Telling Junior Gold Winners from Losers
Wednesday, 7/24/2013 15:49
Junior gold miners stocks are not all alike. How to spot the winners...?
ERIC COFFIN is the editor of the
Hard Rock Analyst family of publications. One of the first analysts to point out the disastrous effects of gold hedging and gold loan-capital financing in 1997, he also predicted the start of the current secular bull market in commodities based on the movement of the US Dollar in 2001 and the acceleration of growth in Asia and India.
Now Coffin says gold juniors need to get back to the basics, and it is going to take large discoveries to get the market excited again. Here he tells
The Gold Report how the new economics of gold production require investors to concentrate on companies with three specific qualities, and names the regions that could generate breakout projects.
The Gold Report: Federal Reserve Chairman Ben Bernanke indicated last month that the Fed would begin to taper quantitative easing in September. The equity markets responded quite negatively to this. In the wake of this response, do you think the Fed is committed to this new policy?
Eric Coffin: I think the Fed is committed to tapering, but I suspect it will happen a little more slowly than some people think. Bernanke's quite cognizant that when he does taper it's going to have an impact on the markets. But you can't keep buying $85 billion worth of bonds a month forever. Bernanke has backed off a bit himself on this issue and was back to using 6.5% as his unemployment target. If the US keeps creating jobs at the pace of 175,000 to 200,000 per month, it will take a long time to get unemployment to 6.5% – probably 18 months or more.
TGR: We've seen these hints about a slowing down or an end to quantitative easing (QE) for some time now, haven't we?
Eric Coffin: A lot of people in the goldbug community can't stand Bernanke and I think they give him less credit than he deserves. I think these occasional hints he drops about ending QE early are completely intentional. He's testing the market to see how it will react and indirectly talking bond yields up in a way that doesn't induce some full blown panic. I think if we see him say he might move up the QE schedule and the market doesn't freak out – that will be the time he starts tapering. He's trying to get us used to the idea.
TGR: We've seen gold rebound in July. Why do you think this is happening, and do you think it's likely to continue?
Eric Coffin: Some of it, a lot of it really, is due to the Fed backing off on its short-term tapering comments. And it's partially due to gold falling to $1180/ounce ($1180 per ounce). That's getting into the range a lot of the technicians were calling as a bottom. I don't completely accept technical analysis, but a lot of people who trade gold and commodities are chart traders, so you can't ignore those patterns.
The other factor is that we've been getting down to pricing that's below the all-in cost for the gold mining sector, which means we're going to see cutbacks in production. This will flush out the supply pipeline pretty quickly. Ironically, it seems the gold market is taking the end of QE more seriously than other markets. I would like to think that means QE ending is partially or even largely priced into the gold market. Unfortunately, we won't know that for sure until the Fed actually pulls the trigger and decreases the bond buying.
TGR: Do you think that one big discovery could excite the whole market and bring investors back to the table?
Eric Coffin: This market feels more and more like the markets I saw back in the 1980s and 1990s. That's not to say I think that the commodity cycle is necessarily over. If you go back to those markets, it was quite common that what would ignite them wasn't big moves in the commodities. It was almost always two or three big discoveries that really got traders excited and reminded them why they buy these crazy stocks.
I've talked myself into chasing companies with resources just because their ounces have gotten cheaper and cheaper over the last two years. While I think those companies will definitely catch bids if the gold price starts moving substantially, my gut feeling is that if you're looking for really large percentage gains in the near-term, they're going to come from discoveries.
TGR: Do you think that some regions will come back faster than others?
Eric Coffin: Areas that are easier from a logistical and permitting point of view, areas that are
gold mining friendly, will probably come back faster. This basically means North America or large swaths of it. Other areas like Central and Eastern Europe also look interesting and have a lot of discovery potential. A number of Central and South American countries – even though they're good areas geologically – will have a much more difficult time.
TGR: What about Mexico?
Eric Coffin: Mexico has a couple of pretty big advantages. It has a good mining act and a well-understood and fair permitting system. It has gotten a lot better security-wise. Infrastructure is good in a lot of areas, and basic costs are also good. Mexico's geology has generated many highly oxidized and relatively soft and brittle deposits. This enables companies to set up heap-leach operations, which means that capital expenditures (capexes) are relatively low.
In the state of Sonora, a half-dozen gold mines have opened up in the last three or four years with average cash costs in the $400-450 per ounce range. The all-in costs probably aren't much more than $600-650 per ounce. By world standards that's really, really good.
TGR: Do you think the Yukon is still an area play?
Eric Coffin: Not in the sense that just being in the Yukon is going to give you market cap and financing. It basically comes down to individual companies now and many of the companies involved there a couple of years ago have moved on. There certainly are successful explorers there.
TGR: The three criteria you cited for successful companies are strong management, strong projects and cash. Given how difficult it has been and will be to raise financing, would you say cash is the most important criterion?
Eric Coffin: It's definitely a really important one, but I wouldn't value a company solely in terms of cash. Unless a company has strong targets and management that's willing to be proactive about those targets, there's no real rush to buy it.
TGR: Considering how bad it has been for junior gold mining equities, what is it that keeps you excited? What is it that keeps you in the market?
Eric Coffin: I've always been a discovery guy, and I'm always looking for good development stories. Being there for the big drill hole and swinging for the fences is probably what keeps me interested. I don't think we're done discovering new deposits. It has never been easy, and it is probably getting harder, but the big discoveries are what get everybody excited. When they work, you see these stocks going up 400%, 500%, 1,000%. That's what keeps people in the game.
TGR: Eric, thank you, for speaking to us today.
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