Casey Research
Must-Own Metals & Mining Stocks for
2013
By the Casey Research Metals Division
7 Must-Own Metals & Mining Stocks for 2013 Dear Fellow Investor, The transition from one year to the next caused us to reflect on what has been and to look ahead to what will be. And what we see is that metals and mining stocks have been beaten down badly by a fear-driven market, even though global demand for metals continues rising. Doubly so for precious metals. It is no secret that gold and silver have done exceptionally well over the past decade. Less well-known are the spectacular gains in the shares of select mining companies – gains we’ve made and realized. And now, we’re in a short-term swoon in the market that could give you a chance to pick up shares of the best-of-the-best companies at prices we may never see again. In other words, though many market participants are disgusted with the recent performance of precious-metals stocks, this is a buying opportunity. In fact, this market disgust is the reason for the buying opportunity; this is precisely the kind of market that allows one to “buy low” in order to be able to “sell high” later. In this special report, we will show you our seven favorite precious-metals mining stocks to load up on while they are on sale. How can we be sure that this secular gold bull market will continue pushing gold prices north – and gold stocks even higher? Because the political decision-making that got the global economy into its current predicament has not changed. Indeed, things are getting worse. Just consider: • Taxes and regulations at all levels of government have hamstrung businesses. Without a healthy small-business sector in the US, there will not be a strong recovery, as small businesses do most of the hiring. • The European Union is bursting apart – and even if by some miracle it stays together, even its own economists do not forecast an end to its recession any time soon. • China, once seen as a sort of economic savior to the world, has reported much lower growth than in past years, and seems to have taken a political step backward with its latest changes in top leadership. • US unemployment remains high and corporate earnings low, resulting in greatly reduced taxes remitted to all levels of government. Trillion-dollar deficits seem to be the “new normal,” but they can’t be – the strain on government budgets is reaching the breaking point. • The US Federal Reserve has moved beyond QE2, skipped QE3, and gone right on to QE Forever. All around the world, governments are running their money-printing presses as fast as they’ll go.
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7 Must-Own Metals & Mining Stocks for 2013 In short, the dollar and the euro are being systematically destroyed. This is the phenomenon that is powering the rise of gold and silver – the only true money and store of wealth. Until the above problems have been solved and sanity returns to government spending, the gold bull market will keep gaining speed. It’s time to get on board, before the train leaves the station. The current excellent opportunity to get your boarding pass at a discount should not be passed up. The question, of course, is choosing which companies to climb on board with. There are hundreds of companies both small and large in the business of metals exploration and mining, and the vast majority of them will never actually produce anything at all. For investors, separating the wheat from the chaff is absolutely essential. For over 30 years, Casey Research has been bringing the very best companies to the attention of subscribers: companies with the best management, property, financing, and more. The companies in this report are among our top investment recommendations from both Casey International Speculator and BIG GOLD. Each was carefully selected using an evaluation method developed by our chairman, Doug Casey, that he called “The 8 Ps.” Doug’s 8 Ps are the secret of finding winning gold, silver, and other natural-resource stocks. It’s a relatively simple process of questioning. Here they are: 3 People. Who are the key players involved with the company? 3 Property. Does the company have a credible ore body or a moose pasture? 3 Phinancing. How is it going to pay for everything? 3 Paper. What is the structure of the company? 3 Promotion. How will it get the story out? 3 Politics. How stable, safe, or meddlesome is the jurisdiction? 3 Push. What’s going to move the stock? 3 Price. How much is the company worth? However, answering these questions is far from simple. The first P, People, is by far the most important. With the right leadership and expertise covering a company’s key positions and making the decisions, the other Ps will fall into line. It’s all about the people. And nobody has a better network of insiders and on-the-ground contacts throughout the mining industry than Casey Research. That’s not hyperbole; that’s a fact. Doug Casey has the most-coveted Rolodex in the business. And of course it is our people who make it happen. Louis James, senior metals analyst and editor of the International Speculator, and Jeff Clark, editor of BIG GOLD, have visited many of the mine sites, grilled 3
7 Must-Own Metals & Mining Stocks for 2013 management, met with politicians, tapped their sources, and scrutinized company financials to identify the companies with all the right stuff. We present seven of them here. Equally important is our integrity; we do not accept envelopes under the table and a wink, nor advertising on our website in exchange for a compromised company report. We are beholden to no one but our subscribers. Period. You can make investment decisions with 100% confidence that our reviews are unbiased, critical, and candid. The current correction may be one of your last chances to own these companies at good prices before the next leg up in the resource sector takes hold. Mind you, these stocks can be volatile, but it is exactly those swings in share price that make for great entry points. So get ready to grab this gold bull by the horns and hold on for the profit ride of your life. As Doug Casey is fond of warning: “Hang on to your hat!” Your Casey Research Metals Division
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7 Must-Own Metals & Mining Stocks for 2013
7 Must-Own Metals & Mining Stocks for 2013 By the Casey Research Metals Division
SILVER COMPANIES FIRST MAJESTIC SILVER CORP. Metals: Silver, gold, lead, and zinc AG, T.FR, www.firstmajestic.com
Price
Share: US$ 22.65
MCap: US$ 2.63B
On 12/10/12
Shares
Est. SO: 116.13M
FD: 120.99M
As of: 10/31/12
Cash
Est. US$ 72.8M
EPS: US$0.61/share
As of: 9/30/12
Buy 1st Tranche at US$22; Back Up the Truck if It Falls to US$19. First Majestic is a silver producer with four mines in operation and a fifth starting up, all located in México. What we like about First Majestic is that annual production will double to 16 million ounces by 2014, giving us the chance to buy the next big producer before it becomes one. With plenty of cash and an aggressive development and exploration strategy, this mid-tier producer is on track to becoming a major and almost certainly a keeper to the end of the bull market. Both Jeff Clark and Louis James have visited First Majestic’s operations, and here’s what they found… PEOPLE Keith Neumeyer, president and CEO, founded First Majestic in 2002. This is actually his second big success, having founded First Quantum Minerals (T.FM), a mid-tier copper producer whose market value is over $10 billion today. Keith has listed a number of companies on the Toronto Stock Exchange and thus has extensive experience navigating the financial, regulatory, legal, and accounting issues. While Keith provides the vision, Ramon Davila, COO, provides the technical expertise. A native Méxican, Ramon has worked for Peñoles (PK.IPOAF), the largest silver producer in México, and Pan American Silver (T.PAA; Nasdaq.PAAS), where he was in charge of all aspects of production, exploration, and administration of its México operations. He holds an engineering degree in mining and metallurgy, a master’s degree in minerals economics, and is a board member of the Chamber of Mines in México. We’ve met management and find them to be competent and well organized. They were also awarded the “Socially Responsible Company” for four consecutive years (‘08 to ‘11) from the Centro Méxicano para la Filan5
7 Must-Own Metals & Mining Stocks for 2013 tropía (CEMEFI). It’s our impression that the company is hitting on all cylinders, which was not always the case (more below). Overall, this team is highly experienced, conservative, and not prone to outlandish claims. PROPERTY First Majestic’s four operating mines are expected to produce 8.4-8.7 million ounces of silver (9.2 to 9.5 million silver-equivalent ounces) this year at about $8.90/ounce. Its fifth mine starts production in December 2012 and should hit commercial levels in early 2013. The company currently has 86 million ounces in Reserves, a lower number than some of its bigger peers. However, we’re buying the stock because big production increases are on the horizon – 11 million ounces in 2013 and 16 million by 2014 – and also due to its tremendous organic growth potential. The company has a total Reserve and Resource base of 383 million ounces, and as you’re about to see, there’s a good chance that number is going a lot higher. Here’s a breakdown of AG’s assets… La Encantada is the company’s flagship operation, a remote mine located about 60 kilometers from the Texas border. The 4.5 million ounces of annual production comes from blending old tailings with fresh mine ore (350 g/t). The 200 g/t average-grade composite material is then sent for processing through an enormous 4,000-tonne-per-day cyanidation mill. Management informed us that the company is testing a new roasting technique that it hopes will raise recovery rates. Costs will remain higher for the next two years and then drop to under $7/ounce by 2013. What’s exciting, though, is the exploration potential; after touring the mine and examining the drill maps, it’s entirely possible that La Encantada could hold a half-billion ounces – and a billion is not out of the question, though we’re certainly not counting on that. Several anomalies have been identified by geophysics that are similar to the mineralized areas currently being mined, and drilling is under way to test these targets. The company has a total land package of 4,000 hectares that it is just now starting to explore. This site alone is a company-maker. La Parrilla, 65 kilometers southeast of the town of Durango, produced 1.8 million silver-equivalent ounces last year at a grade of 180 g/t. Mill expansion doubled capacity and increased recoveries, pushing output to 3 million ounces annually/year. The focus for now is to finish the mill, but the company recently expanded land holdings to 69,867 hectares, which included several old mines. Lots of land to explore. San Martin, which we haven’t toured, produces 1.3 million ounces/year. Noteworthy here is a ramp that was built at what’s called the Esperanza Vein that will increase production this year. The operation sits on 8,000 hectares, most of which hasn’t been explored. The company produces its own silver bullion rounds and bars at the San Martin mine. The prices are competitive, and the minimum for rounds is only 20 ounces (and 10 for bars). You can check them out if interested.
