Mike Starogiannis: Are You Ready for Commodity Bargain Season?
Interview

The Gold Report: In a recent National Post article about gold's rising price versus the languishing prices of gold equities, Mining Reporter Peter Koven quoted Yamana Gold Inc.'s (TSX:YRI; NYSE:AUY; LSE:YAU) CEO Peter Marrone as saying, ". . .people rely on net asset value to value gold companies, and the calculations don't seem to rise so dramatically because the long-term gold price used by analysts is at a deep discount to the current price. . .there's a tendency to say, 'I'm not taking advantage of the equities because they're not reflecting the current gold price.'" As an analyst, what's your view?

Michael Starogiannis: I think Peter is correct in that the long-term gold price deck used in net present value (NPV) calculations is relatively sticky. But a lot of people also use a cash flow multiple to value companies. Cash flow isn't relevant for junior exploration companies, but it is relevant for junior producers. I think pricing, to some extent, reflects fluctuations and the steep gold price. If you combine valuation methodologies, including NPV and cash flow multiples, you should see some fluctuations in the junior-producer space.

TGR: But do you think Marrone is right? Could there be something else behind those languishing prices?

MS: I think it also reflects the part of the cycle we're in; we had a very busy fall and winter with respect to the number of new equity raises in the space. If you use the show-and-tell analogy, all the companies told us their stories. The markets have raised money for them and now they're trying to show us what they can do with it. We're in that pause stage, as companies begin their summer drill programs and sink those big equity raise dollars into the ground, into mine development or building new mill facilities.

TGR: But you're referring more to smaller rather than large companies. As the news cycle picks up and drill results come in, do you expect to see a rise in the juniors share prices?

MS: Provided that the gold price remains in the $1,400–$1,500/oz. range, the juniors should start to come back in earnest. All of that deployed capital will have been put into the ground and results will start showing which projects are of merit and which will fall by the wayside.

TGR: In your five years as an analyst with Fraser Mackenzie, you've seen a lot of market fluctuation. How does what we're seeing now in the funding cycle compare to what was going on in 2007?

MS: Overall, the market is fairly efficient right now, particularly in valuing gold stocks. We're benefitting from having gone through a little bit of a retracement, as we did in 2008 when the juniors pulled back and the market got a bit savvier. Prior to that 2008 blip, the valuations in the junior space were getting a bit ridiculous. Now, the valuations in gold stocks reflect the true value of the companies.

TGR: Prices for precious metals typically fall off in early summer before strengthening in August and into the fall. How would you recommend playing the precious metal sector now, in terms of junior equities?

MS: Many of our companies under coverage have a drilling and news flow hiatus this time of year, which coincides with a drop-off in commodity prices. For investors who believe in commodity prices coming back in the fall and in the long-term health of those commodity prices, the early summer months might be the opportunity to pick up some bargains.

TGR: You're based in Toronto and cover many Canadian-based companies with gold and silver projects. What role does Canada play in the global gold market today?

MS: I have a biased view because I'm based here and I don't see a lot of the work that's being done elsewhere. But I believe Toronto and Vancouver are powerhouses in financing the junior sector, in particular. But more than just financing, a lot of the companies are headquartered here. That means much of the technical talent resides, or is based, here. So, Toronto and Vancouver, and Canada in general, play a very important role in advancing projects in the junior space—particularly on the precious metals side.

TGR: What are some of the companies with projects in Canada that you feel are the better buys right now?

MS: Gold Canyon Resources Inc. (TSX.V:GCU) is one of our top picks in the exploration space. Its flagship asset is the Springpole Gold project, an alkaline gold deposit about 100 km. from Red Lake. The company's had quite a bit of success over the past 18 months delineating a zone of mineralization that's about 1,300 meters long, at an average of 75m wide by 300m–350m deep. The grade is particularly interesting. For a bulk deposit, the grade seems to be averaging 1.3–1.4 grams per ton (g/t). If you compare that to some of Canada's better-known bulk mineable deposits, such as Osisko Mining Corp.'s (TSX:OSK) Canadian Malartic project, that grade is about .97 g/t. Detour Gold Corp.'s (TSX:DGC) Detour Lake deposit grade is about 1.02 g/t. So, the Springpole zone appears to have 30%–40% higher grades than either of those.

TGR: But is the deposit as large as those others?

MS: Based on our in-house estimates, we think there's the potential to demonstrate 5–6 million ounces (Moz.) at Springpole, which is a fair bit smaller than Osisko's or Detour's deposits. However, grade is a very telling factor in the potential economics of any deposit. There is also still some significant depth and strike potential.

TGR: Would you compare Gold Canyon to Brett Resources Inc. (TSX.V:BBR)?

