The Mining Report: Jeff, when we talked three years ago, $2,000 per ounce ($2,000/oz) gold seemed to be within reach. The Toronto Stock Exchange was full of cash-heavy juniors. What is your forecast for gold's prospects for the rest of 2014 based on today's fundamentals?
Jeff Wright: Gold should stay centered around $1,300/oz, not moving more than $50 in either direction, through the end of the year. Forces holding gold within that narrow band include the U.S. Federal Reserve tapering quantitative easing to a point where, possibly in mid-October, asset purchases will end and interest rates will increase. Also, the macroeconomic environment's improvements are still fairly soft.
"The size and scale of Pretium Resources Inc.'s Bruckjack project stand out from the basic junior or even mid-cap company."
The one area of concern that could drive gold either much higher or much lower is the continuing crisis in the Ukraine. There is safe-haven demand around the world to avert exposure to what is now viewed as a soft conflict. If the conflict between Ukraine and Russia escalates, gold could go above $1,350/oz. If there is a peaceful resolution, gold could dip lower before coming back up $1,250–1,300/oz.
TMR: Do you think the Federal Reserve is willing to counterbalance if the price of gold goes way up?
JW: No, the Federal Reserve's mandate isn't aligned with the macro-political situation in Europe. The Federal Reserve would be much more concerned about the economic impact of a conflict in Europe and its impact on gross domestic product, employment and inflation, than on the price and movement of gold.
TMR: Even when the price of gold was a lot higher three years ago, we were talking about the flight of investors to larger companies. With gold in the range that you predict, are some juniors standing out as value plays?
JW: There was a flight from mining equities to the large-cap and the mid-cap companies a few years ago. Generalist investors left the gold and mining space as momentum dissipated. There are quality juniors out there that are in production or advancing large-scale, high-growth projects, but it becomes a stock picking exercise versus investing in a basket of juniors or large-cap mining companies.
TMR: How do you decide what goes in the basket?
JW: It comes down to if a company has a worthy project. Is the project going to be a true mine or is it a mine that's in production that has expansion possibilities versus one with a short mine life and a small project? We're not looking for small projects with limited mine lives.
"Pershing Gold Corp.'s Relief Canyon project is a low-hanging fruit that will produce over a number of years."
Second, we want to be in good jurisdictions with stability. That being said, there are projects outside of the usual suspects in Canada or Nevada that make sense in today's price environment. We're not very positive on Africa based on the geopolitical risk and the lack of interest from U.S. institutions, but we also recognize there are some noteworthy large-scale projects there.
We still like Nevada. We like Mexico. We like Brazil. We like certain parts of Canada.
TMR: What are some juniors that fit that description?
JW: A couple of juniors definitely fit that description. Pretium Resources Inc. (PVG:TSX; PVG:NYSE) has the Brucejack project in British Columbia. It is a large-scale project that successfully completed a bulk sample at the beginning of 2014. That size and scale stand out from the basic junior or even mid-cap company. It's going to be a mine with high-grade, high-production and low-cost metrics. That's what we're looking for.
TMR: Pretium Resources is working on permitting. Will that be the next catalyst that could move its stock price higher?
JW: Work on the permitting is ongoing and, while that's not the sexiest thing to do in any business, it's certainly a necessity. Permitting is a long process. It's not something that's up on the horizon in the next quarter or two, but it's definitely one of the biggest gating items to move that project forward. We're looking for some updates toward the end of the year.
Pretium is going to have to update the feasibility study, which could be a catalyst. We don't anticipate the update to the feasibility study being revolutionary. The project has been fairly well defined at current gold prices, and it's still very positive. The information we got back with the bulk sample and the metallurgical work that was associated with it had positive results. A lot of those concerns and considerations have worked themselves out to the company's favor. The next step is the permitting, updating the feasibility, and coming up with a plan to either organically put the project in production or put itself into play for acquisition.
TMR: What other junior are you watching?
JW: Golden Queen Mining Co. Ltd. (GQM:TSX). This company is a little bit out of the box given its location. It has the Soledad Mountain project in California. Typically, when people think California and mining, they cross their fingers or just shake their head, "No, thanks." I would normally agree, except Soledad Mountain is permitted and has begun the initial phase of construction. It's a nice-sized project—it's not as big as Brucejack, but it's not a small project—that is an open-pit mine that could produce 90,000–110,000 oz (90–110 Koz) with10–12 years initial mine life.
The amount of capital it takes to get that in production is not unreasonable. We're talking about $125–150 million ($125–150M) all-in. As an open-pit mine less than 100 miles from Los Angeles, that's attractive.
Golden Queen has advanced the project judiciously, but not too fast. It didn't go out and raise a lot of capital at low equity prices. It is fully permitted at the state and federal level. It's now attempting to raise the capital with debt and equity to minimize dilution and proceed fully through construction. We'll see how that plays out.
The company has also successfully defended its permits. It had a last minute challenge to the permits by the small environmental group Center for Biological Diversity, which claimed there was an endangered Mohave snail on the premises of the project. The U.S. Fish and Wildlife Service turned down that challenge based on no scientific evidence. That's an example of how you can successfully operate in what most people would agree is a challenging jurisdiction that does not typically welcome mining.
TMR: Do you expect the company to take that to production or do you think it will get bought out?
