There are two things investors pay too much attention to, according to Jennings Capital Analyst Dan Hrushewsky: metals prices and grade. Why? Extremes of low and high prices never last, and high grades don't always make for economic deposits. In this interview with The Gold Report, Hrushewsky explains the metrics behind his all-in cash cost estimates and profiles West African projects that are connecting the dots.
The Gold Report: So far in 2013 we've seen steep one-day drops in metals prices and seemingly endless redemptions in gold exchange-traded funds (ETFs). Is the gold bear here to stay?
Dan Hrushewsky: Interesting question. Bear markets never last forever, and being roughly two years into this one, I would say that we are closer to the end than the beginning. It is difficult to say how far away we are from the end. We may be seeing the first signs of life. You'll recall that during the last bear market in the late 1990s and early 2000s, signs of life began showing up in the diamond sector first. It's almost as if investors still had a bad taste in their mouth from the traditional gold and base metal sectors, but started feeling comfortable with risk again and started with a different "flavor." We could even be starting to see this in the uranium sector with some of the juniors active in the Athabasca Basin, such as Fission Uranium Corp. (FCU:TSX.V) and Alpha Minerals Inc. (AMW:TSX.V).
TGR: Some mines aren't profitable at $1,250 per ounce ($1,250/oz) gold. How are companies adjusting to the new price environment for gold?
DH: Recently, a lot of companies have been talking about: 1) cutting head office costs, 2) renegotiating contracts with third parties, 3) deferring capital expenditures (capex), cutting down on sustaining capex and deferring pre-stripping, 4) re-sequencing mine plans to access higher grades first, 5) re-calculating resource estimates at higher cut-off grades, reserve estimates at lower gold prices and 6) suspending, closing or divesting of higher-cost assets.
TGR: Are mines operating in West African countries typically higher margin?
DH: Not necessarily. It depends on the specific characteristics of the deposit, such as grade and metallurgy, and access to infrastructure, such as cheaper hydroelectric power and water. High-margin projects are strong performers in high or low gold price environments and, as an example, two such higher-margin projects are those of Roxgold Inc. (ROG:TSX.V) and True Gold Mining Inc. (TGM:TSX.V). Roxgold's 55 Zone deposit is one of the highest-grade deposits in the world with 0.6 million ounces (0.6 Moz) Measured and Indicated at 19.3 grams per ton (19.3 g/t) at a 5 g/t cut-off grade, and has very high gravity recovery. This translates into a low cost, high-margin project with lower financing risk. True Gold's Karma project is one of the highest-grade heap-leach projects in the world with above-average recoveries and leach kinetics. This also translates into a low capex with therefore lower financing risk.
TGR: What are your near-term and medium-term prices for gold?
DH: I use a near-term gold price similar to current levels, and a long-term gold price of $1,500/oz. I don't use lower gold prices in the long term, because if you use steady state lower prices you have to assume a lower-cost structure, and you have to assume different mine plans and different resource/reserve estimates (i.e., smaller reserves/resources at higher grades). Making these detailed adjustments in my model just doesn't make sense.
TGR: As an analyst, are you shifting your focus to low-cost producers? Perhaps some equities operating high-grade underground mines or open-pit, heap-leach operations?
DH: Most of the companies I cover are attractive depending on your gold price outlook. For example, if you think gold prices are going up, you would want to own companies with high leverage to gold price increases, such as Volta Resources Inc. (VTR:TSX), Orezone Gold Corporation (ORE:TSX) or Perseus Mining Ltd. (PRU:TSX; PRU:ASX). If you think low gold prices will be around for a long time, then the companies with high-margin projects, such as Roxgold and True Gold, are optimal investments. Of course these latter companies do well in rising gold price environments as well.