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Volume 16 | Number 1 | Spring 2013 Vancouver, British Columbia www.ReportOnMining.com Planning for Profits - Report on Mining edition is published four times a year by Fusion Publishing Inc. All rights reserved. Any reproduction or duplication without prior written consent of Fusion Publishing Inc. is strictly prohibited. Published by Fusion Publishing Inc. Canadian Office Fusion Publishing Inc. #317 – 1489 Marine Dr. West Vancouver, BC Canada V7T 1B8 1.888.925.0313 (Toll Free) USA Office Fusion Publishing Inc. 145 Tyee Dr. Pt. Roberts, WA USA 98281-9602 1.888.925.0313 (Toll Free) Publisher Terry Tremaine Associate Publisher & Editor Connie Ekelund
he last quarter of 2012 was likely the worst in 50 years for the junior mining sector. However, the S&P has enjoyed its best January in five years. The “fiscal cliff” has been avoided. Europe appears to be holding it together. Generally, the world’s economy appears finally to be improving. Not a moment too soon! A nice steady bull run would be appreciated by one and all. Currently, commodity prices are such that mines can be profitable even with increased costs being experienced globally. Hopefully the retail market will return in the near term providing the explorers with needed capital. Again PDAC will set another record for attendance attracting attendees from around the world. When this magazine was first included in the delegates’ kits nine years ago, 5,000 copies were required. This year 11,500 are required. Canada leads the world in the resource sector. Hopefully this year’s PDAC sets a tone of enthusiasm which spreads out into the investor community allowing the juniors to be reinvigorated. Portfolios can then bounce back with the profits required to replenish after the years of losses.
Production Manager Christie Smith Contributing Editors JElvis Picardo Don Durret PDAC Account Managers 1.888.925.0313 Terry Tremaine Maureen O’Brien Marie Richards Garry Ferris
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Cover Story 8 Eagle Hill Corporation 15 18
Commodities Outlook by Elvis Picardo How to Value Mining Stocks by Don Durrett
Subscriptions: 1 year $14.95 in Canada (+$8.00 in USA) 2 years $28.00 in Canada (+$16.00 in USA) 1.888.925.0313 x1001 info@ReportOnMining.com www.ReportOnMining.com Free Digital Subscription www.fusionpublishinginc.com/subs.html The information in Planning for Profits - Report on Mining has been carefully compiled from sources believed to be reliable, but its accuracy is not guaranteed. www.ReportOnMining.com
Spring 2013 | Planning for Profits | Report on Mining 5
he Prospectors and Developers Association of Canada (PDAC) is pleased to announce the recipients of its 2013 awards for outstanding contributions and excellence in the mineral industry. The PDAC’s prestigious awards program goes back to 1977, when the first Bill Dennis Award for prospecting success was handed out. Recipients of the 2013 awards will be honoured at the PDAC’s awards evening on March 4, 2013, at the Fairmont Royal York Hotel. The awards evening takes place every year during the PDAC Convention—the mineral exploration and development industry’s premier networking and educational event. Pretium Resources is the recipient of this year’s Bill Dennis Award for a Canadian mineral discovery or prospecting success. Pretium is receiving the award for advancing the Brucejack Property’s Valley of the Kings, which was first discovered in 2009, into a world-class, high-grade gold deposit. Since 2011, Pretium’s successful exploration program has seen the high-grade Indicated Mineral Resource Base for the Valley of the Kings grow to the current 8.5 million ounces of gold.
New Gold Inc. is the recipient of this year’s Viola R. MacMillan Award for company or mine development. New Gold is receiving the award for demonstrating leadership in management and excellence in best practices in bringing the New Afton mine to production. The New Afton copper-gold mine, located in Kamloops, British Columbia, is a large underground copper-gold deposit which is expected to produce, on average, 85,000 ounces of gold and 75 million pounds of copper per year over a 12-year mine life. The New Afton Participation Agreement with local First Nations is considered a best practice in Canada.
