Brian Mok: Gold Dynamics
Source: Brian Sylvester of
The Gold Report
Union Securities Analyst Brian Mok gets excited about gold
companies with prospects for big-time growth. But then again, who
doesn't? In this exclusive interview with
The Gold Report,
Brian discusses at length, and offers target prices on, no less
than five juniors headed for big increases in gold production.
The Gold Report:
Tell me how a strong gold price is changing the companies that you
Obviously, a strong gold price bodes well, but really, it's a
double-edged sword. You have the nice, high gold price, but the
companies I'm currently looking at have functional currencies that
inversely correlate to the U.S. dollar. You get the rise in the
gold price, but unfortunately, you also get a rise in costs that
offsets some of the impact the strong gold price brings to cash
flow. That's what I'm finding right now.
But have you seen a change in the type of company you're covering?
It's not so much the explorers now. Almost all the companies you
cover seem to be either near-term producers or producers. A lot of
them are high-cash-cost operations. I was wondering if that has
become something of a trend.
Yes, there is a trend. If you go back to 2006 and 2007, explorers
found it quite easy to raise money. It was easier for explorers to
get traction with investors. However, during the financial crisis,
maybe investors got burned and became a little bit more
risk-averse. Now, they're looking at companies where cash flow is
imminent, or at least it's in the foreseeable future, where there
is a lower risk profile. To satisfy that need, companies may be
considering gold projects that were marginal two years ago but are
now in favor, given where the gold price is. This partially
explains the migration toward the group of companies I currently
But whenever you have fairly high-cost operations, that reduces
your margins. These types of companies have to be well managed in
order to maximize profits.
An early-stage explorer has nothing in the ground
when it gets started, very much like a lottery ticket. Which
company is going to make a hit? Which company is not going to hit?
When you move up into the more advanced explorers, developers and
emerging producers, there's a known quantity of gold in the ground,
which offers some comfort. But then it's a matter of executing a
plan to get it out of the ground.
I believe, you can always find people to execute that plan, to
help mitigate that risk. In exploration, you can have all the tools
in the world and some of the brightest minds building these
geologic models, but at the end of the day, you won't know until
you start drilling. Even then, it may just be a one-hole
Is there a chance that the gold price could be threatened by small
producers bringing their gold to market?
I don't think so. Not in the short-to-medium term. In the last six
or seven years, global gold production actually declined, from
about 83 million ounces to 75 million now. I think there's a bit of
a gap that needs to be filled. You've got the large projects that
will be coming into production, like
Osisko Mining Corp.'s (
Canadian Malartic and maybe
Detour Gold Corporation's (
Detour Lake. Those scale at a half-million to a million ounces per
year, and you could include
Barrick Gold Corporation's (NYSE:ABX; TSX:ABX)
Pascua-Lama project. But a lot of other projects coming into
production are small. In aggregate, they won't be able to tip that
supply-and-demand balance to the extent that you would start to see
a fall in the price of gold. Gold is also used as a hedge against
inflation and those themes still play out.
What does Union look for in small-cap producers?
With small caps, it's the potential to rapidly expand production.
If you've got an established resource and plans for 100,000 ounces
annually, can you bring it up to 200,000? Are you able to double
the mine life, given what you know is in the ground? There is also
the upside in exploration. Is there the potential to expand the
known resource, or improve the confidence in that resource and
eventually bring it into reserves? You can look at a small
producer, but you have to go beyond the current production levels
and ask, "What else can be done here?"
But when you're building your models, how much weight do you allot
to management? How much weight do you put on cash flow?
Essentially the biggest one is cash flow. I build my model to see
when the gold project will be spitting out cash and when the
project will hit its stride. Then I look at exploration upside.
Given the setup of the operation, is there potential to easily
expand production from the current plan? Some of the management
teams with these emerging junior producers don't have a lot of
experience bringing new projects into production. This all plays a
role in my decisions. However, I tend to focus more on the
technical aspects, because I believe that if a project has merit,
you'll be able to bring people on board with the skills needed to
get the project into production. You can always add to your
management team, but what you have in the ground is what you have
in the ground.
