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Eric Coffin: Yukon! I've Hit Gold
Source: Brian Sylvester of The Gold Report (10/15/10)
The Yukon is going to be huge next year, according to Hard Rock Analyst Writer Eric Coffin. "If you're playing development-stage gold juniors, you should be excited about the Yukon." He certainly is. "It's going to be just ridiculous," he says, "there'll be 100 companies up there." In this exclusive interview with The Gold Report, Eric reveals some promising gold juniors in the camp and some others in Latin America.
The Gold Report: Eric, everyone is buzzing about gold's September run to more than $1,300 an ounce. Is this a seasonal uptick, or are we finally seeing the much-anticipated flight of investors into the safe haven of precious metals?
Eric Coffin: It's probably both. Historically, September has been a good month for gold. But I think its recent performance is just a continuation of a 10-year trend. Dave and I have never been in the gold-at-$5,000 camp. We're quite happy to see it at +$1,300/oz. I won't be too shocked if it goes higher. In the last 18 months, a couple of things have happened that are significant. One is that central banks (CBs) are pretty much out of the picture on the sell side. They've been doing some buying but mostly from each other or the International Monetary Fund (IMF). A central bank (CB) selling agreement has been in place for 10 years, limiting collective sales to 400–500 tons per year. Last year, they sold a quarter of that and this year CBs have sold basically none. That takes about 10% off the supply side of the market, so it's significant.
Mine supply is always an issue. A lot of people think gold will fall off the hillsides at $1,000, $1,200 or $1,300 per ounce. But life is not so simple in the mining business. With these prices, you'll start seeing an increase in mine supply; but so far, it really hasn't accelerated much. What's filled the gap, as much as anything, has been scrap—the dollars-for-gold programs and such; but it appears those sales are starting to flatten out. That could also be significant. If scrap sales went flat or actually dropped, the gold price could go up relatively quickly. But we're not betting on it. We've seen just one quarter's worth of data that suggests it's slowing down. We have seen comments from those that follow scrap sales closely, and they say sellers have lifted their target prices. When gold fell back to $1,200 midyear, scrap sales apparently dried up quickly. This, too, is supportive of prices.
TGR: So, you're evaluating the gold price based on the supply/demand fundamentals alone. You're not really factoring fear into the equation.
EC: You could see a fear-based spike for any number of reasons. While you could trade bullion with that in mind, you can't time stocks that have their own schedules for information flows against it—so we don't bother trying. I think the world has changed when it comes to precious metals. One group of investors/traders is buying gold based on fear; a just-in-case purchase. Most bullion dealers sell it based on the idea that everyone should have a little gold in their portfolios as insurance in case the world goes off the rails. Another group is concerned about inflation. I think these buyers are more important now. They're worried about monetary debasement of paper currencies. That's not fear buying per se because those who buy gold as a monetary inflation hedge don't necessarily believe the world is coming to an end. In fact, many of them are worried it isn't coming to an end. They're saying: "Well, if the world economy sort of gets going again and CBs don't stop the printing presses, price inflation is almost inevitable and monetary inflation is already here."
I don't see Consumer Price Index (CPI) inflation anytime soon because there's so much slack capacity in the economy. But I can certainly understand people being worried about the printing presses. A lot of gold bugs and hard-money guys that are friends of mine are incensed at the Fed. But, if I was in Washington's situation and the rest of the world wanted to give me a 10-year loan at less than 2.5%, why the hell wouldn't I take it? The U.S. economy is the only one I know that can have that kind of balance sheet and still borrow money at those rates. Of course, as they do that, they create more money supply. I don't know if we'll get CPI inflation, but we sure as heck have monetary inflation.
TGR: There's some fear now that the Fed can't pay interest on its T-Bills. Have you heard anything about that?