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7 Must-Own Metals & Mining Stocks for 2013 What is perhaps most exciting, though, is the Del Toro development project, the company’s next big mine. Located 60 kilometers south of La Parrilla, mining activities are just under way, and once in full operation by 2014, Del Toro will produce 6 million ounces/year. This mine alone will double First Majestic’s current production levels. Production is initially processing 1,000 tonnes of ore per day, but will eventually increase it to 4,000 tonnes by mid-2014. Mining will begin at two areas within the project – Perseverancia and San Juan – where recent development work revealed higher grades than originally thought, now about 300 g/t. The site also holds lead and zinc (and even some gold), enough that the silver will be produced at essentially zero cost after the base-metal credits. This will be a large and incredibly profitable mine. And there’s more. Not only have the two main ore zones not been completely defined (meaning they are most certainly bigger than currently known), a recent drill intercept showed a third ore zone might be connected to them. Grades in that hole hit as high as 2,000 g/t – 64.3 ounces for every two wheelbarrows of ore! Further, the company has identified eight other zones that have demonstrated mineralization and have yet to be fully explored. The upshot of all this is that the total Resource at Del Toro has yet to be determined, and while we can only speculate, we know it’s going to get bigger, potentially much bigger. Finally, La Luz in eastern México is an exploration project that will get a lot of drilling attention once the environmental impact study permits are received in the second half of 2013. The bottom line is that, first, no other primary silver producer will undergo a jump of this magnitude in nominal production over the next few years. (The only exception would be if Pan American gets Navidad permitted.) And output could realistically jump another 1-2 million ounces at La Encantada by 2014. Second, First Majestic has more growth on tap than can be projected from current Resources. The company has about a dozen drills turning, so the potential to substantially add ounces is high. At this point, even management can’t say how big the company will eventually be. This lends a speculative element to the stock, as big organic growth will be one of the major catalysts for years. To be clear, as with any miner, First Majestic isn’t perfect. It took several years of development to reach its current level of production, longer than both it and the market anticipated. And costs will be high for the next year or so due to price inflation in labor, chemicals, and energy. But management has recently been over-delivering, making our timing ideal. POLITICS As longtime readers know, México is one of the safer jurisdictions in the world. The greatest concern with First Majestic is security. We had a military escort at both Del Toro and La Parrilla, as well as AK47-toting guards patrolling the perimeter at La Encantada. This is definitely an area of concern, because when Louis James first visited two years ago, there was no military presence. 7
7 Must-Own Metals & Mining Stocks for 2013 When asked, management explained that it was a “precaution only” and that the company has “never had any issues.” We were also assured that operations are fully insured should something ever occur. While there’s no denying that some risk exists, it’s not enough to keep us from investing; and management seems to be doing everything it can defensively. We’ll be monitoring this, of course. PHINANCING/PAPER The company has no debt, no hedges, and $72.8 million in cash. It doesn’t pay a dividend, but we’re confident that this will come at some point, given the amount of cash it’ll be generating. How much cash, you ask? Earnings should double by 2014 at current silver prices. Consider this: of all the primary silver producers, only Silver Wheaton and Pan American had higher earnings per share in 2010, and First Majestic is just getting started. By 2015, AG will likely be spitting out a billion dollars in annual cash flow, and that’s assuming silver prices never rise from current levels. Keith owns 3 million shares, and insiders own approximately 4% of shares outstanding. Their motivation is aligned with ours. PROMOTION AG has a dedicated investor-relations staff that is very accomplished in getting the word out. The company listed on the NYSE in December 2010, so the exposure to US investors certainly increases attention. No concerns here. PUSH A slew of updated 43-101 reports will be released next year, including La Parrilla, La Encantada, La Guitarra, and Del Toro. Other catalysts include the startup of the cyanidation plant at Del Toro, where production is slated to rise from 200,000 ounces this year to 7.2 million by 2014; construction of the new 1,000-tonne-per-day (tpd) mill at La Guitarra in the second half of 2013; and expansion at San Martin. The biggest catalyst, of course, is the double in production over the next two years. PRICE Looking at a recent chart of AG shows that it almost doubled from June to September 2012. Why would we buy a stock after such a climb? Answer: Because it’s eventually going higher. And it’s a safer pick now because the company hadn’t turned a profit until mid-2010, which it’s since demonstrated in spades. The primary reason one would consider owning this stock is its tremendous production and organic growth potential. While not every goal will be met, the end result for the company will be the same: bigger. 8
7 Must-Own Metals & Mining Stocks for 2013 We consider AG a Best Buy. Buy a 1st tranche at US$22, and back up the truck if it falls to $19. Keep in mind that AG is highly leveraged to the silver price; approximately 90% of revenue will come from silver this year, making it the purest silver producer in the world. Expect the stock to be as volatile as the metal, and use big price drops to start or add to a position. Given the growth trajectory of the company along with the tremendous exploration potential, it’s my opinion that buying First Majestic now is like buying Pan American a couple years before it became one of the world’s largest silver producers. How high could the stock climb over the next year or so? Assuming that the silver bull market isn’t done, AG could potentially hit $40 by the end of 2013, and $50 in 2014. And absent any drastic changes, we’ll be holding it longer than that; odds are high this is a stock you can buy and tuck away. Get the best price you can and plan on holding until the silver bull market comes to a close.