MS: Well, Brett is no longer there. The Hammond Reef project is now owned by Osisko. But, yes, it's a good comparison from the perspective of permitting challenges. The Hammond Reef and Springpole deposits would face very similar permitting challenges with respect to their proximity to adjacent or overlying bodies of water. From the perspective of grade, the Springpole grade is more than double that of Hammond Reef.

TGR: When do you expect more news from Gold Canyon?

MS: Gold Canyon put out its final few holes from the winter program on May 31, with some good infill results. The company showed grades and widths very consistent with our 5–6 Moz. estimate. There will be a bit of a news hiatus as we await results from its deep-drilling program, which is designed to show some depth potential. Gold Canyon won't start its summer program until mid-June. We wouldn't expect to see new step-out or infill drilling until early to mid-July.

TGR: You also cover Confederation Minerals Ltd.'s (TSX.V:CFM) Newman Todd Project in the Red Lake District. Why haven't we heard this name before?

MS: This project has been around for quite some time. It languished from not having had systematic drilling across the length of the property. Previous operators were very cautious in the way they drilled. New management has taken over, with good technical talent that is starting to drill in a more systematic way. This is not a large property package in the context of the bigger players in the Red Lake District, such as Rubicon Minerals Corp. (NYSE.A:RBY; TSX:RMX) or Premier Gold Mines Ltd. (TSX:PG). However, in the context of finding a deposit within the property limits, it's quite conceivable that Confederation may find a high-grade zone within 2,000 meters of strike length that it can contain within the Newman Todd property package.

TGR: Confederation is trading at about $0.71 right now. What will push Confederation to new levels?

MS: The current drill program is designed to do systematic drilling and stepouts from drill fences that the company's already drilled and which have demonstrated consistently high-grade hits at various depth horizons at four different locations along a 1,500m–2,000m strike. We expect that all successful fences will build the case that there's a significant gold resource hiding on the Newman Todd property.

TGR: Are there other Canadian plays you'd like to share with our readers?

MS: Three other exploration plays that I would mention are Kaminak Gold Corp. (TSX.V:KAM), Taku Gold Corp. (TSX.V:TAK; OTCBB:TAKUF) and Pacific Ridge Exploration Ltd. (TSX.V:PEX), all three of which have significant land packages in the White Gold District of the Yukon Territory.

TGR: Kaminak has the Coffee Gold Project, close to Kinross Gold Corp.'s (TSX:K; NYSE:KGC) White Gold project, which was previously owned by Underworld Resources before Kinross bought out that company. One hole there hit 17 g/t gold over 15.5m. Do you expect similar results from the current drill program?

MS: Yes, that was an early discovery hole in the Supremo Zone. Chances are they'll hit similar grades this summer with follow-up drilling. We also expect Kaminak to hit different types of systems; for example, lower grades but broader intersections, such as in its Latte Zone. The company will do follow-on drilling in all of the previously discovered zones, including Supremo, Latte, Double Double and Americano, as well as more grassroots exploration in targets that have yet to be drilled.

TGR: Taku just added about 13,000 hectares in claims to its holdings in the White Gold District. When will it start drilling those?

MS: It probably won't drill on those claims this year. Instead, the plan is to drill the Rosebute and Portland properties. There is good soil geochemistry and geophysical anomalies on those properties. The plan is to drill about 7,500m on various drill targets, split between the two properties. In the meantime, the company's work program, basically, is follow-up soil geochemistry grids, ground proofing, ground mapping and some geophysics.

TGR: And that's a relatively cheap stock, trading just below $0.38.

MS: Another White Gold district play I'd like to highlight is Pacific Ridge, which has some very compelling soil geochemistry anomalies on its Mariposa property. The property is about 15 km. northeast of Kaminak's Coffee Gold Project and 15 km. southeast of the Kinross' White Gold property. Skookum Jim is just one of the anomalies that got me quite excited about Pacific Ridge's drill prospects for this season. It'll be drilling a 4,000-meter program beginning in the second half of June, so we can probably look forward to drill results by early August.

TGR: Looking more to the south, you like Evolving Gold Corp. (TSX.V:EVG; OTCQX:EVOGF; Fkft:EV7).

MS: Evolving Gold is largely a Nevada-focused player with its Carlin-Humboldt projects. It's engaged in a deep-drilling program targeting a horizon that's anywhere from 700–1,500 meters deep. The company's looking for a true Carlin-type system, right in the heart of the Carlin Trend. Evolving Gold is one of the largest property holders along the Carlin Trend, second only to Newmont Mining Corp. (NYSE:NEM).

TGR: One interesting thing you state in your report on Evolving Gold is that the economic mineralization in the Carlin Trend should be valued more highly, given its proximity to major players like Barrick Gold Corp. (TSX:ABX; NYSE:ABX) and Newmont, as well as the existing infrastructure.