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Cameco Corporation is the recipient of this year’s Environmental and Social Responsibility Award. Cameco is receiving the award for its outstanding accomplishments in establishing good community relations to support its exploration and mining operations. Cameco’s five-pillar Corporate Social Responsibility (CSR) model is designed to ensure local community support and proactive environmental stewardship, and has led to recognition of Cameco as an industry leader in CSR by Aboriginal associations and industry rankings.
Windigo Catering Limited Partnership is the winner of this year’s Skookum Jim Award for Aboriginal achievement in the mineral industry. Windigo Catering is receiving the award for its achievement as a Canadian Aboriginal-run business and its service to the Canadian mining industry. Located in northwestern Ontario, the company is solely owned by Windigo First Nations and boasts an 83% First Nations employment rate. Windigo specializes in providing catering services to industry, including remote camps, and is currently providing camp management, catering, housekeeping, laundry, and light maintenance services to Goldcorp’s Musselwhite Mine at their remote fly-in camp on Opapimiskan Lake.
Daniel G. Wood is the recipient of this year’s Thayer Lindsley Award for international mineral discoveries. Daniel is receiving the award for his leadership of exploration teams responsible for numerous discoveries of mineral deposits in a variety of geologic settings, with an aggregate gross value in excess of $100 billion. Daniel retired from mineral exploration in late 2008 after 24 years with BHP and almost 18 years with Newcrest Mining Limited, leading teams exploring for a range of mineral resources in Australia, SE Asia/SW Pacific and the Americas. Their efforts produced coal, gold, gold-copper and coppermolybdenum discoveries in Australia, Indonesia and Peru, including the large Cadia gold-copper deposits in NSW.
Ronald P. Gagel is the recipient of this year’s Distinguished Service Award. Ron is receiving the award for his outstanding contribution to the mineral industry in the field of finance, and for his contributions to the PDAC. Ron’s background in mining finance, accounting and taxation has provided outstanding support to the financial activities and affairs of the PDAC, particularly through his work on the Finance and Taxation Committee. Ron was part of the team that successfully lobbied the federal government to implement the Mineral Exploration Tax Credit, and is the Chair of the Mining Industry Task Force on International Financial Reporting Standards.
Spring 2013 | Planning for Profits | Report on Mining 7
ver the past three-plus years, Eagle Hill Exploration has been diligently working to unlock the potential of the gold deposit at the Windfall Lake property, making progress every step of the way. They now stand at the edge of a major evolution as they advance from a junior explorer into a gold producer. Their flagship property is ideally situated between Val-dâ€™Or and Chibougamau Quebec. The location is noteworthy since the province of Quebec is consistently ranked as one of the top five mining jurisdictions in the world for several reasons including: government friendly policies, advanced infrastructure, plentiful skilled labour, and a century long history of mining.
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In the fourth quarter of 2011 the Company announced its first NI 43-101 resource compliant estimate then quickly doubled that based on a 25,000-metre drill program. Today the resource stands at 1.4 million ounces of gold, indicated and inferred, at an average grade of 9.26 grams per tonne with a 3.0 gram per tonne cut off.
Eagle Hill’s CEO Brad Kitchen explained, “The resource estimate includes the deposit located roughly 200 to 500 metres from surface but does not include our most recent drill program that has hit significant near surface high grade gold that may be easily extracted by an open pit operation.” Some of the best results released in January 2013 for this near surface zone include 22.85 grams per tonne of gold over 25 metres in drill hole EAG-12-318, 9.75 grams per tonne of gold over 55.0 metres in drill hole EAG-12-351 and most recently 5.53 grams per tonne of gold over 15.8 metres in drill hole EAG-12441. In addition to their intersections in Zone 27, several of the shallow drill holes returned other significant intersections from parallel mineralized lenses in the first one hundred metres below the surface.
The best results for the additional lenses include hole EAG 12-443 returning 14.74 g/t Au over 17.9 metres and hole EAG 12-444 returning 15.12 g/t Au over 4.20 metres all within 100 metres of surface. Mr. Kitchen on the import of these results, “The broadening of the gold mineralization at such a shallow depth strengthens the case for easy extraction of the deposit for this part of the Windfall Lake deposit. We can probably access this gold with our existing underground ramp. All we would need to do is extend the ramp laterally. In addition, the feasibility for an open pit operation will be investigated in more detail but regardless of which method of mining is choosen, this validates our commitment to proceed towards commercial production.”
