Small (Capex) Is Beautiful in Silver and Gold, Says Salman’s Ash Guglani


Source: Kevin Michael Grace of The Gold Report   (8/26/13)

Ash GuglaniMultibillion-dollar capital expenditures for precious metals projects have gone the way of the dinosaur, says Ash Guglani, research analyst at Salman Partners. In this interview with The Gold Report, Guglani delivers a report card for eight gold and silver companies, with the highest grades going to those that have kept down costs and have kept capital requirements modest.


TGR: The traditional market advice is sell in May and go away. This period of market restraint typically lasts until November. Why should investors in precious metals come back then?

Ash Guglani: What we’re seeing now is companies adapting to a new environment. The big theme this past quarter was cost containment. Many companies have followed through on that and reported good operating numbers. Going into the fall, investors will have the opportunity to pick companies that have shown improvement.

TGR: We’ve had a recovery in bullion, with silver over $23/ounce ($23/oz) and gold over $1,350/oz. Do you expect silver and gold equities to increase to match the increases in bullion?

AG: Yes. We’re seeing it now. The main thing is that we need some sort of price stability so that companies can adapt to this new price-point environment. If you go through the quarterly earnings, a lot of companies are cutting headcounts, capital expenditures (capexes) and exploration budgets. They are focusing on operating efficiency. I’m finding that miners are very quick to react.

TGR: I’ve been looking at your coverage list and see Pretium Resources Inc. (PVG:TSX; PVG:NYSE). Its Brucejack project in British Columbia has been an investors’ darling for years. The company put out a feasibility study in June, and you visited the site that month. In your opinion, is the promise justified?

“What we’re seeing now is companies adapting to a new environment.”

AG: Pretium’s flagship asset is its high-grade Brucejack project. In the Brucejack feasibility study, the capex was $663.5 million ($663.5M). For that amount of money it would produce 7.1 million ounces of gold over a 22-year mine life. This bodes well for the project. There are not a lot of high-grade discoveries like this out there right now. The feasibility study showed the numbers are very strong. In our visit, Pretium outlined a little bit more of what it is doing with underground development. The bulk sampling remains the major catalyst for the story and we’re hoping to see that by the end of 2013.

TGR: Why is the bulk sample so important?

AG: When you get a high-grade asset like Brucejack, there’s always the question of what kind of grades we are actually going to see consistently. The main reason for the bulk sample is to verify the strength of the economics of this project.

TGR: How is Pretium’s cash position?

AG: At the end of June it had $33M in cash. The company is in a position now where it doesn’t need a lot of cash at this moment. The feasibility is done and most of the exploration work is finished. Pretium has excavated most of the bulk sample now. Cash-wise, the company is okay for now, but at some point, if it decides to go ahead and develop Brucejack, it will need more cash. But given what we’ve seen with this project, I don’t expect it will have any problem getting the capital it needs.

TGR: British Columbia is not known as the easiest place to open a mine in Canada. What suggests to you that Pretium will succeed where others (for environmental and First Nations reasons) have failed?

AG: I don’t foresee any environmental problems because Brucejack Lake is not a fish habitat. I believe the company is talking to three different First Nations groups in that area, and the talks have been going well. The company hopes to have agreements in place by the end of the year. Seabridge Gold Inc. (SEA:TSX; SA:NYSE.MKT), which is nearby, also reports positive talks with First Nations. I don’t see any real permitting issues here; the area has been permitted before. The Tahltan tribe worked with Barrick Gold Corp. (ABX:TSX; ABX:NYSE) during the Eskay Creek days.

TGR: You rate Pretium a Buy. What’s your target price?

AG: $17.50.

TGR: Turning to Mexico, you rate Almaden Minerals Ltd. (AMM:TSX; AAU:NYSE) a Speculative Buy. This is a company that has about $24M in working capital and owns its drills. Does that put it in pretty good shape?

AG: Definitely. Almaden has a history of raising money in challenging times. It was able to raise another $5.5M in July. It has a strong cash position, and, as you said, it owns its own drills, so the drilling cost per meter is a lot cheaper than its peers. Almaden is in a great position.

TGR: Almaden has pursued a policy of drill, drill, drill at the Ixtaca gold-silver zone of its Tuligtic property. How close is this to bearing fruit?

“The big theme this past quarter was cost containment.”

AG: Almaden has drilled about 80,000 meters so far and has done a great job at filling in the blanks. It is a project generator, so I’m pretty sure Almaden’s management is out there generating interest in this story. It will be interesting to see what people think. Ixtaca is a decent gold story with a nice silver byproduct credit.

TGR: The Poliquin family, which runs Almaden, finds properties, develops them and then sells them. Do any companies come to mind as possible acquirers?

AG: Recently we’ve seen Alamos Gold Inc. (AGI:TSX) make a bid for Esperanza Resources Corp. (EPZ:TSX.V). Mexico being what it is, there would be a lot of producers there that would be looking at a project with this kind of scope. It’s just that we need a little bit of consolidation to start happening in the market first.

TGR: What is your target price for Almaden?

AG: $3.75.

TGR: What other companies have you rated Speculative Buy?

