Gold, Silver and Copper Investing Strategies and
M&A Ideas: Vishal Gupta
Source: Sally Lowder of
The Gold Report
Precious and base metal companies both have to obey the basic
laws of physics and economics to be profitable. In this exclusive
The Gold Report
geologist turned analyst Vishal Gupta of Fraser Mackenzie shares
names of small-cap companies that could successfully take
advantage of unique mineralogy to produce profitable mines.
The Gold Report:
You are an analyst and a geologist. Can you explain the
fundamentals behind investing in base metals compared to precious
The fundamental difference is that base metals can be fairly
straightforward in quantification when it comes to supply-demand
balances. The world needs a certain amount of base metals to keep
up its growth rate. Growing economies like India and China
require base metals for their industrialization initiatives. For
instance, copper would be required in electrical wiring and zinc
would be required in steel galvanization. There is a specific
purpose for base metals in industry.
Gold is valued more from a currency standpoint. There are
actually very few uses for gold. That is why it is difficult to
quantify the supply-demand balances for gold. This leads to the
turmoil we see in the gold market. Any material piece of
macroeconomic information that hits newswires will have some sort
of an effect on the gold price because it is traded as a
You have talked about how even when there is a downturn in global
economies, jewelry demand remains. Why is that?
I am originally from India and I lived in that country for about
16 years before moving to Canada. India is by far the biggest
retail market for gold. The Indian wedding season, which runs
from September to December, is typically the high time for gold
markets. The reason for this traditional demand for gold in India
goes back to what I said about gold being used as a currency.
People in India treat gold as a commodity that holds its value
better than paper currency. So when they give gifts of gold
jewelry, it is because they want to invest in something that is
going to hold its value. The result is that in lean times, when
the markets are down and unemployment is high, people have that
reserve in gold that they can take to the market and sell.
When North Americans think of investing in gold, we think of
investing in maple leaves, gold bars, coins or other physical
forms of gold. But in India, they think of purchasing a necklace,
bracelet or gold earrings. Is it the same investment dynamic in a
That's absolutely right. Gold has held its value better than
paper currency in the past, especially relative to Indian
currency. The Indian rupee has devalued significantly over the
last few decades, so people put their faith in a physical
commodity, such as gold, rather than the paper currency.
We've seen a lot of volatility in the U.S. stock market. We
haven't seen a whole lot of industrial growth, but the price of
copper seems to be holding up right around where it is today at
$3.74. Turning to the base metals, what is your outlook on the
supply and demand fundamentals for copper going into Q212 and
through next year?
I always view copper as the leader of the pack when it comes to
base metals. You'll see in the past, whenever the base metals
markets have turned around, copper is the one that has led the
charge. We are going into a lean time for commodities right now.
However, when the commodity markets do turn around in the next
five to six months, driven by the traditional surge in demand for
commodities during September/October, I would expect copper to
again lead the charge for base metals. Copper is the London Metal
Exchange's flagship metal. Whenever we talk about base metals, we
first talk about copper and then we talk about everything
What are the copper equities that most interest you?
One is a base metals company,
Foran Mining Corp. (FOM:TSX.V)
. Its flagship McIlvenna Bay project hosts a volcanogenic massive
sulphide (VMS) deposit in the prolific Flin Flon belt of
Manitoba-Saskatchewan, on the Saskatchewan side of the border.
That region is traditionally known as HudBay Minerals Inc.'s
(HBM:TSX; HBM:NYSE) backyard because the major miner has been
mining zinc and copper there for over 100 years. Most junior
explorers in the area typically form partnerships with HudBay
simply because of the major's regional processing power. Because
most of the deposits that the juniors are finding contain 3-5
million tonnes (Mt) of very high-grade ore, these deposits are
too small to make building their own plant possible. Foran Mining
is currently sitting on a 22 Mt, high-grade zinc and copper
deposit at McIlvenna Bay. Going forward, I expect the tonnage to
increase to 30 Mt, which would make McIlvenna Bay several times
bigger than your average VMS deposit in the Flin Flon belt.
