Navigating Gold Equities During the Weakest Quarter:
Source: Brian Sylvester of
The Gold Report
Barry Allan, vice chairman of Mackie Research Capital Corp.'s
mining group, is guarded about gold equities from March to May,
statistically the weakest period. However, Allan remains bullish
on gold stocks through the end of the year and has Buy
recommendations on more than 70% of his coverage universe. In
this exclusive interview with
The Gold Report
Allan points to where he's finding value during this period of
The Gold Report:
When we last spoke in
, small-cap mining plays were poised to go on a bull run that
would last almost a year. However, the mining sector has
underperformed expectations recently. Why do you remain
Market appetite for small-cap equities has eroded as investors
clamor for less risky investments. A backdrop to that sentiment
is the gold price, which has shown lackluster performance since
hitting a peak in mid-2011. The gold price continues to be in a
realm of uncertainty, particularly because we are in a seasonally
weak period, the second quarter. The second quarter statistically
is the weakest quarter for gold equities. There's no good reason
for that, but it is a statistical fact. That has also eroded some
of the appetite for small-cap gold stocks.
What is the best quarter for small-cap gold equities?
The fourth quarter, bar none, is the best period for gold and
gold-related equities, particularly small caps. On a percentage
basis, there's less than a 5% probability that the fourth quarter
will be a weak quarter in any fiscal year. There are generally
good prices at year-end, which tend to carry through to February.
Then March presents the highest risk for price decline. I make
this joke about the Prospector & Developers Association of
Canada (PDAC) conference, which is always in early March: The
rule of thumb is wear a warm coat to the PDAC because we always
get a cold snap, but also don't be holding any gold stocks.
You've said that you have no preference between gold and silver
and remain bullish on both in the near and long term. What do you
see that has you bullish in the near term given the recent slide
in prices for both metals?
Trajectories are never straight up. There are seasonally weak
periods. Some evidence indicates that perhaps the U.S. economy is
starting to set a base. However, I certainly don't see anything
that reduces the attractiveness of either gold or silver looking
out to the end of the year. There have been some bumps and
grinds, but all the elements that made gold get here in the first
place largely remain intact. I'm not prepared to say that I'm
negative. I'm cautious about the second quarter, but I've been
cautious about the second quarter pretty consistently over the
last 10 years.
About 71% of the companies on your coverage list have Buy
recommendations. Is it fair to say you see a lot of value in
mining equities at the moment?
Generally, the recommendation list follows my positive bias for
the prospects of bullion. A lot of the equities that we have
looked at are a pretty good value. Then the question becomes are
they value traps? Are they going to continue to just look like a
good value, but not show any performance over the next 12
Where is value consistently presenting itself?
The most compelling theme is those companies where the asset is
clearly identified as having merit. The problem is usually
getting the money to build the mine. There are a number of
examples where there is a positive feasibility study or
prefeasibility study. There are ounces and, in some cases,
reserves in the ground. But how is the cash flow going to get
unlocked? Capital costs could be $400-600 million (
) for a company that probably has a market cap of $120M. How will
it get that into production? It will take capital to unlock
An example is
AuRico Gold Inc. (AUQ:TSX; AUQ:NYSE)
. It has the best growth profile of any junior-to-intermediate by
far. Now it must execute. That is pretty compelling.
The other theme is companies that look like they have decent
assets, but do they have mines? There's quite a long list of
them: Sandspring Resources Ltd. (SSP:TSX.V), Oromin Explorations
Ltd. (OLE:TSX; OLEPF:OTCBB), Klondex Mines Ltd. (KDX:TSX;
KLNDF:OTCBB) and Chesapeake Gold Corp. (CKG:TSX.V). There are at
least a couple of levels of assessments that say they are
economic, but the capital costs are really intimidating.
Let's talk about dividends for a moment and their impact on total
reports that the S&P 500 Total Return Index hit an all-time
high of 2,449.1 on April 9. Dividend returns kept the index in
the black. About 29% of the companies you follow are paying a
dividend. What's your philosophy regarding dividend-paying
I don't want to sound sarcastic, but it's only in the last two
years that gold companies could even spell dividend. This has
been a sector that historically did not pay dividends.
With the evolution of exchange-traded funds (ETFs), gold
companies have vocally come out and said, "Look, buy us because
at least we will pay you something back where the ETF will not."
They're attempting to recapture some of the valuation premiums
that gold equities historically traded at.
