Drew Clark: Adding Value Through Growth
Source: Brian Sylvester of
The Gold Report
Drew Clark is a relatively new analyst with Byron Capital
Markets, but that doesn't mean he doesn't espouse his fair share of
wisdom. In this exclusive interview with
The Gold Report,
Drew provides an in-depth look at gold companies in all
categories that he believes are respectable investment
The Gold Report:
Drew, please tell our readers about your coverage sector and why
you're covering precious metals.
I am one of the two analysts covering the mining space at Byron
Capital Markets. My counterpart, Jeff Wu, is located in our
My coverage universe breaks down into two groups: producers and
developers. All of the companies in those spaces have growth
prospects, either through production growth or the development of
new operations. Our goal is to provide a universe of companies that
present investors with proven management teams, economic projects
in their pipelines and, ultimately, favorable value
Why precious metals? I believe we're in the middle of an
historic run in the price of gold, which is highly favorable for
all participants in the industry. As a result, in this environment
I view both the prospects and investors' appetites in the gold
sector as being much more favorable than other sectors.
You said in a recent research report that "gold companies that are
several years away from achieving commercial production track the
movements in the price of bullion almost as closely as producers.
It's almost as if the market is attributing value based on cash
flows as if their profile is a function of current, not future,
commodity prices." When do you think that started, and what is it a
Primarily over-exuberance. People aren't looking at the big picture
and what drives the value of these development stories. As I said,
one would assume these movements are the result of the market
attributing spot prices to their cash flow profile. But if you
calculated the implied price based on these current market prices,
they're consistently lower than prevailing spot prices. It's a
curious relationship where the share price movement is tracking the
spot prices, but the actual valuation is being calculated by lower,
more realistic, long-term prices.
Market participants are simply not properly identifying the
intrinsic value of a company, which is more a function of these
more realistic prices. Let's say there's a company with a resource
evaluating the economic viability of a potential development. We
don't know with any certainty if that company's project will be
developed or when it could potentially enter commercial production
or even what its output may be. What we do know with certainty is
they're not going to be selling their output at today's prices.
Now, in terms of production companies with profitable
operations, such relationships make perfect sense because market
participants primarily evaluate them on their ability to generate
cash flows and less so on their intrinsic or net asset value.
We recently saw the gold price trade at an all-time high of $1,282
last week. Gold typically climbs higher in the fall with the Indian
wedding season and Christmas jewelry buying. Do you expect gold to
eclipse that mark again before the end of the year?
Long answer and short answer-yes. But accurately predicting the
future price of bullion is very difficult. However, we believe gold
prices will move in a clearly higher direction over the long
One thing I would point out is that although jewelry has
historically been a key source of demand, investment demand is
quickly overshadowing it. It is becoming more of the key component
from the demand side of the equation.
Are the ETFs driving that?
SPDR Gold Trust (
and other ETFs are now holding well over half of the worldwide
production in vaults, a source of demand that is a newcomer to the
Going back to your research for a moment, you recently compiled
something you call the "Lucky 21," which is a fairly comprehensive
list of precious metals companies including producers, developers
and explorers, all of which are poised for growth. We know how you
spent your summer. What are some of the criteria needed for a
company to make the "Lucky 21"?
The Lucky 21 list was inspired by taking a step back and looking at
what enables a company to add value without relying on rising
bullion prices. What are the principal characteristics of these
companies? The ability to accomplish resource expansion,
exploration success (making a discovery), production growth and the
ability to generate returns with positive cash flow growth.
However, the bias in our "Lucky 21" companies are those with an
above-average ability to grow their resource base in a meaningful
way. These companies have added value through the drill bit by
either growing their assets or extending the mine life of their
We've also highlighted companies that are expanding production
or are commissioning projects that are relatively easy to expand,
in addition to companies that have a high likelihood of discovering
or delineating a new ore body.
But geological promise is one thing. How much importance do you put
on things like management? Cash costs?
Obviously, the first thing we look at is the deposit and its
geology when considering an exploration or development play. Once
we have determined that there's a high probability of success, we
look at the management team, in addition to the potential economic
viability of the project. Have they found big projects in the past?
