David Coffin Interviewed by Money Talks
Source: Michael Campbell, Money Talks††(7/23/10)
"Gold, the metals markets and the companies they search for."
Michael Campbell: I am very pleased to welcome back to the show one of the coauthors of the Hard Rock Advisory, David Coffin. David, I appreciate you taking the time in the weekend with us.
David Coffin: My pleasure, Michael.
Michael Campbell: I want to start with the kind of action you have seen in the gold market generally, one of the things that you cover in the Hard Rock Advisory. The bigger picture David, looking at the kind of action, the price action, you have seen in gold over the last while.
David Coffin: While the gold prices of course moved up to historic heights and it is consolidating around the $1200 level, I think we are in a market that makes it difficult to try and give precise near-term timing, but what we are seeing is the notion that gold should be part of a portfolio, as insurance value has grown and we think that is going to support the price and move it higher in due course.
Michael Campbell: Random noise out there compared to what you see as the broader trend?
David Coffin: Oh, definitely. Right now, you know, what you are talking about it is the 1% and 1.5% move, but the market in general is volatile. It is that something that you can shake off on a day-to-day basis. You have got to look for trends and we are still very much in an upward trend for the gold price.
Michael Campbell: When you look at individual companies, what is the environment for them out there right now in terms of raising money? Two years ago it really did not matter what quality you had in the ground, it was just difficult to go get money. Has that environment changed significantly? As gold has performed so well, has that also eased the taps of finding available cash?
David Coffin: It has not eased at the level of exploration companies per se. What has happened though is they came back on with everything else after the credit crunch. So, there is money available if they are properly priced now. It is not as easy as it has been, but for gold and good solid gold companies, there is definitely a market and the money is available. You take the Yukon Gold play for instance to the larger players there, are in the middle of financing after having taken significant upticks since beginning of the summer, so the money is available if you show the goods.
Michael Campbell: What do you look for in this environment that leads you to make the recommendations in the Hard Rock Advisory that have done so exceptionally well? What are the key components on your checklist?
David Coffin: Management is important, the availability to finance, which we just talked about and the two of them are tied together. The assets themselves are quite important to us. We start by looking at what the people have for holding and within that context, there has to be a geological potential, but there also has to be the right environment so that the project can be taken forward to corrasion (in other words, the geopolitics). The geopolitics, some countries we are not very interested in or not interested in at all. With the gold project unlike a base metal property proximity to a coast is not quite so important, but infrastructure is important. One of the things that's aiding the Yukon right now is an infrastructure improvement that is underway. Both will be the main points.
Michael Campbell: You mentioned the Yukon project, that it helps it is in Canada. Political risk has clearly become involved in certain countries in South America and certain countries in Africa. It tends to color all projects in those areas to some degree because it feels so volatile to us here. Has that been the pivotal component in making a project a disaster if the wrong government comes to power?
David Coffin: Oh, definitely. Conversely, if governments change and the right one comes to power, that can sometimes open up opportunities, but yeah, definitely there are some places that we leave alone that we are not interested in, Venezuela, say. We are interested in Colombia because the politics there have been changing and it has got a strong gold belt. We look at the world that way without question.
Michael Campbell: What timeframe for investors do you look at when you make specific recommendations in the Hard Rock Advisory?
David Coffin: It depends on the situation. We will come into a stock based on management and good general geology, from time to time; in other words, we will come into an area if you will. As often as not we would like to come in on specific targets and the timing that we would like is typically a matter of months away from potentially a discovery or a post discovery if the targeting information indicates that the potential is there for scale and the company has not moved so strongly that they are already priced to its overall potential.
Michael Campbell: Do you worry that this cycle is running out of steam at this point, the general commodity cycle outside of just gold?
David Coffin: No, we are not worried about it running out of steam per se. What is worrying is that there were two components to the extension of this cycle. One is the one I think most people recognize now which is China, but China plus India, China plus Brazil, China plus Indonesia, a whole list of large countries, which are seeing their economies mature and industrialize, that is what is driving it from the demand side, but there was also issues on the supply side. There was a long period when it was difficult to capitalize and make money with the mining project and because of that development of them slowed. So, what we have seen is we have matured through the point where the big upticks in price due to demand from China pushing into a lack of supply because mines are not being developed coalescing, but what you have to do is look back and say the price of gold had been 250 an ounce is now 1200, price of copper had been 60 to 65 cents a pound is now $3, nickel $2 is now $8. That first big price move has happened. What we believe is that as we get through the credit crunch, but more importantly as other large economies, India in particular move into their high growth periods, you are going to see that new increase in demand, again makes it difficult for the sector to keep up with the supply and probably push the price of at least some metals, considerably higher for a while.
