Denver Gold Mining Report

What this year's Denver Gold Forum told a senior fund manager about the mining sector...

 

HAVING one-on-one conversations with numerous executives from gold mining companies is an invaluable way to evaluate the state of the industry, writes Frank Holmes of US Global Investors on his Frank Talk blog.

 

We believe this is unmatched experience you can't gain from reading financial statements. And even though the Denver Gold Forum experienced a small drop in attendance, the number of one-on-one meetings grew sharply, which suggests buyers might be on the prowl.

 

In addition to the increase in registration from value-focused funds and private equity funds, there was a 61% rise in one-on-one meetings this year. According to Mineweb's Lawrence Williams, this bodes well for a considerable increase in mergers and acquisitions activity in the sector over the next few months.

 

Ralph Aldis, Brian Hicks and Samuel Pelaez gained useful "boots-on-the-ground" knowledge at the Denver Gold Forum, which primarily has senior miners, and at the Precious Metals Summit, which is focused on the juniors. At 30-minute increments, they met with an incredible 58 different gold mining companies on an individual basis.

 

Here are some of their takeaways...

 

Companies may be resource rich, but they are capital poor. Despite the optimism in mergers and acquisitions, the junior gold exploration cash crisis continues to mount, with no quick turnaround in sight. According to Kaiser Research, back in November 2012 the number of juniors with less than $200,000 in Canadian Dollars available to them was 632 out of around 1,800 public gold companies. In June this year, the number grew to 751, and more recently it grew to 816, nearly half the equities measured.

 

Some seniors are focused on organic growth, others want to be more profitable. Some large mining companies, such as Yamana (AUY) and Goldcorp (GG), indicated that they want organic growth. Others, such as Barrick (ABX), are scaling down to ensure that ounces are more profitable. It's all about proper capital budgeting.

 

Geographically stable areas are a big focus. Countries such as Canada and the US are a huge draw. The US Global team recently trekked to Nevada to check out the Fire Creek project. With nearly 300,000 ounces of gold at a grade of 44.7 grams per ton in the measured and indicated category, Fire Creek's minerals are impressively high-grade.

 

It's also located in one of the safest mining jurisdictions with excellent infrastructure and experienced management to develop a narrow vein deposit. And the owner, Klondex is run by a guy with great operational experience working with Nevada mines, resulting in a shift in drilling and mining methodology, which allows the team to complete work more quickly.

 

Specifically related to Goldcorp (GG), CEO Chuck Jeannes outlined that the company is not ruling out participation in new takeovers. Jeannes hinted the company is not against looking at large multi-billion-Dollar capital-intensive gold projects that have alarmed investors in recent months. In his view, Goldcorp's strong balance sheet is a result of outstanding capital discipline in recent times, and even though the company's focus is on building three existing projects to boost production, the company will continue to look at new opportunities.

 

What impressed us most was a simple, bullish statement made by president and CEO Kevin McArthur from Tahoe Resources, former president and CEO of Goldcorp. He believes the evidence supporting gold is clear due to the fact that currencies around the world are being debased. This currency debasement makes the precious metal as a currency and store of value remain attractive.

 

These notes only skim the surface of the tacit knowledge we'll be applying to our investment decisions for the Gold and Precious Metals Fund (USERX) and the World Precious Minerals Fund (UNWPX).