What gold price are you using in your models, short term and medium
In the short term, I'm using $1,200, basically where it's been the
last few weeks. I've been conservative in my gold outlook. Next
year it's $1,100, and in 2012 it's $1,000. Perhaps this is more of
an optimistic view on the economy and the ability of central banks
and governments to get their act together; that is, ease nerves
around the issue of sovereign debt, and manage inflation using the
tools available. It may be a conservative view on the gold price,
but if a project passes muster at $1,200 per ounce, then at $1,500
gold, you know it's going to be a really good project.
You just started covering
Century Mining Corporation (TSX.V:CMM)
. In northwestern Québec, it has the former Sigma-Lamaque mine,
which has underground ore that Century is starting to mill.
Production is ramping up for 2011. Why did Union decide to focus on
Century is a name that we've been looking at for about a year. I
went up to the Lamaque site last July to get the lay of the land
and meet some of the technical personnel. I was impressed with what
I saw at the mill and some of the other ancillary facilities,
underground, as well as the fact that it's in Val-d'Or, Quebec, a
mature mining center, where you have lots of labor, the supplies
you need, the infrastructure and a cooperative government.
I also felt very comfortable with the technical team's plan to
bring this mine back into operation. I thought the focus on
underground production was key. We know the history of the open pit
and some of the trouble the previous operators had with them.
The engineers described how they wanted to proceed. All they
needed was money, which they finally got at the end of December. In
January they started to roll and I kept an eye on it. Were they
hitting the milestones that they set for themselves? Yes, they were
doing exactly what they said they would do. I have confidence in
the team's ability at Lamaque to bring the operation online.
What about its production profile?
Century has the ability to ramp up from its target of 40,000 ounces
this year to 90,000 next year and eventually 100,000 ounces by
2013. I like that. I'm quite confident that Century will be able to
execute the plan to ramp up to 100,000 ounces in the next three
There is additional exploration potential at Lamaque based on
their historic database, as well as other exploration targets
within the complex.
What about some of their other properties? They've got a
significant project in Peru.
Yes, San Juan in Peru. It's a small, narrow-vein, high-grade
system. It had been capital- starved when they purchased it, and
then they got things rolling. They're producing about 19,000 ounces
a year from San Juan now. There are plans to expand to about 30,000
ounces by 2012, through mill expansion as well as by modernizing
and mechanizing the underground mining methods using refurbished
equipment from Lamaque.
They also want to use different mining methods to increase
throughput and ultimately produce more gold and silver out of San
Juan. That's the plan, over the next two or three years. In terms
of reserves, they've got six years on the books; that's what I've
modeled right now. But the mine has run for 30 years and there's
still significant exploration potential on the zone where they're
mining, as well as the different vein structures within their
property. There is also a porphyry target. I think six years is
conservative in terms of mine life. Over the next couple of years
we'll see what the exploration efforts bring.
What about cash flow?
Cash flow is going to be basically flat this year as they ramp up
Lamaque. Then into next year, we're looking at $0.10 per share in
cash flow. In absolute dollars, that's about $36 million. This
declines to $0.09 per share as a result of the reductions in my
gold price assumptions for 2012.
Will that be enough to service debt and make reinvestments?
Yes. This year is the critical year. I've assumed that they'll need
another $5 million in financing to basically complete development
through 2010. Then they'll start to become cash-flow positive next
year, probably in Q2, then they're home free. They'll be able to
repay the capital leases from cash flow. Right now they're
delivering gold into that prepaid gold forward. I don't foresee any
issues with Century not being able to deliver the gold to meet
The $33 million prepaid forward agreement they entered into with
Deutsche Bank is a five-year facility, so they're partially hedged
until 2014; it covers 61,183 ounces or 17% of the forecast
production during that period. After that, they experience the full
What's your 12-month target on Century?
Another company that has a similar business model but is a fair
distance away is
Crocodile Gold Corp. (TSX:CRK; OTCQX:CROCF)
in Australia. It's a high-cash-cost producer that brought some old
projects back into play. Tell our readers about that one.
