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Investor-Friendly Junior Mining

Stop shooting for the stars and deliver some shareholder value...
PAUL ADAMS is a geologist and head of research at Australian brokerage DJ Carmichael.
With 16 years of experience in the mining industry, in Australia and elsewhere, Adams was previously chief geologist and evaluations manager at Placer Dome's Granny Smith mine. He is a member of the Australian Institute of Mining and Metallurgy and has a Graduate Diploma in Applied Finance and Investment from the Financial Services Institute of Australasia.
Here Adams speaks to The Gold Report's sister title, The Mining Report, about how junior miners should focus on more modest projects best suited to maximizing shareholder value, rather than shoot for the stars.
The Mining Report: After over two years of gloom, we're seeing renewed optimism regarding mining equities in North America. Is there similar optimism in Australia? 
Paul Adams: There is, but the change in sentiment is pretty much in its infancy down here. We recently undertook some analysis of the returns from the various subindices in the market. The small resources index here in Australia is at about +4.3% for 2014 compared to a -8% return for December. The recent surge in the gold price has certainly helped lift the mood. 
The materials sector in Australia is tied closely to sentiment on Chinese growth, and headwinds there tend to have major repercussions. A couple big names have had really strong starts, but they're pulling back a little now as the price of iron ore landed in China has dropped about $10. But those players have such a heavy weighting on the materials index that it's really difficult to get a full picture of what's going on. 
TMR: With regard to China, how much growth do you foresee? 
Paul Adams: Five years ago, China's GDP growth was around 12%. Obviously, as the size of the Chinese economy increases, they can't continue growing at that speed. We expect growth in the 6.5-7.5% range for the next year or two.
TMR: What's your 2014 outlook for precious and industrial metals prices? 
Paul Adams: We think the current gold price is about right, plus/minus $100 per ounce. Wobbles in the emerging markets have prompted gold's recent move up into the $1300 per ounce range. We're seeing gold coming back as an alternative investment, a bit of a safe haven.
We're relatively bullish on platinum and palladium given conditions in Southern Africa.
TMR: What about silver? 
Paul Adams: I don't see a major diversion from the current gold/silver ratio
TMR: How about industrial and critical metals? 
Paul Adams: The consensus data for the industrial metals generally looks positive for 2014 and into 2015. Obviously, we want to see what effect the Indonesian ban on raw exports will have. That's very important to nickel prices. 
Zinc and lead should be reasonably well supported. There is very muted mine supply growth. As the global economy improves, there are going to be some increases in industrial demand for those particular metals. There's softness in the copper market. With the consensus price probably falling below $7,000 per ton, inventories are growing. These data are conflicting, however, and copper has a history of staying up longer than many had anticipated.
TMR: You've said that juniors should choose appropriately sized projects in order to have the best chance of generating shareholder wealth. Could you expand on that? 
Paul Adams: In a post-global-financial-crisis and post-metals-boom world, we're seeing a lot of companies with large projects that can't get financed. Investors today want to see projects that can weather the complete commodities price cycle. Our view is that we would rather see a good management team take on a Tier 2 or Tier 3 project in a good jurisdiction with a reasonable capex and a reasonable timeframe, rather than a Tier 1 project they ultimately won't be able to develop without joint ventures. 
TMR: With regard to timeframe, how long is too long? 
Paul Adams: A project that looks like it's going to take much longer than four to five years to get into production is probably a little bit too far out. 
TMR: What's the danger zone for capex? 
Paul Adams: It depends on the economics of the individual project, but I think a capex north of about $600-700 million is pretty high. The sweet spot for small companies is somewhere up to $200-250m.
TMR: Is it difficult for mining companies to keep expectations modest? Isn't there a natural tendency to shoot for the stars? 
Paul Adams: With many mining companies, management has come from majors. They're used to dealing with big projects and big budgets. There's a degree of relearning when you're in a small company; you have to be quick, nimble and you must count the pennies. There is a tendency to shoot for the stars, with the belief that maybe you'll settle for the moon. But the statistics tell us this isn't likely to happen. 
We look for teams that have a measured approach to development because smaller projects are easier to develop without overly diluting shareholders in the process. Some management teams forget about that. They're so intent on making a huge discovery that they forget about the shareholders along the way.
TMR: Which jurisdictions do you like best now? 
Paul Adams: Certain parts of South America offer good opportunities. We particularly like Chile. The other emerging jurisdiction for Australian Stock Exchange (ASX)-listed companies is the United States. Nevada would certainly be front and center, then Arizona, then parts of Utah and Wyoming.
TMR: Chile is politically and socially stable, but concerns have been raised about infrastructure, in particular, deficiencies of water and electricity. What do you think of this? 
Paul Adams: We've been to Chile three or four times over the past three years, and water and electricity are major issues. To get water to the high Andes, it must be pumped from the coast. And if you're not close to existing infrastructure, power costs are a major hurdle. 
TMR: How about another jurisdiction with an interesting infrastructure idea?
Paul Adams: Another example is Fiji, which wants the delta dredged because it will reduce the risk of flooding to the surrounding area. So it's a win-win, really: increasing employment and government revenue, as well as improving the environment. 
TMR: Fiji is not a name one normally associates with the mining industry. 
Paul Adams: Recent political events in Fiji have raised concern, but don't forget, Fiji has a very long mining history. Most famous is the Emperor gold mine, which operated for decades.
TMR: How about rare earth elements (REEs)?
Paul Adams: We believe pricing in the light rare earth elements (LREEs) is going to be soft going forward. So we decided that our interest is only in projects dominated by heavy rare earth elements (HREEs). There are only three or four of those on the ASX. 
TMR: Paul, thank you for your time and your insights.

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