Have they been able to raise the money? And have they been able to
develop projects into mines? At the same time, there are sometimes
very high impediments to development like a lack of infrastructure
or political problems in the country where they're operating. Just
because it's an economic deposit doesn't mean it will be put into
Heading back to the "Lucky 21," explorers and developers have the
most potential for gains given their already low share prices.
Let's start with the explorers and tell us about a handful of those
companies that you like.
I tend to like the exploration plays that are conducting programs
to test areas similar to those that have been successfully drilled
before or of a similar geological model. We tend to shy away from
programs drilling the first or second holes on projects and more
towards drilling step-out holes to test mineralization along trends
As I mentioned before, although we evaluate exploration
companies based on their growth of resource potential, we are
always highly cognizant of infrastructure and other crucial
impediments to developing a mine that could render such an economic
deposit worthless because of factors that have nothing to do with
what's in the ground.
Geologix Explorations Inc. (TSX:GIX)
, for example, which is currently conducting a promising
exploration program in Mexico. Their Tepal Gold-Copper Porphyry
Project is located close to key infrastructure. To date it has
successfully delineated a resource of over 1.15 million ounces
(Moz.) of gold and over 400 milliofn pounds (Mlbs.) of copper,
which equates to about 2.4 Moz. of gold equivalent ounces. The
company's current drilling targets are geophysical anomalies that
are geologically similar to the two pits drilled to date, which
still remain open in multiple directions at depth.
A high likelihood of adding nearby ore bodies in addition to
more ounces will have a favorable impact on the potential economics
of the project, which the company is currently evaluating through a
preliminary economic assessment (PEA). Favorable access and
potential for significant resource expansion is one of the reasons
it's one of our growth companies.
Another property the company holds in Mexico is the Libertad
Project, which we feel they get little or no value for. It's seen
limited drilling to date, but is currently undergoing a 2,000-meter
program. The two most recent holes intersected 2.03 grams gold per
ton (g/t) and 1 g/t of gold equivalent over intervals of 26 meters
and 51 meters, respectively. Although early stage, we feel the
Libertad provides a real kicker to the story.
Like most of our companies in the report, Geologix is very
cheap, trading at enterprise value per gold ounce in the ground of
under $15, based only on the mineralization defined to date.
Another company with similar attributes but with monster
Kiska Metals Corp. (TSX.V:KSK)
. The company holds the Whistler project in a large continuous land
package in Alaska, which I just returned from last week. It's part
of what we believe is an emerging porphyry district. Of the 20
targets delineated to date, only Whistler has been drilled enough
to establish a resource estimate, which stands at 5.75 million
gold-equivalent ounces in all categories. The company boasts a very
low discovery cost of $4 per gold-equivalent ounce and Kiska is
finding all of this in Alaska, which makes it even more
In addition to Whistler, Raintree East and West, Rainmaker and
Island Mountain are four porphyry centers that have been identified
but have yet to be significantly drilled. As these targets are
tested, I expect to see even more potential resource growth through
successfully identifying new ore bodies.
Relative to their other Alaskan projects, Kiska has favorable
infrastructure in a relatively flat area, which could allow
numerous deposits to be mined simultaneously. With potential for
enormous size and a gold/copper weighting of 65/35, we view the
Whistler Project as one that will be highly enticing to the majors
as the company continues to successfully grow its resource
In both of those cases, you're effectively saying that the
companies have projects in addition to their main projects that are
not really seeing a lot of value from the Street. Are there any
short-term catalysts with those companies? For instance, are we
going to see some drill results in the near future from either
Geologix or Kiska?
Absolutely. Geologix is conducting two 5,000-meter drill programs
that are going after new geophysical anomalies. What I find
encouraging about Geologix is that they're going after absolute
growth. They're not drilling around their existing pits for smaller
incremental growth. They're trying to show that this thing has some
So there could be other pits in addition to the main pits?
Correct. Right now they have a north and a south zone, and they're
drilling other ones that have a similar geophysical signature. They
will also conduct a preliminary economic assessment in early
When will we see those drill results from Geologix?
And when will we see Kiska's drill results?
