Vikas Ranjan's Solid Gold Picks
Source: Brian Sylvester of
Toronto-based Ubika Research is making a name for itself on
Bay Street. The firm launched its
Gold 50 Index
in February 2010 and by year-end, the high-potential gold juniors
on that list were up a combined 99%. Ubika Cofounder and Analyst
Vikas Ranjan returns to
The Gold Report
for a discerning look at the ongoing turmoil in the Middle
East, its possible effect on metals markets and several promising
junior explorers and producers in this exclusive interview.
The Gold Report:
The Middle East is always a hotspot for geopolitical tension.
Those tensions escalated recently when Israel announced Iran was
sending warships through the Suez Canal, which hasn't happened
since 1979. And Egypt's new military rulers decided to let the
ships pass. Is it safe to say that this situation has the
potential to radically move the gold price as a result of the
The situation in the Middle East is very fluid right now with
many protests against autocratic governments. Opposing parties
will attempt to seize the moment, and that will likely make the
situation more volatile. This is creating a new risk in the
market, particularly due to its impact on the price of crude oil.
But could the situation have a dramatic impact on the price of
gold? I doubt that. The Middle East situation will probably
continue to help the gold price because risk is increasing-and
it's a new set of risks. Some people always take refuge in gold
as a safe haven, and this will push gold prices higher in the
short term but probably not radically higher unless there is an
all-out war, which I doubt will happen. So, yes, there's support
for gold already and we'll see some near-term rise in the gold
Another factor on the demand side is inflation. Consumer prices
in the U.S. rose about 0.2% in January, which is the fastest rise
in more than a year. And China recently published some data that
suggest inflation is rapidly taking hold there. What is Ubika's
position on gold as an inflation hedge?
Yes, inflation is definitely becoming a major concern-at least in
emerging economies like China, India, Brazil, Russia and
Argentina. Gold has traditionally been a strong hedge against
inflation as investors seek to hold hard assets like gold when
paper currencies depreciate due to higher inflation. If inflation
takes hold, our position is that it will be very beneficial for
gold. Now, the question is: Is there a real threat of inflation?
It's absolutely a threat in emerging markets.
In our opinion, the numbers are actually understated. In many
of these countries, the real inflation rate is much higher than
the official figures because emerging markets are growing rapidly
and are not seeing any let up in demand growth. However,
developed countries, especially the U.S., Eurozone countries and
Japan, are struggling still. In the short term, perhaps one or
two years, we don't see a real threat of inflation in developed
countries because there's no real threat of wage-induced
inflation. Having said that, these countries have pumped up a lot
of liquidity into the system; so, ultimately currency-induced
inflation likely will take hold in a couple of years-that will be
very beneficial for gold.
So gold has significant demand drivers both in the short and long
Gold recently brushed up against its 50-day moving average on the
Comex. Where do you see the next resistance level? Will it be
Yes, I think so. If you look at the trend over the last few
months, gold is making a strong base at higher and higher levels.
Even after swift selling in the new year, after gold had made a
late run in 2010, it did not break below $1,300 on the downside
and has now made a nice comeback. If that level above $1,350 is
sustained for a little more time, I think the next move would be
to test the levels around $1,500. I wouldn't be surprised if gold
breaks $1,500 by midyear.
That would certainly be good news for our readers and most junior
gold explorers. Ubika Research covers a number of gold juniors.
your last interview with
The Gold Report
, you talked about
La Quinta Resources Inc. (TSX.V:LAQ)
, which at the time, was rebranding itself as a Nevada-focused
junior with its Easter property. What's happening with La Quinta
La Quinta has made some good progress since we last spoke. The
company completed a summer drilling program last year at the
Easter Gold Project. The drilling program focused on the area
where there is an historical resource. La Quinta hit gold in
every hole it drilled and successfully determined the direction
of the mineralization. I visited the site in November last year
and I was pretty impressed by the size of the land package.
Current drilling is exploring only one known vein system, and
there is potential for others. We think La Quinta has a strong
technical team to carry out its well-defined exploration program
that should significantly increase the current NI 43-101
resource. Another very interesting thing about the company is
that the Easter Project is in a joint venture (JV) with
Fronteer Gold Inc. (TSX:FRG; NYSE.A:FRG)
, with La Quinta earning its option to own a 65% interest. Now,
Newmont Mining Corp. (
just announced a takeover bid for Fronteer. The gold sector
continues to see lots of mergers and acquisitions (M&A)
activity, and a company like La Quinta can do very well if it
successfully executes its strategy and proves up a sizeable
resource base of, say, 500,000 to 1 million ounces (Moz.).
