The Gold Report: Do you have a price forecast for gold and silver for 2015?
Heiko Ihle: Our long-term prices for gold and silver are $1,200/ounce ($1,200/oz) and $17.50/oz, respectively. We recently lowered those prices from $1,300/oz and $20/oz given current market prices.
TGR: What are the essentials of your investment thesis for equities in the junior gold space?
HI: We pay a lot of attention to three important things: location, management teams and the viability of the asset or assets.
TGR: Have you made any modifications to that investment thesis for 2015?
HI: Not really. That investment premise hasn't really changed. Those are the important things to look for.
TGR: What are you specifically seeking when it comes to management?
HI: It's people that you can trust, people who have delivered on promises. Some people promise that things will happen within a year but they have been saying that for the past three years. That is frustrating as an analyst because it messes with our models and it's hard to put faith into someone who has frequently disappointed the market.
TGR: What about jurisdiction?
HI: Places like Canada, Mexico or the United States are much easier to do business in than more challenging areas, such as Venezuela or Bolivia. That's just the way it is. The permitting process in North America may be a little bit tougher and a little bit more drawn out, but the odds of nationalization or prohibitive tax policies are substantially smaller.
TGR: Tell us more about the viability of assets.
HI: Some assets are much tougher than others, whether it's because of punitive government policies or permitting risks or just getting something financed because no one wants to finance assets in certain locales. I've definitely seen some projects that I would shy away from.
TGR: Is your investment thesis for silver equities basically the same?
HI: While gold and silver don't trade in lockstep with each other given that gold is driven more by investment demand and silver is driven more by industrial use, there is generally a strong price correlation between the two. Most of the projects that we look at are silver projects with a gold component or gold projects with a silver component. There is certainly some overlap.
TGR: Tell us about some silver equities you're following.
HI: I follow MAG Silver Corp. (MAG:TSX; MVG:NYSE). It's a good company with operations in Mexico. I've known President and CEO George Paspalas for a couple of years. He previously ran Aurizon Mines, which was bought by Hecla Mining Co. (HL:NYSE) in a bidding war. MAG Silver owns 44% of the Juanicipio silver project in Mexico as part of a joint venture with Fresnillo Plc (FRES:LSE), an experienced silver miner there. I plan to visit Juanicipio next month. It's a good asset. The grades are phenomenal. Overall, I think it ticks off all the boxes that we look for when we recommend a company.
TGR: MAG Silver spent $4.6 million ($4.6M) in 2014 on Juanicipio but it's going to be at least two more years before Juanicipio reaches production. Will it be worth the wait?
HI: If MAG Silver still owns its share of Juanicipio by then, I believe it would be. There is a good chance that Fresnillo simply takes MAG Silver over before that ever happens.
Our price target for MAG Silver is currently $7.78 per share ($7.78/share) given the lowered commodity price deck.
TGR: What are some other silver names you follow?
HI: I also follow Alexco Resource Corp. (AXR:TSX; AXU:NYSE.MKT), which has a silver mine in the Yukon. It's a slightly more challenging asset given its streaming agreement with Silver Wheaton Corp. (SLW:TSX; SLW:NYSE), which limited profitability when silver was near $15/oz. Alexco's agreement with Silver Wheaton was recently renegotiated and over the next couple of months, assuming that commodity prices cooperate, I believe that the company may restart production. That means silver being in the $17–20/oz range. At the current silver price, the company can make money with production instead of just trading tonnage for dollars and not really coming out ahead.
TGR: The recent preliminary economic assessment there outlined a small, 400 ton per day operation with a six-year mine life. Is that enough to get investors excited?
HI: It's certainly exciting but I would focus on the bigger picture that you're going to have with the Flame and Moth deposits at site, coupled with the fact that there is a functioning mill that is fully permitted.
TGR: Can it raise money based on that story?
HI: It probably could if it wanted to, but my recent conversations with management suggest that it is not eager to finance in the near term. Instead, Alexco management has talked about selling a minority stake in Alexco's environmental remediation business as a means to raise money.
TGR: How much do you think that's worth?
HI: We have $35M in our model for the environmental remediation business and other non-core assets. My price target on Alexco is $1.40/share.
TGR: Any other silver equities you'd like to share with us?
HI: I'll chat a little bit about Great Panther Silver Ltd. (GPR:TSX; GPL:NYSE.MKT). It has two main assets in Mexico: Guanajuato and Topia, which I went to see late in 2014. Guanajuato is producing silver at decent cash costs. Topia is slightly more challenging. It's fairly far from civilization, but in a higher silver price environment it should become an attractive asset.