Kiska is drilling right now and we can expect drill results within
the next four weeks from follow-up testing of previously drilled
targets, in addition to preliminary metallurgical results for
Island Mountain. Although the company is drilling the Whistler
Deposit, which should result in some resource growth, Kiska is
testing new nearby targets that will not be spaced tight enough to
enable a resource to be estimated on them after this round of
drilling. An updated resource estimate on Whistler is coming in
We'll look for that. You told us about a couple of explorers and
now we're on to some developers. Last week
Sandspring Resources Ltd. (TSX.V:SSP)
was one of the big movers on the TSX. It went from $1.30 to over $2
at one point and there was no news other than the rising gold
price. You have a 12-month target on Sandspring of $3.15. Tell us
about that one.
Sandspring is an emerging Guyana gold play; it's had tremendous
success with the drill bit. The company owns the Toroparu Project
located in the upper Puruni River region, which encompasses a land
package of 100,000 hectares. Unknown to most people, Guyana has a
significant amount of artisanal mining. While flying to the site, I
was shocked at how many pits I could see littering the jungle, with
some of significant size.
Toroparu was once mined through sluicing, and it wasn't until a
proper drill campaign testing the bedrock beneath the saprolite
that the potential for size at Toroparu was demonstrated to the
market. The competency of the Sandspring's exploration team and
prospectivity of the property is best demonstrated by the fact that
for every meter drilled they have discovered 100 ounces of
gold-equivalent ounces in the measured category.
Is there a catalyst on the way that could push the share
Another part of the story that's just emerging is the potential for
a new trend. Drilling is underway on one of the many off-trends
identified with geophysics. That has the potential to demonstrate
new areas of mineralization. The prospect of delineating new
resource ore bodies at Toroparu would expand the size and scope of
the project considerably. Furthermore, the in-fill drilling on the
resource extension 400 meters northwest of the current pit has the
potential to significantly increase the pit shell size or even add
a second pit to the pipeline.
Sandspring will conduct a PEA in October. I believe the market
will finally begin to recognize the robust economics of Toroparu. I
conservatively valued it at $3.15, which was based on applying a 1x
multiple on our net asset value estimate for the company.
What about some other developers?
I've just returned from Northern Peru where I visited
Sulliden Gold Corp.'s (TSX:SUE; OTCQX:SDDDF)
Shahuindo Gold Project, located in the Cajabamba Province, along
the same trend and hosted within a similar geologic model as
Barrick Gold Corporation's (NYSE:ABX; TSX:ABX)
Laguna Norte and Newmont's Yanacocha mine. Shahuindo has the
potential to be a large and highly economic mine in as little as
two years. The operation currently envisioned is for a simple,
open-pit, heap-leach operation that will require a relatively low
capital expenditure (capex) of what we estimate will be around $120
million in an expanded scenario.
Prior to this year's drilling, only 45,000 meters have been
drilled on the project. With six rigs on the property by October,
the company will drill an additional 30,000m by the end of the
year. Currently, there's four there. I estimate that the company is
very close to meeting its publicly stated short-term goal of
delineating 2 million oxide ounces. The PEA released earlier on
Shahuindo reported cash costs of $403/oz. on average. The proposed
mine would produce an internal rate of return of 55% using a $975
gold price and with a capex of $90 million. Annual production would
reach a minimum of 105,000 ounces of gold under this dated
scenario. We believe that the company will be pushing production
and all of these metrics in a favorable direction in the upcoming
feasibility update in Q1 of 2011.
Another development with a similar simple heap-leach operation is
Grayd Resource Corporation (TSX.V:GYD)
in Mexico. At the La India Gold Project, the company has delineated
over 1.25 Moz. of gold, and it has enjoyed very encouraging
exploration success as of late. Tarachi, north of La India's main
ore body, had great intersections of mineralization in all seven
holes, which all started from the surface, that they drilled on the
property. The last assay released on the property was 88 meters of
1.5 g/t of gold. Grayd could be on the verge of delineating another
economic ore body on the property.
Grayd is in the process of finalizing a PEA that will consider
the project to be built for around $65 million and generate strong
recoveries by conventional heap leaching. Gold recoveries are
estimated at 83%, which yields an average annual production rate of
100,000 ounces at a cash cost in the $450/oz. range.
The property has excellent infrastructure and is located next
Alamos Gold Inc.'s (TSX:AGI)
Mulatos mine. Both La India and Mulatos share the same geological
system, meaning that La India is sure to have some larger players
watching its progression toward development. In terms of upcoming
catalysts, there is the PEA and ongoing drilling at Tarachi, but
the PEA is the big one coming up.