Are dividend-paying gold companies enjoying a return to
premiums? The answer is no. It's been a flawed strategy in the
sense that the traditional methodology of tracking premiums was
to show good fundamental underlying performance. The notion of
dividend paying for gold companies is a little bit of an anomaly
in this market. The broader market is yield starved and looking
for dividends. As such, dividend paying companies have attracted
more attention than not. But the highest yielding gold stock that
we have is 2.5%. A number of yield stocks in the overall universe
of coverage at Mackie Research have upward of 4% or 6% yields.
We're not buying a 2.5% or 1.5% premium for the yield.
Newmont Mining Corp. (NEM:NYSE) offers the highest dividend at
about 2.5% followed by Agnico-Eagle Mines Ltd. (AEM:TSX;
AEM:NYSE) with 2.3%. Is that enough to lure investors or should
these companies be using that money to improve their asset base
or increase efficiency at their operations?
It's nominal. A yielding stock isn't going to attract much
attention at anything less than 2.5%. I don't know any investor
who's saying, "Wow, I like Newmont because it's got a 2.5%
yield!" They can buy another stock and get a 6.5% yield with much
lower risk. I don't think it cuts it.
What are some promising stories you want to tell us about
If I had to single out a company that is the most likely to enjoy
a re-rating in the market irrespective of the gold price, I'd say
AuRico. It's pregnant with many near-term milestones over the
next nine months that suggest it will get a re-rating before
executing its business plan. It has good growth and a group of
people whom I trust to deliver the growth.
Another company that follows in the category of good growth,
solid management and decent valuation would be
Argonaut Gold Inc. (AR:TSX)
Argonaut is planning to expand production at El Castillo, one of
its operations in Mexico. It also has a new resource at its
development project, La Colorada.
What we really like about Argonaut is that its core senior
management group has done this before. The company has been quite
cognizant that it needed to execute a strategy of growth, but at
the same time be able to live within its means. El Castillo was
exactly that. Argonaut took the asset, ramped it up and optimized
it operations. In the case of La Colorada, it is just going to do
that again. Argonaut knows its capabilities and can maximize
those without overstretching. We expect steady progress with the
existing operations and as it goes into its next phase of
development with La Colorada. It's about solid, reliable
La Mancha Resources Inc. (LMA:TSX)
more than doubled its resource at the Hassaï project in Sudan.
That's a world-class asset. You call La Mancha one of the most
misunderstood junior mining stories in the market. Why is
La Mancha has been broken out of AREVA SA (AREVA:EPA), a large
integrated nuclear entity in France. AREVA had a group of
gold-type assets in Sudan, Côte d'Ivoire and Australia. These
assets were out of sight, out of mind because they were buried in
AREVA. La Mancha really didn't have much of a market profile at
all up until very recently. AREVA is selling the whole company
and put La Mancha in market play. Even though the resources at
the main mine have expanded, one of the driving elements on the
valuation will be the sale process. Interested people have been
spooling through La Mancha looking at its assets. This is about
AREVA maximizing the valuation that it has in La Mancha. AREVA
has had a very disastrous financial performance over the last 18
months. It's trying to monetize everything and, unfortunately, La
Mancha is one part of that.
Avion Gold Corp. (AVR:TSX; AVGCF:OTCQX)
has its main projects in Mali, which recently witnessed a coup
attempt. Some order has since been restored and Avion's share
price has begun to rebound. What strategy are you taking with
We were aware that Mali might be going through some issues, but
we still see some value in Avion. We adjusted our target down
slightly as a result of production. It was starting to experience
some stress at the Tabakoto mine about a week ago. I subsequently
had a conversation with management and they are quite pleased
that the borders have been opened now and goods and services are
freely traveling. Operations are starting to return to normal
even though the country itself is probably going to go through a
few gymnastics before its issues are solved. We're not out of the
woods, but it certainly is looking a little brighter than it was
two weeks ago. The value hasn't gone away, but we're waiting to
see some better outcome on the political front.
What did you make of the recent drill results of
Southern Arc Minerals Inc. (SA:TSX.V;
, particularly the 83 meters of 0.33 grams per ton gold and 0.80%
copper at the West Lombok project in Indonesia?
Southern Arc modified its exploration program for 2012 to focus
on areas that are outside of forestry reserve. Historically in
Indonesia, a company could operate within a forestry reserve even
if it didn't have the official permits as long as it had applied
for them. Southern Arc received counsel that that was probably
not a good way to operate at this time.