EC: The Fed can always pay. I mean, they print the stuff. Although I'm a proponent of gold, I think people get a little carried away with disaster predictions sometimes. I don't see a time in the foreseeable future when the Fed's going to have any trouble with those open market operations. If something like that is coming, you'll see it in the bond and Treasury Bill markets. Rates would spike because the buy side wouldn't be there anymore. That certainly hasn't been the case; everywhere you turn, it seems like rates are lower. People are worried about the economy, and particularly the equity markets, or they got blown out of the equity markets and don't even want to think about stocks anymore. So much money pours into the bond markets that I don't think the Fed will have trouble selling its paper any time soon.
TGR: When you evaluate companies by some back-of-the-napkin calculations, what price are you using for gold in 2011?
EC: Right now, we're using $1,000–$1,100/oz., but we don't necessarily think the price will go next year. When doing back-of-the-envelope calculations, it's a lot wiser to be behind the curve in terms of output selling price. Because of the timelines in mining, you have to give yourself a cushion. We prefer to look at situations that could, or will, make sense at less-than-current prices. We don't spend much time evaluating companies with projects that need $2,000 gold to make money.
TGR: Why haven't we seen significant appreciation in the junior gold and silver stocks, given the respective runs of their physical counterparts this year?
EC: Well, we certainly have in the companies we follow. I don't know about the rest of them. I think the companies we follow averaged about 250+% in the last year and a half. In the last month or so, we've seen large moves in a lot of these stocks. That's partly because we came out of the summer doldrums. The other part was widespread conviction of a looming double dip until about a month ago. Virtually everything I read from market analysts over the summer forecasted a double dip—something I didn't believe. That was holding many things back; it probably held the USD up, too. As that fear eased somewhat, the dollar has come off and gold prices started to run.
The other, real price driver is mergers and acquisitions (M&A) activity. Let's face it, for 99% of the juniors out there, the end game isn't building a mine—it's being bought by a company that's going to build a mine. A fairly long period passed without much M&A. I think people got discouraged and said, "I'm not going to chase these prices higher because I don't know who I'm going to sell my stock to." But over the last month, we've seen three or four really large takeovers—and they weren't cheap. On a per-ounce basis, they were quite expensive. So, that really lit a fire under things. In the last month, we've noticed big increases in many development-level companies we follow. In addition to all of this, several discoveries have been made. The junior resource sector is a discovery- and news-driven one. Higher commodity prices alone will only do so much. Companies need to make discoveries and tell the world about them to see outsized gains.
TGR: While plenty of junior explorers have gone nowhere, you've seen significant appreciation in the companies you cover. What are some common attributes of those companies?
EC: I'm not saying everything we've ever written up is rising. Some are; some aren't. By and large, they have done very well, in part because we focused on companies with discovery potential that did, in fact, end up making discoveries. One set we've focused on this year is of companies in the Yukon . We started covering the Yukon heavily when Underworld Resources started drilling more than 1-1/2 years ago. Now it looks like a classic area play to me and Dave. We haven't seen what we call a "classic area play" for probably 15 years. Voisey's Bay was the last one you could call a classic full-on area play, and it fizzled due to the lack of secondary discoveries.
TGR: Are you talking about the White Gold camp?
EC: Yes and no. There are now at least two centers of discovery. One, of course, is the White Gold camp where Underworld drilled off 1.5 million ounces (Moz.) and got taken out by Kinross Gold Corp. (TSX:K; NYSE:KGC). That was followed by Kaminak Gold Corporation (TSX.V:KAM), which is drilling the Coffee Gold Project south of Underworld's discovery. Though it will take a lot of drill holes, that resource will almost certainly be larger than 1.5 Moz. KAM has announced strong drill results from four separate zones and is awaiting assays from drilling on two–three others. The scale of that system alone is in the 3–5 Moz. range and it's fair to describe Coffee as a gold camp, not just a gold zone.
