The Key to Junior Gold Mining Investments

What to look for in smaller players...

ALTHOUGH the junior Gold Mining sector has not seen the benefits of higher Gold Prices, there is reason for optimism, says Vikas Ranjan, managing director and principal, Ubika Research. In this interview with The Gold Report, Ranjan lays out his case why juniors with quality projects should bump up. 

The Gold Report: When you spoke with us last year, you talked about Europe's financial problems being a policy issue. Are they any closer to a solution to the debt crisis there and is the situation in the US parallel to that?

Vikas Ranjan: I think there's been progress made toward solving the debt crisis in Europe and also in the US, which is a different ball game. When I said Europe is more like a policy problem, I meant that it's not a problem that just came up one fine day. A monetary union without any proper fiscal union creates a situation where weaker countries can hide under a stronger currency and run big deficits, and at the same time don't have the flexibility of using cheaper currency when they get into trouble. That has been the case with countries like Greece, Italy, Portugal and Ireland. 

Now there's a realization in Europe that if they want to save the Euro, they also have to have some sort of fiscal union with a sovereign type of debt facility, which they are working toward. Even countries like Greece have done better than what some people expected and are trying to resolve the crisis. 

The European Central Bank (ECB) has clearly stated that it would do whatever is required to keep the Euro in place. The market is giving some credence to that, with bond yields on stronger countries such as Germany creeping up, whereas weaker countries are seeing a fall in those yields. We are probably moving toward some sort of solution, which is going to take some time. 

Since the US election is over, we will see more systematic talk about reducing the deficit and the debt. We may see some differences in approaches, and some give-and-take, but ultimately a solution will have to be found.

TGR: You were relatively optimistic last year about the Gold Price finally going through $2,000/ounce (oz), probably this year. What's your forecast for gold going into the coming year?

Vikas Ranjan: I remain optimistic about the price of gold, at least for the next two to three years. I believe gold has a good upward trend, especially due to Quantitative Easing 3. Now the ECB is following what the Federal Reserve Bank has been doing for the past three or four years, an easy money policy. The next target for Gold Prices is that $2,000/oz barrier. I would not bet on that happening this year, but early next year, yes. 

When economies start to recover, people begin to think about inflation coming into play. Gold has traditionally done well when inflation is expected. It does well in the short term because of economic uncertainty and currency debasement, and also when there are inflationary expectations. I would be a buyer of gold and gold-related securities at these prices, and the trend is good.

TGR: You were also quite positive for the prospects of the junior mining shares when we last spoke. Even with higher Gold Prices, a lot of them have not been doing all that well. Is there going to be a point when people finally jump in and take them higher?

Vikas Ranjan: There has been some decoupling between gold and the share prices of both junior and senior mining companies. The juniors have a harder road to climb. While we may see another situation like 2010, when everything went up, I do feel there will be a flight to quality, especially among junior companies. The emphasis is on companies that have a definitive plan for what they expect to achieve in the next two years or so, and a definitive exit strategy. 

That short-term goal will be to create something that will be appealing to somebody else. If you're a junior with an advanced asset that somebody can see being developed into a mine in the next four or five years, you're in a good position. If you have something closer to production, you're in a good position. But, investors have to be choosey in the junior market. Just because the Gold Price is going up doesn't mean that every junior explorer will go up. Good juniors will see some life coming back to them, and it's happening to some extent already. 

TGR: It's been a pretty tough year or two for a lot of junior companies that don't have cash flow or feasibility/prefeasibility studies and the ability to finance operations. There have been some casualties along the way. Do you think the higher Gold Prices are going to be able to rescue some of these companies, or are some just not going to make it?

Vikas Ranjan: There will be companies that are not going to make it. Higher Gold Prices will not salvage every company out there. A good one-third to one-half of junior companies with sub-$50 million (M) market caps will have to consolidate or do something creative to get to a stage where they will be appealing, or they will go out of business. There is not enough money for exploration plays for every company out there.

TGR: There do seem to be a lot of small companies with promising properties, but the cost of continuing exploration and overhead is going to make it tough for some of them to survive. Do you expect some merger and acquisition (M&A) action or joint ventures (JV) on some of these smaller projects, or are companies going to abandon properties and move on?

Vikas Ranjan: I would say both. We will see a lot more M&A and JV-type actions happening. I personally feel that JVs are a very good route for companies that have good projects but lack the capital to advance them. Instead of losing the entire project, they could still keep 40–60% and find a funding partner. We will see a lot more of that happening, at least with companies that have good assets. 

M&A would also happen on that front, but more so with junior companies that have advanced projects closer to feasibility in places where people can see production happening. A great project in a geographical location that is very hard to reach and will take five years to develop, forget about that, no matter how good the project

TGR: So, let's talk a little about your Ubika 50 Index. How's that done over the past year and what have been some of the better performers in your index?

Vikas Ranjan: Well, it has been a bit difficult the past year, and not surprisingly because companies in our index are mostly juniors. Many of those are very early stage exploration companies, so they have been battered. There have been some names that have done well, even in this market, but overall the index has underperformed Gold Prices. That's not surprising, because most of the gold shares have underperformed gold, as an asset class.

Still, we have managed to outperform the TSX Venture Index by a big margin. Since inception, our index is up about 41–42% in the last two years, whereas the Venture is down 13%, while gold is up 55%. So, we were outperforming gold until recently, but of late we haven't. There are several companies that have done very well. 

TGR: What are you suggesting our readers do to make some decent profits or recover some of their losses in the coming year?

Vikas Ranjan: Nobody has a crystal ball, but I would say investors would do well by being focused. Precious metals are a good place to be in the next year, especially gold. I think you have to be choosey. You have to go for quality and to look for companies that have a great defined plan in the next two years, and a path to achieving that plan by spending a reasonable amount of capital. If they can show those catalysts, then I think there is a good possibility that stock will do well. 

If investors have stocks in their portfolios that do not fit those criteria, I would say that taking a loss and getting out of those is probably going to save some money, which can be redeployed into better quality names. I think markets will move higher in the new year, regardless of what has happened in the US elections. It always happens when you have an easy money policy, which should continue for the near term. So, I would be more optimistic about the market's prospect, especially for precious metals juniors in the next year.

TGR: Thank you for that optimism and for joining us today, Vikas.

Vikas Ranjan: Thank you very much.

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