David Goguen: Finding Real Value in the Ground
Source: George Mack of
The Gold Report
PI Financial Institutional Sales VP David Goguen sees real
potential for share price appreciation in select mining companies
with expandable resources. Through their quantitative research
Dave's team, including Associate Brodie Dunlop, are focused
on Latin American explorers and producers. But they don't stop
there; they continue to search the globe for companies moving
through the industry lifecycle of advanced explorers and emerging
producers all the way up to junior producers. In this
exclusive, Dave and Brodie share a few mining plays that
range in size from micro cap to liquid small cap that offer real
opportunity to leverage the power of value.
The Gold Report:
When you spoke with
The Gold Report
, you said you were looking for undervalued plays. Valued by what
measure? The value unrecognized by the Street, or value that has
yet to be developed and driven out of the ground in the form of
I think it's a combination of both of those things. It will be
defined differently depending what category you're examining. In
the case of advanced explorers, it could be a rapidly growing
resource where the full scale and potential are not yet fully
recognized in the marketplace. For emerging producers, value will
be found very classically in that time period when the company is
two-thirds of the way through a project build and not generating
a lot of catalyst-rich news. That results in a bit of a sleepy
period when oftentimes we see the share price drift to levels
that represent very good value.
Gold has pulled back a bit. Are you currently telling your
clientele this is a good time to buy gold mining stocks?
Absolutely. We feel the gold price is going to be very well
supported above the $1,100/oz. level, and we feel that the
margins being afforded to gold producers in this $1,200-$1,300
gold environment have not been properly reflected in the
valuations for these companies. There's still a sense that the
gold price isn't sustainable at these levels, so there's a
hesitation in the valuations being afforded to these junior
producers. Therefore, they're trading at 3x-5x cash flow when, in
fact, higher valuations are merited. These juniors are generating
strong cash flow.
If gold did go down to that $1,100 support level, could the
producers still maintain earnings growth to satisfy
Given the average cash cost of the eight junior producers we
track is $478 an ounce, it would leave a very healthy margin on
which to generate free operating cash flow.
Would it support quarter-over-quarter or year-over-year
In the instance of these junior producers, they're still ramping
up production, so you're getting unit volumes that, in most
cases, are growing quarter over quarter. Whether we're delivering
50% more production into a $1,300 or $1,100 gold price, I don't
think it's going to make a tremendous amount of difference. It's
still going to have a positive impact on the bottom line and
result in growing cash balances that can be plowed back into
production expansion or the development of new projects.
Your initial stock screen is enterprise value (
) divided by ounces in the ground (EV/Oz. Au) as estimated by the
NI 43-101 resource estimates. Where do you go from that
Certainly in the junior producer category, in addition to the
EV/Oz. Au, we're going to be looking at cash costs and operating
margins, and we're going to be looking at price to cash flow.
I imagine that the multiple of EV per ounces in the ground is
most important in the advanced explorers and less important as
you come up the scale to emerging and junior producers.
I would agree with that in large part, certainly in the case of
the junior producers. Not all ounces in the ground have the same
economic impact. Different ounces have different margins
depending on mining methodology, grade or extraction costs. So,
from a financial modeling point of view and company valuation
standpoint, the differences in those ounces and the methodologies
to extract them are going to have an impact on valuation.
In the advanced explorers' category, I think the economics and
engineering are less defined; it's more about developing as large
an in situ resource as possible. There'll be differences in the
valuations that the market ascribes to these companies; but,
generally speaking, we're looking to provide a primary screen
that will highlight undervalued and overvalued in situ ounces in
Does a company have to reach a certain level of development in
its most advanced project before it becomes interesting to you or
relevant to your investment strategy?
We believe that being early in situations is critical to the
ultimate investment return we're going to achieve for our
clients. So, if we see 500,000 ounces (Koz.) in the ground
growing to 1.5-2 million ounces (Moz.), we'll start presenting
that situation to our clients in the belief that the geology and
execution capabilities of management will be sufficient to bring
it up to size.
Under what level does the EV per ounce have to be for you to look
at it as a great value play?
Well, I don't think we can look at that particular metric in
isolation. We have to look at it in the context of the grade and
style of the resource. But certainly, we're going to be attentive
to anything that's below $50/oz. and we're going to question and
look to justify valuations above $200/oz. in enterprise
So, if you were going to pay $200/oz. it would have to be
relatively easy to get out of the ground?
Certainly, and that's the case with both
Andean Resources Ltd. (TSX:AND, ASX:AND)
Extorre Gold Mines Ltd. (TSX:XG; Fkft:E1R;
. They're trading at north of $200 in EV/oz., but in these
instances the market is telling us the grade is there, that these
will be high-margin ounces and that the geology will continue to
deliver additional ounces into an expanding total resource.
