Good Potential in Junior Gold Miners

Commodities / Gold & Silver Stocks Jul 27, 2010 - 03:03 AM

By: The_Gold_Report

Could gold hit $1,500 by year-end? Ubika Research Cofounder and Analyst Vikas Ranjan thinks so. In this exclusive with The Gold Report, Vikas tells us he's pretty bullish on the yellow metal and lists a handful of gold plays he believes have strong potential for serious gains.

The Gold Report: Vikas, in a July market overview you said: "The world economy is certainly at an interesting juncture. On one side, markets are fretting about the end to government stimulus measures and the likely impact on economic growth, while at the same time remaining concerned about rising government debt and deficits." Where does that leave us?

Vikas Ranjan: We really have a situation that is mixed. It seems to us that the world is divided into two camps. First are the Western countries that have debt fatigue. They are keen to get the deficit and debt down and are facing weak domestic demand. Second are the emerging countries like Brazil, China and India, which are growing fast and do not seem to have that problem.

Overall, we feel most of the developed nations in the Western world will look to reduce deficits and debt. However, we would say the U.S. is an exception because of its grim unemployment conditions and very sluggish economy. It still believes in expansive monetary and fiscal policies. The emerging economies will continue to grow at a relatively fast clip. So, in the end, that will leave us with a world economy that will grow but at a sluggish pace for maybe the next year or so.

TGR: So, you believe growth in Brazil, Russia, India and China (BRIC) and other emerging economies is going to be enough to overcome the debt issues related to Europe and the American economy?

VR: To a certain extent, yes. As I stated earlier, the emerging economies' growth certainly provides a cushion against the headwinds capital markets face today from the debt crisis in Europe and sluggish U.S. economy. But, at the same time, we do not believe it will be enough to contain the damage to the demand situation in these wealthy countries. Emerging countries will pull up the world economy to a certain extent, but we see the danger of sluggish demand in developed countries, including the U.S., dragging down the overall world economy. That will be felt even more so in the next 12 months; but after that, we believe growth in these developed countries will pick up and that the emerging markets will continue to grow at a faster clip. Our outlook for 2012 and beyond is much better than what we see for 2011.

TGR: In terms of growth, what sort of percentage are we looking at?

VR: In the U.S. and Canada, 3% would be a decent rate of growth; but the way things are looking right now, it will be trending just above 2% in these countries. Not a huge disaster, maybe half a percentage point lower than the trendline. For other developed countries, especially Western European nations, the growth rate could be even lower than that. Emerging economies, however, will grow at a faster rate and that will put the global economic rate in the 4%–4.5% range in 2011 and beyond.

TGR: What sectors are going to perform well in this burgeoning economy that you foresee in 2012 and beyond?

VR: The secular trend, in terms of emerging markets growth, remains intact, which means the commodity markets will consistently outperform and continue to grow. Within commodities, we are particularly optimistic about precious metals and energy. If you're looking at sectors, particularly those sectors that have been very volatile, they will probably level out and then take off again from those levels. Apart from that, the financials should also do well once consumer spending kicks back in with an improving employment situation, particularly in the U.S., and demand for credit picks up.

TGR: In another Ubika research report, you quote Aram Shishmanian, CEO of the World Gold Council, as saying, "With the global economic recovery still burdened by high and rising debt levels in Western economies, the outlook for gold as a liquid reliable asset class and store of wealth remains highly favorable." Where does Ubika stand on gold as currency?

VR: Actually, we hold similar views. We also believe many investors view gold as not just a commodity but a store of value and an asset class. We are actually surprised by gold's strength in an environment where inflation continues to be low. As you know, gold has traditionally done well in high-inflation situations, but not as well in low-inflation situations. Strong gold in these low-inflation environments suggests to us that investors will continue to seek refuge in gold as long as capital markets remain uncertain.

Our outlook on gold is pretty bullish. In the short to medium term, we believe that it is proving to be more resilient than previously thought. Actually, if you look at the correlations between the U.S. dollar and gold, typically that used to be in reverse, but of late they have been moving in tandem; when the U.S. dollar rallies, gold continues to be strong. There are very strong fundamentals that support the positive outlook for gold and that will continue to be the case for the foreseeable future.

TGR: Would you care to be more specific in terms of your gold price forecasts?

