Royalty plays may have once been strictly the domain of larger companies, but smaller names are shifting gears to enter the space. Can the smaller players make the numbers work for their shareholders? Kwong-Mun Achong Low, an analyst with Jennings Capital, believes they can. Achong Low tells The Gold Report about which juniors are making the leap into royalties.
The Gold Report: Kwong, investors have transferred billions of dollars from fixed income mutual funds into equity funds during the past few months. The mainstream media is calling it the "great rotation." Do you expect that movement to result in higher bids for precious metals and mining equities?
Kwong-Mun Achong Low: There's some credence to it because some corporations have strengthening balance sheets and improving profits. Also, the Volatility Index (VIX) is at a five-year low and equities tend to outperform when volatility is low. I think that more capital will come back to equities and by extension some precious metals names will see benefits.
TGR: Will that capital reach all the way down to the junior mining equities?
KAL: Not all junior mining companies. Investors are very selective right now, looking for quality.
TGR: You're following a handful of development-stage stories with near-term cash flow and some relatively small-cap producers. What time frame does "near term" imply?
KAL: Mostly 6–12 months. I look for companies that are fully financed to get to production and cash flow. For example, Santacruz Silver Mining Ltd. (SCZ:TSX.V), a near-term silver producer in Mexico, is supposed to be in commercial production within the next few months. It just completed a $40 million ($40M) financing to help finance this and future projects. It could grow from about 500,000 ounces (500 Koz) silver this year to more than 5 million ounces/year (5 Moz/year) by 2015. There's lots of good growth there with the potential for a rerating that miners entering full scale production typically enjoy.
TGR: Santacruz Silver is conducting a 7,000 meter (7,000m) drill program that's targeting the southeast and northwest zones of its Rosario project in Mexico. You hypothesized that given the continuity of the trend of mineralization, the drill program could increase the Measured and Indicated resource by 60% to about 16.1 Moz silver equivalent. What gives you the confidence to make that bold claim?
KAL: When I was at the site, I was able to look at some of the cross-sections of its recent drilling and detailed models of the current resource. The ore body seems continuous and as the company steps out drilling from the defined 500m of strike to explore the full 2.5 kilometers of potential, I expect the deposit to expand incrementally. As such, I don't think my estimate seems that aggressive. It's an extrapolation of what could be found within the year.
TGR: Would you consider Santacruz a high-grade project?
KAL: I would. The company has three main projects that it's focusing on and exploring. All of them have silver grade of at least 100 grams per tonne (100 g/t), which is rare in the silver space for the junior market. It's definitely a benchmark grade that I look for when I'm considering how viable a project could be.
TGR: It's supposed to reach commercial production in the first quarter. Is it on track?
KAL: It is on track. It's been commissioning the mill for the past couple of months. It should be placing ore into the mill soon. Soon after that there should be some commercial production. If it slips, I don't think it will slip by much.