FS: Down the food chain is Claude Resources Inc. (CRJ:TSX), a junior trading at about $0.26/share. Its Q3/14 financials were amazing. Its net income of CA$6.9M in Q3/14 was up from CA$3.3M in Q2/14. That’s the function of increasing production, higher head grades and a weak Canadian dollar. All three have helped the company remain very profitable even at these depressed prices.
A third one, with a slightly higher production profile compared to Claude, is Richmont Mines Inc. (RIC:TSX; RIC:NYSE.MKT). As with Claude, it also increased its production guidance for 2014 and in Q3/14 it earned CA$4.6M and was also free cash flow positive. It has CA$39M in cash and very little debt. It has the grade, which is around 6.0 g/t at its Island and Beaufor mines, and most of the costs are in Canadian dollars. It’s a similar situation to Claude’s.
TGR: Are there some development-stage gold projects that haven’t seen share prices respond to positive news?
FS: One that really has been beaten down, and we discussed in our last interview, is Victoria Gold Corp. (VIT:TSX.V). The share price is down to $0.10. Nevertheless, its strategy is the right one. The Eagle project in the Yukon is permitted to mine, but Victoria is not willing to accept any kind of financing from, let’s say, hungry private equity groups at disadvantageous terms. So the company continues to drill and find new zones, like Olive, and it has the cash to do just that. It’s not in a rush to develop Eagle in this market. From a valuation standpoint, Victoria is trading almost at cash. It’s in the Yukon so that’s a safe jurisdiction, too.
TGR: Is Olive enough to bring investors back?
FS: The grade at Olive is almost double that of Eagle. In my opinion, Victoria should define a resource at Olive. Then when Eagle is three to five years into production and the grade in the mine plan drops, Victoria fills that gap with higher-grade ore from Olive. That would increase the internal rate of return (IRR) because the company would likely need limited additional capital to bring Olive on-line. If Victoria demonstrates it can go that route, Olive could bring investors back. Victoria is like an option on gold without an expiry date.
TGR: Does the company have the right management in place for the current wait-it-out strategy?
FS: Yes, I think so. The management and board have experience in building mines. The other question is: Does Victoria have the operating team in place? It doesn’t yet, but it doesn’t need to. If it came to a production decision, which I don’t see any time soon given its share price and the market conditions, it would have to beef up the operational team.
TGR: Any other updates on companies you mentioned in your last interview?
FS: We discussed Asanko Gold Inc. (AKG:TSX; AKG:NYSE.MKT). Since then, it released what it calls the Definitive Project Plan for phase 1 of the Asanko gold mine project in Ghana.
The market did not get really excited about it. Basically, Asanko reconfirmed the mine’s economics, but a base-case price assumption of $1,300/oz gold is too high. If the assumed gold price drops to $1,150/oz, the net present value shrinks by more than 30%. That also means that it has a lot of leverage to the gold price. The market’s reaction to the stock is more a function of the gold price right now.
TGR: Any other companies?
FS: I’m a director of GoldQuest Mining Corp. (GQC:TSX.V). GoldQuest’s Romero project has an Indicated resource of 2.38 Moz gold equivalent in the Dominican Republic, but the company isn’t getting much love from the market. Basically, there are two issues. One is the $333M it will need to build the mine, which is quite high. And that resulted in a relatively low IRR for Romero. We will have to come up with a strategy to improve the PEA numbers. Can we reduce the upfront capital or is there an opportunity to more quickly mine a high-grade portion of the ore in order to increase the IRR? Some optimization work will have to be done.
Romero is a high-grade deposit with all-in sustaining costs, including byproduct credits, of $350/oz, which is very robust. Otherwise, the 100%-owned Tireo is a big district. It’s not cheap to drill and the mineralization appears in clusters. We have money in the bank, and the company will drill test more targets.
TGR: Without naming names, have you signed confidentiality agreements (CAs) with some of the neighboring companies in the Dominican Republic?
FS: Yes, we signed some CAs, but that was done upon the discovery of Romero.
TGR: What are some of the other players in the Dominican Republic?
FS: Barrick Gold Corp. (ABX:TSX; ABX:NYSE) is clearly No. 1. Glencore International Plc (GLEN:LSE)/Xstrata is on the island, too, and then it’s mostly juniors like Precipitate Gold Corp. (PRG:TSX.V) and Unigold Inc. (UGD:TSX.V). Newmont Mining Corp. (NEM:NYSE) and Eurasian Minerals Inc. (EMX:TSX.V; EMXX:NYSE) are close to the Dominican border in Haiti, but it is unclear how the efforts to reform the county’s mining code will eventually turn out.
TGR: Are there other companies that you’re following?
FS: In the silver space First Majestic Silver Corp. (FR:TSX; AG:NYSE; FMV:FSE) is back to its 2008 levels. It should produce 11.5 Moz silver in 2014, but requires a higher silver price to be profitable. If you expect higher silver prices, I think First Majestic offers a good leverage.
Falco Resources Ltd. (FPC:TSX.V) controls the former producing Horne mining camp in Quebec. The company targets a multimillion ounce gold resource and has cash in the bank.Osisko Gold Royalties Ltd. (OR:TSX), which just announced a friendly business combination with project generator Virginia Mines Inc. (VGQ:TSX), holds 12% of Falco Resources.