ATAC Resources Ltd. (TSX.V:ATC) has the Rau Gold Project, located in the central Yukon, about 50 km. north of Keno City. It has two separate discoveries—the Tiger and Osiris/Isis Zones. Tiger looks like an epithermal system, whereas Osiris looks more like a sediment-hosted, Carlin-type system. Each of these discoveries has 3–5 Moz. scale potential, if not more. Kaminak's and ATAC's projects are secondary discoveries, in terms of the area play; Underworld made the first one. Note that ATAC's discoveries are in different rocks and appear to have different geological models than the White Gold discoveries. This has opened up a lot of prospective territory for other companies.
To drive an area play, there must be a new discovery. I want people to understand the distinction because it's important. A lot of juniors are up there working on earlier gold discoveries. Some are rising, but not nearly as much as these guys with new discoveries. You get treated a lot differently when you make a discovery versus when you go back and drill holes on something everybody knew about.
TGR: Perhaps you ought to explain what's involved in a classic area play.
EC: Several things are required. It has to be a new discovery, the bigger—the better obviously, and the more share-price appreciation the lead-discovery company sees, the better. We were somewhat concerned when Underworld got taken out earlier than it wanted; but Kaminak and ATAC made and expanded their discoveries, so the play has kept going.
It's also important that a junior—not a major—makes the discovery. Juniors must raise money constantly to ensure tons of news flow. A major, on the other hand, will keep quiet until the deal is done and it's staked everything within 100 miles. Juniors leading the play ensure a constant flow of discovery news.
Ideally, an area play should be in a jurisdiction that requires hands-on staking. In the Yukon, companies have to go out and pound claim posts into the ground. In a "paper staking" jurisdiction, a group with deep pockets can simply apply for huge areas and freeze everyone else out. On-the-ground-staking regimes mean a broader set of companies will get involved because a staker can't be in more than one place at a time. Secondary discoveries are also quite important. That's what really drives the area play up a notch and turns it into a classic area play. You also need to find a discovery company that's building a lot of market capitalization; ATAC is probably the best example. The combined market cap of ATAC and Kaminak is now close to $1 billion. Market-cap appreciation of that magnitude tends to pull everybody else up and draw in a lot of competition, which grows the play even more.
One thing that remains unknown about the Yukon is the impact of seasonality. This winter, we're all going to find how much impact that will have on the area. In other classic area plays, such as Lac de Gras—and we think this Yukon play looks a lot like Lac de Gras—the best time to drill is in winter, even in the Northwest Territories (NWT). That's not possible in the Yukon, where there's a lot more topography and running water—a must for a drill program, is impossible to find in many areas in winter. We still don't know how five months of low news flow will impact the Yukon, but we're sure it will survive. I think the Yukon is going to be huge next year. . .it's going to be just ridiculous, and I think there'll be 100 companies up there running around.
TGR: If Kinross found something on the property gained through the Underworld transaction, would that spur further interest in the play?
EC: Three or four people have told me Kinross made another discovery on the other large Underworld property block, (JP Ross and Maisy May) northeast of the White Gold discovery. I understand two or three drills are running there; so, I assume Kinross hit something but hasn't said anything about it yet.
TGR: Could you give us a few more names with prospective Yukon ground?
EC: Another one we follow, Silver Quest Resources Ltd. (TSX.V:SQI), has a 1 Moz., low-grade resource in BC and controls part of Richfield Ventures Corp.'s (TSX.V:RVC) Blackwater discovery. But it's also been drilling its Boulevard project west of Kaminak's project and the high-grade Prospector Mountain project southeast of the camp's center. It recently undertook a large-staking campaign and huge soil survey that is yet to be reported on.
Another one we follow that's nowhere near any of these guys is Northern Tiger Resources Inc. (TSX.V:NTR), which optioned the very high-grade 3Ace prospector discovery this spring. That one got our attention because Dave has a fair amount of experience in the Yukon. He worked a lot there and had never seen those kinds of grades in the Yukon. The company sampled the area it calls the "Main Zone." I think the average gold grade is a couple hundred grams gold over slightly less than 1m with individual samples up to+ 4,000 g/t gold . It recently put out results from another vein, the Sleeping Giant Zone, which returned 6–7 meters (m) grading 6–11 grams per ton (g/t) from surface samples. Sleeping Giant has widths of up to 30m ,which gives the project scale potential. This year's work also generated other zones like the Green Zone that had high-grade grab samples and large soil anomalies, which will be drilled next year.