Tell us about some of the companies you like.
Timmins Gold Corp. (TSX.V:TMM)
represents a successful emerging producer that has transitioned
to a bona fide junior producer. The company is now producing
north of 20 Koz. gold per quarter at a cash cost of approximately
$450/oz. It's trading at what we feel is an attractive valuation.
Timmins continues to expand production at its San Francisco mine
in Sonora, Mexico and it continues to expand both the resource
and mine life. We believe Timmins is underfollowed and isn't
properly valued to reflect gold prices north of $1,000.
The stock's up 74% over the past 52 weeks with a $300 million
market cap-large enough to be bought by funds but not so small
the shares are unmarketable.
Excellent point; we're aware of that sweet spot in the
marketplace. Market liquidity is a critical criteria for large
resource investors. It's a sweet spot for investors in the junior
gold sector as companies with market caps exceeding $300 million
tend to draw a broader audience of institutional investors.
Timmins is continuing to pursue the acquisition of
Capital Gold Corp. (TSX:CGC; NYSE.A:CGC;
. Capital Gold has the El Chanate deposit, which is approximately
60-70 km. north of Timmins' San Francisco mine. The operations
are fairly similar from a mine process perspective. Both are
open-pit, low-grade heap-leach deposits that source a number of
people and engineering services and consumables from Hermosillo,
Mexico. So, we would envision some operating and personnel
synergies being generated from the marriage of the two companies.
Collectively, that would represent production of around 180-200
Koz. per year with a market cap in the $600M range. We believe
that a merger would result in a revaluation of the combined
company and would likely attract larger resource investors
compelled by the operational diversity, improved liquidity and
access to capital market funding.
How about another company.
Also in Mexico, in the Sierra Madre gold-silver belt, is
Kimber Resources Inc (TSX:KBR, NYSE.A:KBX)
. On our valuation table, Kimber trades at under $50/oz. in the
ground. It recently completed a preliminary economic assessment
(PEA) on the Carmen and Veta Minitas deposits at Monterde that
define a potential low-cost, long-life gold/silver producer
profiled at 62 Koz. gold and 1.85 Moz. silver production per year
for over 13 years. Through a combination of underground and
open-pit mining, the operation would produce gold at a
sub-$250/oz. cash cost, assuming silver as a byproduct
The company has initiated a 30,000-meter drill program, which
is targeted toward up grading the classification of near-surface
mineralization and to test for mineralization down dip and along
strike of the known zones. Additionally, the program is going to
target a number of satellite gold and silver showings within a 3
km. radius of the main ore body. So, we think Kimber has a lot of
potential in that it's trading at roughly one-third of its net
asset value (
). The 30,000-meter program will likely add to its resource and
highlight the long life potential at Monterde. Kimber in our
opinion typifies the single asset, junior gold company that will
likely attract M&A interest from any growth-oriented
intermediate gold producer.
Almaden Minerals Ltd. (TSX:AMM; NYSE:AAU)
is a very strong explorer in eastern Mexico. The company is
headed by Chairman Duane Poliquin and CEO Morgan Poliquin.
Almaden is one of the few true project generators out there.
Morgan spent 2000 hours in a Hughes 500 helicopter landing on
intrusives along the eastern seaboard of Mexico sampling and
age-dating rocks that lead to much of the ground that is the
company's exploration portfolio today. These are large land
positions generated from a macro view of the geology that runs
from Arizona down into Central America.
Drilling of specific targets is already yielding strong
results. At Ixtaca, in Puebla State, Mexico, the company has a
low-sulphidation epithermal gold discovery that's characterized
by both very high-grade veins and lower-grade mineralization over
broad intervals. The company is a dozen holes into the project so
far. It's a bona fide discovery that the market is beginning to
appreciate. The deposit model here would be similar to
Aurelian Resources Inc.'s (TSX:ARU)
Fruta del Norte that was taken up by
Kinross Gold Corp. (TSX:K; NYSE:KGC)
via a friendly business combination. Drilling will continue with
2 to 3 drill rigs starting in the middle of February.
Additionally, Almaden owns the Caballo Blanco high
sulphidation gold system in Vera Cruz, Mexico. At Caballo Blanco,
Goldgroup Mining Inc. (TSX:GGA)
is earning in a 70% interest in the project. Goldgroup is
presently conducting a 30,000-meter, $8M-dollar drill program to
expand on a known resource and to test an area of 5 km. by 4 km.
of classic epithermal alteration. A highlight hole from previous
drilling intersected 94.5 meters at 2.09 g/t Au. Almaden has a
carried 30% interest until Goldgroup delivers a bankable
So, there's plenty of potential in Almaden; it's still early
days in the exploration process, so we look for some exciting
news from Almaden in the first quarter of 2011.
