Ima Casanova Uncovers the Under-Covereds
Source: Zig Lambo and Karen Roche of The Gold
McNicoll, Lewis & Vlak Investment Analyst Imaru (Ima)
Casanova specializes in "under-covered" and turnaround companies
in the resource sector. In this exclusive interview with
The Gold Report
, Ima describes several situations that fit her investment
parameters, including the unique field of royalty companies.
The Gold Report:
Thanks for joining us this morning. Before we get into specifics,
please give us a little background on McNicoll, Lewis & Vlak
) and its participation in the resource investment sector.
MLV is a relatively new full-service investment
bank/broker-dealer in New York. We've been around for about a
year, focusing on capital-intensive industries-namely natural
resources, mining, oil and gas and healthcare. Currently, we
cover about 40 companies. We did 25 At-the-Market (ATM) issuances
in the last 12 months. ATMs are becoming a huge segment of shelf
registration takedowns. About 22% of all the U.S. shelf takedowns
last year across all sectors were ATMs. Our philosophy on
research is to provide very in-depth coverage and expose those
ideas to fundamental institutional investors.
Could you explain a little more about how ATM works for people
who aren't familiar with it?
In a very simplified way, companies can issue stock at an
opportune time for them under a shelf registration. So, a company
might file a US$100 million ATM with MLV under a shelf
registration. When the issuer and MLV decide that it's a good
opportunity to issue stock, the stock is issued in the open
market. The goal is to minimize the disruption to the share price
compared to a traditional equity raise. And the costs to the
issuer are lower, which, obviously, translates into better value
Are you looking at mining and metals specifically?
We have other analysts covering the other sectors at MLV. I'm the
Metals and Mining analyst. Traditionally, I have looked at
precious metals names; but now, I'm also looking at some names
with copper exposure. Primarily, my approach has been to provide
research on relatively under-covered names-names that don't have
a lot of analyst coverage out there that I think can really add
value to the institutional shareholder base by providing research
that they're not getting elsewhere.
Let's talk about royalty companies. This is probably an area that
most investors know little about because there aren't many of
them out there. Can you explain what these companies do and why
you think this is an attractive area for investors?
You're right, royalty companies aren't a very well-known area.
One example is
Royal Gold Inc. (NASDAQ:RGLD; TSX:RGL)
, which I believe is a very misunderstood company. I think most
investors don't understand the business model. Royalty companies
enjoy many significant benefits. One of the most important
benefits is that by owning this stock, investors get exposure to
a diversified portfolio of mining projects, including some of the
highest-quality projects operated by many of the major producers.
They also get reserve and resource growth at no cost to the
company, which is a significant benefit.
Generally, the majority of these royalty deals don't have
production caps. If Royal Gold acquires a 2% royalty on a
project, it doesn't need to contribute any capital. So,
basically, it's obtaining the growth without having to pay for
that growth, which is a huge benefit. The royalty on
Goldcorp Inc.'s (TSX:G; NYSE:GG)
Peñasquito project is a great example of how Royal Gold benefited
from a very significant reserve increase without having to spend
Another key differentiation is protection against
operating-cost increases, which all but guarantees expanded
margins in a rising commodity price environment. This is not
always true for the producers. So, the royalty structure is a
great way to get the optionality that comes with owning a mining
name versus physical gold or an ETF. I've always talked about it
as being sort of a middle ground-a hybrid between an ETF and a
producer-because investors get the lower risk profile from the
cost-increase protection, as well as the organic growth potential
they don't get if they own bullion or an ETF.
So, by owning a royalty company, investors end up with something
like a closed-end mutual fund?
You can look at it that way, except the interests are not equity
interests. Basically, the company owns portions of the production
of numerous projects operated by many different publicly listed
miners; so, investors get exposure to all those equities via one
You wrote a very detailed research report on Royal Gold last
October that shows quite a large portfolio of royalty interests.
