Gold Inc., Gold Canyon Resources Inc., Golden Predator Corp., Majescor Resources Inc., Prosperity Goldfields Corp. and Roxgold Inc. Streetwise Reports does not accept stock in exchange for services.
3) Eric Coffin: I personally and/or my family own shares of the following companies mentioned in this interview: Kaminak Gold Corp., ATAC Resources Ltd., Prosperity Goldfields Corp., Precipitate Gold Corp., Northern Tiger Resources Inc., Columbus Gold Corp., Majescor Resources Inc., Riverstone Resources Inc., Roxgold Inc., Argonaut Gold Inc. and Ethos Capital Corp. I personally and my family are not paid by any of the companies I follow in the HRA Advisories newsletters. I was not paid by Streetwise Reports for participating in this story.
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