Do you expect Newmont to take a closer look at La Quinta given
Yes, it's possible. Newmont also announced it would spin off some
of the exploration assets into a subsidiary called Pilot Gold.
We're not sure if it will spin off its Easter Project interests
once the company acquires Fronteer. But, even if it did, Newmont
still owns about 20% of Pilot Gold. Newmont would obviously have
an eye on these assets; it's very aggressive. Newmont is looking
for ounces in the ground. If the company finds a good-sized
deposit it can mine economically, why not?
La Quinta recently got a permit to do some trenching on the
Easter Property from the Bureau of Land Management (BLM).
Ultimately, that work will lead to more drill targets and more
drilling. When could we see a revised resource estimate from La
Our understanding is that La Quinta will engage in a follow-up
drill program very soon. I think the company should have some
results from that by May. Once La Quinta takes into account all
of those results internally, it will probably do an evaluation
and include that drill data. That would be an opportunity to
revise the resource estimate. If everything goes as planned, we
could see a resource revision by late summer or early fall.
I want to ask you about your target price for La Quinta but you
don't call it a target price. Ubika calls it a "model price."
Please briefly explain that.
The Ubika "model price" is based on our valuation methodology. We
do not say that is our "target price" because we are not in the
business of offering targets or recommendations. We just say
that, based on our analysis, the company model price should be
So what's Ubika's model price for La Quinta?
Our model price for La Quinta is $0.23. The stock trades about
$0.08 currently, so there's a bit of upside based on a very
conservative assumption of the company's current resource and
what we think the resource could be in 12 months.
Another company you talked about in that same interview was VG
Gold. Since then, VG has merged with Lexam Explorations. What did
you make of that deal?
We started coverage on VG Gold back in July 2008 when it had a
$20 million market cap. Once the merger with Lexam Explorations
was concluded, the new company emerged as
Lexam VG Gold, Inc. (TSX:LEX; OTCQX:LEXVF; Fkft:VN3A)
and now the market cap is close to $225 million. More and more
investors are warming to the idea that Lexam VG Gold is moving in
the right direction. Mr. Rob McEwen, who is the former chairman
and CEO of
Goldcorp Inc. (TSX:G; NYSE:GG)
and probably one of the best gold mining investors on the planet,
owns close to 30% of the company. He is also the non-executive
chairman. By making that investment and being on the board, he's
basically saying that this is one of the most-promising companies
in the Timmins Gold Camp.
The merger allows Lexam VG Gold access to more than $15M of
Lexam's capital. This will really change the game for Lexam VG.
Now, it can significantly expedite its exploration program. This
company could become a company of choice for many people to get
exposure to the Timmins gold exploration play.
Lexam VG's focus is the Paymaster property, which is part of the
past-producing Paymaster mine. Do you think that's a possible
takeover target by a company like
Lake Shore Gold Corp. (TSX:LSG)
, which is operating near Timmins and generating a lot of cash
Probably not because we think VG has similar potential. Lake
Shore's market cap is $1.5 billion and it has a little more than
3 Moz. in known resources and reserves. VG already has gold
resources of roughly 1.5 Moz. Lexam VG has four properties that
it's going to drill vigorously this year; it'll add a lot of
value at these gold prices. VG is getting about $140/oz. in the
market in terms of market cap, whereas a company like Lake Shore
gets about $550/oz.
Now, I acknowledge that Lakeshore has 1.8 Moz. in the measured
and indicated (M&I) categories and has already commenced
small-scale production, which is fueling strong interest in the
company. However, there's still a big valuation gap in terms of
VG going to the next stage. I think this company's market cap has
the potential to go to $1 billion in a couple of years if it
successfully executes its exploration strategy and expands its
gold resource base.
Yes. The potential is there, considering the vast support it has
and all the exploration potential of its four properties-all of
which are close to past- or currently producing mines. You
couldn't ask for a better address than Timmins.
What about Goldcorp as a potential suitor?
Goldcorp is more likely, but I think a company like Lexam VG Gold
would probably hold out for a longer time and build more value
before agreeing to be acquired.
So, in the meantime, Lexam VG will continue to derisk Paymaster
and its other properties through drilling and further
Yes, exactly. It'll keep exploring, building resources, moving
resources from the inferred category into M&I and,
potentially, move resources into reserves as the company evolves.