Most are fairly small percentages, but they do add up. So how
does Royal Gold and/or other royalty companies acquire these
interests? What do they pay for them if there's any general rule
I did a lot of work in trying to figure out how much Royal Gold
was paying per ounce, and it's related to the gold price. In
higher-priced environments, obviously, it's paying more. But,
ultimately, I found the company's cost to be very competitive
compared to other acquisitions. My report includes a table that
summarizes Royal Gold's acquisition history, which includes
almost 20 transactions starting as early as January 1998.
Many of its royalties come from a transaction the company did
Barrick Gold Corporation (TSX:ABX; NYSE:ABX)
in October 2008 when it bought Barrick's portfolio of royalties.
Many more also came from its acquisition of International Royalty
Corporation in February 2010. Most recently, the company did the
Mt. Milligan transaction with
Thompson Creek Metals Company Inc. (TSX:TCM;
, which was announced in July 2010 and, actually, is one of the
most important royalties it owns now. The company's always
looking for, and is being offered, many opportunities across the
sector. Royal Gold has very good operational experience in the
industry and a great track record of identifying and investing in
very high-quality assets, and then benefiting from the remarkable
organic growth of many of these assets.
When a property is first optioned, some sort of net
smelter-return royalty is part of the transaction most of the
time. And a company ends up buying these from another that owns
the actual property, correct?
Yes, that's one of the ways. Royalty companies acquire these in
many different ways. They also buy them from third parties,
individuals or families. For example, say your company owns a
property, and another company buys it. Your company retains a 1%
royalty. Then, Royal Gold can buy that royalty interest from your
company. It's also being done by companies that need financing
and can come to Royal Gold and say, "I'll give you 2% of the
future production of this project if you give me this much cash
up front." The future producer secures capital to develop its
project and Royal Gold retains an interest in the future
production of a project. Or, it may buy it from another mining
company that has a royalty (as was the case when it acquired the
Barrick portfolio). There are a lot of royalties floating around
and new ones being structured, and Royal Gold has been pretty
successful at getting access to and acquiring these
So, you're optimistic about the prospects for Royal Gold in the
coming years, I presume?
I am. I built a very complex model of Royal Gold with nearly 200
royalties, including about 35 producing and 25 in development.
It's not easy to keep track of all that and come up with a
valuation; I think a lot of it gets lost by the market in that
process, unfortunately. But, I do think there's a lot of value
there. This stock is trading just about $53.27 or so, but I have
a target price of $81.50. I think there's a lot of upside there
that is not being priced in by the market yet.
What's going to change between now and when you hit this target
price of $81.50? What's going to drive it?
The company has all these assets and many of the important ones
haven't reached production or have just recently reached
production. But the cash flow is coming. And, the great thing
about a company like Royal Gold is that most of that cash is
going to be free cash. Examples include projects coming on line,
like the ramp up in Peñasquito, the recovery at Voisey's Bay, the
new Pascua-Lama and Mt. Milligan. Andacollo, a mine in Chile that
Teck Resources Ltd. (NYSE:TCK; TSX:TCK.A,
operates, just came online. The company is very good at picking
projects and all of these are going to contribute.
In the next few quarters, as the company proves that revenues
are increasing and free cash flow is going to be increasing,
pushing dividends up, the market's going to realize that these
royalties are actually coming through. It's going to take getting
the message out there and companies getting more familiar with
the concept. But the proof is going to be the cash-flow
About how many companies are in a royalty business versus mining
You know, there aren't many. Now that Royal Gold has acquired
IRC, the only other somewhat similar royalty company out there is
Franco-Nevada Corp. (TSX:FNV)
, which I do not cover. Those interested in a similar business
model would probably also want to look at
Silver Wheaton Corp. (TSX:SLW; NYSE:SLW)
, a silver streaming company that operates under a similar
The other area you said you're interested in is companies that
are under-covered by other analysts. Could you describe or
mention some of these that you think some of our readers would be
I also cover
Fresnillo PLC (
Compania de Minas Buenaventura (NYSE: BVN;
, two large mining companies, but also fairly under-covered. I
Taseko Mines Ltd. (TSX:TKO, NYSE.A:TGB)
NovaGold Resources Inc. (TSX:NG; NYSE.A:NG)
Great Basin Gold Ltd. (TSX:GBG, NYSE.A:GBG)
Extorre Gold Mines Ltd. (TSX:XG; NYSE.A:XG;
-all very interesting companies worth looking at.
