CM: Gold rally: Time to snatch up the languishing gold miners
It seems to defy logic: even though Gold prices are at historic highs, the stock in many junior gold companies has been languishing. Now is the time to give those shares a second look, says Vishy Karamadam, managing director of Ubika Research in Toronto, which runs the Ubika Gold 50 Index. In this exclusive interview with The Gold Report, Karamadam reveals which companies are poised to announce big news this fall.
Companies Mentioned: Atlanta Gold Inc. - Eagle Hill Exploration Corp. - Focus Gold Corp. - Goldcorp Inc. - HY Lake Gold Inc. - La Quinta Resources Inc. - Lexam VG Gold Inc. - Meadow Bay Gold Corp. - NWM Mining Corp. - Pilot Gold Inc. - Rye Patch Gold Corp. - Timmins Gold Corp.
The Gold Report: The United States narrowly averted defaulting on its debt obligations at the beginning of this week. What do you make of this high-stakes game of chicken that was played out on the global stage by American politicians?
Vishy Karamadam: It shows the difficult situation in the U.S., and to a similar extent, in Europe. Too many promises have been made to citizens without the resources to deliver on those promises. The debt ceiling is a symptom of the larger problem in all these countries as they deal with, "How do I cut down and where do I cut down?"
For the U.S., it is also indicative of a more fractured political system, which is preventing the debt ceiling from being raised, a fairly routine exercise under Ronald Reagan, George H.W. Bush and George W. Bush.
TGR: Basically, the GOP doesn't want President Obama to have two terms. Politicians put people's livelihoods at risk in order to achieve political goals. Even if this legislation gets the country past this hurdle, doesn't it seem like this system is permanently flawed?
VK: The American system of divided government has served the country well for more than 200 years. The process of raising the debt ceiling, while it looks messy, is the case with pretty much all democratic processes. While there may be political agendas behind it, the U.S. is at a turning point.
TGR: Do you believe a deal will return the gold price to below $1,500/oz. (ounce) as it was before this crisis started to escalate?
VK: If the debt deal is to the liking of the market, there may be a short-term correction. However, larger themes are driving gold prices. One is the inability for many developed nations to manage their government debt. The other is the inflation scenario in emerging economies. Both of these have to play out over many years to come. While the debt ceiling may have an immediate impact, I don't think it will change gold's strong, long-term trajectory.
TGR: In late July, managed money funds increased their net long position in gold to 238,319 contracts, which is approaching the all-time high set in October 2009. Do you put much faith in those numbers when you make projections for gold?
VK: When we make projections, we tend to look at emerging markets. Overall demand for gold is roughly around 1,000 tons per quarter. Most of it is coming from the emerging markets. Gold had traditionally served to fight against inflation. That is a better indicator for gold prices.
We also watch the central banks because they tend to have a long-term view about macro-factors. In the first quarter, Mexico added around 100 tons of gold into its reserves. Emerging market central banks are trying to add more weightage to gold.
In the previous cycles, central banks were net sellers of gold. Emerging market central banks have around 2% of their assets in gold. That shows that while the price of gold seems to suggest there is a bubble, the portfolios of central banks don't hold a lot of gold yet.
TGR: Since your index, the Ubika Top 50 Gold Index, was launched on Feb. 1, 2010, the cumulative market cap of the 50 junior gold companies in the index has increased to $14.6 billion, or about 80%. That compares to a 36% increase during the same time for its benchmark, the TSX Venture Index. The gains are impressive, but the index is actually down so far this year due to share price declines for some notable juniors and mid-tier explorers.
VK: The index had a better run last year than so far this year. That is partly based on sectoral rotation away from junior gold stocks as some risk aversion has come into the marketplace. While the underlying commodity has been strong, the junior market's drivers are not always correlated with the commodity. I would note that the TSX Venture Index is also down year-to-date. It's not that there is not potential in these companies. It is a general market capital rotation away from junior companies.