Therefore, I believe Foran's deposit is substantial enough to
warrant a stand-alone mining and processing operation, and it
should not require HudBay's partnership to go into
I also follow
Arian Silver Corp (AGQ:TSX.V; AGQ:AIM)
, a company active in Zacatecas, Mexico. It trades more than 1
) shares/day on the London's AIM Exchange. Arian Silver has a 120
million ounce (Moz) silver resource in Zacatecas. In the next
year or so, I expect the resource to increase to about 140
What's the market cap of Arian?
Arian's market cap is about $95M currently.
So you really do focus on the small caps.
Yes. My educational background and my work experience are in
geology. As a geologist, I believe my maximum value add is
analyzing companies at a very early stage where I can use my
knowledge to estimate which of the junior companies' assets have
the best odds of becoming producing mines and generating cash
flow in the future.
So you think both Foran and Arian have the mineralogy to be
Yes. That is why I cover these two names.
I have been to Arian's property myself. I see a lot of
potential. The resource could conceivably go from the current 120
Moz all the way to the 200-250 Moz range. The next catalyst in
Arian's development is going to be a scoping study on a sovereign
mill. It is considering mill options ranging from 750 tonnes per
day (tpd) up to 2,000 tonnes per day (2 Ktpd). That decision is
going to be made in the next two to three months. Once that
decision is made, I would estimate about 18-24 months for this
large-scale production scenario to be put into operation.
Are there other juniors in that area that could be potential
acquirers that would use Arian's ore and put it through their own
Mexico is prime silver country. The best possible scenario for
Arian to build shareholder value would be to actually put its own
mill into production. That saves it all sorts of operating costs.
Obviously, the up-front capital expenditure (capex) is going to
be significant. For 750 tpd, you're looking at about $15-20M in
capex; for a 2 Ktpd mill, you're looking at about $50-55M in
capex. But once that investment is in place, I think the benefit
to Arian shareholders is going to be tremendous. At a 2 Ktpd
production scenario, it is looking at producing about 4.0-4.5 Moz
silver/year. That is very significant cash flow.
How is Arian planning to finance that mill?
If Arian settles on the 750 tpd scenario, a $15-20M capex could
potentially all be done through equity financing. But if Arian
goes for that $50-55M capex associated with a 2 Ktpd mill, then
it will probably pay for it through a combination of debt and
We didn't really discuss the investing scenario behind silver.
Are you equally bullish on the copper, silver and gold commodity
I think silver is a very undervalued commodity right now. The
market seems to follow what the gold price is doing but silver
has so many industrial uses that you can view it as a precious
metal or a base metal. Many of the silver names, including
First Majestic Silver Corp. (FR:TSX; AG:NYSE;
, are just starting to come into prominence. Very few silver-only
production companies exist today. What is out there is starting
to get the value that traditionally has been reserved for gold
and base metals.
What other names do you like either because they are potential
acquisition candidates or possess particularly good deposits.
There are a couple of companies that I visited down in Arizona
about a month or so ago. One is
Redhawk Resources (RDK:TSX; QF7:FSE;
. It has about 3.5 billion pounds (Blb) of copper in the ground
currently at its flagship Copper Creek deposit at a grade of
about 1% copper. Management is expected to release a new resource
estimate in the next couple of weeks that could push the total
resource to about 5 Blb copper. That would put Redhawk on the
radar screens of all the consolidators operating in the
Arizona is prime copper country. Freeport-McMoRan Copper &
Gold Inc. (FCX:NYSE) has five operations there. In the adjoining
state of New Mexico, it has another couple of operations. ASARCO
LLC (AR:NYSE) has two to three operations in that area as well.
BHP Billiton Ltd. (BHP:NYSE; BHPLF:OTCPK), Rio Tinto (RIO:NYSE;
RIO:ASX) and Quadra FNX Mining Ltd. (QUX:TSX), now KGHM
International Ltd.-all of these players are in the area. They are
all looking for sizable copper deposits and, at 5 Blb in-situ
copper, Redhawk meets this criteria. I think the mineability of
it has to be determined by a major and not by Redhawk itself. I
don't think a junior like Redhawk will be the one to actually put
Copper Creek into production because the capex requirements for
something like this would be well in excess of $1B.
