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.
Mick Carew, a research analyst with Haywood Securities, hopes we have found the bottom of the commodity cycle but expects M&A activity to continue apace through the rest of this year and into 2016 as low metals prices force the hands of underfunded management teams. Carew says M&A is commonly viewed as a potential indicator of a swing in market sentiment, and in this interview with The Gold Report, he discusses a handful of his favorite names, some of which could become M&A targets.
The Gold Report: In Q2/15, Oban Mining Corp. (OBM:TSX), backed by Osisko Gold Royalties Ltd. (OR:TSX), consolidated a number of micro-cap gold equities in Québec and Ontario while Crocodile Gold Corp. (CRK:TSX; CROCF:OTCQX) merged with Newmarket Gold Inc. (NGN:TSX.V) in an effort to become a consolidator in its own right. These are two consolidation stories in the gold sector. Should investors expect more?
Mick Carew: As we approach what we hope is the bottom of the commodity cycle, we view this as an opportune time for consolidation in the mining space. We’ve seen a migration toward increased mergers and acquisitions (M&A) activity over the last couple of years. This year in particular has seen a number of high-profile mergers, including Alamos Gold Inc.’s (AGI:TSX) acquisition of AuRico Gold Inc. and Tahoe Resources Inc.’s (TAHO:NYSE; THO:TSX) acquisition of Rio Alto Mining Ltd. We’ve also seen major gold miners, including Barrick Gold Corp. (ABX:TSX; ABX:NYSE) and AngloGold Ashanti Ltd. (AU:NYSE; ANG:JSE; AGG:ASX; AGD:LSE) sell non-core assets to address debt concerns.
We believe M&A is likely to continue as exploration funding is cut further and development pipelines are also affected. Furthermore, we think that this activity will be more pronounced as miners continue to refine their operating costs after the dramatic fall in commodity prices that started in 2011. M&A is commonly viewed as an indicator of a potential swing in market sentiment as intermediates and majors continue to scour for undervalued assets and potential targets. Therefore, any pick up in this type of activity could be deemed a positive.
TGR: Do you expect M&A activity to increase throughout the remainder of the year and perhaps even gain momentum next year?
MC: Yes, this activity and other novel funding approaches are an expected artifact as exploration funding dries up and project development prospects continue to shrink.
TGR: What are some companies or what types of companies in the gold space stand to benefit most from further consolidation?
MC: Cashed up and cash flow producing companies have a clear advantage over their cash-challenged counterparts (e.g., exploration companies and unfunded development-stage companies). Exploration companies will continue to struggle to raise capital given depressed equity prices relating to low commodity prices. We believe companies with healthy balance sheets and proven management that already hold high-quality assets will continue to be more attractive investment opportunities. In turn, as I addressed earlier, these companies will look to accumulate assets that are considered relatively undervalued as their holding companies struggle to raise capital.
TGR: How long do you expect the low gold price environment to persist?
MC: Gold is obviously a hedge against macroeconomic concerns. The lift in the gold price since early August has been substantial as it now resides well over $1,100 per ounce ($1,100/oz). We will have to wait to see whether this recent move in gold is a short-term climb or whether it is part of a sustained movement to the upside.
TGR: What is Haywood’s price deck for gold near, medium and long term?
MC: We recently lowered our 2015 gold price forecast to $1,210/oz . We have a flat price deck of $1,250/oz gold from 2016 onwards.
TGR: Please provide us with an outline of your investment thesis.
MC: With the recent upward swing in the price of gold, a basket of gold mining equities is likely to respond in kind, providing an opportunity for investors. However, we still believe the market is keeping an eye out for new discoveries and companies that are well funded and run by proven management that can advance projects efficiently. In the developer space, projects that require relatively low up-front capital expenditure (capex) also hold an advantage over their peers and are more likely to attract funding in the current environment.
TGR: Tell us about some of the equities you follow for Haywood Securities.
MC: My focus is largely concentrated on some of the junior companies among the mining equities. It’s been a difficult few months for the junior mining space, with the TSX Venture dropping almost 30% since November 2014. It dropped almost 10% in July alone. Despite this backdrop, we continue to feature a number of junior explorers in Haywood’s quarterly “Junior Exploration Reports.” A couple of names in particular are Balmoral Resources Ltd. (BAR:TSX; BAMLF:OTCQX) and TerraX Minerals Inc. (TXR:TSX.V).
