Mining’s old guard needs strong medicine
A new report details subpar investor returns in the mining industry over the last decade, particularly big cap diversified companies which have not adapted to new realities.
In the following article, we offer our forecast for 2014 including five stock picks from each of our analysts. Compare 400+ precious metals stocks with a Free 14-day Trial to Tickerscores.com.
The TSX-V will be a stock picker’s market in 2014. In this environment, investors should stay cautious and the focus should remain on companies with strong balance sheets, top tier management teams, and projects in safe jurisdictions.
Financings were down 37% in 2013 and we anticipate that many junior exploration companies are in for a rough year. Out of the 410 junior exploration stocks currently covered in our database, the average cash position is less than $700,000. Further, about 30% of companies have less than $500,000. We expect this cash trend to continue until troubled companies become delisted, which will likely come after audited annual statements are due.
The average General and Administrative Expense Ratio, which measures the percentage of total expenditures going to items other than exploration, is above 65%. This indicates that the majority of companies are unable to “put money in the ground” in order to create value for their shareholders. In our database, currently 152 companies have ratios above 50% and 75 companies have ratios above 75%. These companies need to leave the exchange before any kind of “across the board” rebound can happen.
We expect the 975 level to continue as resistance for the Venture and for it to move considerably lower by the end of 2014. We expect it to break the 2013 low of 859 and retest 700. (See below chart and trend of TSX-V)
While a rebounding of the Venture itself is unlikely for 2014, investors need to remember that watching the performance of the whole index can be fairly arbitrary. The TSX-V is made up of hundreds of companies – and though many may continue a downward trend, there are great opportunities out there for those who are patient and focused.
Using our Tickerscores data on hundreds of previous metals companies, here we outline some stocks that we believe could “turn the corner” before the rest of the market. First, we’ll look at a few select metals of interest to us.
Gold
Gold is likely to remain range-bound in 2014 between the levels of $1200-$1400 per ounce. The key to watch will be the US Dollar and what the Fed ultimately does with tapering the QE program.
Silver
Silver is likely to trade in a range of $18-$25 per ounce. We do not see a lot more downside to the silver price because of its unique combination of industrial and investment demand.
Platinum Group Metals (PGMs)
The PGM group exhibited the most relative strength in 2013 and we expect this trend to continue. We expect the PGM group to outperform gold and silver.
Zinc
Zinc has a good chance of outperforming other metals this year. Some large zinc mines are scheduled to close down and inventory levels at the LME are declining.
Copper
Copper is an industrial metal and is tied to economic performance. As the economy both domestically and internationally strengthens, so will the demand for copper. We expect copper to be an outperformer.
James Fraser, Mining Analyst
1. Rubicon (RMX.T)
Rubicon’s ‘Phoenix’ deposit is located in a safe jurisdiction (Red Lake, Canada) and has very attractive project economics with an IRR of 27%. The Phoenix deposit has an NPV of $531 million which ranks 18th out of 75 developers in our database.
2. Timmins Gold (TMM.T)
Timmins is growing production in 2014 and has an all in sustaining cash cost below $1,000 per ounce. Insider ownership in Timmins is the highest out of the five Mexico gold producers we have covered.
3. USA Silver (USA.T)
USA silver has a market cap of only $26 million which is extremely undervalued for a 2 million+ ounce silver producer. If silver has any sort of upward movement in 2014, look for a significant move.
4. Royal Gold (RGL.T)
Royal Gold is a major gold royalty player and is one of the safest ways to play the gold space. 2014 will be a growth year here as the Thompson Creek Mt Milligan mine ramps up production. RGL has a 52% stream on that project.
5. B2Gold (BTO.T)
B2Gold has the best score in our production stress test which tests earnings from operations at numerous price levels. Aggressive growth in production is expected in the next several years. Combined with any rise in the gold price, shareholders here will be well rewarded.
Rob Fuhrman, Lead Analyst
1) Tahoe Resources (THO.T)
Commercial silver production is scheduled for Q1 2014. Tahoe has a world-class deposit with exceptional grade located in Guatemala. We expect Tahoe to be a contender for top spot in our Latin America producer database.
2) Rio Alto Mining (RIO.T)
Rio Alto is a Peruvian producer with the lowest all-in costs out of the 8 Latin America producers. All-in costs were $961 for the quarter. Production guidance is for 190,000-210,000 ounces in 2014.
3) Excellon Resources (EXN.T)
Excellon has the lowest all-in costs out of our 10 Mexican silver producers and has the top score in our producer stress test. All-in costs were $12.11 for Q3 2013 on 607,252 AgEq ounces produced. Additionally, they increased production by nearly 50% from Q2 to Q3.
4) Orca Gold (ORG.V)
Out of 200+ exploration companies in our database, Orca ranks 1st in cash position with $50 million and is our #1 exploration stock in Africa. A maiden resource estimate is expected in Q1 2014.
5) Bayfield Ventures (BYV.V)
Bayfield is ranked 3rd in our Ontario exploration database which encompasses 26 exploration companies. Bayfield is a pure takeover play in the Rainy River area of Ontario. Bayfield has drilled 250+ holes on their Burns property and the “Burns Block B” section is surrounded by New Gold claims.
