Big Gold Mining firms are starting to bid on junior miners before someone else beats them to it...
GOLD HEDGING by the major miners was blown apart in 1997 as a disastrous move for the industry by Eric Coffin and his brother David, co-editors of the HRA (Hard Rock Analyst) family of publications.
David Coffin is the "rocks side" of HRA, and has been active in mining exploration for over 30 years in roles spanning prospecting through feasibility studies, and now markets commentary. Responsible for the "financial analysis" side of HRA, Eric Coffin has a degree in Corporate and Investment Finance.
Here Eric tells the Gold Report about the importance of sniffing out upcoming news and timing in selecting potential resource investment opportunities.
The Gold Report: Let's say you're sitting on the sidelines with a great deal of cash right now. You've been following all the websites, the news, and newsletter writers like yourself. Which end of the resource sector would you head to as a potential investment opportunity?
Eric Coffin: Obviously, with the resource sector, you're talking a pretty broad spectrum of companies in terms of types of resources they focus on, but also level of development and overall risk. If I was fairly risk adverse (and the presumption that you're sitting on the sidelines means you probably are), I suppose I'd go more towards the senior producer end of the sector.
That's not the end we normally put a major focus on. We made the decision some years ago that our strong suit was exploration and development-level companies. We do follow a number of producers because they have taken over companies we followed. This is nice, as it adds producers to the list at very low entry prices for subscribers, but we don't usually initiate coverage on majors. You can certainly make the case that Gold Mining producers and base metal producers really haven't seen the kind of gains that seem rational given what the metals themselves have done in the past year. So there is room there for gains.
You'd want to sit down and look through a company's quarterly financials and read the MD&A (Management Discussion and Analysis). You're looking for good performance, but you also want to see evidence that they're going to expand production because that gives you a bit of a cushion. If metal prices are moving up strongly, anyone that produces them should see some share price gain. It's nicer and safer if the company is also growing production. That should allow top-line revenue to grow even if Gold Prices and other metals are taking a breather.
Next down the track would be development-level stocks. These are companies that have a resource that is being expanded and/or moved forward towards a production decision. Companies at this level are popular takeover targets for majors. We've seen more merger and acquisition activity in both the gold and the base metal side and I think that's going to accelerate.
When markets fell in 2008, explorers and developers were hit the hardest. Few people other than us expected them to bounce back. Large producers thought they had plenty of time and were waiting for the perfect ratio between their share price and that of the company they were targeting. Well, it turns out that explorer shares moved back up quickly. Producers held off, but we think they are now accepting the fact that the perfect ratio they were hoping for may never arrive. There are new players in the market like the Chinese, who have been very aggressive.
Larger companies are starting to bid on juniors before someone else beats them to it. We've seen a couple of recent takeover offers, including a company on our list, that we did not expect this soon. If majors have decided they need to move on these transactions sooner we will probably see much more M&A activity later this year.
TGR: Are you looking at high-risk/high-reward projects and potential acquisition plays with regard to the juniors?
Eric Coffin: Yes, both. There are two schools of thought in the sector. There are guys that look for projects where they can make a discovery and carry out high-impact exploration projects. They are usually hoping for an eventual takeover offer as the end game. The other common approach is the joint venture model. A company will try and accumulate a large number of prospects and try to option them to other companies so someone else is spending the money.
Joint venturing secondary projects is a good idea, but overall we would favor companies working their own marquee projects rather than the pure joint venture model. If the markets are good and they have been lately, strong management groups can raise money. Successful projects will allow for more fundraising on better terms. A company's net dilution is often less this way than through an option agreement where the company gets earned down to a minority interest. The other advantage to working your own projects is that you have control of the news flow, which is usually not the case in a joint venture, especially with a major.
When we looked at the market this time last year, we decided that there was still risk capital around. There were companies with cheap share prices, money in the bank and projects that, to us at least, had obvious potential to deliver really strong exploration news.
TGR: Companies usually have an idea of when drill-program news is going to happen. How does the average retail or even institutional investor know when to get in just before that news pops?
Eric Coffin: Well, one way to do it is to get a subscription to a good newsletter. The other way to do it is to phone the company and ask them where they are in the drill program. What is their lab turnaround time? That varies quite a bit. There are areas where guys are getting results back in two weeks and others where it's taking two months. It just depends on how many companies are active in an area and how many local labs there are to handle the work. The companies will usually give you a good indication of that if you phone up and ask them. Ask them when they think they can start getting news out and are they going to be releasing news every three, or 10 holes or even just once at the end of the drill phase. Most companies don't make a secret of this information and will tell you to the best of their ability if you ask.
If the market's good and it's being good for some of these exploration stories, you start seeing a fairly significant amount of anticipatory buying as the expected date of an important news release approaches. That's probably mainly coming from people that have contacted the company and asked the questions.
TGR: Are you looking at platinum or palladium at all right now?
Eric Coffin: We have followed platinum and palladium explorers in the past, and currently have two producers on the list. I'm reviewing a couple but there are not a huge number of strong platinum group elements (PGE) exploration stories around. I like the way both metals are trading and the market for both palladium and platinum are clearly tightening up. The recent introduction of platinum and palladium bullion ETFs is another positive factor, as these two ETFs drew over $500 million in a few weeks. Almost all of the significant platinum deposits are in one place, South Africa. Large companies that control most of the platinum camps in South Africa have huge resources, but most of it is in relatively narrow zones with tricky geometry; it's not cheap to produce and capital costs tend to be high.
That's another way of saying we don't expect a flood of it into the market. Russia is a big palladium producer, but it's impossible to tell if they have large aboveground inventories; though they do not appear to at the moment at least.
TGR: Thanks very much for your time, Eric.
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