ALEXCO RESOURCE CORP. Metals: Silver, gold, copper, lead, zinc AXU, T.AXR, www.alexcoresource.com
Price
US$3.79
MCap: US$228.9M
On: 12/10/12
Shares
SO: 60.4M
FD: 65M
As of: 9/12
Cash
C$26.7M
EPS: C$0.09
As of: 11/2012
BUY – Alexco is an environmental remediation company turned high-grade silver producer in mining-friendly Yukon. The company has growth on tap and huge exploration potential. By the Ps… PEOPLE Alexco is run by President and CCEO Clynt Nauman, a veteran geologist with almost four decades of experience. We’ve known Clynt for years and know him to be a pretty straight shooter who delivers on his promises. Top management also includes COO Brad Thrall, a veteran metallurgical engineer; VP for exploration Alan McOnie, a veteran geologist; and James Harrington, a biologist who heads the Alexco Environmental Group. The word “veteran” keeps popping up in describing these people, as they all have decades of experience in doing what they do – and it shows in the results they’ve achieved. The team includes hundreds of people on the ground in the Yukon, of course. We’ve been on site twice and have always come away impressed by the quality of operations and professionalism of these people. 9
7 Must-Own Metals & Mining Stocks for 2013 Bottom line: these people made significant bonanza-grade discoveries, built a first profitable mine, and are working on building two more. We have high confidence in their abilities. PROPERTY Alexco is a district-consolidation story. The district in question is the historic Keno Hill district of the Yukon, site of some of the largest, highest-grade silver mines anywhere, including the Hector-Calumet mine that produced over 90 million ounces of silver. Exploitation by numerous parties over more than 100 years ended in a period of low metals prices with numerous parties in bankruptcy, and the government left with substantial environmental liabilities. Enter Alexco, a company that gets paid to fix environmental problems; it was able to work out a deal with the government to consolidate the heart of the district, which it would also clean up, mine responsibly, and reclaim when done. Keno Hill is an extremely target-rich environment, with multiple past-producing mines (that averaged about 40 ounces of silver per ton – ounces, not grams), known deposits, and highly prospective exploration targets. Since starting up modern exploration in 2005, Alexco has drilled off five deposits, including one brand-new, blind discovery (Flame & Moth), which sits almost under the mill the company built. These deposits – Bellekeno, Lucky Queen, Onek, Flame & Moth, and Bermingham – contain over 30 million ounces of silver in the Indicated category, averaging almost half a kilo of silver per tonne. Not wanting to dilute shareholders with endless issuances of equity to explore all the potential targets, Alexco decide to put the “low-hanging fruit” – the Bellekeno mine – into production and use the cash flow to pay for future growth. Bellekeno’s Indicated resource of 7.3 million ounces of silver averages 925 g/t silver. Current mining is at about the 2.0-million-ounces-per-year level, which generated net income of $5.3 million last quarter. However, now that the company is underground at Bellekeno, it is finding more high-grade mineralization not in the mine plan, including one high-grade area outside the currently defined mineralized area. This area was slated for drill-testing this year, and we expect results soon. The point at the moment is simply that though small, Bellekeno is exceptionally high grade, makes money, and is bigger than official numbers indicate. That money is being put back into the ground, developing the next two mines Alexco plans to put into production: Onek and Lucky Queen. Onek’s modest Indicated resource only tallies up to 3.65 million ounces of silver, averaging 194 g/t silver, but it runs 13.7% zinc, and has gold and lead credits as well. This is near surface and near the existing mill, so all Alexco has to do is tunnel into the hillside that contains it and start blasting and hauling. That tunneling is mostly done, and it’s final permitting that will determine when Alexco can start mining ore. Lucky Queen has 4.9 million Indicated ounces of silver at present, but the average grade is even higher than Bellekeno: 1,227 g/t silver. This past producer has an existing tunnel right into the deposit, which Alexco has now rehabilitated, and there’s a good chance of extending the mineralization now that the company can drill 10
7 Must-Own Metals & Mining Stocks for 2013 from underground. At such grades, it doesn’t take a lot of tonnage to add a lot of silver. We understand that resource expansion drilling is under way, and we look forward to the results. Flame & Moth has 11.05 million Indicated ounces averaging 453 g/t silver, and Bermingham has 3.8 million Indicated ounces of silver averaging 460 g/t. Both of these are earlier-stage projects: not ready for a mine plan but still wide open for expansion. Bermingham, we should note, was known for having “bad ground” in the past (unstable rock). Alexco says its new understanding of the controlling faults in the area mitigate this, but even if not, this is only a small part of Alexco’s inventory in the Keno Hill district. What’s particularly interesting to us is that the Flame & Moth discovery does not outcrop. It’s a completely new discovery in the area made by Alexco – and this is an area that was host to deposits ten times as large and at twice the grade. In other words, there’s no reason to assume that the best or largest deposits in the area have already been discovered; Alexco has excellent chances of finding more and better deposits and the cash flow to pay for that work. In short, we don’t really look at this as being primarily a production story. There is production, and it’s high grade, but it’s also relatively small scale. What we like most about it is that it pays for and gives us all the upside of potential large, bonanza-grade discoveries for free. In this almost insanely high-risk business – mineral exploration – that kind of upside with little downside is an extraordinary opportunity. That’s what makes this a must-own stock. PROMOTION Alexco routinely delivers spectacular drill results to the market, often grading not grams, nor ounces, but kilos of silver per tonne. When that happens, the market takes note. Alexco doesn’t need any help with promotion; it just needs to keep exploring and delivering thick, bonanza-grade drill intersections. POLITICS Alexco is a pure Yukon play. The Yukon has permitted several mines in recent years, making it a workable mining jurisdiction, but it’s not easy. Environmental regs are strict, and permitting is often slow. Alexo is currently waiting for final permits for both Onek and Lucky Queen, which are already overdue. Since this is really a matter of scaling up production in an area already being mined, and since it’s an area of past production that already left behind environmental problems which Alexco is helping to clean up, we think Alexco will get its permits, and probably sooner rather than later. There’re also issues with lack of roads and power in some parts of the Yukon, which is indeed a remote place in most people’s eyes. This may be a greater concern for new ventures in places far from such infrastructure, but the 11
7 Must-Own Metals & Mining Stocks for 2013 Keno Hill district has access via paved road, and Alexco has more power than it can use at present – even more than it will need once Onek and Lucky Queen start up. In short, we see no major risks for Alexco on the political front. PAPER/PHINANCING Since Alexco is generating net income, it can keep exploring and building more mines without diluting shareholders. This is why the company only has 60 million shares issued and outstanding – at a time when most other junior producers have twice as many, if not a higher multiple. There are no warrants outstanding, and fewer than 5 million stock options. Management and directors – notably including Clynt, who put a lot of his own money into Alexco – own 11.2% of these shares. We like it when management has as much to gain as any other shareholder from the performance of the shares and not just operational results. We like it even more that this tight share structure magnifies the upside, should the company make a major, Hector-Calumet-style discovery. Note, however, that the same tight share structure means the float is smaller, so you have to be disciplined about how you buy or sell these shares – trying to buy or sell huge blocks of shares could move the share price more than you intend. PUSH Alexco has Push coming on several fronts: • Assays are pending on drill results on the five current 43-101-compliant resources. • Assays are pending on drill results from new areas of exploration – such results have moved the market in the past. • Permits are pending for Onek and Lucky Queen. • Recent cost improvements and increase of throughput at the plant bode well for financial results this quarter and in quarters ahead. • Barring major regulatory setbacks – which we do not expect – Alexco should be producing at a significantly higher level within six months. PRICE The best part of this story is that apart from normal growing pains, Alexco has delivered discoveries, production, and cash flow as promised, but the current correction has hit so hard that AXU/AXR shares are now selling 12
7 Must-Own Metals & Mining Stocks for 2013 at multiyear lows. This is a terrific opportunity that we would not hesitate to jump on. And if we owned shares already at higher prices, we’d average down with gusto (especially this month, December 2012, while tax-loss selling is hitting hard). Should we be lucky enough to see the market melt down further, we’d back up the truck for more with stink bids at ridiculously low prices, and see if we could get lucky.
