Can Gold Prices Rally Further?

Can Gold Prices Rally Further?
Can Gold Prices Rally Further?

With the IMF’s downward revision of global growth forecast and the intimation by the FOMC minutes to still consume considerable time before thinking of an interest rate hike caused the rebound in gold prices from the year’s low during last week. The yellow metal secured nearly 2.5% so far during the current month and is heading for the first back-to-back weekly rise since July. The September month which is historically considered to be a buying month due to the festival season at the world’s second largest bullion consumer, India, is likely to witness increased volatility into the gold prices due to the below mentioned reasons.

Also Read: Can The US Dollar Witness Renewed Strength?

The rout of safe haven buying emanated ever since the IMF downgraded its global growth forecast for the next year and signaled that the European economy can trigger another rescission should the concerned leaders don’t take necessary steps. The IMF also upgraded the US growth forecast considering the recent improvements in their economic numbers; however, the US Dollar couldn’t witness a gain as FOMC members continued spreading the word that the world’s largest economy can face weaker days due to global pessimism. The Japanese Yen also witnessed considerable strength due to the safe haven buying after the IMF release.

In addition to the FOMC members’ comments during last week, pessimistic economic signals from the world’s largest economy continue forcing market players to weaken US Dollar by expecting a slow tapering of monetary asset purchase and a delayed rate hike by Federal Reserve.

After the Geo-Political tensions in Israel taking a stop, the crisis between Ukraine and Russia are still not calmed down and there are new protests in Hong Kong which continued providing buying support to the gold prices. Recently, the protests in Hong Kong taking wild turns after the police used forces to remove student protestors. Market players are speculating that the protests in important Chinese part can also cause the world’s largest industrial player to witness weaker days. Moreover, the situation between Russia and Ukraine can also trigger another series of geo-political crisis which in-turn can support the safe haven demand of the yellow metal.

On the physical side, the ETFs and ETPs registered first increase in their gold holdings in two weeks on Monday after the pessimism fueled risk-aversion demand during the previous week. Gold holdings in SPDR, world’s largest gold backed ETF, liquidated nearly 2 tons yesterday totaling 10.72 tons of liquidation during the month of October while the holdings in global ETPs rose by 3.7 tons on Monday which was the first increase in holdings during two weeks. Gold import from the world’s biggest two consumers, China and India respectively, signaled complex scenarios as Indian gold imports during September 2014 increased by over 450% to $3.75 billion while the China’s net gold imports from Hong Kong declined in August to the lowest since May 2011. Hence, the overall physical demand counter is weak; however with the upcoming buying season in India, the Indian market players expecting higher buying due to the upcoming festival and marriage season together with the lower prices’ support.

From the technical perspective, the breakout from the descending trend channel on the Daily Chart and a reversal from important support level signals additional hike of the gold prices towards the $1265 region where 100-day EMA and 61.8% Fibonacci Retracement level of its January-March up-move resides. Moreover, a close above $1265 can cause the yellow metal to rally till $1295 – $1300, which has been a crucial medium-term zone. Alternatively, a plunge below $1230 can cause it to test $1200 and $1182 levels, breaking which chances of near-term up-move can be negates with the metal prices expected to test sub – $1150 levels.

GOLDDaily 16102014

To sum up, uncertainty surrounding the global growth and deflationary pressure at some of the developed world can continue supporting the safe haven demand of the gold. Further, the speculation concerning interest rate hike by Federal Reserve, which have been fueling US Dollar and weakening Gold prices, is also fading after the recent FOMC release, which in-turn can support the gold prices which generally trades in reverse direction to US Dollar strength.

Moreover, the festival season at the world’s second largest consumer, India, and the on-going geo-political crisis at Ukraine and Hong-Kong, can also provide considerable support to the gold prices.

However, should the Federal Reserve, in its meeting on 28 – 29 October, completes its asset purchase after a final tapering of $15 billion  and conveys a message to alter interest rates, the US Dollar can regain its strength and provide considerable weakness to the Gold prices.

Follow me on twitter to discuss latest markets events @Fx_Anil


Anil Panchal
Market Analyst
Admiral Markets

At any use of the analytical material taken from the site of company Admiral Markets, and the secondary publication on any other resources, the rights to intellectual property for a dealing center «Admiral Markets», the reference to the company site is obligatory.

Technical Outlook: Important JPY Pairs

Ever since the IMF downgraded its forecast for global growth, during last week, safe haven demand for the Japanese Yen helped the currency to register considerable strength against majority of its counterparts. However, with the Japanese markets closed on Monday and having no important data during the rest of the week, the currency is more likely to follow its technical traits.

