A Good Time to Invest in the Juniors
Source: The Gold Report (6/3/08)
Louis Goluboff, managing director of Emerald Capital Investment International, talks about the influences and pressures weighing on the precious metals sector. His company's flagship fund, The Emerald Explorer Fund, focuses on mining and exploration primarily in the Canadian resources market. In this exclusive interview with The Gold Report, Goluboff tells us why he thinks the juniors are a good play and discusses a few of his favorite names.
TGR: How do you explain what's going on with gold?
LG: I think both the fundamentals as well as speculative investors were pushing the market up. A lot of hedge funds started to sell out of the high end of their valuations, so the gold price dropped down a little bit. But the fundamentals remain unchanged.
TGR: You're saying that both the fundamentals and the speculative side are strong for gold?
LG: That's right. But I'm mostly looking at the U. S. economy and what’s happened with the currency—the credit crisis and the Bear Stearns bailout. I don’t think that’s over—maybe you’ve hit a bit of a bottom with the bailout, but there's still a mortgage crisis in progress. This will keep weighing on the U.S. dollar and that's good for the gold price.
TGR: Why hasn't gold gone up? The Fed took another quarter point off the interest rates in late April and gold went down.
LG: Well, I think it's because of all the sales coming from the speculative side of the market. As those funds get squeezed, they’ve got to sell what’s liquid, and if gold is liquid, they sell it. That’s why a lot of the equities have also been underperforming this past year. The juniors have been hit hardest. The large caps have traded more in line with the price of gold.
TGR: What should an investor be doing with gold—hoarding it or selling it?
LG: Gold's recent pullbacks certainly provide good buying opportunities. I think you'd be well off to invest in gold at these prices. When gold goes up over $1000 and into the $1100 range, you might want to sell in the short term. Overall, I think the price of gold is going to continue to rise.
TGR: Do you care to speculate about how far it’s going to rise?
LG: I don’t think you’re going to see $2000 gold so fast, but it'll be back over $1000 by the end of the year.
TGR: You expect it to go above $1000 before the summer ends?
LG: I think you will see it back above $1000 in the early fall.
TGR: As gold drifts higher in the $900 range and into $1000, what does that mean for our equity plays— both the majors and the juniors?
LG: Right now there’s a lot of cash on the sidelines for a lot of funds. You’re going to start seeing some of that cash go back into market. As the price of gold goes back up, the seniors will be the first to benefit from that. Then some of the money will start going into the juniors. Some of these companies are trading at their 52-week lows despite the rise in commodities prices.
TGR: Will the seasonally lower prices of the metals influence that?
LG: The late summer and early fall are seasonally strong, but even if the price of the underlying commodities drifts down a little bit, I think that the equities will start to trade up with the rest of the equity markets as money starts to come back into play.
TGR: So, you're predicting that the market will start going up?
TGR: How do you think the juniors will do over the next six months?
LG: People will reconsider the juniors. There will be quite a bit of consolidation in the market this year and over the next couple of years as some of the seniors go looking for production. They will look to the juniors—let them do the hard work and then, as they get closer to production and defining resources, the seniors will build their own resource base by taking a position in a junior, doing a joint venture, or acquiring the company outright.
TGR: What guidelines do you use to determine which juniors make a safer investment?
LG: Investors have to keep in mind that when they’re investing in the junior mining sector or in any small cap for that matter, whether it is the tech sector or biotech or whatever, that these are very risky securities. It’s fine to have them as a piece of your portfolio, but you should be diversified regardless. So, I don’t think you could ever say that they’re “safe investments.”
TGR: What are your guidelines regarding countries or things to avoid?
LG: There are parts of Africa I won’t invest in and I tend to stay away from politically unstable countries like Venezuela. Where there's the risk of government appropriation of mining concessions, you really have to ask yourself whether it's worth getting involved in a play like that.
TGR: On the other hand, some investors say that when things look really bad, that’s the time to start investing.
LG: That can be a great philosophy and it's why I like the junior sector right now. When you get a lot of speculative buying the market gets too hot, generally that’s a good time to take some profits. When people get pessimistic and fearful, that can be a good time to make an investment. But you always have to balance the risks you’re taking with the rewards you’re hoping to get.
TGR: Are you looking for juniors that are pre- 43-101? How do you evaluate juniors even in stable countries?
LG: We really judge them on a case-by-case basis. We’ll look at private companies that are about to complete a 43-101. Generally you do like to see a 43-101, and you want to see them publicly traded.
TGR: Do you have any preference for the more unusual precious metals?
LG: I prefer gold and gold stocks. There’s been some difficulty on the base metal side, but I do like uranium, zinc, copper and nickel.
TGR: Uranium has really come way off of its highs.
LG: Uranium has gone into a difficult spot but people forget that the long-term contract price is what counts. If the long-term contract price starts to come down, that’s when you have to question what’s happening. A very small percentage of the actual volume of trades takes place at the spot price or on the market. Most of the purchasing by the utilities is done off the market in and around the long-term contract price. And the long-term contract price has remained pretty stable.
TGR: Would you advise an investor to be overweight or underweight with regard to precious and base metals?
LG: I’d definitely be overweight in the uranium sector, especially since a lot of investors have focused on the spot price and considering what’s happened in the junior market overall. I think there’s a real good opportunity here to be investing in junior uranium companies. Again, you have to be careful since juniors are risky, but I think there will be a lot of consolidation in that market. There's a real gap between supply and demand with the potential for supply disruptions.