VR: Well, forecasts are always very difficult to make; but, looking at the trendline, it would not be surprising to us if gold ends up around the $1,400–$1,500 range by year-end. Beyond that, it will probably be finding similar support levels for sometime before making another move, depending upon the economic environment.

TGR: How does Ubika recommend gaining exposure to gold?

VR: There are various ways to get exposure to gold. Obviously, the easiest way is to buy some bullion, which not everybody can do, and there are investment instruments with exposure to gold. The easiest method that comes to mind is buying exchange-traded funds (ETFs) that are linked to gold. For savvy investors willing to take more risks, we believe directly buying stocks of gold producers or explorers is definitely a good way to go. In our opinion, junior gold explorers offer compelling potential because their values have not caught up with gold's gains. Various gold junior exploration companies are very undervalued and not well known, presenting very compelling opportunities.

TGR: What are some of the companies you're following?

VR: We are following quite a few companies; in gold, we have a particularly strong portfolio. Some of the notable names include: La Quinta Resources (TSX.V:LAQ), VG Gold Corp. (TSX:VG; OTC:VGGCF; Fkft:VN3), and NWM Mining Corp. (TSX.V:NWM; NYSE:NWMMF), Rye Patch Gold Corp. (TSX.V:RPM), Eagle Hill Exploration Corp. (TSX.V:EAG) and Atlanta Gold Inc. (TSX.V:ATG).

TGR: One company that you mentioned, VG Gold, just hit about 31 grams gold over about 25 meters on its Paymaster property in Northern Ontario. For our readers who don't know, VG stands for Visible Gold; there's clearly some visible gold in that drill core. Tell us about that company.

VR: VG Gold is one of the companies we follow and have followed for a long time; and, as you rightly said, they had a very interesting drill result recently. All of VG Gold's properties are located in Timmins, Ontario, which is one of the world's best gold-producing zones. The key focus for VG Gold is Paymaster, which it optioned from Goldcorp Inc. (NYSE:GG; TSX:G). There was a huge drill result that returned almost an ounce of gold per ton over 25 meters. That provides evidence for a strong gold-mineralized system, typical of porphyry-system mineralization, which is what we believe the West Paymaster property has. The property shows near-surface mineralization amenable to open-pit, bulk-tonnage mining and also strong underground-mining potential.

This property is situated very close to Goldcorp's Dome Mine, which so far has produced over 17 million ounces of gold. Other discoveries have been made in the area, including one by West Timmins Mining Inc., which was acquired this year by Lake Shore Gold Corp. (TSX:LSG) for more than $400 million. We believe VG Gold has similar potential; based on our research and analysis, we think it could be one of the few junior resource companies with the potential to break out and provide the types of returns investors crave. The company has three other high-potential properties in the same area. It already has an NI 43-101 compliant 1.2 Moz.-gold resource and at least two properties are fully permitted for production. We believe it has probably drilled less than 20% of what is available and has the potential to develop multimillion-ounce gold resource base. We are watching that one very closely.

TGR: And that's in Canada. It doesn't get much safer.

VR: Yes, all the properties are near Timmins, in Canada, which has very good infrastructure and a system of mining financing, as well. That really helps junior exploration companies.

TGR: Another company you mentioned, La Quinta Resources, recently shuffled its management. It got out of the Congo, has two "new" old properties in Nevada and "new" old management. Tell us about that one.

VR: La Quinta is another interesting junior gold explorer that we recently added to our research portfolio. The company is focused on its Easter property in Lincoln County, Nevada. A little bit of history—La Quinta did have an exploration project in the Congo and has since scaled it back, which we believe was a good decision because it's not easy to operate in challenging countries like the Congo.

Now La Quinta is totally focused on Nevada where both its properties are; but the focus is the Easter property, which has a significant exploration history. La Quinta recently announced an NI 43-101 compliant resource estimate, which outlined about 101,000 ounces of gold in the indicated category. That is very good, in our opinion.

What we really like about La Quinta is it acquired this high-potential property at very compelling terms and has been putting together an exploration plan that, I believe, can expand the resource base significantly. Obviously, that would be very good for shareholders.

TGR: And the man driving that is Walter Martin, who was a director and is now La Quinta's president. He's a geologist and has been in the industry quite a long time. Tell us a bit about the management changes and subsequent change of focus.

