Select Gold, Silver Mid Caps for Near-Term Action: Bo
Source: Zig Lambo of
The Gold Report
With high market volatility, running a small fund like the
Magna Opportunity Fund, which seeks to deliver exceptional
returns, requires nimble management. In this exclusive interview
The Gold Report
Bo Chew tells us how he does it and what criteria he uses to
select his fund's investments. In the process he drops quite a
few names with good upside potential for investors to consider in
the current market environment.
The Gold Report:
The CBOE VIX Volatility Index was all over the map in 2011. Your
Magna Opportunity Fund is capped at only $20 million (
) with a goal of producing exceptional returns by trying to be
nimble within the market. Can you explain how you plan to achieve
this when a lot of the larger and more diversified funds try to
just stay even?
With this particular fund we expect to deliver very high returns
by being concentrated in about 30 holdings where each position
has a realistic potential to increase 100% within 12 to 24
months. The basic premise is buying companies that are
undervalued, have great people, offer huge upside and have
important catalysts in the next 6 to 12 months. Unlike large
funds, we can take advantage of really beaten down companies or
less liquid opportunities. One example is
Agnico-Eagle Mines Ltd. (AEM:TSX; AEM:NYSE)
, which recently reached a three-year low at $33/share, down from
a 52-week high of $78/share, due to closing Goldex and the
challenges experienced at Meadowbank. With Agnico we bought $35
January 2014 call options for $6.90.
In 2012 Agnico-Eagle is expected to produce 1 million ounces
(Moz) of gold at $750/oz cost, producing $950M of cash flow, and
its market cap is only $6 billion (
). So, over the next two years we see a lot of potential
catalysts, including possible resumption of operations at Goldex,
lowering costs at Meadowbank, advances in Meliadine and La India,
plus resumption of growth in 2013. If Agnico-Eagle gets back to
$60/share, we've got a gain of 260%, not counting the value of
So, you're playing that one through the options and not through
the stock itself.
That certainly gives you plenty of upside leverage if you guess
right. And, it limits your downside to the cost of your
I'm assuming that in most cases you're probably going to be
buying the stocks rather than playing options. Right?
Yes. We have two options currently. The other one is
Kinross Gold Corp. (K:TSX; KGC:NYSE)
. We try and buy them when we see them, in this case at
multi-year lows, where we believe that the company is strong and
its share price will recover.
How far out are the options?
Are you also buying physical metals or just equities and
Generally we stick with equities and options. We do try to
maintain about 10% cash and also we have the ability to leverage
25%. That gives us a lot of room to take advantage of
opportunities. From time to time, we'll trade 10% in silver or
gold exchange-traded funds.
Do you have a preference for how you weight your portfolio
between the various sizes of companies?
We tend to prefer the small caps and like the mid caps as well.
The challenge with large caps is that in most cases I can't
realistically see a stock increasing 100% within 12 to 24 months
unless it's something that is really beaten down and
You can always play the options on the large caps if you can hit
the right timing.
Correct. For example, the other option that we're looking at is
Cameco Corp. (CCO:TSX; CCJ:NYSE)
, two years out as well.
You've also made an investment in the Commodity Capital Midas
Letter Opportunity Fund. What do you like about it?
We like the people: James West and Tobias Tretter, whom we had
the opportunity to talk to a number of times and to meet. This
particular fund is unique because approximately 80% of it is in
placements, of which 30% is in seed and pre-IPO. We also get
access to some of the placements for our fund. A huge advantage
is we get warrants. On the pre-IPOs, we're getting in at
How long do you typically have to wait for a pre-IPO investment
like that to turn liquid?
Often on a pre-IPO you might have to wait two to six months. For
example, there's one we're buying in at about $0.15/share and the
discussion is that within three months the company will do the
IPO at $0.35 to $0.40/share.
Turning to junior stocks, 2011 was a pretty dismal year. Are you
expecting that 2012 will be a breakout year for them?
That's a good question. The juniors are definitely quite
undervalued. We do expect 2012 to be a good year as merger and
acquisition activity picks up. However, it doesn't really need to
be to help our performance because catalysts in the next 6 to 12
months with our stocks can push the prices up.
So, you're looking for specific catalysts that are independent of
what the general market is going to do?
