Fluctuations in Gold Prices can have a big impact on which mining projects are viable...
IT HAS been a difficult and confusing year for many investors in the resource sector. Despite that, many junior companies with credible projects have continued to show good progress toward future production. In this interview with The Gold Report, Dale Mah, equity research analyst with Mackie Research Capital, talks about the general market environment and discusses his selection criteria.
The Gold Report: This gold market has been relatively confused in the last few weeks. We've had some pretty big fluctuations and days where we had big drops in one day, with the markets going in the same direction as the metals, contrary to what people would expect. What's your take on what's going on now, where things are headed in the coming year, and what kind of catalysts we are looking at that are going to make these moves happen?
Dale Mah: Most analysts would probably agree that the big price surge in gold during that high-week period in August/September was too fast. Lately, when we see gold selling off, it's usually because of a switch into the US Dollar. Considering the price of gold started the year at $1,420/ounce (oz), that's still an 18% return compared to minus 3% for the Dow. Our long-term view is that we're still in a good upward trend in gold with recent volatility due to global economic uncertainty. If we can see some improvements in the European debt situation, I think it will bring some confidence back.
TGR: Looking at a lot of these junior stocks, it seems like they haven't gotten the message yet and are trading as if gold were still down in the $800–900/oz range versus twice that price. What do you think is the problem here?
Dale Mah: Many factors affect the price of junior exploration companies. Right now, risk is the key. In the current investment climate, those looking at rebalancing their portfolios or just wanting to generate some liquidity decide the highest-risk stocks are usually the first to go. Naturally, that drives the prices down.
TGR: How do you define "risky" ones at this point—from the standpoint of fundamentals or just the fact that people are not buying them and so you think they're just going to sit around and do nothing?
Dale Mah: Those would be the early-stage projects or perhaps advanced projects with an element of risk, usually financial risk. A company might have huge NI 43-101 resources, but can also be associated with equally high capital expenditures (capex); that's a huge risk factor. So those will sit on the shelf, because in times like these, when you have a company needing to invest several billion Dollars into a project, that's where you'll see spending cuts.
TGR: There are a lot of smaller companies out there with properties that are pretty credible, and, in years past, people would have been jumping all over them. Now it seems like not much is going on. Do the majors have more on their plates than they can handle or are there just too many things to pick from out there?
Dale Mah: With Gold Prices this high, small deposits get new life so there are a lot of projects to evaluate. However, there aren't very many world-class deposits out there anymore. The 10–20 Moz deposits are the ones that usually get snatched up. There are a lot of small, lower-grade deposits out there that look great when you run an economic cash flow model at current prices, but does a big major really want to take the risk on something small? A higher-grade deposit will be able to absorb fluctuations in Gold Prices whereas a low-grade deposit may not be very robust. I think they're just sitting back and waiting, unsure if Gold Prices can hold these levels.
TGR: As far as valuations of deposits these days, what rule of thumb do you apply to gold in the ground in Dollars per ounce?
Dale Mah: It varies with the stage of the project. We tend to use about $50–75/oz for some early-stage projects and anywhere from $150/oz and up, maybe even up to $300/oz for advanced and developing projects. If the project has a higher degree of risk, like a prohibitively large capex, then $25/oz wouldn't be out of the question.
TGR: A lot of companies seem to be pretty undervalued now. What are you using for criteria to decide who you want to cover and recommend?
Dale Mah: I have three main criteria. The main one is multimillion ounce potential. The second one is good infrastructure. The third one is a politically safe jurisdiction. That's my checklist.
TGR: The politically safe factor has certainly gotten into the news a lot more, recently. All these countries and jurisdictions are realizing that they want a bigger piece of the pie. It looks like that's something companies have to worry about a lot more. What are your thoughts on that?
Dale Mah: Every situation is unique. Recent developments in Peru have certainly added some degree of risk. Financially speaking, the biggest change was a switch from royalty payments on sales to a new system of royalties on operating profits. It makes sense and the amount collected by the government will now scale to metals prices. It benefits the country when commodity prices are high, but is not too onerous on the company if prices dip.
On the political side, however, it's getting a little bit more uncertain. Peru has received about $50 billion (B) in investments, and the country really is at risk of losing much of that because concerns have arisen from approvals that are already in place. One company halted construction of its $4B Peruvian mine. The company pretty much has said it will go elsewhere if the situation isn't resolved. I agree that there needs to be a balance between economic development and social and environmental standards, but President Humala still needs to provide some stability for the country's biggest investors. In my opinion the current government needs to take a stand and support the country's largest economy. Peru just can't afford to shut down the mining sector.
TGR: It sounds like there is progress being made with many junior mining projects worldwide. I guess, now we just need the market to recognize this and take some of these things higher. We're into tax loss selling season. It looks some companies are probably pretty good buys. Would you agree?
Dale Mah: Oh, absolutely. Again, it depends on your situation. There are certainly a lot of bargains out there, but in uncertain times like these, risk is not the flavor of the month. So there's a tendency more toward large cap producers that pay dividends and have a lot of cash in the bank. January has traditionally been the time to pick up a few juniors.
TGR: What parting thoughts do you have for our readers on how to gauge and play this market with all these confusing factors?
Dale Mah: For the average investor, try not to pick the bottom. Everyone has an opinion, including me, but make your own decisions based on the best information that is available. We are in a tough economic environment. Many stocks are at or near all-time lows, but if we just think long term, we should all be in pretty good shape.
TGR: We'll keep that in mind and see how things develop. We greatly appreciate your time today and look forward to talking with you again in the new year.
Dale Mah: My pleasure. Thanks.
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