TGR: What is your 2014 investment thesis in the precious metal space?
“There are value propositions out there. Solid management teams will be able to take advantage of this market to drive value in the longer term.”
PL: We remain defensive. Our top picks are Franco-Nevada and Royal Gold because they’re generating free cash flow yield even at lower gold prices and because we don’t know how long this deflation period may last.
For people interested in taking on a little bit more risk we start outlining companies like Yamana Gold Inc. (YRI:TSX; AUY:NYSE; YAU:LSE) and New Gold Inc. (NGD:TSX; NGD:NYSE.MKT). (Yamana and New Gold are covered by Steve Parsons.) Both companies have strong balance sheets and a little bit more leverage to the gold price.
If you really want to look at names that offer some opportunity if gold goes to $1,500/oz, that group includes B2Gold, SEMAFO Inc. (SMF:TSX; SMF:OMX) and a myriad of names that give you that higher torque.
TGR: Let’s talk about the royalty plays for a moment. Does Franco-Nevada now transcend mining equities? Is it competing with yield-providing equities outside the mining space?
PL: It’s a bit of a hybrid. It’s not the same as owning physical gold. It provides some dividend exposure. It also gives investors torque to the actual underlying commodity, which is another good thing.
TGR: Is Franco-Nevada attracting investors that typically wouldn’t be in the gold mining space?
PL: People who are sprinkling a bit of exposure to gold in their portfolio feel more comfortable with larger companies. Franco-Nevada is a larger company and is more defensive than some of the pure torque names with exposure to the cost side of the equation.
TGR: What did you make of Franco’s deal with Klondex Mines Ltd. (KDX:TSX; KLNDF:OTCBB) of $35 million over five years, or roughly 38,000 oz gold?
PL: That is the type of deal that you can do in this market where you’re tucking in an acquisition. There’s a discovery value to being in a camp and having exposure.
The real value proposition with owning a company like Franco-Nevada is getting the exploration opportunity without having to use your dollars.
TGR: Are there any milestones ahead for Yamana and New Gold?
PL: We expect New Gold to incorporate the recently acquired Rainy River deposit into its development plan.
Yamana recently made some tuck-in acquisitions. Management is focused on defense, keeping the company’s cash costs low and maintaining free cash flow yield.
TGR: In the past, B2Gold’s management has developed assets and sold them off. It’s currently a junior partner in a couple of Colombian projects. Where is B2Gold’s growth coming from?
PL: In the short term, there are two projects: Masbate in the Philippines and the Otjikoto mine in Namibia.
In addition to a great operating team, B2Gold is known for its great geological team. The geological team can find incremental ounces near existing infrastructure, thereby creating value through the drill bit.
TGR: Will B2Gold get to a point where it can compete in the next tier down from the biggest majors, say with Agnico-Eagle Mines Ltd. (AEM:TSX; AEM:NYSE) and Yamana?
PL: I don’t see why not. They’re all competing for the same growth profile. It becomes a matter of which projects are available, how much they cost and where the opportunity is for incremental value added through the drill bit or reengineering.
TGR: What is SEMAFO up to?
PL: SEMAFO has done a good job of retrenching. It’s focusing on higher-grade material—not ounces for ounces’ sake, but ounces that provide a better internal rate of return and better margins with the Siou and Fofina discoveries and recent anomalies identified in and around this trend.
SEMAFO has spun off or ceased production at some of its higher-cost mines to focus on locations where the company can get the best bang for the buck.
TGR: Let’s shift to silver. The fortunes of South American Silver Corp. (SAC:TSX; SOHAF:OTCBB) are well documented. Are there other small-cap companies with exceptional management teams developing world-class deposits that most investors probably aren’t aware of?
PL: We cover several exploration/development companies that offer tremendous value: Lydian International Ltd. (LYD:TSX), Pilot Gold Inc. (PLG:TSX), True Gold Mining Inc. (TGM:TSX.V), Romarco Minerals Inc. (R:TSX) and Mountain Province Diamonds Inc. (MPV:TSX).
These are phenomenal assets that deserve more attention than they’re getting. They will have their day; slow and steady wins the race. For example, True Gold announced the results of the feasibility study for the Karma project, which supports a low capital intensive, relatively simple and scalable gold project.