Killian Charles, an analyst with Industrial Alliance in Montreal, isn't too concerned if the gold price hits $1,300 an ounce or even $1,000. He's more concerned with the gold breaking point. How low can the gold price go without breaking a project? Investors will be surprised to know that a wealth of junior miners are lean and mean enough to survive a pint-sized gold price. Charles talks with The Gold Report about which companies have resized and redesigned their projects to make it in this unforgiving market.
The Gold Report: Killian, what are the main causes of the disconnect between commodity prices and the share prices of mining companies?
Killian Charles: It's the fundamental difference between the commodity itself and mining companies.
There's an unspoken belief that, when you invest in a junior mining company, you're essentially buying a portion of the deposit. Investors are looking to diversify by having gold as a commodity in their portfolios and they look to gold junior companies. Yet the exit strategy from those gold junior companies results in cash, so they're left tangibly playing the gold space, but not having what initially brought them in.
That is why a lot of companies are considering gold dividends. At least that way investors playing the gold space are actually being paid in the commodity that interested them at the start.
TGR: Do you think that's going to gain traction?
KC: The smaller producers are having a lot of difficulty getting good traction in this market. A lot of them are going to explore some of these alternative routes. Just as we've had alternative routes for financing, we're going to start seeing alternative routes to increase shareholder value.
TGR: The fall in precious metal values has shaken a lot of investors. What is Industrial Alliance's forecast for gold?
KC: We are less worried about noise surrounding the price of gold. We're focused on the breaking point of the projects we cover. Even if the gold price may be $1,300/ounce ($1,300/oz) at the end of the year, we are more concerned if the project may survive at $900/oz.
The gold price is important to companies that have producing assets, however. Into 2014 and out to 2020, we typically take a conservative approach and go well below $1,300/oz. Beyond 2020, we forecast roughly $1,100/oz because a lot of companies should not be getting excessive value for production that is too far down the pipeline.
TGR: What would you be doing to gain traction in this market if you were in the shoes of a junior precious metals company?
KC: Instead of showing how well a project works at $2,000/oz, I would show the market how well a project works in any environment. All gold projects have decent leverage to higher gold prices. What's more important is showing that there is a smaller sensitivity to the downside, showing how they can still stay relevant on a downturn. Quite a few companies out there would survive and make money in almost any scenario.