Also Read: Can The US Dollar Witness Renewed Strength?

Meanwhile, the following is a brief technical overview of EURJPY, GBPJPY, AUDJPY and CADJPY pairs.


EURJPY is currently trading near the important horizontal support zone comprising 135.60 – 135.50 region. However, considering the downward slanting RSI and the strength of JPY, it is more likely that the pair can plunge to 76.4% Fibonacci Retracement of its November 2013 to December 2013 up-move, near 134.60 level. Should the pair declines further and closes below 134.60, it becomes vulnerable to test 133.50 levels before testing 132.50 support. Alternatively, a reversal from the important support region can pullback the pair towards 136.30 and 61.8% Fibo. level near 136.80 before rallying to 137.90 -138 resistance zone, encompassing 200-day EMA. On the sustained break of 138, the pair can rally to surpass 139.20 levels.


Even after a break of 200-day EMA, the GBPJPY couldn’t decline further as the ascending trend line support, near 170.30, restricts the pair’s downturn. Moreover, RSI reversal from the oversold region is also supporting the chances of the pair’s pullback. Should it closes above 170.30 level, it is more likely to test 50% Fibonacci Retracement, connecting its February- September rally, near 171.30 level before rallying to 172.10 and 172.60 levels. A sustained trading of the pair above 172.60 can give rise to expectations of 173.80 level re-test. On the downside, a close below 170.30 can cause the pair to test 61.8% Fibo. level, near 169.50, before plunging to 168.80 and 167.40 which includes 76.4% Fibo. level. Should the pair continue trading below 167.40, it is likely to extend its downturn towards 166 level.



Last week, AUDJPY breached important support zone, 94.60 – 94.70, including 200-day SMA and 38.2% Fibonacci Retracement Level of its February- September 2014 up-move, which increased chances for the pair to test 92.80 level. On the extended downtrend below 92.80, the pair can plunge to 61.8% Fibo. level near 92.20 before testing 91.30 level. On the upside, a close above 50% Fibo. level, near 92.50, can give rise to expectations that the pair can re-test 94.60 – 94.70 resistance zone. Moreover, a sustained trading above 94.70 can cause the pair to test 95.30 levels prior to testing 100-day SMA near 95.80.


Having breached 95.30 – 95.25 support zone yesterday, coinciding 100-day SMA and 50% Fibonacci Retracement of its March – September 2014 upturn, the pair plunged below 94.15 support level today which includes 200-day SMA and 61.8% Fibo. level, by giving rise to expectations of a 93.70 ascending trend-lie support re-test. Should the pair closes below 93.70, it is expected to test 76.4% Fibo. level near 92.80; however, 93.20 can become intermediate support. On the break of 92.80, the pair can find multiple supports near 92.00 – 92.10 support zone. On the upside, the 95.25 – 95.30 region becomes critical for the pair, breaking which 95.50, 96.10 and 96.30 (comprising 38.2% Fibo. level) can become subsequent resistances for the pair. A break of 96.30 negates the chances of short-term downtrend by the pair and makes it vulnerable to rally towards 97.60 levels.

Anil Panchal
Market Analyst
Admiral Markets

At any use of the analytical material taken from the site of company Admiral Markets, and the secondary publication on any other resources, the rights to intellectual property for a dealing center «Admiral Markets», the reference to the company site is obligatory.

Technical Outlook: Important JPY Pairs
Technical Outlook: Important JPY Pairs

GBPJPYDaily 15102014AUDJPYDaily 15102014CADJPYDaily 15102014

Next Stop for the Paper Money Printing Press…

Next Stop for the Paper Money Printing Press…
Next Stop for the Paper Money Printing Press…
When we asked our readers what they enjoy reading the most on Profit Confidential, less than 10% of them said they like to read about the eurozone. We understand it’s not a topic of interest with the majority of our readers, but I can’t stress enough that what’s happening in the eurozone right now is very critical to the U.S. economy. 

American-based companies have massive operations in the eurozone and generate significant portions of their sales from the region. American companies are already struggling to post revenue gains in 2014. If the economic slowdown in the eurozone continues, American companies’ revenues will be pressured further, and that means lower corporate earnings. 