Spring 2013 | Planning for Profits | Report on Mining 9
Mr. Kitchen on Eagle Hill’s approach, “We have always preferred to announce what we have done as opposed to pontificating about what could be. We believe we have done a good job building value in EAG in a short period of time.” Still, the junior market continues to be under pressure and as Mr. Kitchen noted, “Right now the market is giving us just $20 per ounce for our gold in the ground which is just a fraction of where some comparable companies are being valued. We have mineable high grade gold in Quebec so we hope that it’s just a matter of time until the value of EAG is more reflective of its competitors.” He went on to offer one main reason why the share price has not been able to gain traction of late, “Once the questions around our Windfall Lake Option Agreement with Noront come out of the equation, the current market uncertainty will be addressed.” Noront controls a piece of the Windfall Lake Property and is the over hanging issue for the Company at this time.
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Mr. Kitchen explained, “Since Noront could buy back the whole project for $6 million we have two options: acquire their piece or satisfy our earn in obligations at Windfall Lake and commit to gold production. Buying back Noront’s interest would be ideal but we may not be accorded that opportunity so we intend to satisfy the earn in requirements. To do that we will need a Feasibility Study, that includes a reserves statement and daily production rates. We have contracted with Stantec Consulting Ltd. and they are working around the clock to get all this in our hands by the end of the first quarter.” What that means for Eagle Hill is that Noront will no longer be a carried partner and any uncertainty around this issue will become a thing of the past. Eagle Hill has been able to easily raise capital as needed, an oft-noted issue for many juniors operating in this sector. As of February 2013 Eagle Hill had $2.5 million working capital on hand.
The eagle’s vision is four times better than a human’s. It sees opportunities others miss. Eagle Hill Exploration is about to show you what we’ve seen – A Golden Windfall.
61% increase in Indicated Resource: now at 538, 000 ounces Au at a grade of 10.05 grams/tonne 126% increase in Inferred Resource: now at 822, 000 ounces Au at a grade of 8.76 grams/tonne
EAG: TSX-V www.eaglehillexploration.com 1.604.697.5791
Mr. Kitchen discussed the reasons why Eagle Hill has been able to attract capital easily, “To start, we now have institutions following us as the interest is there for obvious reasons that include a near surface, high grade sizeable gold deposit located in mining friendly Quebec. Last December we completed a financing with two institutions and raised a total of $1.7 million. These companies conducted full due diligence on all aspects of Eagle Hill and were satisfied that the company will meet its obligations under its Option Agreement. One would think that our ability to consistently raise capital would give the market confidence in the continuation of our program.” Eagle Hill is also awaiting an updated resource calculation due in February 2013 and as previously discussed, an updated reserve calculation due out in March. What the Eagle Hill team is most excited about though is the pending funding commitment that will take the company into production. The Company is beginning to attract major institutional investors and related independent research.
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Mr. Kitchen conceded that while bullish, predicting future gold prices was not really a concern but noted that at the recent $1,650-plus level, the high grade gold deposit at Windfall Lake should be extremely economic. He detailed, “Management focuses on things we can control and that is building value in the company by developing the asset. We have accomplished this by employing the best people, the latest technology and top quality world-class partners in seeking to fully understand the nature of the deposit. I think this approach has facilitated the relative ease with which we have been able to raise capital since due diligence easily reveals that we have added value with every step taken. According to Mr. Kitchen, investors should take a hard look at Eagle Hill because of their efficient management record to date in building a strong asset in a short time. He went on to say, “We don’t hype the stock, rather, we just develop value in the property knowing that in the end, the underlying value in the asset will drive the share price. As mentioned, every drill program has hit significant high grade gold mineralization and we are not finished drilling and expanding the deposit by any means.”
Eagle Hill is continuing to de-risk the project in other ways including moving the inferred resources up to indicated and measured while also calculating the most profitable mining methods for the deposit. Another aspect to de-risking externalities is the superb relationship Eagle Hill has fostered with the local First Nations band. It is impressive that they not only work together on environmental and land issues but that Eagle Hill is just one of only a few companies that the Cree have invested their own dollars in.