Yes. I'm looking at companies that are advancing projects through
to prefeasibility or feasibility or derisking as they ramp up
toward production. We try to buy at the point in the resource
company cycle where there's less risk. Often, that means buying
early while the story is being formed and there isn't a lot of
exposure. We also buy after a company has largely derisked the
project and it's within one or two years of production. Sometimes
we also buy when a company has disappointed but it's still a good
company with an intact story.
How do you decide when you want to sell?
The sell decision is based on one of the four buying
criteria-value, catalysts, great management and upside
potential-breaking down. Often we'll sell a stock when it's run
up because there's no longer value, or when key people leave and
we feel that materially impacts the ability for the company to
move projects forward or when there's an absence of near-term
Just looking at the price chart will give you a good indication
of how much longer you might want to hang on.
That's true. Often you have to give the markets time to tell you
whether you're right or wrong.
Can you tell us about some of the companies you particularly like
at this point and what you're expecting from them in the next
couple of years?
One of those would be
Barkerville Gold Mines Ltd. (BGM:TSX.V)
. Barkerville is a $90M market-cap company with 117,000 hectares
in the Cariboo Gold Belt in British Columbia that has produced
3.8 Moz of gold historically. It has seven past-producing mines;
three gold deposits, including the QR Mine and a 900-ton-per-day
(tpd) mill; and recently permitted the Bonanza Ledge Mine. I like
this particular company because there's been a lot of gold
produced in this area. It has really beefed up its advisory team
and insiders own about 10%.
In 2012, Barkerville intends to process ore from Bonanza Ledge
to produce about 20-30,000 ounces (20-30 Koz). At $800/oz cash
cost and $1,700/oz gold, operating cash flow will be between $18M
and $27M. There is potential to develop additional mineable
reserves at the QR Mine to boost that production to 50 Koz in
2012. It's waiting for results on 33 more holes. One hole at Cow
Mountain returned 52 meters of 14.2 grams/ton (g/t) gold. Within
24 months we would expect over 100 Koz of annual production. At a
conservative $3,000/oz, we've got a $300M value to the company,
which triples its $90M market cap.
Well, those are pretty substantial numbers.
Scorpio Gold Corp. (SGN:TSX.V)
is another one we like. Scorpio owns 70% of Mineral Ridge in
Nevada, which has a history of gold mining dating back to the
mid-1800s. There've been problems with this particular mine more
recently. It sat dormant from 2005 to 2010 until Peter Hawley,
founder of silver producer Scorpio Mining Corp. (SPM:TSX), took
over in 2010. Insiders own 38%. Production started in May 2011
from the Drinkwater pit. Mining at the Mary Zone has just started
increasing the production at Mineral Ridge to about 5 Koz per
month. The ownership increases to 80% after four months of
production above 3.5 Koz. The current resource is only 357 Koz,
but it's only from two pits. There are another eight pits that
are defined and another three pits outlined. Drilling between the
pit areas should expand the resource and define a possible super
pit that could be 3-5 Moz. If cash costs decline and production
increases to 80 Koz, and if a super pit is defined, we expect
Scorpio Gold to do very well.
Definitely has some big upside there too. So, what else do you
MAG Silver Corp. (MAG:TSX; MVG:NYSE)
is a company focused on two large-scale projects within the
Mexican silver belt. MAG has a 44% joint venture with Fresnillo
on a 221 Moz silver project called Juanicipio. It's one of the
highest quality silver deposits in the world and borders the
Fresnillo mine, which is the largest primary silver mine in the
world. MAG has a significant land package in the area and we
expect it to be taken over at some point.
That makes sense. Of course, all these companies that have
something substantial going for them are potential takeover
For sure. We also like
Pretium Resources Inc. (PVG:TSX; PVG:NYSE)
. Pretium is another one of our mid-cap takeover targets. It owns
the advanced stage Brucejack and Snowfield projects in northern
British Columbia with a combined 56 Moz of gold in all
categories. Brucejack is one of the largest high-grade projects
with 5 Moz at 16.9 g/t gold Measured and Indicated and 3.3 Moz at
25.6 g/t gold Inferred. So, the updated Brucejack preliminary
economic assessment shows a net present value of $2.2B
On a per share basis what does that present value work out
About $25. I like Pretium because that particular project has a
lot of expansion potential with the large land package.
