At the Cambridge House Canadian Investment Conference in June, The Gold Report Publisher Jason Mallin asked a panel of experts picking a portfolio of stocks with upside potential for the 2014 Streetwise Reports Natural Resources Watchlist what they wanted to see in an equity. As always, Sprott U.S. Holdings Inc. CEO Rick Rule summed up the ideal beautifully. "We like reality at a discount," he said. Now that three months have passed, we decided to check in with Rick and co-panelists Joe Mazumdar from Canaccord Genuity and Keith Schaefer from Oil & Gas Investments Bulletin to see how that reality is playing out. You can always check the portfolio in real time at the Portfolio Tracker.
The Gold Report: Joe, some of your picks from the Natural Resources Watchlist have performed quite well. Do you want to give us some updates?
Joe Mazumdar: Junior mining sector equities in the gold space, as proxied for by the Market Vectors Junior Gold Miners ETF, have outperformed gold since the June Cambridge House conference. The inter-period high for gold was $1,335–1,340/ounce ($1,335–1.340/oz), about a 7% return. Gold is down about 3% since the conference, on the back of a strong U.S. dollar.
The benchmark Market Vectors Junior Gold Miners ETF experienced an inter-period high of about $45/share, generating a 30%+ return since the conference. But it is currently flat again. On both metrics, the ETF has outperformed the gold price. Our selections averaged an inter-period high of 50%, which included underperformers (+18–26%) and some significant outperformers (+70–115%). Currently, the average return for our selection since the conference is a more modest 14–15%. [NOTE: Figures cited were current 9/30/14.]
TGR: During that panel discussion, you called explorers a lottery ticket and Cayden Resources Inc. was a lottery ticket that paid off. What was your other "lottery ticket" pick?
JM: Exploration stories tend to be for the more risk-tolerant investors, potentially an "educated" guess rather than a lottery ticket. Our other exploration story was Cordoba Minerals Corp. Cordoba Minerals underperformed, both with respect to inter-period highs (+18%) and current return (-54%) since the June conference. A diamond drilling program (2,000 meters [2,000m]) began at the San Matias copper-gold project in Colombia in mid-July 2014, targeting anomalies from a 5,000m, shallow hole, rotary air blast (RAB) drill program. Results are still pending. The only reported results were from RAB drilling at the Costa Azul prospect, which returned 19m grading 0.74 grams/ton gold (0.74 g/t) and 0.32% copper in early August 2014.
Downward pressure on the stock is, in part, due to the lack of news flow. We consider this to be a long-term exploration play, seeking to prove up a cluster of gold-rich porphyry systems that have returned up to 101m grading 1.0% Cu and 0.54 g/t Au from previous drilling. In terms of infrastructure, its location in the northern part of Colombia, at a low elevation with two operating open pit mines located nearby and abundant roads, ports and power, is also attractive.
TGR: What about the more developed picks you have under coverage? The Watchlist was all about catalysts. Did these companies hit their catalysts or is there good news to come?
JM: Roxgold Inc. is well financed to production at its Yaramoko gold project in Burkina Faso, West Africa, expected by the first half of 2016. The catalysts are a blend of milestones from derisking its development timeline and quantifying the upside on its substantial land package. The company has managed to deliver on both fronts since the conference.
With respect to the development timeline, Roxgold derisked some of the financing, technical and execution risk by securing a US$75 million (US$75M) project debt facility, having its environment and social impact assessment approved, and awarding the underground mining contracting to a reputable firm with relevant underground experience in West Africa. Also, on the exploration front, the drill program at Bagassi South intersected 39.6 g/t gold over 4.5m. We believe Roxgold will continue to quantify the upside on its land package.
Despite these releases, the stock underperformed the Market Vectors Junior Gold Miners ETF with respect to its inter-period high (+23% versus +30%), but has outperformed it since (+5.6% versus +0.4%). Some of the drag on the stock may be related to additional financing required to bring the project into production. We have modeled an additional equity financing to support the project's development.
In our opinion, few projects offer the high internal rate of return that the Yaramoko project does due to its high grade (>10 g/t Au) and low throughput (740–750 tons per day), requiring low upfront capital (US$110–120M) to get it into production. The high return should attract investors to the name in a volatile gold price environment. We have Roxgold on our Canaccord Genuity Focus List.
Rubicon Minerals Corp. is financed to go into production in H2/15 at its wholly-owned Phoenix gold project (F2 Zone), which lies within the highly sought Red Lake District of northwest Ontario. Similar to Roxgold, Rubicon Minerals has two streams of catalysts. The catalysts are related to production timeline and drilling, both infill and definition, to better define the mineable resource.
Since the June conference, to further quantify the upside potential, the company raised additional funds (CA$12M in flow-through financing) to support exploration, and added a new vice president of exploration. Recently, the company announced an intersection of 136.5 g/t Au over 4m from the infill program, which has found additional mineralization outside currently modeled stope blocks. On the development front, Rubicon continued to maintain its guidance for production by mid-2015, in line with our forecast. Preproduction capital left to spend is approximately CA$132M. As of the end of August 2014, the company had about CA$158M in cash, with an additional US$45M expected from its streaming transaction with Royal Gold.
Rubicon Minerals easily outperformed the Market Vectors Junior Gold Miners ETF, both in the inter-period high (+68% versus +30%) and to date (+31% versus +0.4%), as Phoenix represents a high grade (8.0 g/t Au) underground gold project that is well financed to near-term production in a prime jurisdiction) and a highly sought gold district.
Dalradian Resources Inc. is an advanced explorer that is metamorphosing into a developer at its wholly owned Curraghinalt high-grade (8.0 g/t Au) underground gold project in Northern Ireland.
Dalradian Resources underperformed the Market Vectors Junior Gold Miners ETF both in the inter-period high (+26% versus +30%) and to date (-8% versus +0.4%), as the company had to await financing. It raised CA$27M in late July 2014 to fund its underground exploration program (CA$30M, 12–15 months), which will underpin a prefeasibility study in H2/15. On a positive note, the financing was both upsized and overallotted. Not many junior mining companies have experienced demand on that level in 2014.
The underground exploration program will verify continuity of grade and thickness of the gold-bearing structures, provide confidence in the chosen mining method as it assesses underground geotechnical and hydrogeological conditions, and generate samples for metallurgical testing. These derisking catalysts will combine with an updated scoping study expected in Q4/15, based on the 2014 resource update. From a permitting perspective, the impacts of underground mining will be simulated during the underground exploration program.
We remain concerned about the usage of cyanide in Northern Ireland, and have removed it from our modeled flow sheet. In our project plan for Curraghinalt, the project produces gold through a gravity circuit and a flotation circuit, generating a gold-bearing concentrate that is shipped overseas, thus avoiding the use of cyanide at the site, which we believe would be less problematic to permit.
We have modeled the company as a takeout candidate, but only after a potential suitor would be confident that an underground mining operation can work on that scale in Northern Ireland, with a prefeasibility complete and a permit in hand.