Michael Campbell: David, we have been talking a little bit about looking forward here and of course what you do is with your geological background, you go look at these properties, these individual mining situations and you have your set of criterion of what would qualify. Then of course there comes times the baby gets thrown out with the bathwater, as when the overall market dropped 260 points yesterday in the Dow and Toronto was down. Sometimes that presents opportunity because people are forced to sell. Maybe they get a margin call, maybe they just want a raise cash, maybe they are just nervous. Can you give us maybe a couple of situations that we could put on our radar screens. . .a couple of things through all of your work that you think are of interest to pick up on selling?
David Coffin: Sure, your listeners should keep in mind that what I will be talking about are speculations on higher risk stories, but I will go into each of them a little bit and explain the risks. I have mentioned the Yukon a few times. In the Central Yukon by way of background, the current push in that territory results from a company named Underworld, being taken over by Ken Ross. That was just finalized a few weeks ago. The takeover had started a few months ago. Underworld made their discovery about 2 years ago. So, this has been a fairly quick moving story. In the Yukon, there are a couple of other companies and both as I mentioned that are doing placements and both of which have had strong upticks. So, bearing that in mind, Kaminak (KAM.V) has been the one that we have followed fairly closely. The other is a company named, ATAC (ATC.V) who made the discovery last year in the Yukon.
What Kaminak has done was last year, in a project near Underworld's, they picked it up, they did the soil sampling, they did the basic targeting. They got some strong surface results from trenching. This year they have been drilling it, they put from 2 zones that have been tested so far, quite strong results, still early in the process. Our comment now to subscribers is they have put a potentially viable result on the table. They will be in the process of moving a long trend and testing other targets and we think they have lots of room in this summer to expand in terms of evaluation potential beyond the correct pricing and they are picking up a $10 million at $1.50 in a BOT deal financing, there may be an opportunity during that financing, since it is not likely to report any results to pick up some stock at this level on bad speculation basis.
A couple of other companies that are coming along, but still to report results, in other words still more pure speculation, a company called SilverCrest Mines Inc. (TSX.V:SVL), we had mentioned them a few months back. We just recently told subscribers that we are moving them to an accumulate status, they have in the past week since we mentioned, that they can have a significant uptick, so look for a little bit of weakness in that market if you can, another that we are following who is drilling a little further away, but still in that play and who have a series of targets coming is Northern Tiger (NTR.V). We told subscribers to start picking that up a while ago. They are a little lower in price. They are still earlier because none of their projects have shown discovery potential yet. So they are more of a pure speculation, but certainly worth a look at.
East Asia Minerals (EAS.V) has put a large discovery on the table in Indonesia. It has had a pullback along with a lot of other stocks beginning a few months ago. We feel it is trading in a good range. We don't feel it is undervalued, but we do feel that the project still has a lot of upside potential. We looked at it on that basis.
One that may interest a different group of people, SilverCrest is in the midst of building a mine in Mexico. It is a gold silver mine. They are to be in output by year's end and we feel that their current pricing is below what they should be trading at cash, below by a significant amount. From there, the growth will come from further expansion on this project and looking at other projects primarily in Mexico in the gold silver space.
In West Africa, Burkina Faso is another area that has had a very rapid expansion of gold output over the last 6 years. It has grown from having no commercial gold mines about 4 years ago, to having by the end of this year, if unless one of the two newer developments get side tracked somehow, it will have 6 mines in production with 750,000 ounces total, very substantial for the country. The company we are talking about there is called Riverstone Resources (RVS.V). They have been working in country for quite a while. They have established a resource of over a million ounces. They recently found several new zones. They did significant financing. So they are well cashed up and they are in the process of determining how much expansion may come from those zones as they drill them off. The company we like quite a bit. West Africa, has been important to the gold space, Ghana is well known to everybody I think who knows the gold mining sector. Burkina Faso is the next country inland and it is proven to be an excellent place to go, discover and put into production gold deposits. We think Riverstone is trading at a little below now because they have had to pullback with everybody else. It is a matter of how much more the drill depth is going to add to their valuation over the next 6 to 18 months.