It's always nice to have big upside to expand resources.
Another company we like is
South American Silver Corp. (SAC:TSX;
, which has traded at a significant discount given its 230 Moz
Malku Khota silver deposit. There are two reasons: it's low grade
and it's in Bolivia. South American Silver is given very little
value for the new 3.8 billion pound copper deposit in Chile,
which is 35 kilometers (km) from El Teniente, the world's largest
underground copper mine. The in-ground value of this deposit is
roughly the same as the silver deposit. South American Silver is
led by Greg Johnson, co-founder of
NovaGold Resources Inc. (NG:TSX; NG:NYSE.A)
. Zamin Precious Minerals Ltd., a resource company with
operations in South America, is 19% owner. It has a really strong
relationship within the government of Bolivia, which has
confirmed that private investments in mining, and South American
Silver in particular, are welcome and will continue to be
Apparently, the market hasn't recognized that and is focused on
the political risk more than on the upside potential of the
Yes. Malku Khota makes up for the low grade with its high indium
and gallium value. The preliminary economic assessment (PEA)
shows that at $18/oz silver, there's $704M net present value (
) at 5%. And, the cost to produce net of byproduct is $2.94/oz.
The catalysts for South American Silver are securing offtake
agreements for the indium and gallium, completing prefeasibility
and feasibility studies, and likely takeovers or joint ventures
on both projects within 24 months.
So, that's relatively short-term visibility for upside
That's true. A little smaller company we like is called
Metanor Resources Inc. (MTO:TSX.V;
. It is bringing its Bachelor Lake mine in Québec into production
and has begun milling ore from a 5,000-ton bulk sample. Metanor
is expected to produce 60 Koz of gold at a cash cost of $464/oz.
Some 20% of the gold goes to Sandstorm Gold Ltd. (SSL:TSX.V) at
$500/oz. Metanor has 1.6 Moz of resources with a fully permitted
1,200 tpd mill and the infrastructure replacement value is $150M.
The huge upside comes from the 781 Koz Barry deposit, which has
the potential to become a significant low-grade, high-tonnage
deposit like Osisko Mining Corp.'s (OSK:TSX) Malartic mine.
Osisko has a $4.5B market cap and will be producing about 610
Koz/year starting this year. Barry has only had 50km of drilling
on a potential 13km strike, compared to the million meters of
drilling at Malartic. If you multiply the drilling at Barry
20-fold, it could conceivably host a 14 Moz deposit.
That's a lot of expensive drilling.
Perhaps, but it should have cash flow to help with the drilling.
Industrial Alliance recently put out an estimate that the 300 Koz
resource at Bachelor Lake is estimated to be about 700 Koz, which
can extend the mine life to 10 years. So, if we take Bachelor
Lake at 60 Koz/year, Metanor's 80% portion is 48 Koz. If we only
assume $1,000 of operating cash flow per ounce, we've got $48M of
cash flow. And, the company is trading at only about a $68M
Any others you'd like to talk about at this point?
Avino Silver & Gold Mines Ltd. (ASM:TSX.V;
, a re-emerging silver producer in Mexico, is expected to produce
1.1 Moz silver equivalent. Avino is in the process of stockpiling
ore and will commence production once it has enough to operate at
250 tpd. It is targeting 3 Moz of silver production from three
projects within three years. It does have a proven resource at
San Gonzalo and the Avino vein as well as a tailings resource.
Avino's market cap is only $61M.
Another company we really like is
Gran Colombia Gold Corp. (GCM:TSX.V)
because it's an extremely undervalued gold producer. It's taking
production from 90 Koz to 540 Koz by 2016. It has total gold
resources of 13 Moz with a market cap of $220M. Its main
operating mine, Segovia, has planned expansion in 2013 to
increase production to 200 Koz per year with cash costs of less
than $900/oz by the end of 2013.