TGR: Your index has moved steadily higher so far this month, however. You attribute this to investors turning their attention to relatively undervalued junior miners given the high price of gold. What are some companies that are riding that wave of renewed investor interest?
VK: One company showing signs of promise is Rye Patch Gold Corp. (TSX.V:RPM). It's an excellent example of an undervalued gold junior with around 4 million ounces (Moz.) in Nevada, which probably is the safest jurisdiction for gold with so many acquisitions happening.
It had some fantastic new drill results that could increase the resource estimate by more than 5 Moz. by the end of the year. Now that some of these companies have hit their lows, there is some interest in getting back into those quality juniors like Rye Patch.
Another example of a quality junior is Lexam VG Gold Inc. (TSX:LEX; OTCQX:LEXVF; Fkft:VN3A). It is a Timmins gold camp (in Northern Ontario, Canada) play that went through a correction when all the gold juniors were going down, but it is seeing some new interest. Quality gold juniors with strong resources located in safe jurisdictions with capital to expand those resources—particularly those that can advance and develop the projects—will start to see some interest in the fall.
TGR: What sort of news are you looking for after Lexam VG Gold's summer exploration program?
VK: After the merger between Lexam and VG Gold, the company had a strong balance sheet with more than $15M. It has a $10M exploration program this year. Four rigs are turning and the company is trying to acquire a fifth rig. Between its Buffalo Ankerite, Paymaster and Fuller properties, there is a lot of resource to come.
The company issued some good results recently, but the market did not fully appreciate it. It was a fairly significant development of high-grade gold in a new mineralized zone within the Buffalo Ankerite property. If it can continue those kinds of results, Lexam VG will have room to increase its resource estimate in the coming year.
TGR: Are there some other companies that offer value at their current price positions in the market?
VK: A number of companies we cover have taken a hit and come down in value. They are ripe for a re-rating of the stock and investor interest to return. La Quinta Resources Inc. (TSX.V:LAQ) is a Nevada gold junior company, which is exploring the Easter property. It has found some good mineralization extension of its current zones.
The company has 110 thousand ounces (Koz.) in the indicated category right now, but it has promise of extending the mineralized zone. With the current drill program, the company could see some improvement in its resource estimations and that will start being reflected in the share price.
LaQuinta has a joint venture with an option to own from Pilot Gold Inc. (TSX:PLG), which was spun out of Fronteer Gold Inc. (TSX:FRG; NYSE.A:FRG) after its acquisition by Newmont Mining Corp. (NYSE:NEM). If the company can show some promise of a half-million to a million ounces, we think La Quinta will have a good chance of being taken out by Pilot or a company of that caliber.
TGR: La Quinta has had some trouble raising money. Have those issues been taken care of?
VK: It did have some challenges raising capital, but they have raised enough capital to continue with the current drill program. Interest in the stock should increase as results start coming in. It has already made some moves from its lows as the drill program has gotten underway.
TGR: What about Meadow Bay Gold Corp. (TSX.V:MAY)?
VK: Meadow Bay is another interesting Nevada play. It acquired the Atlanta Gold Mine project. The advantage of this project is that it is not a greenfield project, so the company is not starting from zero. It does have a lot of data from the past ownership. Kinross Gold Corp. (TSX:K; NYSE:KGC) had already estimated an internal resource of close to 0.5 Moz. within the Atlanta project.
On top of it, Meadow Bay also acquired a lot of infrastructure. The company paid approximately $6M as part of this Atlanta Gold Mine project acquisition, when the replacement value of the current infrastructure on the site could be easily $20M to $25M.
TGR: You said in a research report on Meadow Bay that there would be medium-term cash flow. Will that come from Atlanta?
VK: The company's goal is to commence small-scale production in the medium term. The company believes it can get a medium-term production scenario with an open-pit because it has infrastructure already there. The company is currently working toward making the resource compliant and expanding it to 1 Moz. We have a model price of $3.62 and it is currently trading at about $1.
