Criteria to consider when weighing up a company...
VALUATION disconnects among producers, a rising Gold Price and funding crunches faced by junior miners are among the factors fueling a spate of M&A activity. In this interview with The Gold Report, Aleksandra (Sasha) Bukacheva, a mining research analyst with Fraser Mackenzie in Toronto, shares her criteria for targets in the zinc, copper and precious metals spaces.
The Gold Report: Sasha, what are four or five must-haves for investing in junior mining companies in today's market?
Sasha Bukacheva: To start, I prefer metal producers to developers and explorers, especially in this market.
In terms of specific criteria, number one is quality of the asset base. To me, that means mines with the higher grades and healthy volumes to sustain operations for at least 10 years.
Second, I want companies that have manageable growth. A company should be able to deliver growth at a reasonable price and not overspend on a new mine with lower return on capital.
Third, I like companies that are unique in some way: in their commodity exposure, exceptionally high grade or mine concentration in a friendly jurisdiction.
My fourth criterion is a good management team; the assets are only as good as the people who run them.
Fifth is low political risk; everything else being equal, a company with a project in Nevada is more appealing than the one in Ecuador. It's rare that you can find a company that fits all of these parameters, but it's a good frame of reference.
TGR: You cover several companies operating in Argentina. Do you consider Argentina to have low jurisdiction risk?
Sasha Bukacheva: No, I do not, but Argentina has world-class projects that you might not be able to source elsewhere. By world-class, I mean copper assets that are among the world's largest in the north and exceptionally high-grade precious metals deposits in the south, in the Santa Cruz Province.
Argentina has a fairly long history of mining. There have been years when the mining industry has done well and there are years, like 2012, when the government's policies and decisions have challenged the mining industry. Ultimately, my view is that regimes and policies change, but the quality of the asset base does not. I am willing to hold a company that has a good asset and accept higher political risk as a trade-off.
TGR: Did the European Central Bank's (ECB) move to buy government bonds on the open market change your outlook on the companies you cover?
Sasha Bukacheva: Absolutely. Everyone has been sitting on the sidelines waiting to see what will happen in Europe and China. The ECB's move was very encouraging. It demonstrates political will to inject stability and is an indication of a more concerted effort in Europe. Any additional stimulus in Europe or China would likely be encouraging for growth, which would be good for commodity prices, which in turn would be good for the mining equities.
TGR: Do you think it could raise the target prices of some of your companies?
Sasha Bukacheva: Most of my companies still have a way to go to reach my target prices. I am comfortable with my target prices because they are based on certain long-term price assumptions that forecast a slightly more stable world than the one we live in today. I have not changed my commodity prices either. I may revise my price deck in a few months if necessary.
TGR: In addition to the good news from the ECB, we may see more quantitative easing from the Federal Reserve. There also is a new round of merger and acquisition (M&A) activity in the small-cap junior precious metal space. Does this signal the start of serious M&A activity?
Sasha Bukacheva: It looks that way. It makes perfect sense because there has been a valuation disconnect between certain producers trading at higher cash-flow multiples and others trading at lower cash-flow multiples.
A lot of producers see higher Gold Prices as an opportunity to pull the trigger on an acquisition. But the rationales can vary a lot.
TGR: Is there a pattern or theme among these takeover offers?
Sasha Bukacheva: In addition to the disconnect in valuation among producers, there is an even greater disconnect between companies with cash flow and those without. Juniors without a source of internally generated funds depend on the market for new equity, and investors are rather skeptical about their ability to source that.
TGR: Are the boards and the management teams of these junior companies now more amenable to takeovers, given the market?
Sasha Bukacheva: A lot of the juniors feel they are up against the wall and do not have a lot of choice. They have to either take an offer or discontinue their existence as a going concern. Given that choice, management will probably pick an offer that allows them to preserve some sort of value.
We have been encouraging clients to go into bigger caps because of the increased liquidity. Juniors can provide higher returns, but if you need to sell for any reason, whether it is related to your view on stock fundamentals or not, it is a lot harder to move some of those smaller names. And I favor producers in this market environment and they generally have higher market caps.
TGR: Is this move into midtier miners something more brokerage houses are going to do, given the liquidity issues in the small-cap space?
Sasha Bukacheva: Every brokerage house makes its own decisions. At Fraser Mackenzie we have a lot of freedom to pick the names that we like. However, to me there is more value in intermediates than in majors. I think intermediates right now are a better place to be because they're better cashed up. Their operating track record is a little bit more stable than that of the juniors. They have a better asset base and are better positioned to weather the storm than some of the juniors. Certain intermediates that have better assets or nice growth profiles are more accretive to shareholders because it moves the needle for them.
TGR: Any advice for retail investors in this market?
Sasha Bukacheva: The best advice is to not be complacent. You have to know your companies and understand why you are buying a specific stock. You need to know the catalysts, and most important, you have to understand the risks and not be afraid to sell if you have to.
Investors ought to look at their portfolios and steer clear of anything that might not hold up for 12 months if that company cannot raise money.
If you ask me, this is the time to buy. This is not the time to sell. But be very discriminating in the companies you want to get behind.
TGR: Sasha, thank you for your time and your insights.
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