GOLD COMPANIES ELDORADO GOLD
Metals: Gold NYSE.EGO, T.ELD, www.eldoradogold.com Price
Share: US$ 13.51
MCap: US$ 10.04B
On 12/10/12
Shares
Est. SO: 713.8M
FD: 729.2M
As of: 10/25/12
Cash
Est. US$ 271.4M
EPS: US$0.28/share
As of: 9/30/2012
Buy 1st tranche under $14. Buy 2nd tranches at $13. Back up the truck at prices below $12. Having exposure to China is key if you plan to fully participate in the gold bull market, and the largest foreign-owned gold producer operating in China is Eldorado Gold. What’s even more exciting is that it’s building five new gold mines and will hit 1.7 million ounces annual gold production by 2016, an increase of 160% over 2012 levels. It’s also one of the lowestcost producers in the industry, making the company very profitable. With a strong balance sheet and high growth potential, EGO is another mid-tier on its way to becoming a major and will push its stock much higher in the process. PEOPLE Eldorado is led by President and CEO Paul Wright, with over 30 years’ experience in developing and operating both open-pit and underground gold mines. Prior work includes Placer Dome, the Redpath Group, and Granges. He’s also a member of the Canadian Institute of Mining, Metallurgy, and Petroleum and the Institute of Materials, Minerals and Mining of London. Robert R. Gilmore, a certified public accountant, is chairman and joined the company is 2003, with over 30 years’ experience working with resource companies. He was past CFO of Dakota Mining and Teamshare and serves on the boards of Fortuna Silver Mines and Layne Christensen Company. Also of note is recent addition Peter Lewis, VP of Exploration. Peter holds a Ph.D. in geology and brings over 15 years of experience in mineral exploration, including consulting for Teck Cominco, Barrick, Newmont, and Ivanhoe Mines. 13
7 Must-Own Metals & Mining Stocks for 2013 In our conversations with management, we got the distinct impression that this is a conservative company; Paul insists that the company be able to operate with a high or low gold price. Translation: we keep costs low and don’t take a lot of risks. Running a tight ship appears to be SOP at Eldorado, a management philosophy we can live with. PROPERTY Eldorado has seven operating gold mines in Asia, Europe, and South America, including three in China. It also has four gold projects in development. Other than its newly commissioned iron-ore project in Brazil, the company is focused entirely on gold.
EGO has 19 million ounces of proven and probable gold Reserves, and another 27.1 million in Resources. Of the company’s total reserves, almost half are in China. Gold production in 2012 will total about 650,000 ounces, but the company expects to hit 1.7 million ounces by 2016, an increase of 160% over 2012 levels. This growth trajectory is one of the biggest of all gold producers in the mid-tier or senior category. Make no mistake: this is a serious intermediate producer that’s on its way to becoming a major. Also appealing is EGO’s low cash costs of $465/ounce, lower than about 75% of the industry. And given the high grades of its development projects, management estimates that costs will fall to about $350/oz. by 2016. Management has also shown success at both development and exploration: it converted Inferred resources into Reserves at the Tanjianshan project in China, so that total company ounces never dropped; and current operations are the result of discoveries made by its own geologists. With such a good track record, we think they’re likely to find more. The company will spend an eyebrow-raising $54 million on exploration in 2013.
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7 Must-Own Metals & Mining Stocks for 2013 POLITICS Operations are located in China, Turkey, Greece, and Brazil, with development projects in Greece, Romania, China, and Brazil. Having an experienced and well-connected management is job #1 to operate successfully in China. As testament to management’s savvy, Eldorado was the first North American producer to build and operate a gold mine in China. The company has demonstrated it has what it takes to continue working effectively in the country. (The company has a good presentation on its website regarding the facts and fallacies of mining in China.) Turkish politics isn’t perfect, but regulations for mining are stable and supportive. In fact, a new mining law was approved by the government last year and streamlined permitting, a definite pro-mining move. And the tax rate is comparatively low: 20%, plus a 1% royalty, which compares favorably to other countries in the region and is much lower than the US corporate tax rate of 35%. Turkey’s long history of mining, dating back to the Roman era, may explain this; you can still see mine out carvings at some ruins. Management tells us it has excellent relations with both the Turkish government and local communities. Louis James was in Turkey in late 2012 and inquired about Eldorado. He was told by several independent local experts that they like EGO “a lot” and that the company has “done things right in Turkey.” The violence covered in the media in late 2012 is spillover from fighting by Kurdish separatists and a Syrian civil uprising, and it’s all confined to the border regions, far from operations. Louis also heard positive things about the Certej project in Romania when he was there. It’s important to note that Romania is a difficult permitting jurisdiction – but Certej has been permitted. Some investors also tie the company to Greece’s woes; while this will occasionally push the stock around, the company’s long-term outlook is stronger than these short-term forces. We always monitor this issue, but for now we rate the political risk for EGO’s projects as below average. PAPER/PHINANCING The company has $176.4 million more in cash than debt and has sufficient cash flow to fund mine development. With an approximate 70% margin at today’s gold price, the company can avoid both debt and dilution, something that we’ve seen handicap other producers (and their share prices). The company has no gold hedges and pays an annual dividend of C$0.18/share. Bottom line: this is a financially sound company.
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7 Must-Own Metals & Mining Stocks for 2013 PROMOTION EGO trades on the NYSE, along with Canada’s and Australia’s exchanges, giving the stock serious exposure to world markets. The company is covered by 21 analysts. More exposure = more investors = higher share price. PUSH Catalysts include receiving an approved environmental impact assessment (EIA) for Perama Hill in Greece and then starting mine construction; a company-wide Resource and Reserve update; an EIA to expand production at Kişladağ in Turkey, which would double production from this flagship mine; and submitting for permit approval at Eastern Dragon in China, slated to begin production in 2014. There will also be construction decisions on TZ in Brazil and Certej in Romania. Plenty in the pipeline for 2013. PRICE The stock is cheap by most metrics. It traded in a range in 2012, making this an ideal time to buy before it breaks out. With lots of growth on tap and low cash costs across virtually all its operations, we believe the company is positioned to not only become a lot bigger, but a very profitable producer. No guarantees, but our analysis suggests that EGO will be a $30 stock by the end of 2014. st nd We consider EGO a Best Buy. Buy a 1 tranche under $14. Buy 2 tranches at $13. Back up the truck at prices below $12.
We think this is another producer you can hold till the end of the bull market.
FRANCO-NEVADA
Metals: Gold, silver, platinum, palladium, nickel, copper, lead, zinc T.FNV, NYSE.FNV, www.franco-nevada.com Price
Share: C$ 56.72
MCap: C$ 8.1B
On 12/10/2012
Shares
Est. SO: 146.5M
FD: 161.5M
As of: 11/6/2012
Cash
Est. US$ 951.2M
EPS: US$0.95/share
As of: 9/30/2012
Buy 1st tranche at $55. Buy 2nd tranches at $50. Back up the Truck below $50. Want to lower your gold equity risk? The world has become a riskier place for all investors, in all sectors, and we unfortunately can’t eliminate risk. However, we can certainly reduce it. At a time when the market remains volatile and unpredictable, it’s critical to hold a portion of our gold investments in the safest stocks. Here’s how 16
7 Must-Own Metals & Mining Stocks for 2013 you can accomplish that by holding a royalty company… Fixed costs. Once contracts are negotiated with a producer, a royalty or stream company’s costs are fixed (some contracts include inflation adjustments, but the percentages are relatively minor). And since most royalty and stream agreements continue for as long as there’s production, this offers a real advantage. If energy costs rise, wages increase, currency exchanges rates move against the producer, or regulations or taxes are increased, mine margins suffer – but royalty and stream companies are unaffected. As long as the mines don’t shut down, these companies still collect on whatever metal is produced. This is a very appealing arrangement during a period of rising costs. No operational headaches. Workers calling in sick or demanding higher pay? Truck tires need to be replaced sooner than is budgeted? Unexpected complications? Literally hundreds of issues arise when operating a mine – but the royalty or stream holder simply waits for the next check to arrive. The risk here is if an operation suffers a major delay. This happened when Barrick pushed back the start of production on Pascua-Lama in Argentina, and royalty holders were forced to wait an additional year for payments to begin. (Contracts usually contain reimbursement clauses to protect the royalty holder against a canceled operation; a case where a royalty holder received nothing due to a canceled project has rarely occurred.) Diversification. Most royalty companies have stakes in a greater number of projects than a typical mining company, which reduces project-specific risk. If something goes wrong with one asset, there are many others still operating and paying. The bottom line is this: Royalty companies have less risk than any producer, while simultaneously having just as much upside. The first company to use the royalty model in the gold industry was Franco-Nevada. FNV started in 1985, sold the business to Newmont in 2002, and then repurchased the royalty portfolio in January 2008. It’s since been growing by leaps and bounds, and in our view is the #1 royalty stock to own. Here’s why… PEOPLE Franco-Nevada is chaired by Pierre Lassonde, whom many consider a leader in the gold industry. Pierre was president of Newmont Mining from 2002 to 2006 and cofounder and co-CEO of the original Franco-Nevada from 1982 to 2002. He is past chairman and a current director of the World Gold Council, author of The Gold Book, has served on many mining boards and committees, and won numerous industry awards. President and CEO is David Harquail, who also hails from Newmont Mining, as well as the original FrancoNevada. Like Pierre, he has served on numerous mining boards and industry associations.