Michael Campbell: One of the questions I always get from people is when to buy into and when to sell, positions like this.
David Coffin: Sure and it is important thing in terms of both selling and take profit to reduce your risk. One basic time to buy is, as the saying goes, when the blood is running in the street, best buying opportunity most of us will ever see happened early last year. Now that we are into somewhat more of a normal market, but one that is highly volatile and which will certainly have lower periods, it is worth keeping that in mind. You donít really want to go in and buy much of anything after the market has taken a strong uptick. Typically, you wait for that to settle down and to pullback and use that as a buying opportunity.
At a more specific level, there are a couple of different ways to look at this. One is to come in before a stock has made a discovery. I mentioned a couple like that, but have put out good solid property information that suggests the target of the right type and as importantly of the right scale potential and a company that has been run by management who understands how to deal with those results, then you are taking a speculation. In that case, the company should have enough financial backing and enough other ideas on the table to give you some comfort that they can continue, but you do have to view that for what it is, that is a company that has not yet demonstrated an asset liability, therefore, it will shift down in a weak market.
The other time is post discovery, I mentioned a couple, Kaminak, in particular this year have put discovery level results on the table. The nature of the risk changes, it does not go away, that has to be kept in mind. Kaminak have demonstrated that they have a project in the Yukon, as have others on the list that I mentioned and a number of others, of course, in the world. They have demonstrated that they have the right type of geology. They are showing metal grades and thicknesses, which can be viable if the ongoing drill program expands that deposit to a scale that allows you to capitalize the development, and the development of course itself would be depending on where you are, a minimum of 5 to in some areas with some deposit takes 10 years away; so that also has to be kept in mind. Now having looked and seen that potentially viable results are put on the table, in another words, a drill has cut through a deposit and located good grades at appropriate thicknesses, you then have to think in terms of what will be required as a minimum to make a viable situation in a place like the Yukon or most others, where typically looking for targets that have a scale of certainly of a million ounces, but ideally of several million ounces or more as a potential. Usually that is what is needed in order to put the pieces together to bring a mine to production.
Ideally, we would like to see much bigger, as in the case of East Asia and in that case where you are looking at a country that has a mature mining industry, but in that particular part of the country has not had recent development or a lot of recent foreign investment you want to see a somewhat better situation, a larger deposit with good grades. In the case of a company like Riverstone, where the country has been developing mines for the past few years and has the demonstrated capacity to do that you have a got a little more comfort, there you are back into the somewhere between a million and two million ounces depending on deposit type and viability it is going to be a your threshold for mine development.
Now, the next point where you might want to come in is after that exploration process has been done, the evidence of a viable scale, and then more importantly the evidence of other requirements, the right metallurgy, etc., those studies have been completed, that is another point when you can come in. This is very market dependent. In a strong market companies can get priced up and through their actual cash flow potential. So you do have to be cognizant of that. The period such as we are in there are a number of companies around, who are priced below their cash flow potential, the market is risk averse, that can be a buying opportunity and typically you are looking for a situation in this market potentially a stock that can double. You do again have development risk. Even though all of the studies have been done, the details have been put on the table, there will be circumstances in which conditions are actually different than expected and results are not as strong as hoped for, so you do have to keep that in mind, which brings us to the fourth period.
Post development when a company has demonstrated that the mine is viable, then you are buying into a growth company. If you are looking for that type of situation, what you need to see is that the initial project is large enough to give the company sustainable cash flow for long enough that they can then make their decision on the next point, the next way to grow the company. That in the mining space is typically for a startup company, a development with a 7 to 10-year mine life in that range, ideally something bigger, but that is ample to get full valuation. The company with a strong project is going to run 4, 5 to 6 years is certainly viable and the company will give them price, but you want to look for a little quicker capital repayment in that situation, that is something more along the lines what SilverCrest looks like to us right now.
Michael Campbell: As you say, it is just such a fascinating area and I think there is going to be some massive opportunities that will come in the next few years and it is most helpful to hear that the people can also go to www.hraadvisory.com. David, thank you so much for being here during the weekend; it's always great to talk with you.
David Coffin: My pleasure.
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