TGR: Great Panther cut production costs in the third quarter of 2014; is that enough to make money at silver current prices?
HI: I believe the company can make money at current prices. And given its strong net cash position, I don't really see the company raising a serious amount of money unless it decides to make an acquisition—and I'm in favor of Great Panther making a meaningful acquisition. That would help the company diversify.
TGR: How would it finance an acquisition given that it does not have much cash flow?
HI: As of Sept. 30, 2014, Great Panther had $20.4M cash. That is a decent net cash position and it could issue more shares. It could likely make a $30M acquisition if the target was right. My price target on Great Panther is currently $1.10/share.
TGR: Perhaps one more silver name before we move on to gold equities?
HI: Avino Silver & Gold Mines Ltd. (ASM:TSX.V; ASM:NYSE.MKT; GV6:FSE) is a silver producer. It just put out good production numbers for 2014 from its Avino mine. For the full year, Avino produced 969,524 oz silver, 5,180 oz gold and 307,417 pounds copper for a total of 1.34 million ounces (1.34 Moz) silver equivalent. Avino set 2014 guidance at 1.26 Moz silver equivalent. It's always nice to put out reports for Buy-rated companies that beat our estimates. I think 2015 will be another good year for Avino. The company is commissioning Circuit 3, which should increase capacity by 1,000 tons per day, and the grade should remain similar to the previously mined ore. In fact, Avino could still make money in a slightly lower silver price environment, which is impressive. My price target on Avino is $2/share.
TGR: What are some gold names under coverage?
HI: One we follow is Paramount Gold and Silver Corp. (PZG:NYSE.MKT; PZG:TSX). Coeur Mining Inc. (CDE:NYSE) recently made a bid for Paramount.
TGR: Do you expect that bid to succeed?
HI: I'm fairly confident it will. The bid makes sense for Coeur because it needs the San Miguel silver property, which is next door to Coeur's Palmarejo mine in Mexico that Coeur paid $1 billion for in 2007. The $146M it is paying for Paramount is very reasonable in comparison. Under the deal, Paramount will spin out its non-Mexican assets into a new publicly traded company and Coeur would own just 4.9% of the new firm.
For the longest time there was a good arbitrage opportunity that essentially still exists. Right now you're paying $5.98/share for Coeur. You get 0.2016 shares of Coeur for each share of Paramount so that equals $1.20 each. You're only paying $1.26 for Paramount. In other words you're getting the spinoff company, which will own the past-producing, open-pit Sleeper gold asset in Nevada and $10M cash, for free—as long as the transaction closes under the current terms.
TGR: Do you see a rival bid emerging?
HI: I don't think that will happen. The main asset here is San Miguel, which is worth the most amount of money to Coeur Mining because it already has a mill next door.
TGR: Any other gold names?
HI: Another one that I follow is Comstock Mining Inc. (LODE:NYSE.MKT), with a price target of $2.50/share based on a price deck of $1,200/oz gold and $17.50/oz silver. (Editor's note: Mr. Ihle adds that Comstock is processing above 1 g/t at Lucerne.)
Our target is based on 2,200 tons grading 0.29 grams per ton (0.29 g/t) gold from the Lucerne mine in Nevada at an average recovery of 65%. That should amount to 41,000 ounces (41 Koz) gold. Add in some silver and the total is roughly 45 Koz gold equivalent from Lucerne in 2015.
There may be some production from Dayton late in the year but we haven't factored any Dayton production into our model. Dayton production should grow over the course of 2016 until it reaches full production, probably in 2017. All together that leads us to a net present value calculation of about $223M for the firm as a whole.
TGR: What are some other companies that you believe have compelling narratives in 2015?
HI: One is PolyMet Mining Corp. (POM:TSX; PLM:NYSE.MKT). It's a very viable project in northern Minnesota, an area that needs jobs. Governments at all levels want economic development in that region. PolyMet is a long-term story. There was a mine there before and the facility was used for decades.
TGR: Do you believe this will become a mine again?
HI: In the long term this could very well become a mine again.
TGR: What's your target on that one?
HI: The price target on PolyMet is still $2/share. The price target didn't go down very much when we adjusted our price deck, essentially because there are a lot of commodities such as copper and nickel for which we didn't adjust our price deck.
TGR: Any others?
HI: There's also Wellgreen Platinum Ltd. (WG:TSX.V; WGPLF:OTCPK) in the Yukon. In our opinion, this is an interesting project. The Wellgreen project is still in the early stages of development. It is a big ore body that's close to surface. All in all, we could probably see production of nickel, copper and platinum at Wellgreen by 2018–2019. It's still in the early stages but that's why we're only assigning a 0.4 net asset value (NAV) multiple to the company. If you take the NAV of the deposit at face value it would be about $4.50/share. I like the management team. I've met with them a number of times. I like the story. I have a price target of $1.80/share on it.
