Brent Cook: $1,600 Gold=Big Money for Mid-Caps
August 3, 2011
Brent Cook, editor of the Exploration Insights newsletter, likes to spend his days winnowing out junior companies on the verge of making discoveries. But when he noticed a disconnect between the skyrocketing gold price and the low valuations of some larger mining companies, he jumped on it. In this exclusive interview with The Gold Report, Cook details which types of miners will be the beneficiaries of this continuing trend.
Companies Mentioned: Alamos Gold Inc. - Allied Nevada Gold Corp. - Almaden Minerals Ltd. - Detour Gold Corp. - Eldorado Gold Corp. - Miranda Gold Corp. - Osisko Mining Corp. - Red Eagle Mining Corp. - Ryan Gold Corp. - Strategic Metals, Ltd. - Wolverine Minerals Corp.
The Gold Report: You wrote last summer that "the global macroeconomic picture does not look good," citing high unemployment in the U.S. and Europe that would likely be driven higher by increased taxes and decreased government spending in the face of serious sovereign debt problems. Sounds a little like Groundhog Day. You could say the same thing today. How are you feeling about the global economy now?
Brent Cook: I think we're still sinking. The issues I mentioned last year are still here and, if anything, have gotten worse. Debt problems in Ireland, Portugal, Italy, Greece and Spain have only been compounded. Rating agencies have downgraded them all and the U.K. is facing systemic economic troubles as well. I think the world is beginning to recognize the unthinkable—the U.S. debt situation is not going to improve as rapidly as the government mouthpiece has suggested. It's a slow-moving train wreck globally and most of the people on the train are too busy watching Dancing with the Stars, oblivious to where we are all headed.
The only thing that has really changed since last year is that the gold price is up about $400/oz. (ounce) That's not bad. But the fact that the gold price is up in virtually any currency is proof that we've got a global problem that's not being fixed and that the massive debt injections haven't done any good at all.
Last week, Fed Chairman Ben Bernanke basically said he considers gold little more than a quaint tradition. That should scare the hell out of anyone looking out the train window and banking on him to fix things.
TGR: There was talk last week that Moody's was going to downgrade the U.S. AAA credit rating. Do you think that's just posturing or is that a legitimate concern?
BC: I suspect it's a bit of both. It's posturing in that they are trying to push the politicians to raise the debt ceiling. But these are legitimate concerns given the serious economic situation we are in. We are spending more than we bring in, or as my ex-boss Rick Rule puts it, "When your outgo exceeds your income, your upkeep becomes your downfall." Well, that about sums up the situation.
TGR: Large mining companies are generally not your forte, but you noticed a disconnect in June between the gold price and the mid-cap precious metals producers. You decided to take a position in three mid-cap names in the hope that those companies would close that gap. What were those companies and how have they fared since that investment?
BC: It was a bit of deviation from what we normally do at Exploration Insights, which is to look for junior companies on the verge of making discoveries or developing discoveries. When the market gets scared, investors are increasingly averse to risk and the juniors get hammered because they can be the riskiest bet out there. Remember, most of these junior companies don't have anything of value. They've got moose pasture and sage brush somewhere in the world with some sort of geochemical anomaly that they hope will almost magically turn into a big mineral deposit. My fear was that if things continued to deteriorate, the juniors could get whacked pretty good.
However, mid-tier and larger mining companies have been declining in price despite increasing gold prices. A lot of these mid-tier companies are going to be making serious money at $1,500/oz. or $1,600/oz. gold and that is not priced into their shares.
I picked three companies that I felt had solid, low-cost deposits with good exploration upside: Eldorado Gold Corp. (TSX:ELD; NYSE:EGO), Allied Nevada Gold Corp. (TSX:ANV; NYSE.A:ANV) and Alamos Gold Inc. (TSX:AGI). They've done well and are up an average of 30%. We just sold out of Eldorado because that 30% gain in a month was too good to let pass for a $10 billion company.
TGR: Eldorado and Alamos have projects in Turkey. Alamos primarily runs the Mulatos gold-silver mine in Mexico, but it also has the Kirazli and Ağı Dağı projects in Turkey. Why are these companies looking at Turkey?
BC: Turkey is great geologically and a very rich place for gold and copper deposits. It's been somewhat ignored because it's been a difficult place to work. But it's certainly not impossible. Eldorado's deposit is doing exceptionally well. And the discovery that Alamos has been drilling out has been pulling some very exceptional holes. The company is onto a major deposit with a good grade and I think it's permitable. I think Turkey is a top place to be looking.
TGR: Allied Nevada has the Hycroft gold mine in Nevada. Is that the next catalyst for the company?
BC: Allied Nevada's Hycroft deposit is a unique situation. It's in the U.S.; it's mostly a sulfide deposit; and it's pretty damn low grade. But Allied Nevada is in the process of proving that bulk mining this thing on a large scale is going to be able to produce gold for less than $400/oz.—that's a very high profit margin, especially if you throw that at a 20 Moz. deposit. There is also around 700 Moz. of silver in the deposit that represents about 25 Moz. of annual production, assuming the milling operation works and is running in 2015. The company is finishing the final studies that I suspect will show it's a major deposit in the U.S. hosting tens of millions of ounces. I like that deposit; I like what the company is doing. Scott Caldwell, the guy running it, knows what he's doing. He's worked heap leach deposits before. Allied is not going to give us the big upside that the exploration companies I usually follow enjoy, but I'm happy with 30% or 40% once in a while.