That will build value because, on average, you may get
$75-$100/oz. in the market for inferred resources but
$150-$200/oz. as you move those resources into the M&I
And we know Goldcorp is willing to pay high prices for ounces in
the ground given the $3.5 billion it paid for Andean Resources.
What's the Ubika model price for Lexam?
Lexam breached our model price handsomely. We're reviewing that
price because a lot has changed since we first came out with it
two years ago. Our new model price on LEX is $1.87.
Let's move on to the Ubika Gold 50 Index comprising 50
high-potential junior gold explorers. The companies on that list
were up a combined 99% in 2010. Why did you start your index?
We had quite a few very promising junior gold explorers and
companies under coverage, so we decided to launch an index. As
you know, it's not easy to find a list of 50 promising companies
in the junior gold exploration space. We launched it in February
2010 and it has done very well.
Could you give us a few of the Index's more promising names?
There are quite a few, we have extensive coverage on some of
Lake Gold Inc. (CNSX:HYL; Fkft:HYK)
is a good example. It's a small-cap junior explorer active in
Ontario's Red Lake District, one of the most prolific gold belts
in Canada and home to Goldcorp and
Rubicon Minerals Corp. (NYSE.A:RBY; TSX:RMX)
. Some of the other companies in that area include
Claude Resources Inc. (TSX:CRJ; NYSE.A:CGR)
Premier Gold Mines Ltd. (
We believe Hy Lake has one of the best properties packages in
Red Lake and is one of the most undervalued and unheard stories
out there. The company trades on the CNSX Exchange-an exchange
for juniors in Canada-but it filed a listing application with the
TSX Venture Exchange and is expecting that listing very soon.
That will change the company's profile. The market is taking
notice already and Hy Lake's market cap actually tripled during
the last year to about $20M. But perhaps the most interesting
thing about Hy Lake is that its flagship property, Rowan
Property, is a JV with Goldcorp. Hy Lake has already earned its
60% option and soon it will be announced that Hy Lake is the
operator of that project with Goldcorp having a 40% stake. There
aren't many junior gold explorers that have Goldcorp as a JV
partner. We think it's a very neat story with strong projects and
a strong management team. The company's worth watching, as it
charts a new course in its corporate evolution. We think the year
2011 could be a transformational year for Hy Lake and a year of
What's your model price for Hy Lake?
It's $0.81 and it trades around $0.45-$0.50 right now.
What are a couple of other Index names?
Another company we recently started coverage on is
Gowest Amalgamated Resources Ltd. (TSX.V:GWA)
-another very promising junior working in the Timmins area.
Gowest has a high-potential property called the Frankfield Easter
Gold Project, located near current and past-producing gold mines.
It already has an NI 43-101-compliant resource base of 0.5 Moz.,
which we expect will increase significantly once the company gets
a revised resource estimate based on recent drilling data. What
we like about the Frankfield project is that the mineralization
shows very impressive continuity. You won't often find deposits
like that. The grades are very consistent, 6-7 grams per ton
(g/t), and it's open at depth in all directions. We really like
the company. Gowest has real potential to build the resource base
and move those inferred resources into the M&I category. That
will really build value.
Who's involved in management there; anyone noteworthy?
There are some people who came from a company called Castle Gold,
which was sold about two years ago. But those guys started Castle
Gold from scratch and ended up selling it to
Argonaut Gold Inc. (TSX:AR)
I believe for $150M or close to that. Greg Romain is Gowest's CEO
and Darren Koningen leads the exploration team. We like
management's no-nonsense approach, which focuses on building
ounces and exploring the right way.
What's the Ubika model price on Gowest?
It's $0.80, and it currently trades at around $0.32-$0.33.
Perhaps one more before we let you go, Vikas?
Sure, I'll give you two. One is a Colombia-based junior gold
Seafield Resources Ltd. (TSX.V:SFF)
. We initiated coverage in November 2010. The interesting thing
about Seafield is that it's the largest landholder in the
upcoming gold exploration belt called Quinchia District. Its
Quinchia gold-copper project is within the Mid Cauca porphyry
corridor, the site of a number of large new open-pit gold
discoveries. There is an up-and-coming gold belt there with
several very promising companies in that region, including
Medoro Resources Ltd. (TSX.V:MRS)
. And Seafield has a land package that is kind of in the same
neighborhood. Quinchia is becoming increasingly important. Last
month, Seafield announced a major intercept of 449 meters of 1.3
g/t on the Miraflores target. That's like half a kilometer of 1.3
g/t, which is fairly good grade.
Is that true width?