3Ace is generating a whole lot of buzz, and NTR's trading like crazy. It's completing a small drill program on the Main and Sleeping Giant zones. We'll see what that drilling brings. However it goes, Northern Tiger has plenty to work on next year and this area in the southeast part of the Yukon, could become another busy area..
Different discoveries in different areas with different rock types and geological models open up a slew of potential geography for people to go in and try and make a discovery. It's not like these discoveries have nothing else around them; a promoter can find all kinds of ground there to promote. That's what really brings in the critical mass—when a whole bunch of companies jump up and down and wave their arms collectively, that's what gets you an area play.
TGR: What did you guys see in the Yukon that others didn't?
EC: We know the guys that ran Underworld and saw them generate a set of strong trenching results in 2008. We jumped on it as quick as we could once drilling started last year. We liked the fairly consistent trench numbers with good widths like 30–40m trenches of 2, 4 and 4.5 g/t; bulk-tonnage grades, but much better than you typically see in the Yukon; and it's potentially underground-bulk mineable at today's gold prices. A number of bulk tonnage gold resources had been found in the Yukon in the past, but most were in the 1 g/t range. David has a lot of direct experience in the Yukon and he thought Underworld could be the start of a great exploration cycle for the territory and, eventually, for Alaska, as well.
One guy that deserves a lot of credit because he's the one who optioned the property to Underworld and optioned another property to Kaminak is Shawn Ryan. Shawn staked that stuff and did the large-scale soil surveys out of his own pocket; and they really were large-scale surveys. It's amazing how much money Shawn spent on these soil surveys across several projects before he optioned them. That's really what brought Underworld in, when it looked at those surveys and said, 'We've got to give this thing a shot.' Shawn's staked properties in every area and vended claims to probably 15 different companies. It took a lot of guts for him to stick to his convictions and invest that much before anyone optioned anything. He's being well rewarded now and deserves it.
Another group that deserves mention is ATAC, which is managed by and allied with the principals of Archer Cathro, the most-experienced geological consultants in the Yukon. They have large proprietary databases of past results and staked many, many properties.
TGR: Let's head south to Argentina where Goldcorp Inc. (NYSE:GG; TSX:G) recently bought Andean Resources Ltd. (TSX:AND, ASX:AND) and its promising, but unproven, Cerro Negro Project for $3.5 billion. The investment thesis there is that other juniors with similar resources could become takeover targets. What are some of those?
EC: I'll start with our longest-standing Argentinean pick, which is no longer a junior. Minera Andes Inc. (TSX:MAI; OTCBB:MNEAF) deserves credit as the leader in the region. It discovered the San Jose deposits north of Andean's ground, which were JV'd to and put into production by Hochschild Mining (LSE:HOC). MAI owns 49% of San Jose, which is a high-grade underground gold/silver operation. It's been a frustrating stock because it's taken time for the mine to get up to speed financially, and we didn't feel there was enough exploration for new zones. That changed recently when the profit picture improved and MAI announced a set of new high-grade vein discoveries. We've always felt San Jose could contain 5 Moz. gold equivalent or more. These new results lit a fire under the stock. We wouldn't chase it now without seeing further improvement in the bottom line but also think there's room for more discoveries now that the drills are active again at San Jose and on surrounding ground that MAI controls 100%.
Of the juniors, we think Mirasol Resources Ltd. (TSX.V:MRZ) is probably the best example. MRZ has followed the JV model, building up a large set of highly prospective projects with a focus on the Deseado Massif in Santa Cruz province, which also hosts Minera's and Andean's projects. Mirasol has a very strong technical team and has been there a long time. The company's optioned several projects, the most active and important of which is the Joaquin Silver Project optioned to Coeur d'Alene Mines Corp. (NYSE:CDE; TSX:CDM). It has generated some spectacular high-grade silver intercepts and continues to drill there. Mirasol recently made a new discovery in the region, the Virginia-Santa Rita, which also contains high-grade veins. MRZ has sampled many kilometers of vein material with very good results, and we expect a drill program there this season.