TGR: It's in your backyard, too. You're a boot and hammer geologist and you've been all over Nevada and the southern U.S. You're very familiar with the geology there.
BC: Nevada's interesting. It's not been ignored over the past decade and a few companies are really going after new exploration concepts. I've been to some projects recently that are quite impressive, but surprisingly have not seen any drilling. Companies are moving back into Nevada with new concepts and targets. We stand a chance at seeing discoveries there, hopefully by juniors.
TGR: How long do you expect the disconnect between the gold price and some of those mid-cap producers to continue?
BC: The honest answer is that I don't have a clue. I'm not very confident at predicting and timing markets. Nonetheless, the disconnect does exist and these mining companies are going to be making very good money and flowing a lot of cash. We could start to see a new type of investor or institution looking at gold companies as businesses instead of a hedge on the dollar. We might even see gold mining companies begin to pay out real dividends.
The other positive for me about these companies is that for every ounce they produce, they've got to replace it or find a new deposit. They can now afford to pay a fair amount for legitimate high-margin deposits. That takes us back to what I like to look for: exploration projects.
TGR: Is $1,600/oz. gold translating to a higher dollar value for those ounces still in the ground?
BC: It is for the companies that have proven resources with some sort of economic study behind them. Companies like Osisko Mining Corp. (TSX:OSK) and Detour Gold Corp. (TSX:DGC) with deposits that are 1 gram per ton (g/t) sulfide are being valued very highly. But if the gold price drops down to $1,000/oz., these guys are toast.
Larger development stage companies with an economic study behind them are being valued at the higher gold price. I'm more cautious about the companies that are just exploring, or that have large low-grade deposits still sitting out there. Economic deposits are unique; geochemical anomalies are a dime a dozen and ultimately worth about that much.
TGR: Ryan Gold Corp. (TSX.V:RYG) and Wolverine Minerals Corp. (TSX.V:WLV) are both drilling geophysical and geochemical anomalies in the Yukon this summer. Yet Ryan is valued at around $230M (million) and Wolverine at around $22M. Can you compare the potential of each of those companies and their values as it pertains to the larger play going on in the Yukon?
BC: That's a real interesting question. Both of them have geochemical anomalies in the Yukon—so do a hundred other companies. Ryan Gold has a very influential and well-connected group of people associated with it. That has helped its valuation a lot.
It also has one project that I consider pretty darn sexy: the Ida Oro Project. It's got the look and feel of a large, intrusive-hosted gold system. That's all we know. We don't even know what the average grade is going to be. If it's a disseminated deposit, which it appears to be, it could be an average of 1 g/t. That's a pretty skinny margin for a deposit in the Yukon and I hope they do better than that. Even at a 2 g/t average everything else would have to work to make it an attractive takeover target. That jump between 1 g/t and 2 g/t gold is a big hurdle if you look at a cumulative grade plot for large deposits.
Turning to Wolverine Minerals, it also has good, competent management. I've got a lot of respect for them. The company has a number of projects and I think it will begin drilling on a few of them over the summer. The company's team is out there right now sampling and mapping. If they can pull two drill holes that show a potential economic system, our odds are leveraged at a $22M market cap versus Ryan's $200M. I like Wolverine in that respect, but it does not have the solid target defined yet like Ryan Gold.
TGR: What about Wolverine's agreement with Strategic Metals Ltd. (TSX.V:SMD)?
BC: Strategic is supplying a lot of the workers, geologist, samplers and mappers. It's certainly an advantage. The company received most of its projects from Strategic in exchange for shares. I think that's the only involvement from Strategic.
TGR: When should we expect some drill results from Wolverine and Ryan?
BC: I suspect they'll be drilling in August. It's taking a long time to get assays to the labs given that everybody and their dog is up there rushing samples to the labs. There could be results in September or October.
TGR: Is there an entry point on those stocks that is favorable?
BC: We got into Wolverine at $0.35 in Exploration Insights and it's trading around $0.63 now. For investors looking for high-risk exposure in the Yukon, it's probably a reasonable entry point.
Ryan Gold is a tough call. With Ryan, investors might want to wait and see what some of the results look like.
TGR: Almaden Minerals Ltd. (TSX:AMM; NYSE:AAU) recently released some drill results from its Tuligtic project in Mexico. The highlight of the drilling program was an intercept of 248m (meters) grading 1.6 g/t gold equivalent. But you have suggested that soil sampling in the area identified a 4x6 km. area of geochemical anomalies inside a circular topographical feature that could represent a volcanic caldera. If what you suggest is true, what could that mean for the Tuligtic project?