TGR: Do you have any specific companies you could discuss for our readers?
LG: NFX Gold Inc. (NFX.V) is a perfect example of a junior exploration company in the gold sector that’s really been hurt by the downturn in the junior equity markets. You can find a real upside in stocks like NFX. Their 52-week high was at $1.25, and they’re down to $.45 today. The junior market revolves around finding potentially good deposits. NFX has a joint venture with Maximus at Larder Lake and their recent results point to a significant deposit three miles west of the old Kerr Addison Mine, which was an 11-million ounce producer. That's not their only potential. They do have joint ventures with other companies, but certainly this is their most interesting. They have a 40,000-meter drill program going on right now in the area in a previously significant gold camp. It's in northern Ontario—a mining-friendly district. Sometimes half the battle is getting drills on the property and good people. There are a lot of good people in Larder Lake and the surrounding areas.
TGR: Do they have drilling results?
LG: They just completed a drill program this past winter on Bear Lake and the early results have been very promising. As they continue to drill, they can then start to get a resource definition.
TGR: Is there a projected date for that?
LG: They will release the rest of their drill results and then they will be able to start drilling deeper. First you drill at surface, then you drill at depth, and then you prove your resources, probably by the end of the year.
TGR: Are there any other companies you especially like?
LG: Eloro Resources (ELO: TSX.V). We really like Eloro at these levels. They have a strong group of properties and claims and you get diversified exposure, since they have multiple holdings—copper, gold, and uranium projects. This gives you a bit more diversification than some of the other stories that are pure gold plays or base metal plays. The company has been getting encouraging results on the Hurdman Zinc-Silver project. Eloro is in mining friendly areas—Quebec and Ontario—and they’ve got strong management and technical people.
They’re in the Otish Mountain Basin, and there’s been some significant results coming from that area. It’s very close to Strateco’s uranium discovery, and similar to properties in the Athabasca Basin. They still have more work to do on that property, but certainly there’s a lot of exploration going on there, and Cameco and Areva are both active in the area.
On the copper side, in the James Bay area, they have 19 properties. They should have a resource calculation soon on some of their properties, and once you get to the resource calculation, then people have a better way to value the company.
TGR: Can you share some insights with us about any other companies?
LG: One of the companies I’ve been looking at is Delta Uranium (TSX:DUR), based out of Kenora, Ontario. They’re about 35 kilometers from the town. They have a 100% interest in 1,833 claims covering about 29,000 hectares east of Kenora, and then they have another 4200 claims covering 70,000 hectares in both Kenora and Timmins.
They’ve been doing an extensive drill program, and have a strong management team, including Wayne Isaacs and Rick Bonner, who were formerly with Forsys Metals, a uranium company in Namibia. Rick Bonner was the QP (Qualified Professional) on the project in Namibia. It's well funded, with $8 million in the bank and trades right now at just about two times cash.
TGR: Are these start-up programs?
LG: They went public in November. They are an example of a good uranium company; they have 29 million shares outstanding, $8 million in the bank, and very encouraging results with both their Bee Lake and Richard Lake properties.
TGR: And how close are they to having a resource definition?
LG: They’re a little further away. They did have a 43-101 that they went public with, but that was more based on historical results.
TGR: Was that also in the Kenora area?
LG: Yes. At the Richard Lake Mine that was previously established, where they’re doing a lot more work.
LG: There's another gold company I like that is similar to, but a little further along than NFX, also hurt by the downturn in the junior market. The name is International Tower Hill (TSXV: ITH, AMEX: THM, Frankfurt: IW9). They currently have just under 40 million shares outstanding, and are currently trading around $1.65 a share. They actually just completed a resource definition at their Livengood property, located 100 kilometres north of Fairbanks, Alaska. They have a three million ounce resource defined at that property. They have properties in Alaska and Nevada, and this is one of their more advanced projects. Again, strong management—Jeff Pontius, the president and CEO, had a long career with Anglo Gold. It’s a fairly young company, but they have a lot of good projects, and they have a really good relationship with Anglo Gold Ashanti Exploration, which owns about 15%.
They’ve also been coming out with some very encouraging results in their Nevada properties. They’ve got a good group of properties at various stages of exploration, with Livengood being the most advanced, and they also have about $15 million in cash. So, again, you see the multiples these companies are trading at are very attractive.
TGR: If the companies are so young, how did they end up with so many of these advanced properties?
LG: Because Jeff Pontius and his exploration group put together a really good project list, and through their relationship with Anglo.
TGR: Any other favorites you want to mention?
LG: Another one that is more advanced is Aquiline Resources Inc. (TSX: AQI); their Navidad in Argentina is a world-class silver deposit, one of the world’s largest unmined silver deposits—606 million ounces. And they had to get through a number of legal battles, but now they’ve done that and can move forward. It’s a fairly attractive valuation, trading at about 86 cents an ounce.
TGR: Is this really just a silver play or a silver and gold play?
LG: Well, their core deposit is a silver play, but they did do a deal with the Absolut Resources, which is another gold play. But their core is the obviously the Navidad property. It gives you a little bit of diversification, but it’s all precious metals.
TGR: Louis, we appreciate your time. Thank you, this has been very informative.