TGR: Do you have any insight for investors who might be looking to adjust their portfolios in preparation for this year?
HI: I think gold, silver and even base metals equities have a place in everyone's portfolio. The world is moving away from cash so it's good to have hard assets in your portfolio. I wouldn't make hard assets my only investment, but people who are currently underexposed to hard assets should certainly take a look at metals equities.
TGR: Thank you for talking with us today, Heiko.
Heiko Ihle joined H.C. Wainwright in March 2014 as a managing director for equity research, covering companies in the mining industry. Prior to joining H.C. Wainwright, Ihle spent 2.5 years at Euro Pacific Capital as a senior research analyst covering the mining industry. In addition, he spent over six years working on equity research with Gabelli & Company in Rye, NY. While at Gabelli, he was awarded second place in the 2010 Financial Times / StarMine Top Analyst Awards for the Engineering & Construction space. Prior to his time with Gabelli, he completed summer internships with Deutsche Bank on the foreign exchange trading desk in New York and in fixed income sales in Frankfurt. A native of Germany, Ihle received his Bachelor in Finance and Management from the University of Illinois at Chicago in 2004 and his Master of Business Administration from the University of Miami in 2006. He has been a CFA Charterholder since 2010 and is currently a member of the CFA Institute and the Stamford CFA Society. He holds FINRA 7, 24, 63, 86 and 87 registrations.
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1) Brian Sylvester conducted this interview for Streetwise Reports LLC, publisher of The Gold Report, The Energy Report, The Life Sciences Report and The Mining Report, and provides services to Streetwise Reports as an independent contractor. He owns, or his family owns, shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of Streetwise Reports: Alexco Resource Corp., Comstock Mining Inc., Great Panther Silver Ltd., Silver Wheaton Corp., MAG Silver Corp. and PolyMet Mining Corp. The companies mentioned in this interview were not involved in any aspect of the interview preparation or post-interview editing so the expert could speak independently about the sector. Streetwise Reports does not accept stock in exchange for its services.
3) H.C. Wainwright Public Appearance Disclosures: Jan. 20, 2015, Analyst: Heiko Ihle
Topics: MAG Silver Corp., Comstock Mining Inc., PolyMet Mining Corp., Alexco Resources Corp., Great Panther Silver Ltd., Avino Silver & Gold Mines Ltd., Paramount Gold and Silver Corp. and Wellgreen Platinum Ltd. The Firm or its affiliates did not receive compensation from PolyMet Mining Corp., Alexco Resources Corp., Great Panther Silver Ltd., Avino Silver & Gold Mines Ltd. or Paramount Gold and Silver Corp. for investment banking services within 12 months prior to publication.
The firm or its affiliates did receive compensation from MAG Silver Corp., Comstock Mining Inc. and Wellgreen Platinum Ltd. for investment banking services within 12 months prior to publication.
The firm does not make a market in MAG Silver Corp., Comstock Mining Inc., PolyMet Mining Corp., Alexco Resources Corp., Great Panther Silver Ltd., Avino Silver & Gold Mines Ltd., Paramount Gold and Silver Corp. and Wellgreen Platinum Ltd. as of Jan. 20, 2015.
The research analyst or the research analyst’s household does not have a financial interest in the securities of MAG Silver Corp., Comstock Mining Inc., Alexco Resources Corp., Great Panther Silver Ltd., Avino Silver & Gold Mines Ltd., Paramount Gold and Silver Corp. and Wellgreen Platinum Ltd. (including, without limitation, any option, right, warrant, future, long or short position).
As of Dec. 31, 2014, neither the firm nor its affiliates beneficially own 1% or more of any class of common equity securities of MAG Silver Corp., Comstock Mining Inc., PolyMet Mining Corp., Alexco Resources Corp., Great Panther Silver Ltd., Avino Silver & Gold Mines Ltd., Paramount Gold and Silver Corp. and Wellgreen Platinum Ltd.
Neither the research analyst nor the firm has any material conflict of interest in MAG Silver Corp., Comstock Mining Inc., PolyMet Mining Corp., Alexco Resources Corp., Great Panther Silver Ltd., Avino Silver & Gold Mines Ltd., Paramount Gold and Silver Corp. and Wellgreen Platinum Ltd. of which the research analyst knows or has reason to know at the time of publication.
Heiko Ihle: I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I determined and had final say over which companies would be included in the interview based on my research, understanding of the sector and interview theme. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.
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