The Gold Report: What is your overall strategy for gold-related investments at this time?
David Sidders: As with any sector in the market right now, everybody is a bit cautious. There's risk in everything and around every corner. We have problems in Europe. We have problems in the U.S. Investors are pulling in the reins, and money is tight. In this environment, I strongly prefer domestic operations in well-known, proven, mining-friendly jurisdictions. I don't need the additional political risk from overseas investing. The strategy is simple—stick with domestics. If you want something exotic, go order a Mai Tai at the bar. Investors aren't compensated for the risks involved in exotic mining investments at this time. Investors have been chasing rainbows in Africa and windmills in South America and lots of other fantasies when they could be focusing on domestic projects that are crushing rock, pouring dore and making profits in Nevada.
TGR: Do you have a preference between exploration/development and production?
DS: I like two scenarios here. I like smaller companies that are defining an ore body and building reserves. I also like producers that are increasing production and containing costs. Clearly, the companies that are looking to build mines—they already have this magnificent resource and now they need to come up with financing—are finding that the input costs and the capital expeditures (capex) are exploding. Even the majors are seeing cost pressure; some pretty big majors have dropped out of large capex projects. When you read Barrick Gold Corp.'s (ABX:TSX; ABX:NYSE) financial statements, it is clear that costs are escalating. One strategy to deal with cost escalation is for the major to re-examine existing operations and see how it can run them better, perhaps on a smaller scale while adding to reserves. Another strategy would be to buy new blue-sky opportunities in proven jurisdictions. Not far off places like Ecuador or Mauritania, but somewhere closer to home, somewhere the company may have nearby operations.
TGR: That brings us to Nevada, which you like, but Nevada is already a huge gold producer. Most of the majors are there and have been there for over 20 years, producing a lot of gold. Has all the low-hanging fruit already been picked? Could there be that much exploration upside?
DS: In Nevada, something like 24 metal mines and 24 industrial mines currently are in operation. So that's four dozen mines, and all the majors are there—companies like Goldcorp Inc. (G:TSX; GG:NYSE) and Barrick Gold. There are more holes in Nevada than there are on a dartboard. That is not bad—it indicates that the ground is good. Many of those holes were drilled long ago; the technology has improved and gold prices are higher. Today's industry is different from 15 years ago.
"I don't need the additional political risk from overseas investing. The strategy is simple—stick with domestics."
What is new in Nevada? One example of an area that is getting a second look is the Bullfrog Mining District, where Barrick produced 2–3 million ounces (Moz) during the 1990s. We're seeing some juniors working there now. One of the juniors, Corvus Gold Inc. (KOR:TSX), has a resource of greater than 1 Moz Indicated and Inferred in the Bullfrog Hills. It's about a half-dozen miles from the old Barrick open-pit mine. There is still exploration opportunity because the technology and the economics have improved dramatically since Barrick first mined the area. The improvements are in addition to the well-known advantages that Nevada already has—low cost surface mining, ores that can be processed by chemical leaching and a favorable legal and tax system. There is a reason that Nevada produces 80–85% of all the gold in the U.S.
TGR: The Nevada gold fields are concentrated in several trends: Battle Mountain Trend, Getchell Trend, Walker Trend and so on. The Bullfrog district is in the latter. Is it possible that some of these trends are relatively underexplored?
"I like smaller companies that are defining an ore body and building reserves."
DS: I think so. Barrick closed down its operation at Bullfrog in 1999. If it would have stayed in production, it could have done a little more exploration, but the gold price was much lower. The economics have completely changed since then. The capex of new mines in this area is low. For example, Corvus expects to spend around $70 million in capex on its North Bullfrog project. That is a bargain compared to other projects in far-flung jurisdictions.
TGR: Nevada is a good jurisdiction for your investment model. Are there any other companies that you are watching?
DS: Another company that I like is Bullfrog Gold Corp. (BFGC:OTCBB). The company has three projects; its prime Nevada project is adjacent to Barrick's former surface mines. Bullfrog's second project, Newsboy, is in Arizona. That state is another jurisdiction that is extremely friendly for mining and has excellent infrastructure. Bullfrog completed two drill programs at Newsboy during the past eight months. The historical mineral resource was a few hundred thousand ounces (Koz). Bullfrog has confirmed much of the old drilling and intersected a higher-grade zone in the basement rocks. The geologic potential appears to be approximately 800–900 Koz. Bullfrog also acquired a third project in Nevada that has strong potential for silver with base metal credits. Bullfrog's projects are located in areas that offer low political risk, straightforward permitting, good metallurgy, with a good local workforce that will get the job done. The management team is led by a mining engineer and has built many mines. It will be interesting to watch for the drill results from the second drill program recently completed at Newsboy as well as a third program scheduled later this year.
Over the next months, Corvus and Bullfrog will be generating lots of excitement in the Bullfrog Hills area. It could become an area play. Maybe we'll see a staking rush. If so, that would be exciting.
TGR: What is your exit strategy for these types of investments? Could it be M&A or mine building?
DS: Mine building can be expensive, but it is one option. A faster, and probably better, exit strategy is to sell to a major that is already operating in the area and needs to replace reserves. The goal of the junior is to create value by proving up a great ore body and selling it to a major at a revalued price.
TGR: Are there other domestic or North American areas that you're interested in?