And finally onto the Lucky 21's precious metals producers. These
companies are probably the least risky of the bunch. What are your
favorite names in that space?
Our favorite name has been
Yukon-Nevada Gold Corp. (TSX:YNG)
. Yukon Nevada just commissioned the Jerritt Canyon Mine in Nevada
and it has the Ketza River Project in the Yukon. Yukon Nevada is
producing at Jerritt Canyon and is on the verge of commercial
production. So it's emerging from an obscure turnaround story into
a cash flow generating miner.
The company has already surpassed my estimated output rates for
2010 and has positioned itself to post strong production numbers
for the remainder of 2010 and 2011. We are extremely encouraged by
the progress made at Jerritt Canyon.
In the Yukon, Ketza is a high-grade, past-producing project
surrounded by infrastructure. It is currently undergoing a
promising and fully funded exploration program. We estimate that
the open-pit operation would require a relatively small capital
outlay of around $25 million and would produce at a minimum of
62,000 ounces annually for 7.5 years at a cash costs around
Why we like Yukon Nevada is not only for its production growth
and its development project in the pipeline, but also because of
the fact that it's still got a table-pounding value proposition.
Our 2011 production forecast, 237,000 ounces, produces a cash flow
estimate of $0.16 a share. That puts the forward price multiple of
our estimated cash flow at a little over three times, a level
normally not seen by anyone generating such significant profitable
With the profile for 2011, we see the likelihood of YNG being
re-rated as an intermediate producer as inevitable.
Any other producers you like?
Avion Gold Corp. (TSX.V:AVR; OTCQX:AVGCF)
as well. Avion holds interests in numerous projects in Mali,
principally the Segala and Tabakoto Projects, in addition to the
Houndé concessions located in Burkina Faso. It is currently
producing between 75,000 and 85,000 ounces in Mali, and Avion is
poised to grow their output rate to 200,000 ounces by 2012,
according to management.
Production aside, I see the real source of Avion's growth being
the exploration upside through both the drill bit and potentially
more strategic acquisitions similar to those they've conducted in
the region to date. Avion is already conducting a $10 million,
60,000-meter drill program in 2010 on its land package. I believe
it will continue to yield strong drill results.
Recently they tied up a property that is just south of
Semafo Inc.'s (TSX:SMF)
Mana Mine, called Houndé, in Burkina Faso. The package is hosted in
the same greenstone belt as Mana, which trends directly onto the
property. They are conducting a program for 5,000 meters this year
along with a geophysical program. With the resource estimate by
year-end, we feel the market is attributing no value to potential
resource at Houndé.
Given its proximity to the Semafo property, is Avion a potential
I would see Avion as a potential takeover target based on their
continued resource expansion. They've had some struggles related to
ramping up production, but from a resource standpoint, it's a
terrific story. Semafo has a huge chunk of that trend, so, one
would assume they've got enough to work with in the area.
Do you have any parting thoughts on the precious metal sector in
general and what's happening there right now?
Yes, for the most part what we're trying to tell investors is that
you need not rely on a rising gold price to find value in these
companies. Think about American Barrick when they bought Gold
Osisko Mining Corp. (
that bought Canadian Malartic for $80,088.88 (8s are lucky for
Chinese) and turned that into an absolutely breakneck growth
We are not trying to imply that we're onto the next Osisko, but
looking for similar traits-good management, good resource upside
and obviously, people who are going to be able to develop a proper
mine at the end of the day.
Drew, thanks so much for your time.
Drew Clark joined
Byron Capital Markets
research team as a mining analyst in November 2009, focusing on
small- to medium-capitalization precious metals companies with
strong growth profiles. Drew has several years of research
experience and most recently, he worked for two years in the
Institutional Equity Research division at CIBC World Markets.
Drew holds a Bachelor of Commerce with a Major in finance from
McGill University and is currently a Level III candidate in the
Chartered Financial Analyst (CFA) program.
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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:
2) The following companies mentioned in the interview are sponsors
The Gold Report:
Sulliden, Avion, Grayd, Sandspring and Kiska.
3) Drew Clark: I personally and/or my family own shares of the
following companies mentioned in this interview: None. I personally
and/or my family am paid by the following companies mentioned in
this interview: None.
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