Latin America holds big promise for Gold Mining investors...
VICE PRESIDENT of Institutional Mining Sales at PI Financial, David Goguen specializes in the mining sector.
part of his service to Canadian and US resource-focused institutional
investors, David Goguen evaluates and screens junior gold companies by
initially dividing their enterprise values by total ounces. The result
acts as a filter that either encourages David and his team to ask more
questions about the company or to find other dance partners.
Here he speaks to The Gold Report about PI Financial's recent institutional sales-desk report, Select Golds: Latin Focus and his methods of analysis.
The Gold Report: David, you recently published a report titled Select Golds: Latin Focus. Tell us about your report.
David Goguen: With
the Select Golds piece we're tracking advanced explorers, emerging
producers and junior producers in Latin America as they move through the
One objective of our report is to look for
ounces in the ground that are being undervalued by the marketplace.
Among the junior producers, the market focuses less on enterprise value
per total ounces and more on the basis of their ability to generate cash
flow and earnings.
TGR: Can you define advanced explorer?
Typically, advanced explorers have published a National Instrument
43-101 resource estimate that to some extent outlines the quantity and
quality of the resource that is under consideration in the report. They
generally have a sufficient number of drill holes into the resource that
we're able to adequately define what it is and what its potential could
be. As these projects become better defined, they move up the curve to
become emerging producers and eventually junior producers.
TGR: How can an investor differentiate an explorer with good chances of success from an explorer that's unlikely to succeed?
There are a number of factors that define a quality project. One should
look at explorers seeking deposits in world-class districts. They
should have a strategic land position with district scale potential and
the possibility to host multiple deposits. Perhaps most important is
whether or not these newly defined resources are on productive faults
and large structures. Without these structures you're limiting your
potential to find world-class deposits. The structures are very, very
TGR: You rank all of the companies in each
category by dividing each company's "enterprise value" by each company's
total ounces. How do you determine enterprise value?
David Goguen: We
calculate enterprise value by taking the company's market cap plus debt
and minority interest, less its cash and cash equivalents. Enterprise
value provides a more accurate reflection of the total value of the
company. By then dividing the enterprise value by its gold ounces we are
able to get a measure of what the market is currently paying for gold
in the ground
TGR: That's a fairly simple calculation.
David Goguen: It
is. In situations where a company has a market cap that is
significantly comprised of cash, our method tries to take the cash out
of the equation so that we can look at what the market is currently
valuing it at for its gold ounces.
enterprise-value-per-ounce calculation is really a preliminary filter
that gets us to ask additional questions and conduct additional due
diligence. In the case of junior producers, it's going to lead to
further analysis, including absolute and relative cash flow multiples
and net asset values. With emerging producers, it's going to lead to
greater definition in the various resource categories.
You manage to quantify quite a few things, but how do you quantify
management, exploration upside, jurisdiction and things like that?
Again, this report represents a screening process that leads us to ask
additional questions and get into some of the qualitative elements.
There a long list of factors we consider in our analysis. For example,
we would evaluate the quality, diversity, geological background and
experience of the management team. We would also research their track
record in finding deposits and successfully raising equity. Of course,
we would evaluate the corporate and financial structure of the company
and where its properties are located to ascertain country and mining
TGR: Are there factors that these companies being taken over have in common?
Certainly there's a theme within Mexico and elsewhere in Latin America
at the moment, and what's being consolidated is the 70 to 100 thousand
ounces-per-annum (Kozpa) producer.
We're coming out of an era
where a company that was looking to grow through acquisitions was really
not looking at companies producing less than 100 Kozpa. Now, with the
Gold Price moving from $800 to $1,300, we're seeing that 70 to 100 Kozpa
producer generating some $40 to $60 million in operating cash flow,
depending on cash costs. These companies have now become much more
attractive to anybody looking to consolidate through acquisitions.
From the other side, which companies are typically seeking these
takeover targets? Is it the majors? Is it mid tiers? Is it both?
No, it's the 100 to 150 Kozpa producer today that is recognizing the
challenge of discovering another 150 Kozpa ore body and seeing the
relative value in existing companies that have either just finished
building or are in the process of building a 100 Kozpa mine.
Among these various groups – junior explorers, advanced explorers and
junior producers – which group has the greatest potential for share
David Goguen: I think as a group we've
seen that the advanced explorers have probably the lowest valuation on a
per-ounce basis. But the continued expansion of the existing resource
by 50%, 100% or even 200% through drilling generally brings a lot of
additional value to shareholders. By expanding a resource into something
in the 1-3 Moz. range, these companies are going to become potential
A number of these companies with a dynamic
enough resource may not make it to a junior producer but may get taken
over in the advanced explorer stage.
TGR: How about some parting thoughts on this particular report and these kinds of companies?
The Metals Economic Group recently published a report that said $11.5
billion will be spent on exploration in 2010 – that's a 44% increase
from 2009. That work, coupled with the work that's taken place since
2005 when we had a large number of junior company financings, and even
more financings in '06 and '07, is starting to bear fruit five years
later – after we've had second, third, fourth passes at understanding
these new discoveries. That money has allowed junior companies to have
their "Eureka" moments in terms of doubling and even tripling the size
of their resources through a better understanding of the geological
controls on those resources.
That's a powerful theme that's
taking place and that is going to feed Select Golds' advanced explorer
category. A lot of those discoveries are happening in Latin America.
They're happening in countries like Argentina. They're happening in
Peru. They're happening in Colombia. They're happening in Ecuador.
They're certainly happening in Mexico. Those are the areas where we're
going to see a new breed of advanced explorers come in and continue to
populate our Select Golds list.
TGR: David, sounds like some exciting opportunities ahead. Thanks for your time.
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