BC: We need the actual geologist on the ground doing work to figure out what's going on, not some guy arm waving on the beach in California. When I was down there a few months ago, I got the sense that the prospect sat within a caldera. I've been to a lot of calderas; I've got a feel for what they look like and their importance. What that means is that it's an area of hot springs and such that are the result of cooling magma. In Yellowstone National Park, there are a number of hot springs, volcanic eruption events and that sort of thing. About 12 million years ago, I think that's what Tuligtic looked like. In another 12 million years, we can go mine Yellowstone. Ask your next guest what the gold price will be then for me.
Back to Almaden, it's going to take a lot of detailed work to find the mineralization, but the system is the sort that can generate and produce major gold-silver deposits. That's why we're there. When they drilled their first hole a little over a year ago, just knowing what I knew about this system, we bought into it that day. I've been sitting there ever since and accumulating it. One day, hopefully, the company will find the heart of the system and our big payday comes.
TGR: These are systems that would channel precious metals to the surface?
BC: Basically. For example, hot springs at Yellowstone bring up hot fluids from the magma along with copper, lead, zinc, gold and silver. The metal precipitates out under specific pressure, temperature and chemical conditions.
TGR: Is that Almaden's best hope for a major discovery?
BC: The good thing about Almaden is that it is not a one trick pony. It has a number of projects being worked by partners in Canada and in Mexico. Caballo Blanco is being worked by the Goldgroup Mining Inc. (TSX:GGA; OTC:GGAZF). The company, which maintains a 70% stake, is hoping to put that into production at no cost to Almaden. The Elk gold property in British Columbia has been taken over by Beanstalk Capital. The company has about 30M shares of Beanstalk. Almaden's a very solid company. It's not going to zero even if Tuligtic is a bust.
TGR: It's trading at around $3.75. Is that a good entry point?
BC: That's a tough thing to say. If it was $2 I'd be much happier and buying more. It's great for investors looking to gamble on a discovery with the hope to get a lower price sometime this year. It's not a cheap stock. I'll grant you that, but in this market you sometimes have to pay up for quality.
TGR: Are there some other juniors with projects in Mexico or Latin America that recently found their way onto your radar screen?
BC: I evaluate about 25 companies in detail each month and then I visit maybe 20 projects a year. I'm always looking at things. My most recent trip to Latin America was to Colombia, where I spent some time with Red Eagle Mining Corp. (TSX.V:RD) and Miranda Gold Corp. (TSX.V:MAD).
Red Eagle has one project in Santa Rosa, Colombia, which is an old mining district. It's going to be more of a disseminated-type target. The company is down there now trenching and working it up for drilling. The other project we looked at is Pavo Real, which is a joint venture with Miranda Gold. Red Eagle can earn 70% by completing a feasibility study. It's different than a lot of stuff I've seen in Colombia because it's hosted in sediments and it's a broad area of alteration and surface mineralization. It's an intriguing target.
TGR: Red Eagle just listed so it's probably not on too many radar screens. It's trading at $1.27 right now. What do you think of that stock in that range?
BC: I think it's something to watch. At a $34M market cap, there's certainly some success priced into it. It's worth watching to see what the results at Santa Rosa and Pavo Real look like.
TGR: You're going to be speaking at the Agora Financial Investment Symposium in Vancouver from July 26-July 29. What do you plan to talk about there?
BC: I'm titling my presentation "Turning Rocks into Money" because I think that's really what it's all about. I'm going to go through a bit of geology, how to value companies, and how to judge where a company is in the discovery lifecycle. Hopefully next year's talk isn't titled "Turning Money into Rocks."
I'm also leading a panel on Thursday titled, "Insights into the Business of Exploration." Bill Pincus, president of Esperanza Resources Corp. (TSX.V:EPZ), Ken Cunningham, president of Miranda Gold, and John-Mark Staude, president of Riverside Resources Inc. (TSX.V:RRI) will be on the panel. This is going to be an interesting discussion. We won't be talking about their companies, their soil samples and that sort of thing. I'm hoping to give the audience a real feel for what exploration is about, how these people run their businesses, and how they plan to make money for shareholders in the long run.
TGR: That will make for an interesting panel. Thanks, Brent.
http://www.theaureport.com/pub/htdocs/expert.html?id=755 brings more than 25 years of experience to his role as a geologist, consultant and investment adviser. His knowledge spans all areas of the mining business from the conceptual stage through detailed technical and financial modeling related to mine development and production. His hallmarks include applying rigorous factual analysis to the projects and companies he examines, and augmenting his analysis with on-site field evaluations. He has worked in more than 60 countries on virtually every mineral deposit type. Brent's weekly Exploration Insights newsletter focuses on early-discovery, high-reward opportunities primarily among junior mining and exploration companies. Paul van Eeden, who produced Exploration Insights' predecessor publication, claims Brent "has always been my primary source of information and intelligence with respect to mineral exploration investments."
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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: Allied Nevada Gold Corp., Detour Gold Corp. Wolverine Minerals Corp., Red Eagle Mining and Miranda Gold Corp.
3) Brent Cook: I personally and/or my family own shares of the following companies mentioned in this interview: Almaden, Miranda Gold, Red Eagle, Esperanza Resources, Riverside Resources, Wolverine Minerals, Alamos Gold and Allied Nevada. I personally and/or my family am paid by the following companies mentioned in this interview: None.
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