In the third quarter of 2012, Eagle Hill announced the completion of a wide-ranging Business and Employment Capacity study aimed at determining the extent of the existing potential for direct and indirect economic benefit for the local Cree band. Mr. Kitchen commented about the announcement, “Thanks to the collaboration of the Cree of Eeyou Istchee and in particular the Cree First Nations of Waswanipi, Windfall Lake promises to have a positive impact on the region. In addition to providing for meaningful benefits for all stakeholders, this agreement confirms the support of involved parties in the pursuit of activities and studies necessary to enhance the value of our project.” In response, Waswanipi Cree First Nations Chief Paul Gull stated, “The Cree First Nation of Waswanipi are eager to collaborate with the mineral exploration and mining industry. We recognize that this industry has a corporate social responsibility to follow in the footsteps of Eagle Hill. It is an important step for all parties.” With gold production just around the corner, cash on hand, solid partnerships, financing near completion and Noront soon to be an issue of the past, Eagle Hill is poised to make the transition from explorer to producer. As they continue to flawlessly execute a strategy centred on adding value at every step, the share price is bound to reflect this before long. Eagle Hill trades on the TSX-V under the symbol EAG. For more information visit their website at www.eaglehillexploration.com Eagle Hill Exploration Corporation Suite 601, 999 Canada Place Vancouver, BC, Canada V6C 3E1 Phone: 604.697-5791 Fax: 604.697.0790 firstname.lastname@example.org TSX.V: EAG.V Year Hi/Low: $0.215/$0.105
Spring 2013 | Planning for Profits | Report on Mining 13
Commodities May Rebound in 2013 as Global Macroeconomic Risk Recedes Will This be the Year of Opportunistic Acquisitions? By Elvis Picardo, CFA
2012 Review – Canadian exchanges lagged as commodities unperformed ommodities as a group failed to benefit from a turnaround in market sentiment triggered by global stimulus measures, as they declined for the second successive year in 2012, even as equity markets overcame a number of headwinds in convincing fashion to register their best gains since 2009. At the beginning of 2012, two of the biggest risk factors with downside implications for the global economy were an escalation of the European sovereign debt crisis and the possibility that softening U.S. economic activity could be exacerbated by factors such as a political impasse or renewed weakness in housing. But thanks to the European Central Bank’s bond-buying program and the Federal Reserve’s successive rounds of quantitative easing in the second half of the year, European and U.S. equity indexes ranked among the best performers in developed markets in 2012. But for most of last year, commodity prices were weighed down by a slowdown in China, whose growth rate slowed to a 13-year low of 7.8% in 2012, which was well below the 9.0% pace projected at the beginning of the year. The impact of slower Chinese growth was particularly felt in areas such as base metals, where China accounts for more than 40% of global consumption. As a result, the TSX Composite (Figure 1) and TSXVenture index lagged their U.S. counterparts because of their substantial weighting in commodities. The senior index significantly underperformed the S&P 500, and has now trailed it by an average of 10 percentage points for the past two years, while the junior index fell 17.7% in 2012 after plummeting 35.1% in 2011.