Balmoral is focusing on the Grasset nickel-copper-platinum group metals (PGE) project in Québec. The project is situated along a southeast-northwest trending coincident magnetic/electromagnetic anomaly, about 8 kilometers (8km) east of Detour Gold Corp.’s (DGC:TSX) Detour Lake gold mine. The nickel-copper-PGE mineralization at Grasset is similar to what we see at Vale S.A.’s (VALE:NYSE) Voisey’s Bay base metals mine in Labrador. Drilling along the southeast extension of the Grasset anomaly has identified multiple stacked sulphide horizons. One assay returned an intersection of 58 meters (58m) of over 1.8% nickel and contained copper, platinum and palladium. In addition to that, some reconnaissance drilling by Balmoral northwest of the main Horizon 3 zone, 8km along strike, intersected nickel, copper and PGE mineralization, including some gold-rich zones. These gold-rich zones suggest there may be more than one mineralizing event. We view this as positive given that the presence of multiple mineralizing events suggests the mineralized system is dynamic and complex. This added level of complexity ultimately enhances the potential for a significant discovery at Grasset.
TGR: Considering the amount of drilling that has been completed at Grasset thus far, what sort of picture emerges?
MC: It’s still too early to talk about specific numbers or size, but when we look at the drill results on the southeast portion of that anomaly, there appears to be continuity, particularly along the net-textured sulphide zones. Of particular interest is the presence of massive sulphide lenses. At this stage, Balmoral has only intersected narrow intervals of massive sulphide, but these high-grade lenses could be a game changer for the project—especially considering some of these massive sulphide lenses grade up to 14% nickel. If the company can identify similar zones with greater width and continuity elsewhere, we could be dealing with a significant system reminiscent of other magmatic nickel sulphide systems worldwide.
TGR: How much cash does Balmoral have to continue its exploration program?
MC: Definition drilling and metallurgical studies are underway and expected to be completed in Q3 or early Q4/15, the costs of which were included in a $3.8 million ($3.8M) summer/fall exploration budget. In addition to the resource delineation work at Grasset, Balmoral continues to delineate and expand the high-grade Martiniere gold system located 40km east of Grasset. The company has indicated it aims to produce a maiden resource estimate for Grasset in late 2015 and an initial, partial resource for the Martiniere system in Q1/16. The company has results from about 40 drill holes pending from both projects and currently has two drills on site.
TGR: What about TerraX?
MC: TerraX Minerals has the Yellowknife City gold project situated immediately north of Yellowknife and hosts the past-producing Con and Giant gold mines. Osisko Gold Royalties now owns about 17% of TerraX and has a 1% net smelter royalty option. TerraX has set aside $2.2M in support of a 6,000m drill program plus some field work, structural and mapping, in partnership with Osisko. Drilling will focus on what the company terms the “Core Gold Area,” which includes the Barney Shear, which is interpreted as the extension of the Con and Giant deposits, as well as the Crestaurum deposit, which has similar high-priority targets. The company conducted 1km of channel sampling along strike of the Barney zone, which returned 11m grading 7.55 grams/ton (7.55 g/t) gold. We view TerraX’s exploration portfolio as one of the more prospective in the Canadian junior gold mining space. This view is further supported with Osisko coming in as a partner and providing technical support to the exploration program.
TGR: Do you have more faith in TerraX and Balmoral given that key members of the management team have had previous success?
MC: It certainly provides a degree of confidence if a company’s management has a successful track record. Exploration is a high-risk venture in which most companies that raise capital fail to discover assets that migrate into production. We like companies that have strong management teams with histories of discovery success, capital to explore and portfolios of prospective projects.
In this context, the management teams of both TerraX and Balmoral have proven track records. Darren Wagner, CEO of Balmoral, is the former CEO of West Timmins Mining that was acquired by Lake Shore Gold Corp. (LSG:TSX) for $424M. TerraX CEO Joe Campbell was central to the discovery and delineation of the Meliadine gold project in Nunavut, which was subsequently acquired by Agnico Eagle Mines Ltd. (AEM:TSX; AEM:NYSE) through its acquisition of Comaplex.