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7 Must-Own Metals & Mining Stocks for 2013 Heading up acquisitions is senior VP Paul Brink, with experience in mining-focused investment banking and financing at Newmont Capital, BMO Nesbitt Burns, and UBS. There are many other key executives with the company, which you can see here and here. All told, this is a highly experienced team with over a century’s worth of combined experience. PROPERTY The majority of Franco-Nevada’s revenue comes from 45 producing precious metals assets. It hase royalties on another 25 projects that are in development, plus 139 exploration projects. Currently, gold represents 76% of all company revenue and precious metals 91%, a higher ratio than Royal Gold (RGLD). The company also has 135 oil and gas royalties, though those only represent 8% of revenue (you can view all assets here). Here are some of the company’s bigger gold royalties: • US: Goldstrike, Gold Quarry, Marigold, Mesquite, and Holister. •C anada: Sudbury (3 mines), Golden Highway (3 mines), Musselwhite, Timmins West, and Hemlo • Australia: Duketon, Henty, South Kalgoorlie, and Bronzewing • I nternational: Tasiast, Palmarejo, Subika, Cerro San Pedro, Edikan, and MWS. These are all with major mining companies, including Goldcorp, Barrick, AngloGold, New Gold, and Coeur. Further, most of Franco-Nevada’s key assets should be in operation – and thus paying royalties – for the next 20+ years.
There are various types of royalties, the most common being a net smelter return (NSR). Here, smelter costs, which average $5-$10/ounce, are deducted from the revenue against which the royalty is calculated – but a producer’s operating or related costs are not. Separately, a net profits interest (NPI) royalty, for example, includes deducting certain production-related costs from gross revenues, and a rise in production costs would mean a reduced payment to the royalty holder. As of 2012, 89% of Franco-Nevada’s royalties are NSRs or Streams, meaning that royalty-company revenue is not impacted by production costs.
What’s just as exciting, though, is the level of growth that has yet to kick in for FNV. With the existing agreements already in place and assuming mild rises in precious-metals prices, the potential revenue from the royalties that have yet to start paying exceeds $2 billion. And that’s without further exploration and discoveries! In fact, by 2015, annual royalty revenue is expected to be more than twice that of 2010, reaching $450 million or more. And long-term, attributable production will still be growing in 2017, and that’s without further acquisitions – something that is certain to occur. The long-term growth trajectory of FNV is enormous. 18
7 Must-Own Metals & Mining Stocks for 2013 The kicker to all this is that it will transpire with minimal exposure to rising costs, something we expect will pinch producers harder as inflation inevitably rises. If you’re bullish on the price of gold, it’s easy to see how this company can earn enormous profits over the coming years. POLITICS Existing royalties come from the US (27%), Canada (26%), México (26%), Africa (16%), and Australia (3%). The riskiest mines are probably those in South Africa; the country has problems related to politics, energy, and labor. That said, these assets will represent less than 12% of the company’s total net asset value... and unless the mining business completely shuts down there, the royalties will have value. In total, we would rate political risk as low. PAPER/PHINANCING As you can see in the table above, Franco-Nevada has no debt, and almost a billion dollars in cash. It also pays $0.72/share in dividends ($.06 monthly), for a current yield of 1.3%. Combined with the amount of cash flow it generates every quarter, this is a financially sound company. The biggest risk here would likely be a poor deployment of capital in the eyes of investors (buying non-gold assets, overpaying for an asset, buying a project that’s years away from production, etc.). We rate this risk as low, based on management’s excellent track record. PROMOTION The stock is well known in Canada and is covered by 11 analysts. As the company continues to grow, it will command more attention in the marketplace with each new acquisition and every increase in revenue. When inflation heats up and investors are looking for a gold stock largely immune to rising costs, the company will promote FNV as a perfect solution. PUSH The strongest catalysts for the stock in 2013 will be the new royalties kicking in – Detour Lake is a big one, and fullyear payments on Hemlo, Duketon, and Subika will start next year. Other catalysts include potential positive news on permitting at New Prosperity and Rosemont and expansion feasibility at Tasiast. And of course, further acquisitions, something we’re confident will occur with the amount of cash they’re sitting on. Plenty of push for 2013.
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7 Must-Own Metals & Mining Stocks for 2013 PRICE In 2012, FNV rose 49% (through December 10). This was in stark contrast to gold rising 9% and GDX (Gold Miners Index) dropping 9.5%. This is exactly the kind of strength we want in a gold stock. Based on our projections, we think FNV trades between $80 and $90 by year-end 2014. And long term, it will march higher since the company will still be growing in 2017. That said, don’t buy with reckless abandon, as it has galloped far ahead of its 2012 lows. Best Buy. Buy 1st tranche at $55. Buy 2nd tranches at $50. Anything below $50 should be considered back-up-the-truck territory. Plan on holding to the end of the bull market.
