TGR: Where is the best value?
IP: Capstone Mining is a valuation call. I think there's a catch-up to be made in that name. I can't explain why it is lagging the group. It recently acquired the Pinto Valley asset from BHP Billiton and that asset is running well. The cash costs were a bit higher than it originally guided, but they are trending in the right direction. All things are looking solid at Pinto Valley. Capstone's other assets are Minto in the Yukon and Cozamin in Mexico. My price target is $4.50.
TGR: Lundin's best asset is a 24% stake in Freeport-McMoRan Copper & Gold Inc.'s Tenke Fungurume copper mine in the Democratic Republic of the Congo (DRC). How does that asset compare to others in its peer group?
IP: It's a staggering asset in terms of grade and scale. We are dealing with a mine that's moving material that's 10 times the grade of other mines in my coverage universe. What holds back the deposit is that it's located in the DRC—a difficult place to do business due to limited power, infrastructure and the overall work environment. If that deposit were anywhere else in the world, it would have been mined much earlier and be much bigger than it is.
TGR: How does Lundin balance the DRC risk?
IP: Lundin has become increasingly diversified. The Eagle nickel-copper mine, its main growth asset, is under construction in Michigan's Upper Peninsula—the polar opposite of the DRC in political risk. There's also the Zinkgruvan zinc-copper-lead mine in Sweden, and the Neves-Corvo copper-zinc mine in Portugal. Its political risk is broadly diversified. I have a $6.75 target on Lundin.
TGR: Most of the gold companies you cover have been given a rough ride in 2014. Among the underperformers year-to-date, which ones are poised to post a stronger H2/14?
IP: Probably Argonaut Gold Inc. and AuRico Gold Inc., for different reasons. Argonaut has two producing mines, El Castillo and La Colorada. El Castillo in Durango, Mexico, had a pretty rough finish in 2013. The mine schedule at El Castillo saw it mining transitional ore for longer than expected and that impacted recoveries and production into Q1/14. That's over, but I think the market probably needs to see it deliver. The recent pullback with the name is really based on that short-term operating scenario. We should see Argonaut revert to where the name was trading not that long ago.
TGR: Scotia Bank recently revised Argonaut's target to $6.50 from $8. Yours remains at $8.50. Why?
IP: I still have a positive view on its growth assets. We just talked about El Castillo and La Colorada. Argonaut has two other growth assets: San Antonio in Mexico and Magino in northern Ontario. I carry value for essentially all five parts of the story: the two operating mines—El Castillo and La Colorada—San Antonio, Magino and then San Agustin, which it recently acquired from Silver Standard Resources Inc. and is now drilling. The first set of drill results looks very encouraging.
TGR: San Antonio has had some permitting issues. Do you believe Argonaut can work those out and get that asset into production?
IP: With San Antonio it's a matter of time. The asset has value, and I think it will go into production.
TGR: And AuRico?
IP: It's a "show me" year with AuRico, because it is transitioning from an open-pit mine at Young-Davidson in northern Ontario to underground mining at higher grades. More ore is coming from the underground portion but it's still ramping up and that's skewing the financial numbers. By the time Q3/14 rolls around, the open pit should be completely shut down and the numbers should be clearer. The higher grade should move its mining costs in the right direction.
TGR: You have a $2.50 target on Timmins Gold Corp. After a brief rally earlier this year, the share price hovers around $1.50 despite better than expected earnings and cash flow per share in Q1/14. What's going to move that name?
IP: Timmins is a single-asset story and that may help explain the underappreciation of the name. It has solid cash flow, solid earnings per share but not a great deal of growth beyond the San Francisco mine in Mexico. Having said that, in a higher gold price environment the company's land package has some exploration upside.
TGR: The mill is operating pretty much at nameplate capacity, isn't it?
IP: Timmins added crushing capacity last year and made incremental improvements on the ground without spending a lot of capital. Timmins is a solid operating group doing what it said it was going to do, exceeding expectations the first part of the year and operating in a very safe part of the world.
TGR: AuRico took a close look at Timmins a few years ago. Would a takeover make sense?
IP: I regularly field that question. AuRico's El Chanate mine is geologically similar to Timmins' and not too far away. If you're looking for consolidation stories, it makes a lot of sense.
TGR: Please leave us with a thought or two to buoy the spirits of disheartened gold investors.
IP: I'm encouraged that the industry is focusing on economics. Growth for the sake of growth is no longer the preeminent mantra. Assets are being shelved, sold or put on care and maintenance as companies focus on assets that make money. Management teams are being forced to be prudent. The industry is in better shape today than it was a year and a half ago.
TGR: Thank you for your insights, Ian.