Figure 1: China GDP vs, TSX and TSX Metals and Mining Index – Jan. 2012 to Jan. 2013
Wide divergence in individual commodity returns Commodities also lagged stocks by the biggest margin since 2009. On a total return basis, the S&P GSCI Total Return Index of 24 commodities barely stayed in positive territory in 2012, with a scant 0.1% return, while the MSCI All-Country World Index (a benchmark for global equities) generated total returns of 16.9%. The Reuters CRB commodity index retreated 3.4% in 2012, after a decline of 8.3% in 2011. The London Metal Exchange index of six industrial metals staged a modest rebound last year, gaining 4.5% after a 21.5% decline in 2011. Returns for individual commodities varied widely, especially in the agricultural sector where divergent factors led to record prices for some crops and huge declines for others. Soybeans and corn recorded double-digit gains in 2012 to reach new records, with wheat prices also up strongly, as U.S. farmers endured the worst drought conditions since the 1930s and dry weather affected output in Europe and Australia. On the flip side, Arabica coffee futures plunged 37% as a record harvest in Brazil boosted surplus global inventories, while raw sugar futures slumped 16% on excess supply. Spring 2013 | Planning for Profits | Report on Mining 15
Among industrial metals, lead was the best performer in 2012 with a 14.5% advance, and copper – the widely watched proxy for global growth – rose 6.3% after a 22.7% plunge in 2011. Gold gained 7.1% as it rose for the twelfth consecutive year, the longest streak since the 1920s, and silver advanced 9.0%. In the energy sector, crude oil fell 7.1%, while natural gas rose 12.0%. The mixed performance of commodities last year understates the real extent of risk aversion in the first three quarters of 2012, as investors flocked to dividendpaying blue chips and other yield-bearing investments. The challenging environment for junior producers for the second successive year resulted in a sharp decline in financing activity on the TSX-Venture exchange. According to the TMX Group, total financings on the TSX-V fell 41.0% to $5.98 billion in 2012, from $10.1 billion in 2011. IPO financings plunged 48.5% to $149.9 million, while supplemental financings fell 41.7% to $4.0 billion and secondary financings decreased 38.8% to $1.83 billion. The average financing size declined 27% to $3.2 million, as the total number of financing deals fell 18.1% to 1,888. However, total financings on the TSX rose 23.4% to $50.5 billion, led by a 46.1% surge in secondary financings to $28.9 billion.
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In our opinion, 2013 may well turn out to be the year when commodities finally respond to the global flood of liquidity, especially if macroeconomic risk continues to recede and the Chinese economy gets back on the growth track. A broad rebound in commodity prices is quite possible this year, which in turn could lead the TSX-Venture index out of the red and into the black for the first time in three years. Global economy should continue to recover in 2013 In its World Economic Outlook report published in October, the International Monetary Fund (IMF) forecast that the global economy will grow at a 3.6% pace in 2013, up from about 3.3% last year. The IMF expects emerging market and developing economies to continue to lead global growth, with an overall growth rate of 5.6% this year; output is expected to remain sluggish for the advanced economies (overall growth rate of 1.5% forecast for 2013). But the global environment seems to have changed markedly for the better since then. After some last-minute jitters, the New Year’s Day deal between the Democrats and Republicans averted the dreaded fiscal cliff in the U.S. The Federal Reserve’s annual stimulus of $1 trillion should provide a tailwind for the U.S. economy, especially as housing and employment already seem to be well on the recovery path.
In Europe, although the economy remains mired in a shallow recession, the European Central Bank’s stimulus measures have greatly alleviated concerns about a disorderly and disastrous break-up of the Euro-zone. Confidence about the European Union’s ability to survive in the short-term and prosper in the long-term can be gauged by the euro’s 10% appreciation against the U.S. dollar since mid-July, as well as the decline in sovereign bond yields of embattled nations such as Spain and Italy. China also appears to be in recovery mode, with several recent data points suggesting that monetary easing and local government spending is fuelling a rebound from a seven-quarter slowdown. Reports released in early January showed that China’s exports in December increased 14.1% from a year ago, while aggregate financing surged 28.4% to 1.63 trillion Yuan. Overall, assuming that the fiscal issues in Europe and the U.S. continue on the path to resolution, the global economy could potentially surprise to the upside in 2013 as the Eurozone stabilizes and China recovers. Commodities would benefit from this improvement in the global macro environment. In our opinion, the continued dissipation of global macro uncertainty contrasts with the rising risks to the domestic Canadian economy posed by a likely correction in housing and record household debt levels (discussed in detail in our 2013 Outlook report released in December). Commodity themes for 2013 1. Risk appetite should improve: Financial markets have been wracked by periodic bouts of risk aversion over the past couple of years, which is one of the primary reasons for the underperformance of commodities. We believe risk appetite should improve this year, and although the pendulum of risk appetite will continue to oscillate, its gyrations may not be as wide as they have been since 2011. 