TGR: There has been considerable unrest in Guerrero. Have you put out any notes on what's happening there?
DM: There are some security risks in Guerrero, but Goldcorp Inc. operates a mine there, and Torex is building one. Guerrero has a history of security issues, but part of our view is that as the area develops, that security risk could be reduced. We model construction starting in 2017 and production starting mid-2018. The security risks in Guerrero could be different when Timmins needs to make a production decision on Ana Paula.
TGR: What are some others that could perform in H2/15?
DM: Another one is West Kirkland Mining Inc. The company has a development-stage asset in Nevada. It's a simple heap-leach project with the potential for a relatively short timeline to production. The company is working on a prefeasibility study that should be published in Q2/15. West Kirkland's approach is likely to be for a smaller scale, higher grade mine than the one envisioned by the previous operator.
Until now, the only economic study on the project was Allied Nevada Gold Corp.'s preliminary economic assessment (PEA), and that PEA envisioned a higher throughput, lower grade project than West Kirkland. The pending prefeasibility study should provide some clarity to the market. As well, in the near-term we expect a ruling on whether the Three Hills deposit can be developed via an economic assessment, a shorter permitting process, which if used would reduce the project's time to production.
TGR: This is still a penny stock. Does the market recognize the potential at both Hasbrouck and Three Hills?
DM: We're always of the view that good projects attract capital, and this one certainly fits into that category. It is a smaller project and if the market doesn't appreciate it, we think that an acquirer might.
TGR: Tell us about West Kirkland management.
DM: CEO Mike Jones and CFO Frank Hallam have a reasonable track record with multiple successes, the most notable being Timmins West Mining before it was bought by Lake Shore Gold Corp., another company we cover. Jones and Hallam have surrounded themselves with a management team that is focused on project development, which checks off a lot of those other boxes that we spoke about earlier.
TGR: What are your targets on Timmins and West Kirkland?
DM: My target on Timmins is $2.60; West Kirkland is $0.20.
TGR: Are there other stories you would like to briefly share?
DM: There are three development or exploration stories that we've been following that are certainly worth mentioning. One that we just launched coverage on is GoldQuest Mining Corp. It's a development-stage project in the Dominican Republic famous for a couple of very good drill holes in 2012 at its Romero project. That's one that has underperformed so far this year.
One of the reasons that we think it has a good chance to change that is because it put out an optimized PEA in the middle of 2014. Our review of the previous PEA suggests that it is relatively unoptimized for the current market conditions and the deposit. We're likely to see an optimized PEA in three to six months. That optimized PEA should provide a different value proposition for GoldQuest, and it should help the stock perform in H2/15.
The other two are more early-stage exploration plays. One is Source Exploration Corp. It previously had some good drill results at its Las Minas project in Veracruz, Mexico. The company raised some money earlier this year, and that should allow it to start drilling again. We expect to see some good drill results from that project over the next three months, which should help it perform in H2/15.
And one company that we have on our watch list is NuLegacy Gold Corporation. It's an interesting play because it is a junior earning into a project. NuLegacy has enough money to get to the end of its earn-in in October, but at that point, Barrick Gold Corp. has a clawback option. NuLegacy is focused on proving a decent-sized resource. If the resource is large enough to attract Barrick, it would be interesting to see whether Barrick chooses to earn back in or simply acquire NuLegacy. In the interim, obviously, NuLegacy needs to finish its earn-in and is going to be spending money drilling. There is potential for good news flow in the next three to six months.
TGR: Do you have targets on those names?
DM: We have a target of $0.25 on GoldQuest. NuLegacy is a watch list company. Source Exploration is one we are following.
TGR: Please leave our readers with one thought on investing in a bear market.
DM: Investing in a bear market for mining equities is not only about finding quality assets that are undervalued by the market but those companies that have the ability to change the situation. Having that ability, as I mentioned, is both a function of effective management and having the necessary catalysts to change the market's view.
TGR: Thank you for your insights, Derek.
Derek Macpherson is a mining analyst at M Partners; before joining M Partners he worked in mining research for a bank-owned investment dealer. Prior to entering capital markets, Macpherson spent six years working as a metallurgist. Macpherson has a Bachelor of Engineering and Management in materials science and a finance-focused Master of Business Administration.