While giving its 2014 outlook during it first-quarter earnings release, Caterpillar Inc. (NYSE/CAT) said, “The Eurozone economy is recovering but is far from healthy. The ongoing decline in business lending, slowing inflation and recent strengthening in the euro are all concerns. The unwillingness of the ECB to take more aggressive actions risks leaving the economy struggling for years. Continued weak growth would make it difficult for businesses to maintain existing operations, let alone make new investments.” (Source: “Caterpillar Reports Higher First-Quarter Profit Per Share and Raises its 2014 Profit Outlook,” Caterpillar Inc. web site, April 24, 2014.) 

But when you listen to the mainstream media, they are saying the opposite of Caterpillar; they are saying the economic slowdown in the eurozone is over. I think they are completely wrong. 

And the situation with “bad debt”—the reason the eurozone got into trouble in the first place—is getting worse, not better, as debt-infested countries like Spain and Italy are seeing their bad debt increase. 

Italy’s bad loans amounted to 164.6 billion euros in March compared to 162 billion euros a month earlier. As a portion of total loans outstanding at the Italian banks, bad loans amount to 8.6%—the highest level since November of 1998. (Source: Reuters, May 20, 2014.) 

All the bad loans in Italy are keeping banks away from lending more. In fact, according to the Italian Banking Association, lending by Italian banks declined for the 24th straight month in April. Loans to families declined 2.2% in April after declining 2.1% in March. 

Spain, the fourth-largest economic hub in the region, is experiencing similar conditions. Bad debt compared to total debt was 13.4% in March. Lending in the country declined as well. (Source: Reuters, May 19, 2014.) 

Bad debt is just one problem for the eurozone; the economic slowdown in the region continues to take its toll. France’s unemployment is severely high, and its growth is next to nothing. 

The eurozone crisis is far from over. When we hear statistics like the ones I’ve just mentioned above, it becomes more evident to me that the European Central Bank (ECB) will eventually be forced to follow the same path as the Federal Reserve and the Bank of Japan—print more money to keep the economy going. 

This article Next Stop for the Paper Money Printing Press… was originally posted at Profit Confidential

Ted Dixon: What Gold Stock Insider Trading Tells Us

Despite the recent big gains in gold stocks, company insiders and institutional investors are still 2.5 times more likely to be buyers than sellers. According to Ted Dixon, co-founder and CEO of INK Research, this shows that those in the know are still quite bullish, despite the pullback in March. In this interview with The Gold Report, Dixon names the top insider buyers by dollar amount and by volume and explains how investors should interpret this data. 

The Gold Report:The price of gold fell more than 6% in March. To what do you attribute this? 

Ted Dixon: Gold took a one-two punch in late March. The first was the widening of the renminbi trading ban in China by 2%, which added extra costs to buying and hedging gold. The second was the surprisingly hawkish tilt of the U.S. Federal Reserve, pointing to interest rates rising a little bit sooner. Tighter monetary conditions do not usually benefit gold. 

TGR: Increased import duties in India haven’t reduced gold buying there. Why would China be different? 

TD: I think the flows are different. In China, there is a lot of financial activity related to gold, whereas in India gold buying is cultural and driven by consumer consumption. 

TGR: We’ve heard about greatly increased governmental buying in China, have we not? 

TD: There have been rumors of that, and the Chinese media has called for the government to boost its gold reserves. That could provide a longer-term counterbalance to the shorter-term renminbi pressure. 

TGR: DataQuick’s latest U.S. national homes sales snapshot shows that “prices are flatlining or drifting lower while sales are sinking like a stone.” Meanwhile, “The big private equity firms [are] exiting the [housing] market.” These data don’t suggest a U.S. economic recovery, do they? 

TD: Basically, insiders are telling us that stock prices now have priced in a lot of good news, so it would be interesting to see how they react to whips to the downside. One has to be cognizant that much of the U.S. equities rally has been driven by the Fed and, arguably, has little to do with GDP growth one way or the other. 

TGR: With regard to this hawkish tilt, it has been assumed for several years that we’d see higher interest rates and an end to quantitative easing (QE) only after an economic recovery. Given how weak the U.S. economy remains, can we assume that the Fed believes it is close to exhausting the utility of zero interest rates and quantitative easing? 

TD: The Fed has a big ticking time bomb on its balance sheet. It is still piling up reserves, and I’d love to be a fly on the wall in staff meetings that don’t get reported. I have to assume there is much concern about what happens to those reserves, particularly if the economy does surprise on the upside. In this sense, the low-altitude economy has been a blessing for the Fed. 

