Louis James: 'Screaming Buys' Among the Quality Juniors
Source: The Gold Report (9/30/08)
The big downhill slide in the junior sector has a real plus side for investors—a bounty of incredible bargains. In Part II of our exclusive interview with Louis James, Senior Editor of Casey Research, he gives us the names of some of his top picks and explains why their prospects are so bright.
The Gold Report: You said earlier that Wall Street might look at companies like Barrick Gold Corp. (NYSE:ABX) and Newmont Mining Corp. (NYSE:NEM) if they've had five or six good quarters. Would Wall Street consider the juniors?
Louis James: The juniors will never really interest Wall Street but they will get the attention of the average Joes. That will happen during the mania phase when your barber and bartender start talking about the gold coins they just bought at the corner shop. Some people do understand that you can leverage commodity's (or technologies', or other asset classes') moves through small companies.
Also, the majors decimated their exploration departments when metals prices dropped through the long bear market for commodities. These big companies need a lot of new ounces just to remain the size they are, let alone in order to grow. Some gold companies are even starting to look at other commodities, because major-sized gold discoveries are so few and far in between. So we expect a lot of consolidation in the sphere, as the majors buy the juniors with projects of real size and merit—that's generally a good exit strategy for investors in junior gold stocks.
However, if the majors start to snap up the good juniors now, while they're still on the deep discount rack, that could be a bad scenario for those who bought at higher prices over the last 12 to 18 months. It would cap a lot of the upside of projects still being advanced by the juniors. Even if we weren't as bullish as we are on the sector, mid-to longer term, if we thought that a company we owned could interest a major, we sure as heck wouldn't sell now. We'd at least wait to see if a major might take a go at it while the market is down; even if they get it cheap, it would still be at a premium to prevailing share prices. If they offer cash, you get a better exit price than you have now. If they offer shares, you might end up with shares in a major that could do quite well. (But you'd want to do your due diligence on that.)
TGR: Let's talk about specific companies. What do you think of Exeter Resource Corp. (AMEX:XRA; TSXV: XRC; Frkt: EXB)?
LJ: We like Exeter a lot. The high-grade Cerro Moro Project is generating good headlines. Long term, it has multi-million-ounce, high-grade potential. The Caspiche project, a gold-copper prospect in Northern Chile, is also exciting. The company's exploration target for Caspiche is a 10-million-ounce deposit. That's not unrealistic, and it may end up being much more than that.
TGR: Last December, after Exeter's stock took a correction, you said it still wasn't cheap, that the market had already priced in some of the potential upside?
LJ: Right. That's obviously gone now. At $1.75, I would say Exeter is an absolute screaming buy. At $1.75, I wouldn't even care if there were a tax-loss sell off. Exeter is working on its first resource calculation, for Caspiche. The company should be able to start drilling again by the end of October (spring in South America), which could result in significant results before tax-loss season. If that happens, and gold rebounds, you may not see these prices again. It's rare that you can catch an elephant by the tail so early in the game.
Also, this isn't a project that the majors have already looked over five times and passed on, which would make you suspect there's something wrong with it. There's a reason Exeter has this project, and not somebody else; it's a new discovery. But as I understand it, the majors are looking at it now.
TGR: What about Jinshan Gold Mines (JIN:TSX)? That's another company you were high on last December.
LJ: I still like them and for the same reasons. It's personally a little difficult for me at the moment because the former CEO, Jay Chmelauskas, who nurtured the company through its infancy, has been replaced by Zhaoxue Sun, of China National Gold. However, because this is a China-focused gold company, it's probably good that the ownership has shifted. It gives the company good political support, which is obviously good for shareholders. The deal should also give the company access to projects it otherwise wouldn't be involved in. I'm still bullish on Jinshan.
TGR: What are your thoughts on Virginia Mines (VGQ.TO)?
LJ: I like Virginia a lot, though we're a bit nervous about its flagship Coulon project being a base metal play in this market. Economic corrections have a tendency to ding the base metal prices. So in general, we're not buying base metal companies; we're waiting for an opportunity to buy them cheaper. However, Virginia has a lot of things going for it, even at Coulon, which is very high-grade. It's in an extremely pro-mining political jurisdiction. It gets tax credits on the order of 50% of its exploration expenses. Plus Virginia is paid a significant management fee—about $750,000 a year—by its exploration JV partner. You put all these things together and the company's cost of exploration is almost zero.
TGR: That's unusual.