I have also been paying attention to companies that fit within
a potential turnaround theme. At present, I probably only cover
one or two companies that fit that theme; however, I think it can
present great opportunities. In general, I'm referring to
companies that have had their stock price depressed because of
permitting roadblocks that I feel will eventually be resolved.
It's a riskier bet, clearly, and one for those investors willing
to be patient and hold onto the stock, as these issues can take a
while to get resolved.
Taseko is one company which, in my opinion, could become a
perfect turnaround situation. I think it's perfect because the
company is already a producer. The way I see it, if you buy
Taseko, you're paying for the producing and expanding Gibraltar
Mine and you're basically getting the large Prosperity gold
project, which is facing permitting difficulties, for free. That
makes the risk minimal.
Another company I have been learning more about recently, but
do not cover, is
Revett Minerals Inc. (TSX:RVM;OTCBB:RVMIF)
. Its Rock Creek project is stalled due to permitting problems.
But it does have a producing asset, the Troy Mine. Actually,
Royal Gold owns a small royalty on that mine. Again, I think it's
a lower risk situation when it comes to this turnaround theme.
There are other companies that don't have producing assets, such
Gabriel Resources Ltd. (TSX:GBU)
Greystar Resources Ltd. (
, which are a bit more risky plays in that sense, but that I
believe also have a very good chance of overcoming their
permitting obstacles and present very good opportunities for
I remember when I first started looking at this theme. It
started three years ago with
Eldorado Gold Corp. (TSX:ELD; NYSE:EGO)
. Its Kisladag mine in Turkey had been closed because of issues
with the government and permitting so its stock had plummeted. I
looked at the situation and understood that once the mine
reopened, the stock would bounce back to where it had been or
higher, which it did. Since then I've been keeping an eye out for
What other factors do you consider?
Obviously you can't just look at isolated events. You look at
jurisdictions. You look at the quality of the project. You look
at the strategy of the management to try to recover from whatever
obstacle they're facing. And you decide if there's a good chance
that it might indeed get resolved. I think they present a great
opportunity to realize great returns with the obvious
understanding that they're riskier plays. If a project should get
built, it will get built. It may just take time.
You mentioned NovaGold. Can you give us a little further
explanation of what you're thinking is on that situation?
Yes, NovaGold is a very interesting company. It has a 50% stake
in two main projects, the Donlin Creek project in Alaska and the
Galore Creek project in British Columbia. These projects are in
an early stage of development and we estimate first production
will not come until 2017. Despite this, NovaGold is one of those
companies you can't afford not to consider.
You have to pay attention to it because of the size of the
assets and also because of the strong partnerships. Barrick is
the partner at Donlin. Teck is the partner at Galore. Both are
multi-million ounce deposits, which are rare. The company also
has another project, Ambler, that's less advanced. But, it's
looking very promising and could unlock a lot of additional value
for the company. So, that's another positive.
My analysis suggests a target price of more than $18. The
stock is trading at around $13.25, so we think there's
considerable upside there. The management is solid. The company's
gone through some difficult times. But it has, indeed, recovered
and this has brought in some solid investors.
Are there any companies you'd like to mention, perhaps in the
lower price range that our readers might be interested in taking
a look at?
Certainly. I'll speak briefly about two other names I cover that
I think are very interesting. I've been covering Great Basin Gold
since I started covering the sector. It's at a turning point
right now, I think. The company has two assets, the Hollister
Mine in Nevada and the Burnstone Mine in South Africa. Burnstone
is actually its main project. It just came online this year. I
actually visited the asset in February and was pleased to finally
see the mill turning.