Gran Colombia's other project is Marmato, with 12.4 Moz gold
and 75 Moz silver. A PEA done in 2011 shows a mine that's
projected to produce 540 Koz gold and 1.3 Moz silver at $524/oz
costs. As it ramps up production and gets closer to putting
Marmato into production, we expect it to be taken out as
Another company that has really been beaten up due to delays
Gryphon Gold Corp. (GGN:TSX; GYPH:OTCBB)
. It was supposed to be in production at 43 Koz gold per year
this March. It has about a 2.1 Moz combined resource in Nevada;
$1,000/oz of operating cash flow times 43 Koz is $43M on a market
cap of $30M. In addition, there are three new anomalies that have
been identified, each significantly larger and shallower than the
main sulfide resource, which is about 1.1-1.2 Moz. So, there is
potential for Gryphon to get into the 3-5 Moz size.
We also see upside in
Geologix Explorations Inc. (GIX:TSX)
, which has a $44M market cap. Geologix's Tepal project in Mexico
shows a PEA with a $412M NPV at 5%. And, there's a potential for
this to continue growing. There's a new resource estimate
expected in March and a prefeasibility study in June. Depending
on how the prefeasibility study goes, it could be in production
Do you see any developing opportunities that are still in the
early and more speculative stages that might be places for people
to get into at this point?
I think there are a couple of areas. One would be commodities
that are less common or less mainstream, like graphite or
tungsten. Also, companies that are less followed could be great
opportunities, because with less news there's very little hype
and very little trading, leading to potentially depressed levels.
There are many great opportunities, but you have to do your
In the category of companies that are less followed, one is
Xtierra Inc. (XAG:TSX.V)
, which is a $26M market-cap company with about $8M in cash. It
has $100M of silver equivalent in Mexico and is advancing the
Bilbao project, which is likely to produce 2 Moz silver in Q414.
But, it also has a tailings project that could produce 2 Moz
silver, which is likely to come onstream earlier than that.
So, is there anything else you'd like to talk about?
I have one more company in a less mainstream region. This is
Minco Gold Corporation (MSV:TSX)
, which has a $168M market cap with $70M in cash. It has a 101
Moz silver deposit in China with significant resource expansion
potential and is very close to getting into production at 5.5
Moz/year at a $5.65/oz cost. There's been very little news and
it's just waiting for the environmental impact assessment to
start construction. It is fully funded to production, which is
expected in Q114.
What would you like to leave with our readers as far as how they
can best profit in the current investment environment?
We have a volatile investment environment so it's important to
keep a certain amount of cash available to take advantage of
opportunities. At the same time you have to take your profits
when things do go up. Resource investing is inherently risky as
only a small percentage of deposits ever become mines. But,
you'll have greater success focusing on high-quality projects
with a lot of blue sky run by excellent people who have financed,
built, joint ventured and sold mining operations. These companies
can reward shareholders in today's very difficult
That's a good investment philosophy with useful guidelines to
follow. Thanks for giving us a nice list of creditable companies
with some great upside potential.
is the manager of the Magna Opportunity Fund and has been
associate portfolio manager with Chartwell Asset Management
since 2010. He is the principal of Legacies Financial Group and
was formerly the trading director for Chartwell Financial Inc,
a mutual fund dealer, from 1994 to 2006. He is a Canadian
Investment Manager (
). Chew has successfully managed a stock account since November
2003 using a similar investment approach as the Fund. He seeks
the highest returns without excess risk and has a significant
amount of money in the Fund.
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1) Zig Lambo 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
The Gold Report:
Barkerville Gold Mines Ltd., Scorpio Gold Corp., MAG Silver
Corp., Pretium Resources Inc., South American Silver Corp.,
NovaGold Resources Inc., Avino Silver & Gold Mines Ltd.,
Geologix Explorations Inc. Streetwise Reports does not accept
stock in exchange for services.
3) Bo Chew: I personally and/or my family own shares of the
following companies mentioned in this interview: Agnico-Eagle
Mines Ltd., Kinross Gold Corp., Barkerville Gold Mines Ltd.,
Scorpio Gold Corp., MAG Silver Corp., South American Silver
Corp., Metanor Resources Inc., Avino Silver & Gold Mines
Ltd., Gran Colombia Gold Corp., Gryphon Gold Corp., Geologix
Explorations Inc., Xtierra Inc., Minco Silver Corporation. I
personally and/or my family am paid by the following companies
mentioned in this interview: None. I was not paid by Streetwise
Reports for participating in this story.
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