ATNA RESOURCES
Metals: Gold, silver T.ATN, ATNAF.PK, www.atna.com Price
Share: C$1.13
MCap: C$162.9M
On: 12/10/12
Shares
SO: 144.2M
FD: 153.2M
As of: 9/2012
Cash
C$23.9M
EPS: $0.14
As of: 12/2012
BUY FIRST TRANCHE – Atna is not a new story to us, but has recently shown that it can deliver to the bottom line as an emerging producer. The company has one operating mine and two advanced-stage projects well on their way to becoming mines. The company has a lot of both exploration and production upside, and it’s selling cheap, by more than one measure. All of this makes Atna an attractive Buy, but let’s look at it by the Ps. PEOPLE CEO James Hesketh has over 30 years of experience in mine operations, engineering, and mining finance. He has been a director of Atna since 2001, became president in 2008, and CEO in January 2009. Before joining Atna, he worked for over 11 years with Cyprus Amax Minerals as chief engineer, director of business development, and later as superintendent of technical services for the open-pit Sierrita and Bagdad copper mines in Arizona (now owned by Freeport-McMoRan). Before joining Cyprus, Hesketh spent seven years with a company named Dresser Minerals as a mine manager in Canada, Thailand, and Greece. Another key person in Atna’s management is David Watkins. We have known Dave for many years; when we recommended Atna in 2005, Dave was CEO and part of our reason for recommending the stock; he has a solid reputation as a straight shooter. 20
7 Must-Own Metals & Mining Stocks for 2013 On the technical side, the person in charge of overseeing operations at the company’s producing Briggs mine and the development of the Pinson and Reward projects is Douglas Stewart. Before joining Atna in 2011 as chief operating officer, Stewart spent 14 years as VP of project development at Gold Reserve Inc. (V.GRZ) and as general manager of the Florida Canyon mine in Nevada and Montana Tunnels mine in Montana at Pegasus Gold Inc. Atna’s management has many decades of cumulative experience, and – having shown they can make discoveries, build mines, and make money – we’re ready to back them again. PROPERTY Atna’s three key projects are: the Briggs gold mine in California, and the Pinson and Reward gold projects in Nevada. Briggs Briggs is the company’s first operating mine. It is a past-producer: first built in 1995; closed in 2004 due to the low gold-price environment; and restarted by Atna in July of 2009. We have to say that we were very skeptical of Briggs before the company showed it could make it work; it’s an open-pit heap-leach operation near Death Valley, and we thought the risk of environmental opposition was high. But the company persevered, got Briggs permitted, rebuilt the mine, and is now making money. Kudos to management. As of Q312, Briggs was producing at an annualized rate of 34,400 ounces of gold, generating a modest net income of $700,000. As of last May, Briggs had 247,000 ounces of gold in Proven & Probable reserves, at 0.6 g/t gold, within a Measured & Indicated resource of 662,000 ounces. There is also an Inferred resource of 229,000 ounces at 0.56 g/t Au. This is not very large, and it doesn’t seem likely to get much larger, but it is making money, and the company has growth on tap elsewhere. Briggs’ current NPV, based on $1,500-per-ounce gold and 5% interest rate, is $100 million, slightly below the company’s current market capitalization. That means that when you buy it now, you’ll get a solid producing asset and the rest virtually free. Pinson Pinson was our original reason for speculating on Atna, and our main reason for speculating on it now; it’s a past-producing gold mine with a solid, high-grade discovery in the heart of Nevada’s mining country. Atna had originally optioned the property from Barrick in 2004, subject to a clawback that allowed Barrick to regain a 70% stake in the project – which got exercised in 2006, trashing Atna’s share price. Barrick spent $36 million on the project, then sold 100% of the main deposit back to Atna in 2011. This at last consolidated ownership in Atna of a Measured & Indicated gold resource of 1.1 million ounces averaging 12.4 g/t gold, plus an additional Inferred resource of 1.1 million ounces at 10.6 g/t gold. 21
7 Must-Own Metals & Mining Stocks for 2013 Atna also closed a deal to process Pinson ore at Barrick’s Goldstrike facilities, which had been part of the Barrick JV in the first place: Atna does not need to build a plant – just dig the ore out of the ground and run it through Barrick’s mill. That greatly reduces the amount of capital expenditures needed to get into production at Pinson – a very important thing these days, with capex money so hard to come by. The agreement, however, allows for Atna to choose another third-party facility that would better suit production needs, if it can find one, so Atna is not chained to Barrick – which is a good thing. Barrick retains a 10% net profits royalty that will take effect after the first 120,000 ounces of gold are produced. Since this is on profits, not off the top line, it’s bearable. Atna launched a feasibility study on Pinson that will take into account not only the higher-grade underground resource but also the open-pit resources left by the previous operators. Open-pit resources add 981,700 ounces of gold in the M&I category (at an average grade of 1.32 g/t Au) and 28,300 ounces of gold in the Inferred category (at 1.18 g/t Au) to the company’s total in-situ resource. In a 43-101 report published in May, Atna projected that Pinson will produce a total of 548,400 payable gold ounces at a total cash cost of $935-$1,010 per ounce. At a modest $1,300 per ounce of gold, Pinson returned an impressive 103% IRR; at $1,700 gold, the IRR soars to 239%. The project’s NPV at $1,300 gold is $72 million; at $1,700 gold, it more than doubles to $185 million. If these numbers seem incredible, remember that Atna doesn’t have to build a plant, and that it has a head start with previously existing underground mine development. All it needs to do is access the high-grade ore and haul it to Goldstrike (or Newmont’s nearby operation, or whoever will pay them the most for it). The project is slated to start production by the end of this year, with a planned ramp-up to about 90,000 ounces per year, out of only the existing P&P reserves. As that happens, the market should give Atna credit for Pinson’s NPV, which could easily result in a double of the current share price, even without gold breaking out to higher levels. Reward Reward is just northeast of the Briggs Mine, in Nye County, Nevada. It’s slated to start production in late 2013 as another open-pit, heap-leach operation. According to the latest technical report, Reward promises very rewarding economics: based on 265,800 ounces of gold in P&P reserves, the project’s NPV-5 is $52.8 million, and its IRR is 38.4%, at $1,200 gold. At $1,600 gold, the IRR jumps up to 76.1% and NPV-5 to $116 million. Cash costs are projected at $569-$600 per ounce. If Atna can deliver on this as well as Pinson, the numbers make a good case for an easy double from current valuation levels, maybe more. We have been skeptical of that in the past, as junior explorers that try to become miners often fail at the transition – exploration and mining require completely different skill sets. But Atna has already shown that it can do it, so we’re inclined to start building a position before the imminent value added becomes obvious to the rest of the market.
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7 Must-Own Metals & Mining Stocks for 2013 Other Projects Atna has another interesting advanced-stage project, the Columbia mine in Montana, but it is further down the road and Montana is a harder state to get permitted in. However, it has significant resources: 971,280 M&I ounces of gold at 0.9 g/t and 627,890 Inferred ounces at 0.8 g/t. It’s tempting to write this project off, since Montana prohibits the use of cyanide in gold processing, but Atna has found a workaround. Preliminary tests show that 90%-94% of recoveries are achievable via conventional gravity and flotation to produce gold and silver concentrate. Environmental work, including baseline water quality data collection, has started, and a feasibility study is planned. The feasibility study should deliver reliable estimates of Columbia’s value to ATN, but if the economics disappoint, it will not be a disaster for the company: its other projects have enough potential to deliver outstanding gains on their own. POLITICS Nevada is one of the world’s best jurisdictions – no issue there. Montana has an issue with cyanide, as discussed above, but the company has a workaround, and the project is non-core anyway. California is not mining-friendly, but the Briggs mine is already permitted and in production, so while we’re still not crazy about California projects, we’re not worried about this one. Actually, perhaps due to the state’s high unemployment rate and state budget deficit, California seems to be more cooperative lately. As of the beginning of July, Metal Investment News reports that California has granted all 30 previously received mining permits. No red flags. PAPER/PHINANCING Atna has a reasonable share structure for an emerging producer. There’s some debt and what amounts to hedging, but it’s manageable – and the company didn’t have much choice if it wanted to build its mine. The main thing is that the company has all the cash it needs to get into production at Pinson, thanks to a private placement last September. The shares from this, by the way, come free trading on January 13, 2013, which could prove to be an excellent day to buy at lower prices – but they were issued at a dollar, so don’t expect too much selling pressure. PROMOTION Atna has been around for a while and is well known in the industry. The market noticed its recent transformation into an emerging producer, and some well-known analysts initiated coverage of the stock. Since then, the general market retreat has put the shares back on sale again, giving us prices similar to those before the company 23
7 Must-Own Metals & Mining Stocks for 2013 started making money. We expect this story to get around easily as the company delivers on its planned growth. PUSH Plenty of push here: • More earnings from Briggs. • Start of production from Pinson. • Development milestones from Reward. • Exploration results from these or any of the company’s projects. Continuing cash flow from the company’s Briggs mine will support low-capex development projects, which will allow it to increase the total output during 2013. That should add to E, which should push the P higher, whatever P/E ratios are prevailing. PRICE Given its resource base of 5.6 million ounces of gold in the M&I and Inferred categories (including 1.2 million ounces of gold in P&P), Atna is valued at $22.7 per ounce, excluding inventory, as of August 31. That makes Atna undervalued on a per-ounce basis alone, but Atna’s ounces are cheap and high quality, with imminent production potential and located in good jurisdictions. And we think that that potential will be realized in short order. In short, this is a genuinely undervalued stock, which we think is about to deliver growth the market won’t be able to ignore. Consequently, while sticking with our tactics of buying in tranches, we rate Atna a strong Buy.