JW: Golden Queen has the ability operationally to run a mining company, but at the same time, it's only speculative to gauge merger and acquisition activity. The current plan is to proceed to production as a standalone company, but that's not necessarily within the company's control if somebody's willing to buy it out at a premium. We'll wait and see on that one.
TMR: Has the management team taken a company to production before?
JW: Yes, H. Lutz Klingmann, the chief executive officer, is a production CEO. He was previously president of Minto Explorations Ltd., and a director at other midtier and junior companies.
TMR: Let's go on to the next one.
JW: We like Pershing Gold Corp. (PGLC:OTCBB) in northern Nevada. Pershing Gold has Relief Canyon, a former producing mine. The company's plan is to proceed with full permitting of the site to mine both above and below the water table of this open pit. It's currently permitted to mine above the water table, but not below. Pershing successfully added ounces to the resource base last month. It shows a heap-leachable oxide resource above 500 Koz gold.
Once permits are in hand to restart operations, the project comes with a carbon mill onsite that can produce a carbon concentrate, so the heap-leach operation is a fairly low technical risk. It's a low hanging fruit project that will produce over a number of years. The mine plan is still being developed, however. But given the location and potential, as well as the resource expansion in the offing, it's certainly very advantageous.
TMR: You were just there in Lovelock, Nevada, looking at the project.
JW: I was there in March. It was a good site visit. It confirmed what we had seen in the technical reports. The technical aspects of the mine itself, an open pit that's already somewhat assessable, look good. The heap-leach pads were in place. The grasshoppers and the conveyors were all in place, so we're not looking at a full build-out. It's essentially the restart of a brownfield mine, but Pershing wants to make sure that it has sufficient resources and all the permits in place for a number of years.
Pershing could probably start up operations on a small scale rather quickly, but it doesn't make sense to be a small-scale producer immediately. It's looking for a bigger operation that's sustainable over a number of years and that was confirmed at the site visit. Everything looked in pretty good working order and I was fairly pleased with what I saw. It just has to get all its permits and get going.
The last company on the small-cap side we like at present is Brazil Resources Inc. (BRI:TSX.V; BRIZF:OTCQX), which has the São Jorge project, an open-pit potential project at the preliminary economic assessment level. It comes with a sizeable gold resource that has good open-pit grade and is fairly near surface. It has more than 1.7 million ounces gold at 0.3 grams/ton cutoff with about a 10-year mine life at least. It could be much longer, given the amount of gold that's there.
The next steps would be to take that through feasibility and build the project out. We're looking for an update in the next few months on the next steps.
The management team was able to acquire this project from a small company called Brazilian Gold Corp. (BGC:TSX.V) that had run out of cash at the end of 2013. There are high-quality projects out there in cash-starved companies. A company like Brazil Resources was able to take advantage of that situation and add a substantial project to its books and make that its flagship project.
Brazil Resources' second project, Cachoeira, is also a very good project, but São Jorge is more advanced and has more gold. It probably accelerates the company's timeline to production by more than a year. The capital to get to production isn't too much of a daunting task. We see it as a reasonable $40–50M build-out over time.
Brazil Resources has two quality projects in Brazil and it could become much more substantive in the future.
TMR: Are other small to midsized companies buying projects that have been deeply discounted?
JW: There are additional opportunities out there—other projects and companies are in play. A number of high-quality projects either have lower capital costs to get to production or a reasonable permitting timeline. These projects have substantial ounces and good grade, but are at a point where the existing management team, either through lack of ability to raise capital or with geologists who have done a great job on discovery but are not production-minded, can't take the company further. We see that transition all the time in mining and we're certainly at one of those points right now in the cycle.
TMR: What will set the stage for the next rally in the juniors and how can readers prepare themselves to play a part in that?
JW: It comes down to identifying companies that have a path toward advancing a project. Either they have the capital or they have the skill set. It's going to be a very selective rally through 2014. I don't see a broad market rally of all the juniors. There is going to be a number of companies that have good-quality projects that don't go anywhere, or that people aren't very excited about. A lot of that comes down to what's the next step on this project becoming an actual mine that can show production—and profitable production at that. Investors really have to do their homework and understand that a lot of projects aren't going to advance. They're going to be on the shelf for a while until either costs come down or commodity prices go up.
TMR: Thanks for your time.
Jeff Wright of H.C. Wainwright & Co. has more than 15 years of capital markets experience. Previously with Global Hunter Securities, Wright has also worked as a managing director and head of the natural-resource practice at Shoreline Pacific LLC. Prior to that he was vice president at Montgomery & Co. and was a leader on the team that launched a capital markets business in a historically mergers and acquisitions-focused investment bank. Wright was formerly a vice president at Robertson Stephens in the equity financial products group. Wright received his Master of Business Administration from the University of Southern California and his Bachelor of Arts degree in political science from North Carolina State University.
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DISCLOSURE:
1) JT Long 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 employee. She owns, or her 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: Pretium Resources Inc., Pershing Gold Corp. and Brazil Resources Inc. Streetwise Reports does not accept stock in exchange for its services.
3) Jeff Wright: I own, or my family owns, shares of the following companies mentioned in this interview: None. I personally am, or my family is, paid by the following companies mentioned in this interview: None. My company has a financial relationship with the following companies mentioned in this interview: Pershing Gold Corp. and Brazil Resources Inc. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. 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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