VR: That's a very good point. There were significant management changes after the company decided to scale back from the Congo. Glen Watson, who is the CEO, took over the company. In his previous role, he was on the corporate development side but he's also one of its founders. He decided to take hold of the company and refocus it, and we believe he has done a very good job. He has started to attract good talent, including Walter Martin, and other people on the board and advisory team. Walt has significant experience in mining, especially in the area where the property is, and in U.S. gold exploration. He is now leading the exploration effort. La Quinta also recently attracted Mark Abraham, a geologist with more than 30 years' experience with companies like Agnico-Eagle Mines Ltd. (NYSE:AEM;TSX:AEM) and Placer Dome (purchased by Barrick Gold Corporation (NYSE:ABX; TSX:ABX) in 2006). They have a good team on the technical side and business/financial side. I think that bodes very well for the company.

This is a good example of investors being able to get exposure to gold at a low entry point and how some junior gold explorers can provide strong potential for growth. La Quinta is at a really low valuation stage simply because it is kind of re-launching itself with this new property. An investor could see some growth potential as the company carries out exploration in 2010 and beyond. And, if it succeeds, in that exploration program the value could be very rewarding.

TGR: What about NWM Mining? One of your research reports said it's "right at the inflection point of the value curve, which can substantially reward its shareholders." Please explain that.

VR: What we meant is that we believe the NWM story is relatively unknown to many investors. This is not an early stage exploration company; it has 370,000 ounces of gold in the proven and probable category—it's not a resource, now it is reserve.

The company is well financed, close to small-scale production and it trades at a really low valuation. We believe that will likely change as the company implements a new 25,000-meter drill program. NWM has the potential to substantially improve the current reserve estimate by year-end. We believe NWM has the potential to produce up to 50,000 ounces of gold within two years.

TGR: 50,000 ounces annually?

VR: Exactly. It can use cash flow to keep exploring and continuously increase the resource base—that's another advantage. Something comparable would be Capital Gold Corp. (TSX:CGC; NYSE.A:CGC; Fkft:CGU), which mines in the neighborhood of NWM's property. It currently produces 60,000 ounces of gold from nearby El Chanate gold mine and has a market cap of $184 million. NWM's market cap is about $20 million. Just think of that! We believe investors could do well if they have exposure to this company after this stage.

TGR: There's also some copper in NWM's property, right?

VR: Yes, there is some but this is a primarily gold company. But because that ore body is copper-rich, they are using a particular processing method that has been proven very successful in extracting gold from ore bodies with a complex copper composition.

TGR: Yes, the ore at NWM's project in northwestern Mexico seems to be a little difficult to process. They are using a sulphidization acidification recycle thickening (SART) plant. Do you think they have a grasp on that?

VR: We think they have a good system in place. That SART program has been proven to be very effective, and it's actually more environmentally friendly than other programs to extract gold from those types of copper-rich ore bodies. Companies are already using it successfully.

TGR: Any other companies?

VR: Another company we like is Atlanta Gold, an Idaho-based gold exploration company. Its main focus is its Atlanta Gold project in Atlanta City, Idaho. Again, this is a company that has a very strong management team, an internal NI 43-101 compliant resource and near-term production potential.

TGR: What is the resource?

VR: Based on the internal NI 43-101, the current resource is roughly 475,000 ounces of gold in the measured and indicated category. They have an intensive drilling program going on right now—two drills are working full time—and the results should provide short-term catalysts. They also have a plan to move to small-scale production very soon.

TGR: What is the timeline on that?

VR: Based on our discussion with management, in two to three years they will start producing 40,000–50,000 ounces of gold while they continue to explore. Mind you, this property is at a site where old mines existed; so, it is easier to create an onsite processing facility there. The Atlanta Shear Zone, where its current exploration program is focused, is open along strike and at depth; and, based on past drilling data and current and future drilling plan, we believe the company has potential to develop 3+ million ounces of gold at this property.

Another gold company we follow is Eagle Hill Exploration, which is a Quebec, Canada-based company. This is in the Val d'Or Mining District, a very famous mining camp in Canada; the property is called Windfall Lake Property.

TGR: Right, this is the former Noront Resources Ltd. (TSX.V:NOT) property.