We may have a little game of bluff going on here. The Fed is taking a hawkish stance now, saying it has to move rates up earlier, but, of course, if the economy remains weak, and the Fed has to backtrack, that opens up risks on the other side. The Fed has been running a big monetary policy laboratory over the past few years, and sometimes in laboratories accidents happen. At this point, however, the stock market seems to have assigned a very little risk premium to something bad happening. 

TGR: It has been argued that if you remove the Fed’s monthly stimulus from the monthly GDP report, GDP is actually shrinking, not growing. 

TD: The Fed has certainly manipulated the economy. It has picked its favorite sectors, housing and autos. I believe that Operation Twist and QE have hurt the commodities base because they have favored interest-sensitive industries. Now, however, these industries will have to stand on their own two feet, and we’ll see how this experiment in industrial policy works out. Usually, planned economies have a day of reckoning when stimulative measures run out of steam. 

TGR: Your company, INK Research, tracks the legally reported buying and selling by public company executives and institutional investors. What does this tell us about the status of individual companies in particular, and the gold sector in general? 

TD: In general, U.S. market-insider indicators have been languishing at 25% for a long time. Insiders do not see very many bargains. This suggests that value strategies are going to be very important going forward if you’re looking to make money in the broad market. 

A year ago, in the gold sector, insider buying went through the roof as the prices of gold and gold equities tumbled down. This was a bit early, but it basically confirmed a bottom in the equities last spring. The S&P composite gold index finally moved above 1,800 and then pulled back, with some insider selling into that run-up. We’re seeing a measured profit taking. It’s nice that there can be some profit taking in the gold sector, given how beat up it’s been, but money has come off the table, and that could foreshadow some short-term weakness. 

TGR: As of March 24, 2014, your INK sentiment indicator of Toronto Stock Exchange (TSX)-listed stocks is 85.2%. What does that figure mean? 

TD: It means there’s less insider buying than trading. At 100%, you have an equal amount of insider buys and sales. So the indicator rating is Overvalued. 

TGR: For the TSX Venture-listed stocks in total, the figure is 341.1%. 

TD: Right. That includes not just gold stocks but also the other miners and technology and energy juniors. But the TSX Venture Exchange is heavily weighted toward junior mining. 

For the overall TSX gold sector, the indicator is 250%. So we’re seeing 2.5 companies with insider buying for every one that’s selling. This means that gold stock insiders are still quite bullish, despite the recent pullback. 

TGR: And that indicator reading equals Undervalued? 

TD: Right. The junior miners have been toughing it out for years. The TSX Venture Index moved 20% above its 2013 lows in March, and it’s been a long time coming. The insiders were early, but they’re not packing their bags now. 

TGR: You publish a list of Top 50 Insider Buys by dollar amount over the past 60 days. What’s the significance of this? 

TD: The dollar amount is a good initial screen to examine. Of course, you want to look at it with regard to the overall market cap of the company. So $1 million ($1M) bought in a large-cap company is not as significant as $1M bought in a medium- or micro-cap company. We also look at both the company’s valuation and its price direction because they put the insiders’ signals in context. 

For example, if a stock is going up and there’s a lot of insider buying, that could mean insiders are buying into the news. On the other hand, if the stock has fallen and there’s a lot of insider buying, that could signal a value opportunity, that the market has overreacted. Then you want to dig a little deeper and see who specifically in the company is doing the buying. 

TGR: Which gold and silver miners are in the Top 50 insider net buying by dollar volume as of March 24? 

TD:B2Gold Corp. (BTG:NYSE; BTO:TSX; B2G:NSX) is No. 13 with $579,106, Wildcat Silver Corp. (WS:TSX.V) is No. 17 with $411,030, Premier Gold Mines Ltd. (PG:TSX) is No. 18 with $401,660, Barrick Gold Corp. (ABX:TSX; ABX:NYSE) is No. 25 with $335,720, IAMGOLD Corp. (IMG:TSX; IAG:NYSE) is No. 32 with $221,188, Treasury Metals Inc. (TML:TSX) is No. 35 with $192,760, Rusoro Mining Ltd. (RML:TSX.V) is No. 38 with $154,600 and Roxgold Inc. (ROG:TSX.V) is No. 48 with $120,000. 

TGR: To what extent can insider buying be attributed to confirmation bias? In other words, this must be a good company, otherwise I wouldn’t be working for it. 

TD: That is something to be aware of. There may be examples of that, but we find that insiders tend to buy when they think they can make money. They are usually pretty picky, and they usually like to spot opportunities for bargains. And one has to keep in mind again that insiders tend to be early, and I think that’s a more important consideration than confirmation bias. 