That project has generated some great results, but the stock is
up over 235% over the past 52 weeks. And you feel like it has
more room to go?
Yes. We recognize the potential of this kind of system, which
could deliver a high-grade, long-life, low-cost asset if the
initial discovery continues to play out as this deposit model has
been known to do.
What other companies do you like?
B2Gold Corp. (TSX:BTO; OTCQX:BGLPF)
, a new junior producer with 120 Koz. of production in Nicaragua
at a cash cost of $540/oz. The company has a cash position
approaching $50 million and aggressive drill programs around both
of its existing mines-La Libertad and El Limon. There is also
interesting exploration going on at its Cebollati gold project in
Uruguay. At Cebollati, B2Gold has just commenced a 5,000m drill
program that will follow up on some promising trenches reported
in late 2010. Soil sampling, trenching and geophysics are
supportive of a large multimillion gold target.
B2Gold is unhedged, debt free and has improved its cash cost by
$131/oz. So, is the company for a more conservative investor?
I think B2Gold represents one of the best examples of a junior
producer in the junior gold space. It has a strong management
team capable of both discovering and building through its
exploration and development teams. It also has strong access to
capital markets through the executive team with a demonstrable
track record of success. B2Gold has strong production growth
coupled with a solid pipeline of exploration potential.
What did you want to mention next?
Sulliden Gold Corp. (TSX:SUE; OTCQX:SDDDF)
is exploring on the Shahuindo gold project located in northern
Peru. Peru is the largest gold producer in the Americas. This
year Sulliden has a very aggressive 70,000-meter drill program,
which is one of the largest drill programs that we know of any
junior company we follow. That program will continue on last
year's work, which we believe resulted in a possible doubling of
its existing 1.8 Moz. gold resource. The company has had a
discovery cost per ounce of less than $6.00.
The geology here is really permissive to rapid resource
growth. This year's drilling will have the objective of defining
additional ounces along strike and also to test some parallel
structures that have seen limited drilling from previous
operators but yielded encouraging results that have not been
followed up on until now. Management will also be testing for
sulphide mineralization below the oxide mineralization at
surface. Classically, high sulphidation gold systems like
Shahuindo have sulphide tonnage below the oxides that can be 1-3
times that of the oxide tonnage. Shahuindo may evolve into the 5
Moz. gold resource category of large gold deposits not yet
controlled by a major.
I noted that in mid-December, Sulliden announced an accelerated
expiration initiative for the warrants. I was thinking that that
was a very bullish sign by management.
Well, certainly it's a strong signal for the marketplace the
company believes its 70,000-meter program is going to deliver a
lot of new ounces and certainly be accretive from a total
resource standpoint. The acceleration of the outstanding warrants
represents an opportunity to bring in additional capital for
previously incurred dilution. So, this basically represents the
market endorsing the acceleration of the exploration program and
providing Sulliden with the capital to work that program.
Sandspring Resources Ltd.'s (TSX.V:SSP)
Toroparu gold/copper deposit in Guyana, South America, continues
to profile well on our
report, trading at under $50/oz. They've had a very successful
2010 where they managed to more than double the size of their
current resource through 57,000 meters of drilling. Coming into
2011, the most important catalyst for the company will be the
scoping study that is due out mid-year. That study is going to
provide the market with a bit of clarity on the economic
viability of their ounces.
The most important information that's going to come out of
this study is how they intend to recover the gold and copper, and
what the cost of the recovery process are going to be. There are
still a lot of untested targets on that property that will
continue to be drilled.
Another name that we like in that category here in North America
West Kirkland Mining Inc. (TSX.V:WKM)
, which was founded by CEO Mike Jones and CFO Frank Hallam . They
have an outstanding track record of success. As an example, they
were most recently associated with Timmins West Mining that was
taken out by
Lake Shore Gold Corp. (TSX:LSG)
for $440 million. There's a similar corporate strategy at West
Kirkland of tying up and exploring on land positions along some
of the historic major structures within greenstone belts. In this
instance it's in the Kirkland Lake area where they have tied up a
more than 80-sq. km. land position through both staking and
The second aspect of the West Kirkland story is a large and
increasing land position in northeastern Nevada where they have
entered into a joint venture agreement with
Fronteer Gold Inc. (TSX:FRG; NYSE.A:FRG)
on 11 properties. We expect that market interest in Kirkland will
heighten in anticipation of drilling at both projects in Kirkland
and Nevada over the next several months.
