To make wise investment decisions, gold investors must coldly assess economic realities, says Eric Coffin. As the publisher of Hard Rock Analyst Advisories, Coffin tracks a range of gold explorers with the bling to weather the long capital drought. He has figured out how to separate the winners from the losers and, in this interview with The Gold Report, he shares the names of some strong ventures.
The Gold Report: In your January Hard Rock Analyst Journal, you remarked that 2012 "sucked" for precious metal investors. What happened?
Eric Coffin: Last year was a very difficult time for junior gold miners to raise funds and there has been no improvement in the financing environment yet in 2013. There were a few bright spots. SilverCrest Mines Inc. (SVL:TSX.V; SVLC:NYSE.MKT) moved into production profitably. Management did a great job getting the Santa Elena mine up to full production and the company uncovered a lot of new ounces at its La Joya property. Generating profits insulates SilverCrest from having to finance, although its share price will still track gold and silver — for good or for ill.
The companies that did well, and there weren't many of them, were new discovery stories. The epitome of the phenomenon on the HRA list was GoldQuest Mining Corp. (GQC:TSX.V), which shot from a share price of $0.07 up to $2 after its discovery in the Dominican Republic. It drifted down thanks to the weak market and some weaker holes but it now has a $15+ million ($15M) cash position to sustain it.
The basic problem is that with such a weak market backdrop, the financial sector is focused only on companies with strong management and proven projects. That's a very small subset of the explorers.
TGR: Are the small companies going to wither on the vine?
EC: Companies with large shareholders that can be tapped for cash to keep things going might eke through. Companies that did not have a lot of success in the last two years are going to have a real problem — unless the fundraising situation improves soon.
TGR: Are the capital markets for gold miners likely to improve this year?
EC: I believe that the financial market will get better for the juniors, but selectively. Money will go to development stories with clear top-quartile economics and successful exploration stories. And the devil will take the hindmost. A few hundred companies could disappear over the next couple of years. That stinks, but on a rational, sector-wide level, it is better for everybody in the long run if there is more focus on a smaller number of companies that have multiple targets and the ability to deliver. That's where the real game is.
The thousand other companies hoping to be able to option a property to a major are just not going to get any attention. It is easy to see the writing on the wall: Today's tiny financings are via insiders. Those are guys in the front office putting in $100,000 among them to keep the door open for another three months. You can only do that for so long. Without real funding to generate real news, companies are stuck.
TGR: Is there a feeling out there that the price of gold is too high, that it's going to collapse and not be able to sustain development and exploration?
EC: When gold was at $280/ounce (280/oz), mining companies were trading at 50–60 times earnings. That's because investors were not trading on earnings; they were buying for leverage on gold reserves. But after the price of gold went up more than fivefold, the market shifted to trading on earnings. The firms that get higher multiples, as in any other sector, have convinced the market that they can grow earnings. That's fairly normal market behavior, but it is shocking to a lot of people in precious metals. Plus, there is just a lot of competition for capital, although a fair amount of it will eventually return to the gold sector.