LJ: It's very unusual. So base metal company or no, you've got great projects, tons of cash, and the company is almost cash positive. It's a no brainer. On top of all that, Virginia sold its Éléonore Project to Goldcorp Inc. (GG-NYSE; G-TSX) and the deal included an advance royalty—whether or not Goldcorp has started production at Éléonore. Sometime in Q2 '09, I believe, the company starts seeing royalty payments on that project. The royalty is calculated on a sliding percentage. It's similar to an author's advance from a publishing company—the mine has to produce the value that justifies the royalty. But the bottom line is that Virginia starts seeing major cash flow early next year, just from this deal alone.
TGR: What about Minera Andes Inc. (TSX:MAI; OTCBB: MNEAF)? The last time we talked you said the management team had delivered against all odds, but you were concerned about the corporate debt load.
LJ: The good news here is cash flow. Production is strong, and the company is starting to pay off its debt. The stock's been hammered in the market more than it deserves. The San Jose Silver Gold Project is very much a going concern, in fact the company is doubling the plant's processing capacity, and I think it will achieve its doubled production targets. That's terrific for MAI, which has been able to hold onto 49% of the project, while having a larger experienced company do all the work. It's a great deal.
And then there's the Los Azules Copper Project. Minera came out with its first resource, a base case of just under a billion tons of .6 copper, and the market didn't even respond. At a 0.4% cut-off, that contains 9.6 billion pounds of copper. At 0.3 it's 12.9 billion pounds. This is a very significant resource. I think it's possible that Minera's JV partner, Xstrata PLC (XTA:VX), may decide to claw back into ownership of the project. If anticipated production from Los Azules were to exceed 100,000 tons/year, that would trigger an option for Xstrada to do so. Frankly, I think that would be the best scenario. If Los Azules looks like it's going to be big enough and robust enough to interest Xstrata, Minera gets a whack of cash that it can then invest in other gold and silver projects and Xstrata will do all the work building Los Azules. Hochschild will keep running San Jose, giving Minera dual streams of cash to advance its other projects. Of course, we're talking "if" with Los Azules—not so with San Jose.
TGR: Sounds positive, and yet the marketplace hasn't priced in the results that have been produced so far.
LJ: Minera did get a bump recently but, it's still closer to 52-week lows than it is to 52-week highs.
TGR: The last time we talked you mentioned Silvercorp Metals Inc. (OTC: SVMFF), which you liked for its profitability. At the time, you said it was far from cheap. But that's changed, right?
LJ: Silvercorp started correcting before the market as a whole stepped off a cliff. I still don't fully understand why. The company's shares took their first big hit right after an analyst put out a "market perform" recommendation instead of a "market outperform." That seemed to spur a lot of profit taking, but the results seemed out of line with the cause. The company had just posted record profits and was on track to do so again.
On the next quarter's financials, on all levels, the company was very sound. There was one setback, when the Chinese did some power rationing during the Olympics. Silvercorp had what seemed to be adequate power infrastructure, but when the power rationing started, it had to shut down its mine for a few days. There's a fear out there that those non-productive days will affect the current quarter negatively. But operational pauses are far from uncommon in mining; the impact of Silvercorp's Olympic mishap is yet to be seen. This is not a company-killing event.
TGR: But that's been explained and that's not expected to be a long-term issue.
LJ: Right. You could ask why management didn't anticipate the power shortage, but I don't think anybody did. The company's response was immediate and effective. The company obtained temporary power-generating capacity and has set up a second power line to a different source. Sometimes there are set backs. The exploration potential is still there, the super high-grade story is still there and the company is adding more near-term production. The worst-case scenario right now would be that somebody buys the company out at this low price. We'd get a little bit of a premium on the takeover, but given where the shares have been and where they are now, it wouldn't be anything like the company recovering.
I would much rather see Silvercorp remain independent and recover because it has the kind of story that I think could capture the average investor's attention during the coming Mania phase of the bull market. It's not Barrick or Newmont, but it is a highly profitable growing company consolidating the silver sector in China—a solid story.
TGR: Would Silvercorp be a great buy at the current price?
LJ: I wouldn't put it on my short, short screaming buy list, but only because I still don't understand why it sold off so strongly, and that bothers me. But it's a strong speculative buy. This quarter's financials could be lower than previous ones, but should still be very strong. Even though such a dip is expected and we know that there's no long-term problem with profitability, there is a chance that just the fact that the profits didn't hold up this quarter could hurt the company again. Between the fact that the stock is down, that there could be something to hit them again in the near future, and tax-loss selling is approaching, there may be other buying opportunities. That said, at this price, some level of profit is almost baked in the cake.