The one big exception to this is when companies issue good news, and insiders buy. This could be a signal that the market hasn’t yet fully priced in that news. 

TGR: Pretty much every company in the list above has seen a significant share price fall in the second half of March. To what extent, particularly among the juniors and the micro caps, could insider buying be seen as an attempt to bolster investor confidence? 

TD: That’s why we must look at each stock individually. In addition, it’s best to look at insider signals on a portfolio basis. We’ve found that when investors have a portfolio of stocks that use insider signals as a key input, they are going to have a few big winners, a number of stocks that do better than the market and a number that do worse. Investors certainly want to avoid the tendency to zero in on one company on an insider-buy basis and then put all their eggs in one basket. That would not be prudent. 

TGR: How often do you track insider buying and selling? 

TD: All our indicators are updated overnight, like a rolling poll. They are aggregated across the sectors, so they tend to even out company-specific situations. We update individual companies daily because, as I mentioned, when a news release comes out, it could change company fundamentals. So we want to see how insiders react to that change. 

TGR: How about Barrick, in particular? It took a hit March 24 after a Barron’s article cited a Credit Suisse Group analyst who continued to rate Barrick and Newmont Mining Corp. (NEM:NYSE) shares Neutral. Would the insider buying and selling in the days after this event be pretty significant? 

TD: In our view, it would be. We don’t consider analysts ratings’ in our models, but investors can do both and compare, if they like. 

TGR: What does it tell you when Barrick has had so much bad news lately, and yet it appears in the Top 50 list of insider buying by dollar amount? 

TD: Well, insiders as a group are suggesting that the prospects for Barrick going forward are likely pretty good. It doesn’t mean the numbers wouldn’t get dragged down should the gold price take a tumble, but there’s enough insider buying there for us to have put Barrick in the top 30% of all stocks we rank. Our rankings are not an investment recommendation, of course. 

TGR: How about other majors? In your interview with The Gold Report last year you said that it was “nice to see” that Goldcorp Inc.’s (G:TSX; GG:NYSE) chairman had bought shares. How does this company look in that regard lately? 

TD: We’ve seen with Goldcorp some insider selling related primarily to insider compensation. It’s not unusual, but it has taken place at the same time as the post-December rally. Insider holdings at Goldcorp have remained fairly steady. 

TGR: Which gold and silver miners are in your Top 50 insider net buying by share volume over the last 60 days as of March 24? There seem to be a lot of names, so how about only those in the first 25? 

TD: Rusoro is No. 3 with 5,155,000; Quia Resources Inc. (QIA:TSX.V) is No. 6 with 3,920,000 shares; Manson Creek Resources Ltd. (MCK:TSX.V) is No. 17 with 1,679,500 shares; Currie Rose Resources Inc. (CUI:TSX.V) is No. 18 with 1,500,000 shares; Crown Gold Corp. (CWM:TSX.V) is No. 19 with 1,500,000 shares; Eskay Mining Corp. (ESK:TSX.V) is No. 20 with 1,460,000 shares; and Silver Predator Corp. (SPD:TSX) is No. 22 with 1,395,000 shares. 

TGR: How significant is this data? 

TD: Actual volume is another good first screening, but most of the companies that appear here tend to be small. When stocks are light traders with market caps under $20M, you’ve got to do more homework to ascertain what might be motivating insider activity. Is this company a value proposition, or is something else going on? You want to take a good look at the company’s management and its cash position. 

TGR:Arian Resources Corp. (ARC:TSX.V; 0GT1:FSE) closed a $2.78M private placement March 24. Of the 18M units sold, 800,000–that’s $120,000 worth–were bought by members of that company’s advisory board. What does this data tell us? 

TD: I can’t comment on a specific transaction, but, in general, when there are private placements you want to look at the terms. If they are reasonable, and management is participating, then it’s positive. But, of course, every deal is different, so that’s why we focus on public-market activity, which is more of a standard measure. 

TGR: Your Top 3 INK Edge Quick Wins Q4/13 has Wesdome Gold Mines Ltd. (WDO:TSX) at No. 3, up 50%. What can you tell us about this? 

TD: Our Morning Hour Report stocks use our INK Edge process, which looks at insider activity, valuation and price rank. We call it VIP criteria of valuation, insiders and price, and what we’re looking for is the stocks that have insider buying that are good value and have good price strength. That’s what we scour the market for every day. 