2. Will this be the year of opportunistic acquisitions? Mergers and acquisition activity may well rebound in a big way in 2013. With numerous stocks trading at deep discounts to their net asset values, aggressive acquirers may try to scoop up their rivals at attractive or even bargain prices. One such deal that is currently playing out is First Quantum Minerals’ hostile bid for Inmet Mining. On January 9, First Quantum took its $72 per share offer in cash and stock for Inmet directly to Inmet’s investors, after twice being rebuffed by Inmet’s Board. On January 14, Alamos Gold announced an unsolicited takeover bid for Aurizon Mines of $4.65 in cash and stock. While that offer represented a 36% premium to Aurizon’s previous closing price, it is 45% below Aurizon’s record high of $8.48 reached in November 2010. www.ReportOnMining.com
Also on January 14, Russian-owned state miner ARMZ and its Effective Energy affiliate – which together own 51.4% of Uranium One – unveiled an offer of $2.86 per share for the remaining shares of Uranium One. Although that offer represents a 32% premium to Uranium One’s 20-day weighted average price, it is almost 60% below Uranium One’s record price of $7.02 reached in February 2011. We believe that this increased M&A activity may be focused largely on mid-sized producers or companies that are on the verge of production. However, the resultant increase in valuations may trickle down to the small-cap sector and provide a floor to well-run and efficiently managed companies in this space, in our opinion. 3. Gold stocks may rebound from depressed levels: Gold stocks were affected by a plethora of negative factors in 2012 – earnings disappointments, spiralling costs, lower grades, rising political risk. The TSX Global Gold index slid 16% last year as a result, and the BMO Junior Gold Index ETF (a proxy for small-cap gold stocks; Figure 2) declined 17%. In our view, gold stocks could rebound this year as cost pressures ease and M&A activity in the sector picks up. Note that forecast earnings growth of 30% for the materials group in 2013 is expected to be led by gold and silver producers. Figure 2: Spot Gold vs. TSX Global Gold Index and BMO Junior Gold Index ETF – Five years (Weekly)
4. A better financing environment: We are optimistic about the prospects for an improved financing environment in 2013, fuelled by a recovery in risk appetite, as well as higher commodity and stock prices. With an abundance of investment choices in the small-cap space, discerning investors may prefer to stick to the best-run and most compelling opportunities here. (Elvis Picardo is Vice President – Research, and a strategist and analyst at Global Securities Corporation in Vancouver. Mr. Picardo or a family member have long positions in the following stocks mentioned in this article – Aurizon Mines, Uranium One. The opinions expressed herein are his own.) Spring 2013 | Planning for Profits | Report on Mining 17
How to Value Mining Stocks By Don Durrett This is a condensed version of Chapter 10 from my book: How to Invest in Gold & Silver. The complete chapter can be read on my website: www.goldsilverdata.com from the link Mining101.
he difficulty in investing in gold and silver stocks is understanding how to value a mining company. I know, because when I started out I didn’t have a clue and made many investment mistakes. Now I make fewer mistakes and I am much more confident that I am making the right choices. The starting point for valuing a stock is collecting and analyzing data. You need a checklist of information you are interested in knowing. This is how you find the red flags which nearly every company has to some extent. A short list of these data points include the stock price, market cap, share structure, amount of resources, ore grade, location, management, timelines/guidance, growth potential, cash/ debt situation, and valuation. You need these data points and information to use a systematic approach to valuing a company. Moreover, you need to look at all of the data points before you will understand the valuation of a company. There are really only two things to do when you analyze a company. First you want to identify any red flags, and second you want to give it a future valuation. You then combine these two factors to arrive at a rating, which is the upside potential of the stock. The purpose of looking for red flags is that you will use them to adjust down the future valuation. In this short article, I will show you how to find the red flags and how to value a stock. I will also show you how to arrive at a rating, which you then use to identify the best investments. I invented this ten step rating system through years of experience, and it works very well at finding undervalued stocks. When I hear about a stock, I use my systematic approach to determine a valuation, which is defined by a rating. The rating represents the upside potential of the stock. If you use this ten step method, you will have a good way to filter out stocks that you don’t want to own. Also, once you use this system, when you analyze a company, you will know what to look for. 18 Planning for Profits | Report on Mining | Spring 2013