VR: Exactly, Windfall used to belong to Noront until recently. Eagle Hill acquired Windfall and, in our opinion, got it at very compelling terms—only $3 million and I believe there is a royalty. This is a property where Noront spent more than $22 million in exploration, so there is a rich history of exploration data and knowledge Eagle Hill is using. They had a spectacular drill hole in March, when they got 14.52 gpt over 52 meters. That shows strong evidence of mineralization, gold mineralization, and for open-pit and underground mining. There is potential for higher-grade gold at depth. Eagle Hill started Phase II of its exploration program in June, and we believe the goal is to expand the resource and confirm a big deposit there.

TGR: We don't usually talk about potash in The Gold Report, but you have a target price on Allana Potash Corp. (TSX.V:AAA) of $1.02 and it's trading at around $0.30. Your risk level on all of these companies is high, but what do you see in Allana that garners such a high target?

VR: That's a good question. Allana is a potash exploration company with a project in Ethiopia. The reason we have a high target on Allana is due to its potential and the resource estimate. This project was drilled probably 45 years ago and has just been sitting there. Obviously with potash prices on the upswing in the last couple of years, the project garnered some interest.

Allana just started Phase I drilling at the Dallol potash property and has been receiving very good results. There is strong evidence of near-surface mineralization; the deposit seems to be open in the eastward direction and the company is finding evidence of new zones of potash, so the resource base could be expanded. Now, one of the reasons we like the company is because it has the potential to be one of the lowest-cost potash producers in the world. The reason for that is because it's in the Ethiopian desert, so the climate is very dry and hot. Allana could use a potash-processing method called solar evaporation, which will bring down the operational costs as it uses less energy. And because the potash seems to be near the surface, it is amenable to lower-cost open-pit mining.

Allana has done a good job of putting together other pieces of the puzzle by entering into a strategic partnership agreement with China Mineral United Management Ltd., a Chinese mining investment group closely associated with one of the largest fertilizer companies in China. China Mineral has agreed to fund up to 45% of the project costs as Dallol moves toward production. And Allana has de-risked the project to a large extent. They have 105 million tons of potash in an NI 43-101 resource. We expect them to at least double that as they continue drilling.

TGR: Our readers might think Ethiopia is something of a jurisdiction problem, but perhaps a Chinese partner offsets that somewhat. Can you comment on that?

VR: We acknowledge the risk is higher when you operate in places like Africa, but not all countries within Africa are the same. We believe Ethiopia is a fairly stable and mining-friendly jurisdiction. There has been lots of interest from Chinese, as well as Indian, companies. And the big advantage for a potash project in Ethiopia is it's closer to India and China, which are two of the largest consumers of potash—and potash is a heavy fertilizer to ship. If you're sending it from Ethiopia, it takes a lot less time and cost to get there as opposed to sending from Saskatchewan or New Mexico.

TGR: What about some other gold juniors that offer investors some exposure to gold?

VR: We like Rye Patch Gold, another compelling Nevada-based junior in a new gold trend called the Oreana Gold Trend. They were one of the pioneers in discovering that trend, which has an NI 43-101 compliant resource estimate of close to 4 million ounces of gold and gold equivalent and 1.2 million of that is in the indicated category. The company trades at a very low valuation based on the in-situ valuation and compared to its peer group; $15 million is the market cap.

Once again, I would say this is a classic case of the market not being fully aware of this company's potential. It has excellent properties in a high-profile place like Nevada and a strong management team. The CEO comes from Placer Dome, which was acquired by Barrick Gold Corp., and other management and board members have been in this business a long time. The company is focused on building a large resource base and has been very successful in doing so at a very low cost until now. The fact that it accumulated close to 4 Moz. gold within a few years and spent only $1.25 to find each ounce speaks volumes about the proficiency of its exploration team. We believe the company's strategy of building a large gold reserve that can be economically mined could be very attractive to larger producing miners in the area and that an investor could do well with exposure to this company at this stage.

TGR: Are there any thoughts you would like to leave us with?

VR: I would just say the markets seem choppy currently, and that is typical in the summertime. We believe the outlook is not as grim as a lot of people would want us to believe. We do not see strong potential for something like a double-dip recession or capital-market collapse as was the case in 2008. Yes, there will be volatility in the market, sluggish growth and probably lower returns than we anticipated maybe six months ago; but we still see potential in the market, and especially good potential in the junior gold sector.