DS: I like Canada, and specifically Timmins. Everybody likes Timmins. It's another jurisdiction with a 100-year history. In Timmins, I like a company called Brigus Gold Corp. (BRD:TSX; BRD:NYSE.A). All of the majors are up in Timmins, Goldcorp, Rio Tinto (RIO:NYSE; RIO:ASX), Xstrata Plc (XTA:LSE) and a whole string of juniors. Brigus is producing; I think this year it's on target to do 85 Koz and is projecting over 100 Koz next year. This is a situation where you have a company that's already built the mine. Brigus is working on cost containment and increasing production. There may be a role for a major to play by coming in and taking production to the next level using its expertise and economy of scale. And there's your exit strategy. To summarize, I like the blue-sky opportunities where we're drilling to prove up a resource for a smaller producer. At the same time, if the efficiency can be improved, a major might become interested and ideally become a bidder.
TGR: Another district with a long domestic history is the Carolina gold belt. The most advanced project there is the Haile mine for Romarco Minerals Inc. (R:TSX). Is that one that you follow as well?
"Nevada has well-known advantages—low cost surface mining, ores that can be processed by chemical leaching and a favorable legal and tax system."
DS: The Haile mine was, I believe, used to finance the Civil War. That's a project where the company has gone into a historic district, used the data, drilled it out, twinned it and now has expanded the resource base. We did well with Romarco on the run-up as it proved the resource. Lately, it has unfortunately run into some permitting problems because part of the proposed mine is on wetlands. Romarco is dealing with the Army Corps of Engineers to find a solution. Once those issues are resolved, Romarco has to raise the funds to build the mine. The Romarco story was terrific. It ran to $2/share, and then it ran into these problems. All the majors, everybody, can be subjected to the difficulties of trying to get a mine off the ground, to raise the money and to get it going. That's when it's really difficult.
TGR: Is there money out there to finance permitted mines with a defined resource?
DS: Sure there is. That money will come from the majors who want it. Once reserves have been defined, they have lots of cash. If the majors are passing on big projects, they still need to replace their reserves. If a major passes on advancing a Donlin Creek-sized project, that's a lot of money that can be reallocated to something that's already running or a resource that's a little closer and a little simpler to bring to fruition.
TGR: Are there any other specific regions, jurisdictions or companies you want to talk about?
DS: Those are my three favorites right now. I love Corvus. I love Bullfrog because of the two projects it has and the exploration upside near Barrick's former mines. And I love Brigus because of its potential efficiency improvements, additional production and because it is a takeover target. All three of those companies are operating in these terrific mining-friendly jurisdictions where there's no political risk—they're almost lay-ups.
TGR: Over the past couple of years, there have been a lot of investors who thought they had lay-ups. But the junior sector moved sideways or down. How do you deal with the investing psychology in the junior sector when the stocks trend sideways or down—for what seems like forever?
DS: You have to remember, last year things got very low, and they bounced. The conditions are, again, where we're getting oversold here. People are nervous and people are throwing out value, and they're doing it almost irrationally and for comfort. But at some point, we'll start to see a little M&A. We've already seen some companies try to merge with one another to keep things going. We've seen some acquisitions, and I think that will increase as we go into the fall. Once the risk appetite returns, we're going to definitely see first these domestic companies take off and then, later on, the companies operating in far-flung jurisdictions should get a bid as well. Prices are getting so cheap; Hecla Mining Co. (HL:NYSE) the other day made a bid for U.S. Silver Corp. (USA:TSX.V; USSIF:OTCQX). It just said, hey, what the hell? It's next door and cheap—here is the cash.
TGR: It feels as if we're in a holding pattern macroeconomically as well as in the sector. It could be the summer doldrums. Maybe things will get a little bit more exciting in the fall.
DS: There's an election coming up. There are problems with Europe. If there is a convincing victory in the election in the U.S., money is going to come back into the market. Equities are cheap, and these gold equities are cheap. They're trading for $35–40/ounce in the ground. At some point, everything becomes so cheap that they become acquisition targets.
TGR: Do you have any closing thoughts?
DS: Keep it simple. Just keep it simple for the next little while. Stay domestic. Avoid unnecessary risk. You don't need Nigeria or New Guinea in your portfolio.
TGR: And if you still seek more risk, there are plenty of casinos in Nevada as well.
David Sidders is a Canadian who has been resident in Bermuda since 1995. His career in the investment industry began 25 years ago in Toronto at First Marathon Securities and then at Altamira Investment Management where he worked as an institutional equity trader. In 1995, Sidders moved to Bermuda to run the trading operations of the LOM Group and, in 2002, he became the senior vice president of program trading at Bank of NY ConvergEx. In 2008, Sidders and a partner founded Xeitel Capital Management, which helps fund startup companies and offers investment recommendations to individuals.
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1) Alec Gimurtu of The Gold Report conducted this interview. He personally and/or his family own shares of the following companies mentioned in this interview: Goldcorp Inc., Romarco Minerals Inc. and Hecla Mining Co.
2) The following companies mentioned in the interview are sponsors of The Gold Report: Bullfrog Gold Corp. and Goldcorp Inc. Streetwise Reports does not accept stock in exchange for services. Interviews are edited for clarity.
3) David Sidders: I personally and/or my family own shares of the following companies mentioned in this interview: Bullfrog Gold Corp. I personally and/or my family am paid by the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this interview.