Crocodile Gold's sole asset is in the Northern Territory in
Australia. The asset base consists of the former assets of GBS
Gold, which went into bankruptcy protection in 2008. Essentially
GBS tried to bring these operations on and ran into operational
problems, then faced a cash crunch just as the financial crisis
hit. They had to go into bankruptcy.
Crocodile Gold purchased the assets, applied a new mining plan,
and essentially started operations in November 2009. I think the
company was a bit aggressive in terms of their initial gold
production forecast of 120,000 ounces for 2010. They had to
subsequently reduce it to 100,000 ounces and the stock took a bit
of a hit earlier this year, but they recently announced commercial
production beginning in June. June production figures are around
8,700 ounces. I had forecast 7,500, and I was surprised they were
able to beat my estimates. They've maintained their guidance for
100,000 ounces in 2010, which I think is very positive. I'll keep
an eye on the stock for Q3 and Q4, but I'm fairly comfortable now
that the company will be able to execute on this year's target and
line things up for 2011, when they're aiming for 200,000
It's not just one mine, though. There's a lot going on there.
This operation is actually a series of operations. They've got two
mills, a number of open pits planned and two underground mines.
Basically they're drawing ore from all the mines and processing
them in the Brocks Creek Mill, as well as at the Tom's Gully
But if somebody came up to you and asked, "What stands out about
Crocodile Gold?" what would you say?
What I like about Crocodile Gold is that, in typical Aussie
fashion, they drilled shallow and only drilled a resource large
enough to justify a small operation. The previous operators, even
prior to GBS Gold, missed a lot of potential. Now Crocodile is
going back and doing what we would typically do in North America,
in terms of drilling to define a resource. I think there's
significant potential to add resources to enhance the production
profile and the mine life. Also, they can ramp up production
quickly, and are able to go from 0 to 100,000 and potentially to
200,000 ounces. Those are the main things I like about Crocodile
What's your 12-month target price on that?
My target price on Crocodile Gold is $2.60.
Another company that you cover is
Alhambra Resources Ltd. (TSX.V:ALH)
. It's producing similar numbers to Century right now, 20,000
ounces a year in Kazakhstan. It also has a lot of exploration
upside. Tell us about that one.
Alhambra has a large, large land package, about 2.7 million acres,
in Kazakhstan, right in the Charsk Gold Belt. The property is
bookended by two large gold deposits, I believe 10 million ounces
to the west and 13 million ounces to the east. Both are operated by
Polyus Gold (LSE:PLZL; OTCPK:OPYGY)
, a Russian-based gold company. There's potential for very large
deposits, just given the swath of land that Alhambra controls.
The Soviets had previously done some work there and focused on a
few targets, but there are a number of geochemical and geophysical
anomalies that haven't been followed up on yet. That's really
exciting in terms of being able to build your resource inventory.
Also, the roughly 20,000 ounces per year that they're producing at
Uzboy is all oxide heap leach (a relatively simple gold recovery
method). It's a relatively small resource, roughly 170,000 ounces.
However, there's about 1.2 million ounces below that, and it's
open-pittable. There's the potential to put in a mill and ramp up
production from 20,000 ounces to 150,000, 200,000 or 300,000
ounces, depending on the timing of production and so forth. There's
a significant ability there to add to the production profile. The
Dombraly and Shirotnaia are two advanced exploration targets that
may be two or three years from production. There are many ways that
you can add to the production profile and extend the life of the
But what would you say to an investor who's a little bit leery
about tying up equity in a company whose main project is in
Kazakhstan is, I guess, democratic, in the sense that the free
economy more or less reigns. They haven't run into difficulties
politically in terms of advancing projects. But it's very
bureaucratic in the way projects are approved or advanced. The
government doesn't step in and expropriate your projects. The
uranium industry is a good example of that. The government has
joint ventures with private uranium companies or companies listed
on the TSX. They're able to advance projects. I look at
Cameco Corp. (NYSE:CCJ; TSX:CCO)
and their Inkai uranium mine. It's always a good sign when the
majors are there.
What's your target on Alhambra?
What are some other companies that you're following?