PRETIUM
Metals: Gold, silver PVG, T.PVG, www.pretivm.com Price
Share: US$13.72
MCap: US$1.3B
On: 12/10/12
Shares
SO: 94.8M
FD: 102M
On: 11/2012
Cash
C$52.9M
Burn: C$9.5M/mo
As of: 9/2012
BUY FIRST TRANCHE – Pretium is hands-down the best gold-exploration story on the market today. Usually, one makes a discovery that is either large, or high grade – both attributes in one deposit is very rare, but that’s exactly what the Valley of the Kings discovery has. 24
7 Must-Own Metals & Mining Stocks for 2013 PEOPLE For those who don’t know him, Bob Quartermain is someone we know well and in whom we have both a great deal of trust and confidence – another rare combination in this industry. As track records go, remember that Bob took Silver Standard from being a $2-million company to a $2-billion one. He’s halfway to doing it again with Pretium. To do that value-adding work, Bob has hired some of the same Silver Standard personnel he worked with before, making the Snowfield and Brucejack discoveries Pretium now holds, among others. Notably, this includes Ken McNaughton and Joe Ovsenek who, together with Bob, were the heart of the team that delivered so much value. We could say a lot about various individual team members, but we’ll just summarize for now by saying that we know many of them, and know them to be competent. PROMOTION On the subject of Bob, we also note that his track record has won him a following in the marketplace. This is why he was able to raise the rather large amount of funds needed to close the Snowfield/Brucejack acquisition that started this company – over C$400 million – with relative ease. Since then, the exceptionally high grades that Pretium has reported to the market, including over 41 kilograms of gold per tonne, have commanded serious attention. We’ve no concern about promotion of this story. Between the monster size and exceptional grade of the gold resources, this thing will promote itself. PROPERTY Pretium purchased 100% of the adjacent Snowfield and Brucejack projects, located in northwest British Columbia, from Silver Standard in December of 2010 for C$400 million. This hefty price originally purchased a bulk-tonnage gold-copper porphyry-style deposit that was low grade (0.59 g/t gold and 1.72 g/t silver) but huge. Our interest was initially the Snowfield property, which currently has 25.9 million ounces of gold in the Measured and Indicated categories, plus another 9.0 million Inferred, plus almost 127 million ounces of silver in all three categories. But then the company started following up on some narrow but exceptionally high-grade vein and vein stockworktype mineralization on the Brucejack property, including 16,948 g/t gold over 1.5 meters. Subsequent results in this area, called Valley of the Kings, included 41,582 g/t gold over 0.5 meters, 18,754 g/t over 0.6 meters, and 17.750 g/t gold over 0.6 meters. Not all the hits were this high grade, of course, but the company consistently delivers hits grading several kilos of gold per tonne – not grams, not even ounces, but kilos of gold per tonne. Valley of the Kings is a discovery for the record books, with the current 43-101-compliant tally containing 8.5 million ounces of gold at an average grade of 16.4 g/t, plus another 2.9 million ounces Inferred at 17.0 g/t gold (and 10 million ounces of silver at similar grades). This is already a monster deposit, but it will get bigger; new bonanza-grade intersections, including 3,874 g/t gold over 0.5 meters west of a fault that had been feared to 25
7 Must-Own Metals & Mining Stocks for 2013 close off the deposit to the west show that the mineralization is wide open for expansion along strike and to depth. What’s it worth? There is a preliminary economic assessment on Brucejack that was delivered last February. The PEA estimated a capital expenditure of $436.3 million which generated a post-tax NPV-5% of US$1.45 billion and an IRR of 25%, using only $1,100 gold. At current prices for gold and silver, the NPV-5 doubles to US$2.81 billion and the IRR rises to a truly excellent 36.5%. This still only preliminary work, of course, based on a smaller, previous resource estimate, but it makes a good case for value to be added ahead – especially with gold remaining at higher prices. At current prices, Snowfield is also worth billions, but the company is focused on Brucejack at the moment, because the Valley of the Kings would be mined underground and therefore would have a much smaller footprint in the environment and would be easier to permit. This project shows every sign of becoming a major, highgrade gold mine in record time. Why is the stock selling cheaper than it was in early 2012? That’s partly because the whole market sector is down, but mostly it’s because the current resource estimate is smaller than the one back then – smaller, but better. In April of 2012, the company published a 43-101-compliant resource estimate that included 4.9 million Indicated ounces of gold and 10.4 million Inferred ounces. You can’t do feasibility work on Inferred ounces – you need Measured & Indicated ounces for that – but this resource was a large increase over the previous one, and the market loved it. The company kept drilling, and delivered an “interim” resource estimate the following September, but this time tightened the criteria for its modeling of the deposit. The more important Indicated ounce tally grew by 200,000 ounces to 5.1 million, but the Inferred tally dropped by just over 50%, also to 5.1 million ounces. The market reacted strongly and negatively, even though the interim report was a better estimate of what could be shown to be there. That was a buying opportunity. We said so at the time, and that has already worked out well for shareholders; the latest tally comes to the 11.4 million ounces, mostly Indicated, mentioned above. Share prices have risen again, but nowhere near enough to fully value such a large, high-grade deposit. The stock remains an excellent speculative opportunity, an opportunity that may work out in the near term, when the company releases new NPV and IRR numbers based on the much larger Indicated ounce tally. POLITICS British Columbia is not as great a jurisdiction as Quebec or Ontario due to complexities in mining regulations, taxation, and aboriginal land claims. That said, companies like Copper Mountain (T.CUM) have shown that you can work in BC if you do it very carefully – and we have confidence in management to do so. On the other hand, there’s an election coming up next year, in which the same party that was such bad news for mining the last time it was in power is widely believed to be headed for a victory. This makes it all the more important that 26
7 Must-Own Metals & Mining Stocks for 2013 Pretium is planning to permit an underground mine. And it can’t hurt that the pine beetle has eaten many of the province’s lumberjacks out of work. We’ll have to see, but we think the odds are good that the politicians will not want to do anything that would destroy so many jobs and reduce the provincial tax take. And perhaps more important, if a bit cynically, it doesn’t actually matter to our speculation today whether Brucejack ever gets permitted to go into production. What matters is that we have a lot of high-grade gold that will show much-improved economic value in the year ahead, long before permitting becomes an issue – and there remains exceptional exploration blue sky to be tested as well. PAPER Being a relatively new company that issued a lot of paper to acquire its key projects, Pretium has a good-sized float, but a nice, tight share structure. By the way, Bob put C$3.6 million of his own money into the IPO, so his incentives are highly aligned with those of the rest of us shareholders. There are investors in at lower prices, but most of those have been shaken out by both higher and lower prices since then. No red flags here. PHINANCING With C$52.9 million in the bank, even at a very high burn rate, Pretium can fund next year’s activities without needing to return to the trough. Further, even at today’s relatively low price, Pretium’s share price is high enough to raise a few more tens of millions without serious dilution. Building the mine will be another matter, but we expect the return on the project to be so attractive that mine financing won’t be a problem – if Pretium actually gets that far before being bought out by a larger company. Clean bill of health here. PUSH There’s imminent upside on the way, from new drill results of the sort that often move the market to releasing a formal prefeasibility study on Brucejack that should show much greater value. We also see serious takeover potential in this play, as the company “de-risks” the project. There are so few projects of this size, let alone of such high grade, there’s a good chance a larger company will buy Pretium out – an offer could be announced any day. More likely, the bigger boys will want to see some serious engineering work done to show the project is real, and then make their moves… but once one company starts it, we would not be at all surprised to see further bidding.