It's a company that is hugely undervalued due to some delivery
issues. The projects have been late in starting up and had a lot
of issues with project financing. There was a lot of equity being
issued and expensive debt transactions. I think the next few
quarters are going to be critical in demonstrating that these
mines are producing and that they're going to be generating
revenues. I would anticipate a re-rating of this stock following
that performance in the next few quarters.
It's currently trading around the $2.64 range. What are you
expecting for that one?
My target for Great Basin Gold now is $5.30. That's more than
double where it's now trading. That's only a 1.0 multiple to my
valuation, which is much lower than the 1.5 or so multiple to
valuation that many of these stocks trade at in the gold
Any others you care to mention?
I also cover Extorre Gold Mines. It's actually the most recent
name I initiated coverage on. It's a very interesting company
that is a spinoff of
Exeter Resource Corp. (TSX:XRC; NYSE.A:XRA;
. Exeter thought it wasn't getting much value for its Argentinean
assets and it spun those into Extorre.
The Cerro Moro project is their flagship project. It's
actually a small project at this time, but what we see is that it
has a lot of potential to grow. The company is drilling,
increasing its resource and, at the same time, pushing the
project forward toward a construction decision, which I think is
fantastic. The exploration results suggest that there's a lot of
potential there. They already have a 43-101 resource and there
are updates coming soon. We have a target price of about $6.70,
so we feel there is upside there. And, they actually have a
little bit of a potential turnaround project there with their Don
Sixto Project, which has also been suspended. It's one of those I
also believe could turn around.
Why was the project suspended?
Don Sixto is in the Mendoza Province of Argentina. A few years
ago, the government decided that companies couldn't use cyanide
and other chemicals that are required for the metallurgical
processing of gold and silver. More recently that province has
issued permits to other companies in the area. The San Jorge
copper project, which is operated by
Coro Mining Corp. (
, just received environmental approval this year. That, to me, is
an indication that things could move forward, although I should
note that Extorre management doesn't really highlight this
project at present
Does your target price of $6.70 include the potential of this
project in Mendoza turning around or is it outside of that?
It doesn't. I do assign a nominal value to the project of about
$60 million. The last resource on this project is actually about
the same size as the current Cerro Morro resource in terms of
gold ounces, although much lower grade, but my target price
doesn't include a discounted cash flow model of this project or
any potential future resources or reserves.
Thank you for giving us a very good explanation of the areas you
Imaru Casanova joined
McNicoll, Lewis & Vlak
as a managing director in the research department in September
2010. Ms. Casanova covers the precious metals and mining sector
for MLV. Most recently, she was an equity research analyst at
Barnard Jacobs Mellet USA, the U.S.-based arm of the South
African investment bank, where she expanded the coverage
universe and product offering of the metals and mining research
practice for BJM in the Americas. Ms. Casanova also has worked
as an associate analyst for BMO Capital Markets' gold research
team, covering small-, intermediate- and large-cap gold mining
companies. Prior to working as an analyst, Ms. Casanova was a
production technologist, offshore well site supervisor and
petroleum engineer for Shell Exploration and Production in
Venezuela. Ms. Casanova earned an MA degree in mechanical
engineering and a BS in mechanical engineering from Case
Western Reserve University.
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1) Zig Lambo and Karen Roche of
The Gold Report
conducted this interview. Zig personally and/or his family own
shares of the following companies mentioned in this interview:
None. Karen personally and/or her family own shares of the
following companies mentioned in this interview: Royal Gold,
NovaGold and Extorre.
2) The following companies mentioned in the interview are
The Gold Report:
Goldcorp, Franco-Nevada, NovaGold, Exeter and Extorre.
3) Imaru "Ima" Casanova: I personally and/or my family own shares
of the following companies mentioned in this interview: Greystar,
Gabriel and Eldorado. I personally and/or my family am paid by
the following companies mentioned in this interview: None.
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