This system is aimed at identifying highly undervalued gold and silver mining stocks. My personal goal is to invest in stocks with ratings of 3 or higher. A 3 rating is a potential 5 bagger. My belief is that it is currently better to invest in ETFs, such as SIL for silver miners or GDXJ for gold miners, than companies with ratings of 2.5 or less. In the future, if SIL and GDXJ appreciate significantly in value, then 2.5 rated stocks will become more attractive. However, I never envision investing in 2 or lower rated stocks, because there will always be better opportunities in ETFs or mutual funds. Okay, let’s begin. 1) Properties / Ownership You want a company with at minimum a potential flagship property (two million oz. gold, or 40 million oz. silver). This is the most important criteria for picking stocks. All of your mistakes are going to be from companies that do not find flagship (or potential flagship) properties. If you invest in undervalued companies with flagship properties, you will be rewarded. It’s okay to invest in a few companies that have small properties if the valuations are very attractive, but don’t make it a habit. Focus on flagships, because you are after growth and small properties are not generally conducive to growth. Check the properties for growth potential. Ideally, you want to find a growth-focused company that will leverage cash flow from a flagship property to expand production. Future cash flow is what we are after, and large properties have the potential to provide high cash flow. Properties that can add production ounces and resource ounces are what create increased cash flow. This is what will drive the stock price higher. It’s okay to invest in a company with only one property if the valuation is attractive. However, in order for a company to have significant growth potential it will need to have a pipeline of projects, or exploration potential. Thus, if you can find a company that is highly undervalued and has several pipeline properties, it is usually better than a single property. This gives them a pipeline of potential future mines that are likely not valued into their current stock price. This increases the upside potential of the stock. www.facebook.com/reportonmining
When you analyze a company’s properties you want to look at several things. How many ounces are in the ground? What percentage is inferred? What is the ore grade? What is the cash cost of mining the deposit? What is the recovery rate? Where is it located? What is the impact of the location? What is the current exploration program? What is the potential resource size? What is the company’s plan for this property? Are they giving guidance? What is the size of the mineralization zone? How much of the property has been explored? As you can see, there are a lot of questions to ask, and you need to answer them all to get a clear picture. In addition to checking out the properties, always check to see if they own them 100%. It’s not a requirement that they own 100%, but if it is less, then you need to reduce the valuation. I usually check their regulatory reports to find out their ownership stakes (Canadian traded stocks can be found at www.sedar.com and American traded stocks can be found at www.edgar.com). It is quite common in the mining business to option properties at a percentage (known as joint ventures). Ideally you want companies that own their properties and can leverage the increasing gold/silver price for substantial profits. I generally am comfortable if they own at least 75% of their properties, anything less than that and I feel like the upside potential is constrained. With project generators you are going to get much less than 75% ownership. However, they can own dozens of properties which makes small ownership interests acceptable. You want long life mines because once a mine stops producing, cash flow dries up. This will have a deleterious effect on the stock price. For this reason, you need to check the mine life of each project/deposit. Ideally, you want to have at least a ten year mine life. This will ensure that the cash flow multiple is not severely impacted. For instance, if you invest in a company with a single project that has a short mine life, the cash flow multiple (discussed in step ten) is likely to remain below three and perhaps as low as 1x the market cap. 2) People / Management Team 3) Share Structure 4) Location 5) Projected Growth 6) Good Buzz / Good Chart 7) Cost Structure / Financing 8 ) Cash / Debt 9) Low Valuation 10) High Rating www.ReportOnMining.com