AG: Red Eagle Mining Corp. (RD:TSX.V) has pushed for near-term production at its Santa Rosa gold project in Colombia. That’s what I like about this story. It’s not a massive deposit, but it is something that could be producing within a couple of years. It is an open-pit scenario, so Red Eagle could look at different alternatives to get Santa Rosa into production. The company is deciding now whether to go underground first. Red Eagle’s market cap is about $12M. I think it has about $10M in cash. It has some great strategic investors, including Liberty Metals & Mining Holdings and Appian Capital Advisory out of London. Both groups have pretty good technical backgrounds. I don’t expect to see a massive capex for Santa Rosa, and that’s another reason I like it.

TGR: What’s your target price for Red Eagle?

AG: $0.55.

TGR: These days, is small beautiful with regard to capex?

AG: Yes, it is. Small is beautiful now. Until we have stabilization in gold and silver prices, the days of looking at multibillion-dollar capexes are over. There are a lot of them out there already, and I don’t think we’re going to see a lot being developed any time soon.

TGR: What other companies do you rate as Buys?

AG: Silver Standard Resources Inc. (SSO:TSX; SSRI:NASDAQ) and Great Panther Silver Ltd. (GPR:TSX; GPL:NYSE.MKT) are both Buys. My target prices are $16.50 for Silver Standard and $1.30 for Great Panther.

TGR: Has Silver Standard met the challenge of the lower silver price?

AG: It just reported a good operational quarter. The theme for all these producers is to take the right steps in containing costs. We need to see that continuing over the next few quarters as we figure out where gold and silver prices are going.

TGR: What do you think of Silver Standard’s projects?

AG: Silver Standard has one operating mine, Pirquitas in Argentina. The company has the big Pitarilla silver-lead-zinc project in Mexico and it has a whole bunch of little projects in its portfolio that it could potentially develop. I think Silver Standard’s main focus right now is increasing efficiency at Pirquitas. I believe it is looking for a partner for Pitarilla.

“We need some sort of price stability so that companies can adapt to this new price-point environment.”

The beauty of Silver Standard is that it has a pretty sizeable cash position that allows it control over its production profile. The company also has projects that it could divest, if it needed more cash, including a sizeable position in Pretium. I think Silver Standard is actually in a great position right now.

TGR: And Great Panther?

AG: It is a higher cost producer, but it showed some promise this past quarter. The company needs to demonstrate consistent operating efficiency.

TGR: You have a Buy recommendation for Silvercorp Metals Inc. (SVM:TSX; SVM:NYSE), correct?

AG: Yes, and a $4.60 target price. Silvercorp has done a good job at scaling back costs wherever it can and shutting down some of its high-cost mines in the Ying mining district.

TGR: Has Silvercorp triumphed over those who claimed it had exaggerated its resources in China?

AG: I think the company did a good job fighting those allegations and in getting back to what it does best: operating mines in China. So now there is more focus on the actual numbers coming out of the company.

TGR: What other companies are in your coverage universe?

AG: Kimber Resources Inc. (KBR:TSX; KBX:NYSE.MKT) is a Speculative Buy with a price target of $1.25. The company’s Monterde gold-silver project in Mexico is interesting, but it has been the victim of funding. Its cash position limits what it can do. Kimber needs the market to improve so that investors can open up their wallets to get Monterde back on track. The company needs to do a lot more work to delineate its underground resource. But it does have both open-pit and underground mining scenarios.

TGR: Is there one more company you would like to discuss?

AG: Endeavour Silver Corp. (EDR:TSX; EXK:NYSE; EJD:FSE) is a Buy recommendation at $5.50. The company has two mines in Mexico, Guanaceví and Bolañitos, that are profitable and cash-flow positive even with $20/oz silver. Its El Cubo acquisition has hampered the company a little bit, but it has taken the right steps to control grade there, and it will be interesting to see how that plays out.

TGR: What will it take for investors in gold and silver equities to become excited about the market again?

AG: I’ll say again that we need price stability. Also, we need producers continuing to show that they’ve adapted to the new commodity price environment. That’s when investors will begin to see that valuations are ridiculously cheap. That’s when people will start getting excited again.

TGR: Many of these companies have been ridiculously cheap for quite some time, but investors have been waiting for a bottom. Have we gotten to the point where investors can’t resist these bargains any longer?

AG: I think we’re seeing it now.

TGR: Ash, thank you for your time and insights.

Ash Guglani is a research analyst with Salman Partners, covering precious metals companies in the mining sector. He has been with Salman Partners since 2004. Guglani holds a Bachelor of Business Administration degree with a focus in finance from BCIT.

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1) Kevin Michael Grace conducted this interview for The Gold Report and provides services to The Gold Report as an independent contractor. He or his family own shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Gold Report: Pretium Resources Inc., Almaden Minerals Ltd., Red Eagle Mining Corp., Silver Standard Resources Inc. and Great Panther Silver Ltd. Streetwise Reports does not accept stock in exchange for its services or as sponsorship payment.
3) Ash Guglani: I own or my family owns shares of the following companies mentioned in this interview: None. I personally am or my family is paid by the following companies mentioned in this interview: None. My company has a financial relationship with the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.
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