Eric Winmill, mining equities research analyst with Casimir Capital, sees great potential for small-cap metals producers and developers in the Americas — home to good infrastructure, skilled workers and great geology. In this Gold Report interview, Winmill also explains how "all-in" cash costs are making it easier for companies and investors to understand — and predict — cash-flow generation and identifies companies that he expects to take off.
The Gold Report: Eric, most of the companies you cover are small-cap names operating one or two mines in the Americas. Is that where investors will make money in 2013?
Eric Winmill: We are seeing a lot of money flowing back into the Americas, along with a lot of merger and acquisition (M&A) activity in the gold space.
This is happening for all the reasons you might expect: Access to skilled workers, a highly productive workforce, security of mineral rights, great infrastructure and, of course, great geology. These small- to mid-cap producers with one or two assets are typically ramping up. We focus on finding great teams and great assets as we believe these will deliver the best potential for returns this year and in subsequent years.
TGR: What valuation metric do you use or trust most?
EW: We tend to use price-to-net-asset-value (NAV) multiples. That captures most of the growth in the companies and the projects going forward and allows us to run sensitivities on gold prices and such. In some cases we incorporate price to cash flow, but rely primarily on price to NAV.
TGR: Can you give us a brief overview of Casimir Capital's gold trading range projections for 2013?
EW: Rather than forecasting a price range, we use a fixed value. For 2013 we are using a price of $1,800/ounce ($1,800/oz), a little bit above where the quote is now.
I agree with a Barron's quote from Darren C. Pollock at Cheviot Value Management LLC, who said, "We are in the middle of a monetary stimulus marathon, this is no sprint." Just about all of the major currencies are "reflating" at the moment. Against that backdrop, we are bullish on gold prices through 2013 and into 2014.
EW: Under our peak-pricing scenario, we forecast $1,900/oz in 2014. We move to a long-term price of $1,400/oz after 2016.
TGR: Since mid-July 2012 you have turned over or dropped 6 of the 15 companies you cover. Why such significant change?
EW: It really is not as significant or as unusual as it appears. One company, Prodigy Gold Inc., was taken out by Argonaut Gold Inc. (AR:TSX). That is the kind of scenario you want to see.
Three others were transferred to a colleague who joined us last summer. He had covered those firms at his prior shop and it made sense to hand them over to him.
The remaining two names were ones I covered with my previous company. When I joined Casimir, I inherited 10 names that demanded a lot of time although I would look to re-launch on those going forward.
TGR: Of the 10 companies, which is the most likely to receive a takeover offer?
EW: That is a good question, given that takeover "optionality" is a part of what we look for in the companies we cover. We see takeover potential underpinning or sweetening the valuation. However, looking solely for takeover targets as an investment strategy is not really our mandate.
Nonetheless, as companies surface value in their key assets, it is natural to suspect that they might be takeover targets. One example is Luna Gold Corp. (LGC:TSX.V), which is ramping production at its Aurizona mine in Brazil. Next year, production will reach 125,000 oz (125 Koz)/year. The company has a long-term plan that could take production up to 300 Koz/year or even 500 Koz/year. That kind of asset could be very attractive to midtier or even senior gold companies.
TGR: What are the longer-term expansion plans at Aurizona?
EW: Luna Gold has a very clear expansion strategy at Aurizona. The company is working through a phase 1 expansion right now. In the next few months we expect news on a phase 2 expansion that could add another 100 Koz/year or more.
Looking down the road, Luna Gold has a very promising property right next to the Aurizona property called Luna Greenfields. The company intends for that to be the source of its next gold mine. Including underground potential, it could drive production to 300–500 Koz/year.
TGR: Does Luna Gold plan to mine the high-grade portion of that first to generate early cash flow? If so, could we see a slight drop from production at Aurizona over the next couple of years?
EW: I would not call it "high-grading" per se. Right now, Luna is mining a lot of the near-surface saprolite-type ores. These are very easy and cheap to process. Down the road, the company plans to do some crusher improvements to facilitate processing of more of the deeper fresh rock ore.