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7 Must-Own Metals & Mining Stocks for 2013 PRICE Pretium’s assets are selling at a discount. Many market players clearly see that discount as justified, given the early stage and remoteness of the project, and perhaps having been spooked by the apparent loss of ounces when Pretium upgraded most of its resource to the Indicated category. We think that current drilling will bring many of those ounces back and that the discount is overdone. Brucejack is a real company-maker. But don’t forget the huge, low-grade Snowfield deposit next door – as a leveraged play on gold itself, that offers a lot of upside that you get for free, betting on Brucejack. So we would definitely buy a first tranche of shares at current price levels were we not long already, and look for good opportunities to average down on future market fluctuations with additional tranches.
PILOT GOLD Metals: Gold, copper T.PLG, PLGTF.OB, www.pilotgold.com Price
Share: C$1.88
MCap: C$160.2M
On: 12/10/12
Shares
SO: 85.2M
FD: 105.11M
As of: 11/2012
Cash
C$43M
Burn: C$1M/mo
As of: 11/2012
BUY FIRST TRANCHE – Pilot Gold is not new to our portfolio, as we got shares for free when predecessor Fronteer Gold was bought out by gold mining giant Newmont. Because of this, there was never an 8 Ps write-up on the company. Since we see the new, high-grade discovery in Turkey as a game-changer, we thought we’d go ahead and have a new look at the company, by the Ps… PEOPLE This a Mark O’Dea play. Mark has some fame as a geologist for placing second in the Goldcorp challenge – a contest run by that company as a way to crowdsource its search for new deposits. What’s more important to us is that his previous company, Fronteer, made us a ton of money... twice, actually: It went to $15, we sold; it dropped to $4, we bought back in; it dropped again to the $2 range, and we averaged down aggressively. At the end, Newmont offered $14 per share. Mark also oversaw a huge amount of value created for shareholders of Aurora Energy – a one-time uranium spin-out from Fronteer that did spectacularly well until there was a provincial ban on uranium mining. Mark is chairman of Pilot, and that alone is one good reason for buying this stock. Running the show on a day-to-day level is Matt Lennox-King, now president and CEO of Pilot. Matt was 28
7 Must-Own Metals & Mining Stocks for 2013 Fronteer’s senior geologist and personally involved in a lot of the value creation we saw as shareholders, via the substantial gold and uranium resources his geological team delivered to the market. On site in Nevada and Turkey, Louis James has met with many of Pilot’s key people, from senior management down to junior geos, and has been uniformly impressed with their knowledge and competence. Given Louis’ confidence and the known track record of the key people involved, we give the company high marks on the People front. PROMOTION Given the past success of Mark O’Dea’s team, this company doesn’t need a lot of help with promotion. The market’s positive response to the company’s new discoveries in Turkey shows that there’s no worry about getting the word out when the company delivers. PROPERTY Pilot has a substantial portfolio of almost 20 highly prospective projects in Turkey and Nevada, but the focus is on three: Kinsley Mountain, Halilağa, and TV Tower. •K insley Mountain – Kinsley is a past-producer with several old, open pits straddling a mountain to the south of Long Canyon. For those new to the story, Long Canyon was an “off-trend” gold discovery in Nevada, most of the credit for which we give to Explorers’ League honoree Ron Parratt, then with AuEx ventures, now with Renaissance Gold (T.REN). Fronteer bought AuEx, greatly expanded the deposit (which is quite high grade for an open pit), and sold it to Newmont. Moira, who knows as much about Long Canyon as anyone outside of Newmont, sees the same potential in Kinsley Mountain. Drill results this year have been encouraging, including 13.7 meters of 6.07 g/t gold, 20.4 meters of 5.48 g/t gold, 18.4 meters of 5.91 g/t gold, and 19.8 meters of 2.3 g/t gold – with this last hit being over two kilometers from the main zone. No slam-dunk here yet, but there’s gold all over the mountain, and if enough of the dots connect, it could add up to a large resource. It’s a speculation, but based on the people involved, and the money they have to work on the project, this project alone was enough to get us to put a Buy recommendation on this company. •H alilağa – Halilağa is a 40/60 JV with Teck, in the same part of Turkey where the same partners sold two other Fronteer discoveries (Kirazlı and Ağı Dağı) to Alamos gold for $90 million. The project is moving through the progression of feasibility studies that should lead to an eventual production decision. Teck is the operator, so there’s not much Pilot can do about what happens, but that’s not all bad: Teck is spending most of the money, and it knows how to get things done.
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7 Must-Own Metals & Mining Stocks for 2013 The key point is that Pilot gets 40% of whatever happens to Halilağa, which currently has a 7% discounted, after-tax NPV of $474 million and an IRR of 20%. Pilot’s share of this is greater than the market valuation given the entire company, including $43 million in cash, Kinsley Mountain, and the new discovery at TV Tower. And this is all assuming only $1,200 gold – at $1,500 gold, the NPV-7% is $1.1 billion and the after-tax IRR 34%. •T V Tower – The TV Tower property is a district-scale land package that covers many square kilometers of highly altered rock, and exploration targets so numerous that they have not all yet been catalogued. It’s actually still early days at this project, but initial results were very encouraging, including 114.5 meters of 0.87 g/t gold at the Kayalı target to the south and 136.2 meters of 4.28 g/t gold at the Küçükdağ (KCD) target to the north. Last June, Pilot cut a deal with JV partner Teck to buy back in to majority ownership (60%) and assume operatorship, with the goal of getting things going at a faster pace. This paid off almost immediately, with the next batch of drill results from KCD including 137.1 meters of 5.94 g/t gold. Since then, follow-up drilling has returned excellent, high-grade hits, including 32.5 meters of 11.63 g/t gold and 12 meters of 193 g/t gold. This is shaping up to be a “company-maker” discovery. The geology at KCD is complicated, with distinct, separate silver- and gold-mineralized areas, but the known strike of the mineralization and the thickness of the drill intercepts thus far make it big enough to host a large deposit. It is not a world-class deposit yet, but it won’t take much more drilling like what we’ve seen so far to make it one, and that is under way. What are the odds? Better than average, but one must never underestimate Mother Nature’s devious mind when it comes to playing with geologists’ dreams. But given that Halilağa’s value to the company gives us TV Tower and everything else for free, the risk-to-reward ratio here is excellent. POLITICS Nevada is one of the best mining jurisdictions in the world. Turkey has been in the news of late, with alarming headlines about clashes on the Syrian border and trouble with Kurdish insurgents. However, the country has been a stable democracy for years and has remained pro-business throughout. Best of all, several new gold mines have been permitted in recent years, including three operated by Western mining companies. We would not go so far as to say there is no risk involved, but it is safer than the discount to asset value the market is currently giving the company implies. We will watch Turkey closely for negative developments, but for now, all seems well.
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7 Must-Own Metals & Mining Stocks for 2013 PUSH Pilot has major Push on the way: • Assays pending from TV Tower, including KCD, drilling ongoing. • Engineering results for Halilağa. • New drilling to start in Nevada. PAPER/PHINANCING For a company with one advanced project working its way through feasibility and another with an exciting discovery unfolding, Pilot has a reasonable share structure. More important is that the company just cashed up with more than enough cash to advance its key projects to the next level. This insulates the company from market downturns in the near term and makes it unlikely that we’ll see more dilution before the company delivers on its next major achievements. PRICE The current $1.80 range is near all-time highs for this company, which argues for caution. But this is not the same story it was before the new Turkey discovery. For those new to the story, the potential size and grade of the KCD discovery and the huge overall potential across the TV Tower property merit a first tranche, even at current prices. Look for a day when gold makes a strong retreat to try to get in under market. If the scare is big enough, C$1.65 should be doable. On the other hand, the way things have been going, the odds look very good for at least one great hole in the next batch, maybe several, so don’t dally too long on that first tranche either. Short version: Buy this undervalued stock – but be picky about how you do it.
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7 Must-Own Metals & Mining Stocks for 2013
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