TGR: Are there any other small-cap gold names that are worth mentioning?
MC: At Haywood, we also follow Calibre Mining Corp. (CXB:TSX.V) quite closely. The company has adopted the project generator model, an increasingly popular way for explorers to gain access to capital in exchange for a key stake in the project or company. Calibre has a number of projects in Nicaragua including its Borosi project in joint venture with B2Gold Corp. (BTG:NYSE; BTO:TSX; B2G:NSX), where B2Gold holds a 51% interest with the option to earn an additional 19% interest by spending $6M over three years. In addition, the Calibre’s Eastern Borosi project is under an earn-in agreement with IAMGOLD Corp. (IMG:TSX; IAG:NYSE), which can earn 51% by spending $5M. Both agreements are such that exploration is completely funded by B2Gold and IAMGOLD. Both projects are early stage but have already returned several high-grade gold intercepts and we expect more over the coming months.
TGR: What about Nicaragua as a mining jurisdiction?
MC: B2Gold is operating in the country with its El Limon and La Libertad gold mines and obviously views Nicaragua as an investible jurisdiction. Given its history, we believe that the country has shown its potential to provide a reasonable environment for explorers to work.
TGR: Let’s go through some recent news events among the companies you follow.
MC: Atlantic Gold Corp. (AGB:TSX.V) recently posted an updated resource estimate and feasibility study for its Touquoy project in Nova Scotia. The feasibility outlined robust economics with a net present value (NPV) of $168M, an internal rate of return (IRR) of 30% and an assumed capex of $137M with a 9 year mine life.
The feasibility study outlined a comparatively simple operation featuring a 2 million ton per annum carbon in leach (CIL) plant fed by ore material exploited via small-scale open-pit mining methods. The study examines material extracted from both Touquoy and Beaver Dam where material from Beaver Dam will be crushed and then trucked to the facility at the Touquoy processing facility. There is also operating expansion upside potential given the proximity of the Cochrane Hill and Fifteen Mile Stream deposits that have defined resources containing 550 Koz and 480 Koz gold, respectively. In light of the economics of the study, underpinned by relatively low capex requirements, we see Atlantic as being ideally positioned in the developer group and a stock to keep an eye on. We note that Beaver Dam’s environmental impact assessment is due to formally commence later this year with an eye on completion in early 2016, assuming provincial-level review only.
TGR: Another company that released news?
MC: Integra Gold Corp. (ICG:TSX.V; ICGQF:OTCQX) recently announced additional intervals from the Triangle zone on its 100%-owned Lamaque South gold project in Val-d’Or, Québec. The latest results from Lamaque have provided Integra with a better indication of the structural controls on gold mineralization, which in turn has aided in producing a more representative geological model. In particular, recent results have shown that major sub-vertical mineralized structures at Triangle bear a close affinity to the C structures at the Main Plug at the historic Lamaque mine, which was mined to a depth of 1,100m and produced over 4.5 million ounces of gold. We expect an updated resource estimate later this year, which will add to an already robust preliminary economic assessment (PEA). The most recent PEA, which was based on the last published resource estimate for Triangle, returned a pre-tax NPV of CA$184.3M and 77% IRR. The PEA considers average annual production of ~110 Koz/year over 4.5 years, with preproduction capex of CA$61.9M, noting that Integra purchased the Lamaque mine mill last year. The new interpretation will no doubt improve the current resource, which will ultimately result in improved economics moving forward.
TGR: Thank you for your market insights today, Mick.
See Mick Carew’s thoughts on investing in the energy sector in The Energy Report.
Mick Carew is a research analyst with Haywood Securities. Carew has mineral exploration experience on three continents, Asia, Australia and North America, with specific expertise in a variety of uranium, base and precious metal ore deposits. He also brings extensive technical experience in the evaluation of potential targets and geological properties. Carew holds an Honors Bachelor of Science from Monash University of Melbourne and a Ph.D. from James Cook University.
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Source: Brian Sylvester of The Gold Report
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Source: Brian Sylvester of The Gold Report (8/24/15)