I also follow
Dundee Precious Metals Inc. (
. I have a $5.90 target and a speculative buy rating on it. Its
flagship asset is the Chelopech gold-copper mine located in
Bulgaria. There's potential here for the stock to appreciate. I
believe the overhang on the stock has been its past efforts to
obtain regulatory approval to build an autoclave (a high-pressure
"oven" which processes ores in order to facilitate gold extraction
with cyanide) in Bulgaria. Due to a recent Supreme Administrative
Court of Bulgaria decision, the autoclave has now been ruled out,
so that distraction is gone. It may be a negative, but the positive
is that they've purchased a smelter in Namibia where they plan to
ship their gold-copper concentrate. This now becomes a story of
expansion. They're in the midst of going from processing 1 million
tons per year of ore to 2 million tons. In terms of gold, that's
going from 70,000 ounces to about 130,000-135,000 ounces, plus 50
million lbs. of copper. It's an exciting story. When they purchased
the asset it was severely undercapitalized.
Who did they purchase Chelopech from?
From a U.K.-based company that had gone bankrupt. Essentially, they
turned around the asset. They brought in a good team of ex-pats and
Bulgarian nationals to help run the operation. It's taken them a
few years, but the operation is hitting its stride. The near-term
catalyst for the stock is the execution of their expansion plans at
Chelopech. By the second half of 2012, they should be hitting the
run rates needed to double current production.
What is it about Dundee that gets you most excited?
It would be the growth profile and the fact that a lot of this
"country risk" has been removed because of Dundee's ability to
secure the smelter in Namibia. Also, they've got another gold
project in southern Bulgaria that's coming online called
Krumovgrad. They're targeting 2013 to bring that online. I think
they're going to avoid a lot of the permitting issues they
encountered with Chelopech because they're not going to use
cyanide. They're planning to produce a concentrate product. Also,
they've redeveloped the scope of the project to minimize the impact
on the local population, and that should help with the permitting
process. I think they're doing all the right things. I'm quite
hopeful that this project will come online and add another
100,000-150,000 ounces of production in three or four years'
Are there any others you want to talk about?
Corex Gold Corp. (TSX.V:CGE)
, an explorer in Sonora State, Mexico. Its project is southwest of
Alamos Gold Inc. (
. I was initially attracted to it based on some of the initial
drill holes. One-plus grams of gold over 100 meters-I mean, that
grabs your attention. A lot of that initial exploration was done by
soil sampling; there wasn't a lot of geophysics work at that time.
They completed that initial drill program and there's been a little
bit of drilling since. That has resulted in some mixed results, but
what's interesting is that they've come across a copper-gold
porphyry system closer to the surface at its Benjamin target. That
may change their strategy. They're conducting more geophysics work
to further define some of the structures. And they just completed a
strategic investment with
Gammon Gold Inc. (NYSE:GRS; TSX:GAM)
Gammon's Ocampo gold-silver mine is probably not all that far
Yes, they're not too far away, but with that Gammon money, Corex
can go back and drill some of the targets that were defined by this
extensive geophysics program. We'll keep our eyes on that.
It's a little bit different from the other ones we talked about,
given that it is an exploration play.
This one is just pure exploration. However, it caught my eye. I
went and visited the site and I was quite excited with what I
And your target price on Corex?
It's a spec buy, with a target of $1.20.
Thanks, Brian. We appreciate your insights.
Brian Mok is senior mining analyst at
. Previously he worked at Research Capital as a mining analyst,
and as an associate as part of Scotia Capital's Mining and Metals
Research Team. Brian began his career as an engineer with a
mining contractor working at various projects and operations in
Saskatchewan and Nevada. He is a member of Professional Engineers
Ontario. Brian holds a Bachelor's degree in Mining Engineering
and an MBA from Queen's University, Kingston, Canada.
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1) Brian Sylvester of
The Gold Report
conducted this interview. He personally and/or his family own the
following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors
The Gold Report:
Detour and Crocodile.
3) Brian Mok: I personally and/or my family own shares of the
following companies mentioned in this interview: NA. I personally
and/or my family am paid by the following companies mentioned in
this interview: NA.
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