Benjamin Asuncion and Geordie Mark of Haywood Securities forecast 2014 gold and silver prices of $1,300/ounce and $21.50/ounce, respectively. In this interview with The Gold Report, they argue that the gold and silver companies that will thrive in 2014 will be those blessed with the prudent but aggressive management that can post good margins at today's prices. And they suggest a half-dozen gold and silver miners poised to do just that.
The Gold Report: Gold is up for the year. Do you expect this trend to continue?
Benjamin Asuncion: For 2014, we're officially forecasting an average gold price at $1,300/ounce ($1,300/oz). We've elected to err on the side of conservatism in our commodity forecasts, which leaves company valuations to be more reflective of operating performance than reliant on higher metal prices.
TGR: Ambrose Evans-Pritchard of the Daily Telegraph says if the Federal Reserve "has to back off [tapering] again, gold will have a fresh lease on life." Do you agree, and do you think the Fed is committed to tapering?
Geordie Mark: I agree that if the Fed backs off tapering, it's a total game changer for sentiment. Janet Yellen, the new Fed chair, has certainly been quite cautious as to how she's going to approach monetary policy, so right now we're in a wait and see period, but that being said, the market now appears to show a certain positive sentiment for precious metals companies.
TGR: We've seen various currency panics around the world in recent weeks. Will this lead to a flight to safety in the U.S. dollar?
GM: Ultimately, strengthening of the U.S. dollar likely will be based on a strengthening U.S. economy rather than capitulation of other major currencies. The outlook with regard to tapering demonstrates broader directional strength in the U.S. dollar. We might be able to expand on that.
TGR: For several years, what's been good for the U.S. dollar has been bad for gold and vice versa. Is this a new iron law, or could it change?
GM: That's definitely been the argument in the past. However, the big thing here is that we've got another player that could firm up the gold price: China.
BA: The Chinese typically take a longer view on investing in gold. Last year we saw outflows from exchange-traded funds (ETFs) in the order of roughly 30 million ounces (30 Moz). That amount was quite close to the amount of gold being imported by China from Hong Kong.
The amount of gold being replaced annually is growing significantly slower than the money supply. So we are seeing support for higher metal prices, and the ounces out there are in demand, given the lower prices that are reducing production.
TGR: What's your 2014 forecast for silver?
BA: We're currently using US$21.50/oz in our valuations, based on a gold price of $1,300/oz, which implies a silver-gold ratio of about 60:1. This ratio is fairly consistent with the ratio we've seen from 2000 onward. Looking at the relationship between the two metals, historically silver has correlated closely with gold but demonstrated roughly twice the volatility.
TGR: Unlike gold, silver has industrial uses. How does the supply-demand question in silver look?
GM: On the supply side, the majority of silver production comes as a byproduct of other mining operations (i.e., lead and zinc), therefore, the silver price doesn't necessarily dictate the economic viability of these mines. This results in an appreciable amount of silver supply that's fairly agnostic to the silver price, which translates to greater fluctuations in prices, particularly on the downside.
On the demand side, we have industrial applications accounting for roughly half of the total demand, followed by jewelry, coinage, photography and silverware. Investment demand accounts for the remainder, for which the silver ETF holdings are a significant source. On the ETF side, we see a different picture compared to gold, with gold ETFs shedding ~30% last year, in contrast with a more optimistic picture of silver ETFs posting a marginal increase.
TGR: Gold and silver equities have lagged prices significantly in recent years. Is this changing?
BA: So far this year, we've seen this change as gold and silver have been relatively lackluster with each posting gains around 10%, a stark contrast to the equities that have risen upward of 30–40%, pointing to improving sentiment.
GM: Well, we're starting to see an increase in the overall merger and acquisition activity levels from producers through developers and even exploration companies. Producers are looking to augment their production profile through production consolidation and the shedding of marginal operations. This is what we're seeing with Goldcorp's bid for Osisko—improving Goldcorp's geopolitical risk profile (through increasing its exposure to regions with lower geopolitical risk) and bolstering its projected consolidated cash costs.