The final rating is a combination of a formula and a final analysis. The analysis is a judgment call on your part and will decide how much you like a company. Generally, a low valuation (step 9) and relatively few red flags (steps 1 – 8) should lead to a high rating. You can use this ten step system to rate all of the companies that you analyze. However, if you cannot estimate future reserves, then you have to use a different method to obtaining a rating. I have devised my own method using my experience. For companies that I cannot estimate future reserves, I do not use any valuation formulas. Instead, I use steps 1 – 8 and estimate a rating. These ratings are nearly always below a 3, except for some Project Generators. Ratings are a snapshot in time, when an analysis is performed. They should be updated at least annually, or when a significant event occurs, such as an updated resource estimate, a feasibility study is released, production begins, or an unexpected event that impacts that value of the stock. Rating Formula: Future Reserves x Future Gold Price ($2,000) x 15% = Future Market Cap (Future Market Cap - Current Market Cap) / Current Market Cap = Future Market Cap Growth I use potential future reserves (which I determined in step 9) and an estimated future gold or silver price, which I multiply by 15%. This is my theoretical future Market Cap. Lastly, I divide the current fully diluted Market Cap by the theoretical future Market Cap and arrive at potential Market Cap growth as a percentage. Using this theoretical Market Cap growth, I give the company a rating (see rating table next page). Currently, I only invest in companies that have a rating of 3 or higher, which is at least a potential 5 bagger. Thus, the theoretical growth must be at least 500% or higher for my investments. Many companies today have theoretical Market Cap growth targets above 1,000%. However, I do not give these companies 5 star ratings unless there are no red flags from steps 1 – 8. My future time horizon is 3 – 5 years. Thus, I am expecting the theoretical growth to occur during this time horizon. However, there are many factors (red flags) that can impact this potential growth target. For instance, some of the red flags include location issues (such as a lack of infrastructure, political risk, permitting, native issues, etc.), weak management, legal issues, capex requirements, production costs, debt/cash issues, hedging, share dilution, and a lack of growth potential. Spring 2013 | Planning for Profits | Report on Mining 19
The final analysis is to reduce the potential theoretical growth based on the red flags. If a company has a potential growth of 1000%, but has a few red flags then you can’t give it a 4 rating as a potential ten bagger. The question becomes how much are you going to reduce the rating? Are you comfortable that it will become a 5 bagger? If so, then you can give it a 3.5 rating. Are you comfortable that it has the potential to be a 5 bagger? If so, then you can give it a 3 rating. After you begin rating companies, it becomes fairly easy to determine what they should have. If you are not sure, then move them down a rating level.
Example Rating: Let’s do a rating of Canadian Zinc. Current Market Cap Fully Diluted: $77 Million (January 4, 2013) Projected Future Reserves: 50 Million oz. Projected Price of Silver: $100 50,000,000 oz. x $100 x 15% = $750 Million (Projected Future Market Cap)
Rating Chart: 1 1.5 2 2.5 3 3.5 4 4.5 5
My point is to not overlook the 3 rated companies. It is smart to have a portfolio that is a mixture of strong 3 rated companies and more speculative higher rated companies.
Lowest Rating Potential 2 Bagger Potential 3 Bagger Likely 3 Bagger Potential 5 Bagger Likely 5 Bagger Potential 10 Bagger Likely 7-8 Bagger Likely 10 Bagger
After you have a list of companies with ratings, you will have to decide which companies you like the best. Sometimes you will prefer a company with a 3 rating over a company with a 3.5 rating because of the timeline risk for the full valuation of the stock. Often a 3 rating company will appear much stronger in the near-term than one with 3.5 or 4. However, over the long-term, the higher rated companies will likely outperform the lower rated ones, but in the near to medium term, the stronger lower rated companies will usually outperform. Often these companies have lower ratings because a lot of the value is already built into the stock, and not because they are not strong companies.
20 Planning for Profits | Report on Mining | Spring 2013
($750 Million – $77 Million) / $77 Million = 874% (Projected Market Cap Growth) Final Analysis: The theoretical market cap growth target is 874%, or a potential 8 bagger. They deserve a rating of 3.5, because they are a near term producer and should be a 5 bagger in the next 3-5 years. It would not be wise to give them a 4 rating, because they are currently only permitted for 1,000 tons per day, which will limit production to around two million ounces per year. This limitation could cause them to produce at a lower rate than their future reserves, and even if they increase their permit, it will take them several years to ramp up production to match their reserves. Also, production will not begin until 2014 or 2015, and that adds risk. Another red flag is their lack of pipeline projects, because this is a single mine property. For these reasons, some people might rate them as a 3 instead of a 3.5, and I couldn’t argue with that. However, I gave them extra credit for rising silver prices and being based in Canada. You have to use your judgment on what you think a company can achieve. If they were planning to produce four million ounces by 2015, then I might rate them higher.
1 Vanco 8-19, 2013 uver c onven tion c entre
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