Those drill results were designed to test a porphyry system in
the south and west of Lombok Island. It shows there's a system
bubbling around there. This area has the right geological
conditions to yield porphyry systems. The grade was just not one
that you would get all excited about, but good intercepts show
anomalous mineralization of copper-gold over good regional
widths. I look at it as encouraging. The property's right and the
people are right. We'll see by the way it grows that.
Premier Gold Mines Ltd. (PG:TSX)
recently announced that the Red Lake Haulage Drift crossed onto
the Rahill-Bonanza joint venture in the Red Lake district. What
does that mean for Premier's shareholders?
It illustrates that the Rahill-Bonanza property is strategically
located. That is significant in the mind of Premier Gold because
that drift will provide access to deep exploration potential in
the camp and in an area where the mineralization has shown to be
quite deep. It's more of a symbolic statement than anything meaty
and juicy. It just says that the company is dead center in that
play and is seeing underground access to its project, which will
allow it to more completely explore that area. However, you have
to qualify the enthusiasm in the sense that
Goldcorp Inc. (G:TSX; GG:NYSE)
controls the exploration on that joint venture. So, it will be
done in Goldcorp's time, not Premier Gold's time.
Premier also entered into an agreement to buy the Cove gold
project in Nevada.
I scratch my head a little bit on that acquisition. It's not
clear to me what opportunity Premier sees there other than it was
available. My memory goes back far enough to remember when Cove
was an operating mine at Echo Bay. I know what the mine did for
Echo Bay. I saw what Victoria Gold Corp. (VIT:TSX.V) tried to do
with the asset. It's not clear to me what Premier thinks it can
do that two previous operators couldn't deliver. There's a small
resource there, but the ground was particularly problematic to
operate in. It would have to be a particularly good grade to
compensate for the poor ground.
How did Premier make it on your list then?
We have been actively involved in the Red Lake camp going back to
the initial days of Goldcorp and Rob McEwen. I have had very good
experiences in the area. I feel I have a good handle on what it
takes to be successful there. Two companies caught my eye as
having the capability to make it:
Rubicon Minerals Corp. (RBY:NYSE.A; RMX:TSX)
, which has been reasonably successful in its exploration, and
Premier Gold. Now Premier Gold has moved way beyond the Red Lake
camp and has developed a whole U.S. strategy, which involves
Nevada. Its Saddle property in Nevada is adjacent to Newmont's
assets. I kind of went to bed in Red Lake and woke up in Nevada.
It's not where I really intended to be.
I don't think you're the first to do that.
I'm sure. Premier is a very aggressive explorer. That's what I
liked about it. But the move to Nevada is a little bit more of a
Are there any other companies that really interest you?
There is one company facing some issues, which we're trying to
take advantage of for investors.
Lake Shore Gold Corp.'s (LSG:TSX)
stock certainly would not get you terribly excited, but we
recognize there is certainly some very good resource potential.
It has already released resources that are well over 7 million
ounces. It has an operating mine, but it's not operating up to
where it ought to be. This is another story about execution. We
also know that if current management does not get it right, there
are others in the Canadian mining industry that will. We're
intrigued by the asset value, and we're getting it at a good
value irrespective of what gold prices are doing.
Is the message to investors to wait until later in the year for
performance and approach with caution?
Yes, take a low-beta strategy through the year, increasing
weightings in the August time period to enjoy a better return at
the end of the year. Investors just looking for some good
companies that will do well irrespective of the gold price should
go back to the AuRicos and Lake Shores where there's value to be
unlocked and all they need to do is wait for them to execute over
the next 12 months.
It doesn't really matter what the gold price does. We're just
looking at companies where the value is there and there's a real
proposition that that value is getting unlocked within 12
I enjoyed speaking with you, Barry.
joined Mackie Research's investment banking department in 1998
as a mining specialist and transferred to the research
department as a mining analyst in 2001. He has worked in the
mining sector for over 15 years, serving as a gold and precious
metals mining analyst with Gordon Capital, BZW and Prudential
Bache. He holds a Bachelor of Science degree in geology and a
Master of Business Administration degree from Dalhousie
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1) Brian Sylvester of
The Gold Report
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2) The following companies mentioned in the interview are
The Gold Report:
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Inc., Rubicon Minerals Corp., Premier Gold Mines Ltd., Argonaut
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