Gold News

The Mining Dodo & the Devil

Silver and gold mining stocks could...could...have a good year ahead...
 
CHRIS THOMPSON is an analyst for Raymond James specializing in precious metals and small- to mid-cap developers and producers.
 
Working previously for Haywood Securities, Thompson was awarded the 2011 StarMine Top Analyst Award for Stock Picker in the Metals and Mining sector.
 
Here he tells The Gold Report why precious metals could soar this year...
 
The Gold Report: A recent Raymond James research report refers to silver as the "devil's metal." What is the story there?
 
Chris Thompson: Silver is much more volatile than gold. Typically when we see a weak day for the gold price, silver has a terrible day. Likewise, if we see a strong day for gold, typically silver delivers exceptional performance. Because it's so volatile, we term it the devil's metal.
 
TGR: If the selloff in precious metal equities is over and this is the bottom, how long do you expect the flat-lining to persist?
 
Chris Thompson: At Raymond James, in the near term we see gold trading rangebound between $1200 per ounce and $1300 per ounce and silver trading rangebound between $16.50 per ounce and $18.50 per ounce. We are not seeing fundamentals that would prompt a price outside of those respective ranges. We expect current price strength to continue to the end of Q1 2015, followed by some weakness into the summer and then more strength toward the end of the year.
 
TGR: In a recent research report you warned investors about 2015 possibly being the "Year of the Dodo" for certain precious metal producers. Please explain.
 
Chris Thompson: Over the last three years or so, the silver price has dropped to a level that calls into question the economics of a lot of the primary silver-producing companies that I follow. It's now about survival. We all know that the dodo could not fly. What I'm looking for – regardless of metal prices – are companies that can continue to deliver real growth and shareholder upside; companies that can "fly," not just survive. That is why we cautioned investors toward the end of last year that the majority of the silver names are in survival mode at these metal prices. We want to direct investors toward those few stories we cover where we see significant upside opportunity, even at these metal prices.
 
TGR: That report noted four differentiators that influenced equity performance in 2014. Those were: valuation relative to peers, success in managing/reducing costs, ability to meet expectations, and ability to advance near-term organic growth. Please briefly take our readers through those.
 
Chris Thompson: Valuation is at the core of what we do. My current research and analysis shows that precious metal companies are not cheap; many companies in my universe are trading at over 1X net asset value (NAV). My view is that if companies are trading at over 1X NAV, there's got to be extra on the table. Arguably, certain companies qualify to trade at over 1X NAV based on good management, strong free cash flow at current metal prices and organic growth potential. We look for companies that are undervalued relative to their peers that offer all those attributes.
 
On cost management, we're in a situation where no one can do much about metal prices and most of these companies don't have a lot of opportunity to grow organically, so the only alternative is to reduce costs. That's something we're watching, especially as these companies deliver their Q4/14 and Q1/15 financial results. 
 
Meeting expectations is critical. The market is already a little nervous about the long-term outlook for precious metal companies and is relying on management to meet – and preferably exceed – expectations. Transparency here is fundamental and that's a key element that I need to see as an analyst. 
 
We've spoken a lot about the need for organic growth. There must be more on the table than just survival to really excite and attract investors. We are seeking the few companies that can generate free cash flow at current metal prices, deliver on expectations and grow organically.
 
TGR: By organic growth, do you mean by the drill bit on existing properties?
 
Chris Thompson: A company is growing organically because it's bringing a development-stage project to production, or reducing the costs of an operating mine, or extracting higher-grade ore. Those are all examples of growth without acquiring other assets or merging with other companies.
 
TGR: Concerning meeting expectations, doesn't that lead to CEOs under promising so that they can over deliver?
 
Chris Thompson: That is just as dangerous. As an analyst, I look at a company's guidance and ask: Is it achievable? Second, is the company sandbagging it? The important thing is predictability. I don't like to see a company overshoot in a significant way or miss on guidance; I'm looking for some confidence that the company understands its mines by way of grade, tonnenage and recovery.
 
TGR: Do you have some general wisdom for investors in this market?
 
Chris Thompson: When we see these sharp selloffs, in most instances there's an overreaction in the market, especially in terms of equity pricing. We see those as good opportunities to acquire good quality companies with good quality assets. The second side of it is that you don't want to own shares in a mining company that presents marginal economics in the current metals price environment. For investors who have to be invested in precious metal stocks, quality is paramount both in management's capability and asset value.
 
TGR: When 2015 is over, people in the precious metal space will call it the year of the what?
 
Chris Thompson: I would say the year of the rebuild. I'm looking at 2015 as being the differentiator; we're going to begin to see the emergence of companies that present well via their ability to deliver on expectations, grow organically and really generate the sort of return that investors require from mining companies.
 
TGR: Thank you for talking with us today, Chris.

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