But couldn't one of the existing players in the area just truck
the ore to its smelter because some operate already in the
That's absolutely right. That would save a lot of capex
requirements and one of the reasons Redhawk is a prime
acquisition target for a consolidator in the area that can take
advantage of operational synergies.
Do you think permitting will be a problem? Augusta Resource Group
(AZC:TSX; AZC:NYSE.A; A5R:FSE) has had trouble getting its
Rosemont mine in Arizona permitted. Does Redhawk have aquifer
permits in place, for instance?
Yes, Redhawk does have this permit. And, Augusta has had
permitting issues in the past, but recently received a key
environmental permit-the Aquifer Protection Permit-for its
Rosemont development project. Permitting could be an issue in any
jurisdiction. You have to take things on a case-by-case
As a jurisdiction, Arizona is full of open-pit copper mines.
That says to me that it is a favorable jurisdiction for copper
mining. There could be an odd blip here or there, but the overall
scenario in Arizona is very mining friendly.
You're an unusual analyst in that you're bullish on gold and
silver and copper. Do you have any other names in the junior
space that are interesting to you?
I was going to tell you about the second story that I saw in
Arizona. The company's name is
Toro Resources Corp. (TRK:TSX.V)
. It's a very small company; it's trading at about a $4M market
cap right now. I usually don't visit a junior explorer that
small, but this has what I call an enriched copper deposit; it's
a supergene blanket, which means it has a higher percentage of
copper than most sulphides. This is leachable copper, not
millable copper. The capex requirements for leachable copper are
much lower than for millable copper.
Toro Resources has the Morgan Peak deposit in Arizona. Within
a 5-kilometer (km) radius from it is BHP's Pinto Valley, Rio
Tinto's Resolution copper mine, Freeport-McMoRan's Miami mine,
Quadra FNX's (now KGHM International Ltd.) Carlota mine. The best
part is that it is on a ridge about 800 meters in elevation
higher than all of these other major consolidators in the
valleys. All it needs is 100 Mt at 0.4% copper and it could put
two valley fill leach pads right on top of the ridge, take the
pregnant solution from the leach pad, put it into a pipeline and
either go to Carlota's SX-EW plant or Miami's SX-EW plant just
5km down the hill. That scenario would save Toro on the overall
capex requirements tremendously and would improve the economics
of a potential future operation on the deposit. The mineability
is very compelling for such a small-cap junior exploration
Interesting. That is certainly a new approach. Just do the
leaching and then run it down the hill.
Any final words of wisdom about investing in today's volatile
I know that the commodity markets have been in great turmoil.
People say, oh, gold has fallen from $1,750/ounce (oz) down to
about $1,670/oz and the commodities have started coming off now.
That is not the case. If you compare where the commodity markets
were in 2008-2009 and where the commodity markets are now, we've
gone through a huge growth spurt. We have found a level where
things have stabilized. $1,500/oz gold is ideal for a lot of
companies and could lead to a lot more production coming online.
Anything over $1,500/oz gold to me is beautiful. When you're
looking to invest in the commodity markets, it helps to have a
longer term view. If you have a solid, longer term view on gold,
copper or silver, you should make a lot of money.
Thank you so much, Vishal.
is an equity research analyst for Fraser Mackenzie, covering
resource exploration companies in the base metals and precious
metals space. He holds a Master of Science degree in geology
from the University of Toronto. Prior to joining Fraser
Mackenzie, he worked in the resource exploration industry as a
consulting geologist with Noront Resources, Northern Gold
Mining and Nuinsco Resources. Gupta entered the financial
community in 2009 with Desjardins Securities as a base metals
equity research associate, followed by a brief stay in mining
corporate finance at Cormark Securities. Most recently, he held
the position of equity research analyst at Dundee Capital
Markets covering junior mining companies in the precious
metals, base metals and uranium space.
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1) Sally Lowder of
The Gold Report
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