TGR: Is that a silver-gold deposit?
EC: Mirasol's projects are mainly silver. Another one we follow that has more base metals is Argentex Mining Corporation (TSX.V:ATX; OTCBB:AGXM), which controls the Pinguino project, also down in the Deseado Massif. It's been drilling at Pinguino for a couple of years, initially focused on base metal zones but has recently concentrated on targeting high–grade, near-surface silver. It's a very large set of veins, and ATX is working on targeting the vein set efficiently. An updated resource estimate for the original base metal veins, which also contain a lot of silver, is due out any time. A large drill program to follow up on other silver veins and vein targets is also in the works. It will publish that resource pretty soon, I think.
TGR: What are some other gold juniors with recently revised resource estimates the market hasn't fully noticed?
EC: Well, one not far south that the market has taken some notice of is Esperanza Resources (TSX.V:EPZ). Again, a really strong technical group is running it that has been drilling the main Cerro Jumil project in Mexico this year. The gold-silver zones are localized in a synclinal fold (shaped like the letter A). Esperanza started drilling one side, but a lot of the drilling in the last phase was on the other side; and it pulled some good numbers. The company put out a new resource estimate about a month ago that increased the existing resource by about 50%. There's still some room there; it looks like a pretty decent resource. Esperanza has seen some share-price appreciation out of that, but it's not expensive considering the expanding resource. Like MRZ, this management group is good at generating new projects and targets in both Mexico and Peru and is working on a large number of earlier stage projects.
TGR: Great. Do you have any parting thoughts on the precious metals market?
EC: Well, gold's had a pretty strong run. Gold and silver are not in a bubble, but the upward price trajectory has gotten steep. As we go further into the fall, I think we might see some consolidation but we're not concerned with it being particularly large in percentage terms.
It's been a much better year than most people thought it would be, in terms of both junior miner share prices and money raising. Not every stock has gone up but the access to funds, for most precious metal explorers, has been good. That means next year will also be good because a lot of companies have good projects to explore and lots of money to do it with. The activity level is going to remain quite high—maybe even higher next year. But, as we always tell subscribers—don't be afraid to take money off the table on stocks that have big price runs. It's rarely a bad idea to try to trade your holding costs down to a minimum.
TGR: Eric, I believe you have a special Yukon Area Play report to offer our readers, right?
EC: Yes. Because of our strong focus on the Yukon and what we believe will continue to be a very strong area play, we put together a special free report. This booklet outlines the geology of the region, some companies we cover in the area that show significant potential, plus the anatomy of what makes up a real area play. Gold Report readers can access this report, by clicking this link: http://www.hraadvisory.com/yukon_report.html.
Eric Coffin and his brother David are the co-editors of the HRA (Hard Rock Analyst) family of publications. Responsible for the "financial analysis" side of HRA, Eric has a degree in Corporate and Investment Finance. He has extensive experience in merger and acquisitions and small company financing and promotion. For many years he tracked the financial performance and funding of all exchange listed Canadian mining companies and has helped with the formation of several successful exploration ventures.
Eric was one of the first analysts (along with David) to point out the disastrous effects of gold hedging and gold loan capital financing (1997) and to predict the start of the current secular bull market in commodities based on the movement of the U.S. dollar (2001) and the acceleration of growth in Asia and India.
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1) Brian Sylvester of The Gold Report conducted this interview. He personally and/or his family own shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Gold Report: Esperanza, Goldcorp and Richfield.
3) Eric Coffin: I personally and/or my family currently own shares of the following companies mentioned in this interview: Kaminak, Silver Quest, Northern Tiger, Argentex, Mirasol and ATAC. HRA, and its editors, including myself, are never paid or compensated in any way by companies we follow in the HRA newsletters.