MS: That's right. Most of our companies under coverage, for which we do have targets, are resource-based valuations that we value at $100/oz. of potential in situ. Assuming that Evolving can show us sufficient drilling information on the potential for some ounces, we would likely value the company much higher than $100/oz., given that it's in the heart of one of the world's most prolific gold trends.

TGR: It's not as if Evolving hasn't found anything. One hole from the most recent drill program intersected six separate zones of mineralization, including one intersection at 31 g/t gold over 4.6m.

MS: Yes. Based on what we've seen so far, it seems like the company is into a Carlin-type system. That's microscopic gold in the right kinds of rocks, such as muddy limestones and siltstones. But, Evolving Gold demonstrated those kinds of grades and widths only in holes 7 and 10. The trick now is to go back, do some systematic step-out and infill drilling and prove some continuity in those higher-grade zones.

TGR: For readers who are unfamiliar with that, it's like a grid where the company's putting holes in between the holes to track where the mineralization is along a given line.

MS: That's right.

TGR: You also like some companies with projects in South America, including Apogee Silver Ltd. (TSX:V:APE). Isn't it aggressive to be bullish on a company whose main asset, the Pulacayo Silver Project, is in Bolivia?

MS: Bolivia has seen a rise in political uncertainty in recent months. There's talk of nationalizing assets, but it's our firm belief that much of that talk was political posturing on the part of the current government to curry favor with the unions. Furthermore, Apogee's underlying property interests are already owned by Bolivian Mining Corporation (COMIBOL), the state-owned mining company. So, the asset doesn't have the same level of exposure to nationalization as some other projects in Bolivia.

TGR: Don't you also think there is short-term potential for another 30 Moz. silver equivalent there?

MS: That's right. Apogee is now doing a systematic infill and step-out program in the heart of the mine proper, where there is already an existing resource, basically, it is a step-out to that resource. And it appears to be hitting consistent grades and widths. Volumetrically, based on some of our in-house estimates, we believe there is immediate upside to show a bump up in the resource within the next 12 months.

TGR: Are there other projects in South America that you like?

MS: Another one of note is Sulliden Gold Corp.'s (TSX:SUE; OTCQX:SDDDF) Shahuindo Project in Peru. It's doing an infill program on the core of the mineralization trend and demonstrating fairly consistent mineralization of good grades and widths. This would be a relatively low-grade, bulk-tonnage type of deposit with grades somewhere around 0.65 g/t. We're currently valuing Sulliden on a NPV basis. We've got a cash-flow model that assumes it has 2.2 Moz. of mineable oxides, which it would be mining and heap leaching within a timeframe of, say, three years.

TGR: Sulliden recently found a new mineralized zone highlighted by the discovery that the zone was 1.6 g/t gold and silver over 33m. That's a little bit higher than the average grade there.

MS: That's right. If you start accounting for mining dilution and such, the zones so far have consistently shown that it'll probably end up with 0.6–0.65 g/t. We would be pleasantly surprised if there was a grade uptick, because that would be good for the economics of the project. But even if you just value the company at the lower-grade assumption, we still show ample upside for Sulliden.

TGR: Some majors operate in that area of Peru. Could that be a factor?

MS: I think if Sulliden demonstrates a project of sufficient scale, it could be a factor in the company's valuation. At this point, with anywhere from 2–3 Moz. of potentially mineable gold near the surface and open pittable, it probably would not be a prime candidate for a major or midtier to come in as a suitor. However, if it can demonstrate parallel zones and show multiples to that potential resource size, the company could be in serious contention.

TGR: Certainly, CEO Peter Tagliamonte has done it before.

MS: Yes, he has he's done it before. Peter has generated, and knows how to generate, shareholder value and build good projects.

TGR: Michael, thank you for your time and your insights.

Michael Starogiannis is an analyst for Fraser Mackenzie covering the metals and mining sector. He is a professional engineer and a graduate of the University of Toronto with a BASc in geological and mineral engineering. He started his career as a consulting geotechnical engineer working for Golder Associates on a variety of projects entailing rock mechanics, hydrogeology and tailings. Since finishing his MBA at the Rotman School of Management in 2001, he has held roles in equity research, private business and investor relations. He has prior experience researching the gold and precious metals sector for several Canadian broker/dealers.

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DISCLOSURE:
1) Brian Sylvester of The Gold Report conducted this interview. He personally and/or his family own shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Gold Report: Gold Canyon, Detour Gold, Rubicon, Premier Gold, Evolving Gold, Apogee and Sulliden.
3) Mike Starogiannis: I personally and/or my family own shares of the following companies mentioned in this interview: None. I personally and/or my family am paid by the following companies mentioned in this interview: None.