TGR: Rio Alto climbed well above $3/share in September as rumors of an impending takeover carried the share price higher. Were those rumors unfounded?
AK: They're never unfounded, but during that period Rio Alto was consolidating its Sulliden Gold acquisition. Once investors understood what the acquisition was all about, we started to see the share price appreciation. Sometimes a well-timed acquisition, even though investors aren't expecting it, can really reinvigorate a company's prospects.
TGR: Primero increased production at Black Fox by 30% in Q3/14 versus Q2/14, but the mine still requires capital improvements that will likely siphon money away from the development of Primero's Cerro Del Gallo project in Mexico. Is Black Fox worth it?
AK: When we look at Black Fox there is a large capital requirement and a longer runway to get that project to where Primero wants it to be. Primero is committed to moving that project forward and there are very good indications that the mineralized structures that host gold at Black Fox continue at depth. Brian Quast, the intermediate analyst here at BMO, would point out that the real driver for Primero at this point is very much San Dimas and the growth opportunity there.
TGR: Another company you listed, B2Gold, has received some criticism for some recent takeovers but consensus on the Street seems to be that the Papillon Resources Inc. acquisition will be accretive. Your thoughts?
AK: That's our view. The Papillon Fekola gold project in Mali is a good quality asset. It provides increased geographic concentration for the company and certainly has the potential to be an accretive acquisition.
TGR: What about the developers and explorers?
AK: There are some interesting themes taking place in the junior space. We have a lot of data from junior takeovers dating back to the mid-1990s. One thing that is apparent is that the actual value of junior companies (using enterprise value per ounce of reserves) has never been cheaper—even in the context of today's gold price. We see a number of junior companies with credible assets that will be developed at some point and those companies are going to be acquisition targets.
TGR: What are some likely names?
AK: Lydian International Ltd., one of the companies that I cover, recently received its final permit to construct a mine at the Amulsar project in Armenia.
Romarco Minerals Inc.: even though Romarco has seen a delay in permitting at its Haile gold project in South Carolina, it's only a matter of time. My view is that the permit will come sometime in 2015.
Rubicon Minerals Corp. is a junior company that's constructing the Phoenix gold mine in Red Lake, Ontario, that will enter commercial production in 2015.
And Guyana Goldfields Inc. is building the Aurora gold project in Guyana. Quite a number of junior companies offer good opportunities. I believe we're moving to a stage where consolidation will be well received by investors.
TGR: Leave us with one thought that precious metals investors can chew on.
AK: One thing that I believe has been forgotten is that smart business decisions by both mining companies and junior exploration companies are at the heart of opportunity for investors in this sector. For instance, it was a smart decision by the management team at Aurelian Resources Inc. to say that its shareholders would be better off in Kinross Gold Corp., a larger entity. A lot of value was created for shareholders through that deal. Did political issues sideswipe the project over the last couple of years? Absolutely, but from a junior perspective that was a wise decision for Aurelian shareholders.
The sector needs to get back to the key principles of opportunity. One of them is a healthy transactional environment for precious metals companies. That requires acquirers to see that they can make acquisitions that are accretive to their businesses, as well as junior company management teams that see acquisition as part of their business strategy. We've diverged from that. My hope is that we'll move back into an environment where value can be created for shareholders.
TGR: Thank you for your insights, Andrew.
Andrew Kaip is managing director of mining equity research at BMO Capital Markets. Previously, he worked as a mining analyst at Haywood Securities, most recently covering gold and silver junior exploration and mining companies. Prior to that, he served as a project and consulting geologist for more than 10 years. Kaip received his Bachelor of Science in geology from Carleton University and his Master of Science in economic geology from the University of British Columbia and is a professional geologist.