Philippine Metals Inc. (TSX.V:PHI;
is another explorer that we think represents very good value. It
has a tiny market cap of under $15 million and is an early
entrant into the Philippines, an increasingly hot country in the
geological and exploration worlds. It's got a tremendous geology
both for gold and copper gold.
The company has three projects on which it is presently
exploring and also has a large copper-gold target in the Malitao
property. The company looks forward to getting its exploration
permit on this property and to commencing on a drill program that
has been designed and is ready to go. The company also benefits
from a strong board of directors and strong local representation.
One of the early entrants, it is focused on making additional
acquisitions to capitalize on its presence in the
Is this ideal for a small hedge fund perhaps, because it has a
small market cap?
I think Philippine Metals represents a lot of potential share
price appreciation through exploration success. It is certainly
of a market cap size that success at the drill bit is should be
quickly reflected in success in the share price.
Is there another one?
Looking at other areas of favorable geology, another company that
we quite like and that is undertaking two exploration programs
right now is
Edgewater Exploration Ltd. (TSX.V:EDW)
. Edgewater has the Enchi Gold Project in southwest Ghana in West
Africa. Enchi was acquired from Red Back Mining (which was
acquired by Kinross in September 2010). The Enchi geology is
analogous to Kinross's Chirano Gold mine and has been subject to
over 40,000 meters of drilling, which was effective in
identifying several strong gold zones that are presently the
subject of a newly initiated drill program.
At Enchi, a soil-sampling program has yielded several
anomalous gold trends, the largest of these gold in soil
anomalies is located in the southeastern section of the gridded
area and measures 4.2 km. in length and averages 0.5 km. in
width. Edgewater will be targeting these new gold trends with
drilling starting immediately.
In addition to Enchi, Edgewater owns the Corcoesto gold
project in Spain. Edgewater is conducting a multi-rig 12,000m
drill program to strengthen and expand an existing resource.
Recent results include 10.72 g/t Au over 17.0 meters and is the
best grade-X thickness interval on the project to date and is
indicative of managements growing understanding of the
mineralization at Corcoesto. We expect the next several months to
be exploration news rich for Edgewater.
Thank you, Dave and Brodie.
David Goguen, CFA, vice president, Institutional Sales, has
been focused on the mining sector at
for 13 years. David has 18 years of investment experience
servicing institutional and private client portfolios.
David earned a BA in economics from Carleton University and
holds the Chartered Financial Analyst designation. Brodie
Dunlop, associate, Institutional Sales, joined PI Financial's
Institutional Sales desk in 2009. His primary focus is on the
resource sector. Brodie earned a BA from the University of
Concordia and studied finance and accounting at the University
of British Columbia. Brodie services Canadian, U.S. and
Want to read more exclusive
interviews like this?
for our free e-newsletter, and you'll learn when new articles
have been published. To see a list of recent interviews with
industry analysts and commentators, visit our
1.) George Mack 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
The Gold Report:
Extorre, Timmins, Capital Gold Corp., B2Gold, Sulliden,
Sandspring and Philippine Metals.
3.) David Goguen: I personally and/or my family own shares of the
following companies mentioned in this interview: Almaden
Minerals, Kimber Resources, Philippine Metals and West Kirkland
Mining. I personally and/or my family am paid by the following
companies mentioned in this interview: None.
4.) Brodie Dunlop: I personally and/or my family own shares of
the following companies mentioned in this interview: West
Kirkland Mining and Kimber Resources. I personally and/or my
family am paid by the following companies mentioned in this
The Gold Report
is Copyright © 2011 by Streetwise Reports LLC. All rights are
reserved. Streetwise Reports LLC hereby grants an unrestricted
license to use or disseminate this copyrighted material (i) only
in whole (and always including this disclaimer), but (ii) never
The GOLD Report does not render general or specific investment
advice and does not endorse or recommend the business, products,
services or securities of any industry or company mentioned in
From time to time, Streetwise Reports LLC and its
directors, officers, employees or members of their families, as
well as persons interviewed for articles on the site, may have a
long or short position in securities mentioned and may make
purchases and/or sales of those securities in the open market or
Streetwise Reports LLC does not guarantee the accuracy or
thoroughness of the information reported.
Streetwise Reports LLC receives a fee from companies that are
listed on the home page in the In This Issue section. Their
sponsor pages may be considered advertising for the purposes of
18 U.S.C. 1734.
Participating companies provide the logos used in The Gold
Report. These logos are trademarks and are the property of the
Streetwise Reports LLC
P.O. Box 1099
Kenwood, CA 95452
Tel.: (707) 282-5593
Fax: (707) 282-5592