Other examples of producer consolidation includePrimero Mining Corp.'s (PPP:NYSE; P:TSX) bid forBrigus Gold Corp. (BRD:NYSE.MKT; BRD:TSX). We've also seen the majors shed non-core or marginal operations, namely Silver Standard Resources Inc.'s (SSO:TSX; SSRI:NASDAQ) acquisition of the Marigold mine in Nevada (jointly owned by Goldcorp and Barrick Gold Corp. [ABX:TSX; ABX:NYSE]). Moving further down the food chain, we've seen examples of producers picking up stranded development-stage projects (i.e., B2Gold Corp.'s [BTG:NYSE; BTO:TSX; B2G:NSX] takeover of Volta Resources Inc.).
TGR: The crisis in precious metals equities is almost three years old. What must junior gold and silver mining producers do to ensure their survival?
BA: To ensure survival in the paradigm of declining metal prices, companies have trimmed non-operational expenditures (i.e., corporate general and administrative, and exploration) and deferred significant capital projects to preserve the balance sheet. We're also seeing some signs of more selective mining (i.e., focusing on higher grade and higher margin production). However, the latter requires a longer-term outlook.
One of the criteria we evaluate companies on is their ability to endure at current metal prices—those without significant burdens like hedges or onerous amounts of leverage or debt. We're focusing on companies with attractive valuations that we see have the opportunity for lower cost growth profiles with the means to fund development plans. Having said that, given the current equity valuations, sometimes it's cheaper or less risky to wait and buy ounces than drill them.
TGR: What must junior explorers to do survive?
GM: Juniors need to differentiate themselves from their peers. Right now these companies need to take a step back and take time to assess or re-assess their portfolios. Exploration targeting metrics need to be cognizant of prevailing commodity prices and thus look for mineralized systems capable of potentially operating in a lower commodity price environment. Such strategy also follows for those companies with defined assets that need to be re-examined in light of a lower commodity price environment. Such strategies likely will make those companies capable of attracting available capital in the markets. Above all, companies must continue to move forward rather than to stagnate.
TGR: What are your top picks among the gold companies you follow?
GM: We recently returned from a site visit to B2Gold's Otjikoto gold project in Namibia. This company's management has a track record of capitalizing on acquisitions by adding ounces and expanding production. Otjikoto should be in production by the end of 2014.
B2Gold has a significant production growth profile, which we estimate production of approximately 400,000 (400 Koz) this year at cash costs of US$725/oz, growing 60% over the next two years to around 630 Koz in 2016 with lower cash costs. This is what we like: producers with margins and growth potential.
TGR: What's your rating for B2Gold?
GM: We've given it a Buy rating and a target price of $3.50.
TGR: B2Gold took over Volta, and Asanko Gold Inc.'s (AKG:TSX; AKG:NYSE.MKT) takeover of PMI Gold Corp. has just closed. What do you think of Asanko?
GM: With Asanko's acquisition of PMI Gold, the company gained around 4.5 Moz gold in resources, bringing its total to just over 10 Moz. Asanko is a re-invigorated company now with significant potential and financial flexibility having over US$270 million (US$270M) in cash and up to US$150M in undrawn debt. All of Asanko's assets are in Ghana and we're looking at the company heading down the development road later this quarter, targeting initial production by 2016 and growing from there. We see the company's plan of initiating production from the higher-grade deposits at Obotan as a prudent, lower-risk strategy that facilitates organic growth funded from operating cash flow.
TGR: What's your rating for Asanko?
GM: We've given it a Buy rating and a target price of $3.75.
TGR: What else do you like in Africa?
GM: Papillon Resources Inc.'s (PIR:ASX) Fekola project is, in my view, the best gold asset discovered in Africa in the last half-dozen years. It's in Mali, just over the border from Senegal and close to Randgold Resources Ltd.'s (GOLD:NASDAQ; RRS:LSE) 11.5 Moz Loulo project and AngloGold Ashanti Ltd.'s (AU:NYSE; ANG:JSE; AGG:ASX; AGD:LSE) 13.1 Moz Sadiola project. It is looking for 2017 production.
TGR: How much and at what cost?
GM: Around 320 Koz annually over the first 11 years at an all-in sustaining cost of US$740/oz.
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