TGR: Are you looking at as a longer-term investor?
LJ: As a longer-term investor I think it's a great company, great assets, great proven management, cash positive in a major way. It's absolutely on my shortest list of stocks to own. But remember, the whole M.O. for Casey Research and for the International Speculator is to look for stocks that have the potential to double in a year. If a company doesn't have the potential to double in 12 months it won't get our enthusiastic endorsement. Silvercorp might do that; however, it has some challenges to overcome. And it could be bought out before it gets the chance. But it's a great company.
TGR: Are there any other screaming buys on your list?
LJ: I really like AuEx Ventures Inc. (XAU.TO). We have a premium management team here. Ron Parratt, the CEO/President, has discovered more than 20 million ounces of gold. Not just one multi-million-ounce deposit, but several. AuEx already has several significant discoveries.
The company is pursuing the JV model. Fronteer Development Group (AMEX: FRG) is its partner on the flagship Long Canyon Project. Some investors are concerned that AuEx is giving away a majority interest in the project. But it makes sense to use Fronteer's money to do the hard work.
AuEx ends up with a significant chunk of what is very much starting to look like a mine. Its at-surface, early metallurgy looks good, and it's relatively high-grade for an open pit target. It has all the hallmarks: great infrastructure, water's not a problem, it's on a mountain, so your stripping ratio remains low. Long Canyon alone is reason enough to buy the company and, at the current share price, that one project has the capacity to move the company forward quite a bit.
But it's not the only project. AuEx's JV partner, Agnico-Eagle Mines Ltd. (AEM:NYSE), on the other side of the ridge from Long Canyon, is drilling off the West Pequop area. They're hitting enough gold across enough area that there's obviously something substantial there. Agnico is also AuEx's regional JV partner in Argentina. And AuEx also has some projects in Spain, which is another pro-mining jurisdiction.
If you look at the company's stock chart, you'll see it was basically flat during August. It held up well while everybody else's share price had people jumping out of windows. But then something happened in early September. Some fund somewhere, we presume, or some major shareholder, had a liquidity crunch and had to dump hundreds of thousands of shares on a market with no buyers, and the stock just fell off a cliff. It was certainly not in response to any disappointing results from the company. Nothing changed except somebody had to sell a lot of shares and there weren't enough buyers. The stock has since recovered quite a bit, but it's vastly cheaper now than it's been for a year plus. So, to me, this would be a new screaming buy.
Let's wrap up with one more company, Canplats Resources Corp. (TSX: CPQ). This is a sister company to Silver Standard Resources Inc. (Nasdaq: SSRI). It has a major discovery in Mexico, the Camino Rojo Project. It has tremendous positive characteristics, gentle topography, and an almost ideal shape for an open pit mine. It doesn't have a first resource out yet, but you can connect the dots of the company's highly consistent results so far, over the main area. It's easy to see several million ounces there.
Until lately, Canplats' stock has held up well in spite of the volatile market. But some investor must have dumped it in September. It's now almost as cheap as you could get it in the days just after the discovery last November. And since then, there has been drill hole after drill hole of hundreds of meters in the gram range, very consistent near-surface gold. So this would count in the screaming buy category in my book.
TGR: Does Canplats have enough cash flow to continue forward at this low market cap?
LJ: The company has about C$5 million in cash, and, unlike other companies, it would be able to raise money. It only had 56.7 million shares issued and outstanding at last check. And the spread-to-fully-diluted is not great. So if it did a new placement now and had to put a full warrant out there to entice investors, I would view that as an opportunity. If I liked the warrant structure on the offering, I would try to be first in line for that. But I don't think that's in the immediate offing. I think they've got the cash to take them through their first resource calculation
TGR: A lot of these are turning out to be screaming buys as long as people have that cash and haven't run the market all the way down.
LJ: That's the main thing. I actually spend a significant amount of my time answering subscribers' questions. Some investors who bought last year are under water now, and not very happy. But most of our subscribers understand the trend, they believe in where things are going. They just wish they had more cash to invest, because there are so many buying opportunities right now.
Louis James has a background in physics, economics, and technical writing, which prepared him well for his role as senior editor of the International Speculator and Casey Investment Alert. Louis constantly travels the world, visiting highly prospective geological targets, grilling management and company geologists, and interviewing natives to find out what they really think (it helps that he's fluent in French and Spanish, and speaks a little German and Russian).