Actually, the intersection was 449 meters of 1.3 g/t. Obviously,
it included some sections that were very high grade but the
average grade was 1.3 g/t. Just last week, Seafield announced
some follow-up drill results from other holes on the same target
and, again, very encouraging results. That is just one of the
targets; it has several others on the property and already has an
NI 43-101-compliant resource of close to 800,000 oz. (800 Koz.)
Based on the recent drill results, we believe there could be a
multimillion-ounce deposit at various targets on this property.
Seafield trades at a very low level versus its peers, but we
think that will change as the company expands its resource base
and moves further along the exploration curve.
What's your model price on Seafield?
For Seafield, our model price is $0.79; but based on the recent
drill results and the other things that have happened in the last
few months, we may come out with an updated model. It's currently
trading around $0.45.
And one more?
Another company we have been following for some time is
Paramount Gold and Silver Corp. (TSX:PZG; NYSE.A:PZG)
. This high-profile company has multimillion-ounce,
advanced-staged projects in Nevada and northern Mexico and
already has more than 4 Moz. in NI 43-101 resources.
Are those inferred resources?
Its resources are in both inferred and M&I category.
Paramount is not under full coverage but we've been watching this
company and know a fair bit about it. It's exploring in an area
populated by established gold companies like Goldcorp,
Alamos Gold Inc. (TSX:AGI)
Gammon Gold Inc. (TSX:GAM; NYSE:GRS)
. We think Paramount has the potential to become the next big
thing, in terms of an advanced-stage gold explorer. It already
has a $500M market cap, and we think it'll likely go to the next
stage of becoming one of those high-profile companies like Lake
Shore Gold, for example. The management team is very strong and
has been doing a great job of understanding the geology.
Paramount's immediate neighbor is
Coeur d'Alene Mines Corp. (TSX:CDM; NYSE:CDE)
Coeur d'Alene is a silver miner, so if it's next door there must
be silver in the deposit.
silver in the deposit but Paramount's project is more a
gold-silver than silver-gold property in terms of potential. But
if you look at current silver prices, it's becoming a very
attractive play in itself.
Generally, when you find a gold-silver deposit it contains
significantly more silver than gold.
That's correct, in terms of volume. The known resources for
Paramount are 4.5 Moz. gold and 12 Moz. silver.
And the model price for Paramount?
Actually, we don't have a model price for Paramount because it's
not under full coverage. But, as I said, we are watching this
company closely. It's part of our gold index.
What should our readers expect to happen with the gold price over
the next 6-10 months?
Gold is in a sweet spot right now-it's a hedge against risk, a
refuge for people who are worried about risk. Then, down the
road, you have inflation. I wouldn't be surprised if gold keeps
growing by 10%-15% on a yearly basis for the next few years as it
has for the last five or so. We started this year at $1,350/oz.
and the gold price could very well go to $1,500/oz.-$1,550/oz. by
year-end. Then, it could be looking to build on those gains.
Don't be surprised if you see gold around $1,800/oz. in a few
Thank you for talking with us today, Vikas.
Vikas Ranjan is a management and investment professional
with over 15 years' experience in diverse areas of investment
management, finance, customer analytics and investment
research. He is a principal of
, a specialized research and analytics company with a wide
range of small-cap clients and operations in Toronto and
Vancouver. His previous experience includes various management
positions in companies such as TAL Global Asset Management and
Bank of Montreal. He has a strong knowledge of financial
markets and has researched and analyzed companies in diverse
industry sectors and markets. He holds a bachelor's in
economics (Hons.), masters in management studies from
University of Mumbai, India and an MBA in finance from McGill
University. Prior to cofounding Ubika, Vikas cofounded P2P
Systems Inc., which was acquired by Toronto-based technology
company, Microforum Inc.
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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
The Gold Report:
La Quinta, Lexam VG Gold, Goldcorp, Rubicon and Argonaut.
3) Vikas Ranjan: I personally and/or my family own shares of the
following companies mentioned in this interview: Lexam VG Gold,
Hy Lake, Seafield and Gowest. I personally and/or my family am
paid by the following companies mentioned in this interview:
4) Ubika Research has received fees from the following companies
mentioned in this interview to provide research and/or exposure
coverage: Lexam VG Gold, Hy Lake, Seafield, La Quinta, Paramount
and Gowest. Ubika Corp. also has an agreement in place to receive
options from the following companies mentioned in this interview:
Hy Lake, Seafield, La Quinta and Gowest.
Disclosure: Except for the historical information presented
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