TGR: So based on your various indices, which stocks stand out in insider buying, good value and good price strength? 

TD: I’ll repeat the caution that investors should take a diversified approach. I’ve already mentioned Barrick, which ranks quite well on our screens. Looking at other stocks with high amounts of key insider buying as of March 24, the company with the second-highest amount over the last 30 days is Endeavour Mining Corp. (EDV:TSX; EVR:ASX); it also has a mostly sunny outlook according to our INK Edge, which puts it in the top 30% of all stocks ranked. 

Teranga Gold Corp. (TGZ:TSX; TGZ:ASX) is also in our top 30% of all stocks ranked. It has a mostly sunny INK Edge outlook. Arian Resources is No. 4 in insider buying and Amarillo Gold Corp. (AGC:TSX.V) is No. 5. But we do not rank the last two stocks due to their small sizes. These might be stocks for investors with very high risk tolerances to take a look at. 

TGR: Ted, thank you for your time and your insights. 

Ted Dixon is co-founder of INK Research (Insider News and Knowledge), Canada’s first online financial news and research service dedicated to providing data on public company insider trading. (Free services are found on and He worked previously for Connor, Clark & Lunn Financial Group in portfolio strategy and product development, the Fraser Institute as an analyst, TD Bank as a treasury specialist and the Vancouver Stock Exchange as a floor trader. He has lectured in corporate finance at the BC Institute of Technology and is a Chartered Financial Analyst and member of CFA Vancouver. He holds a Master of Business Administration in financial management from the University of Chicago. 

Want to read more Gold Report interviews like this? Sign up for our free e-newsletter, and you’ll learn when new articles have been published. To see recent interviews with industry analysts and commentators, visit our Streetwise Interviews page.

Source: Kevin Michael Grace of The Gold Report  (4/7/14)

Raymond James’ Pavel Molchanov Sees Stars in the Expanding Cleantech Universe

  cleantech, an outperformer in the energy space since 2012, experienced a major expansion phase in 2013 that is still unfolding. In this interview with The Energy Report, Raymond James Energy Analyst Pavel Molchanov points to companies with innovative technologies, strong balance sheets and financial flexibility as examples of low risk with high-flying rewards. Find out about his strongest Buy recommendation, as well as a special situation in big oil. 

The Energy Report: Let’s talk about growth in the energy sector. How well is the cleantech investment sector positioned during the next six to eight quarters? 

Pavel Molchanov: The cleantech index has been the best performer of the energy indexes over the past two years. Since the beginning of 2012, cleantech has outperformed oil services, E&P companies and MLPs, and has dramatically outperformed coal. 2012 was a tough year for the cleantech space. But 2013 was fantastic, and year-to-date cleantech is outperforming again, despite the choppy market. I doubt that cleantech will continue to perform at this pace during the next two years, but there are many opportunities. In 2013 the cleantech index was up 58%, but there were plenty of stocks that doubled and even tripled. There were also stocks that were cut in half. This is a stock picker’s market. 

TER: Do you categorize cleantech stocks as intrinsically high risk? 

PM: There are a number of cleantech companies at the low end of the risk spectrum, so we have to look at them case by case. As a matter of investor perception, the cleantech space appears to have a fair amount of volatility, and in some cases it does have a very high beta. But generally speaking, cleantech stocks, like most tech stocks, will outperform in a bull market and underperform when the Dow is under pressure. 

TER: What cleantech companies do you like right now? 

PM: EnerNOC Inc. (ENOC:NASDAQ) is currently my strongest Buy recommendation in cleantech. It is at the lower end of the risk spectrum, and it has done quite well for two years. It is still not priced for perfection, currently trading at about six times EBITDA. The company has no debt, and it has been throwing off free cash flow year after year. 

TER: What is EnerNOC’s business? 

PM: EnerNOC is an energy software company that fits nicely into the cleantech category because it enables energy efficiency solutions using proprietary technology. In other words, it is not weatherizing windows, or building diesel generators. It uses advanced software to improve stability on the grid. EnerNOC connects utilities to commercial and industrial power users and enables demand-side energy efficiency solutions, particularly when the grid is in crisis. Imagine a hot summer day when the grid is overburdened. Normally, there could be rolling blackouts. EnerNOC prevents blackouts with its automated demand-response software. It is essentially a service company with regularly recurring revenue, and it earns extra revenue during times of crisis on the grid. 

It has created a nicely diversified revenue mix. In 2010, it only operated in the U.S. Last year, 20% of its revenue came from Australia and New Zealand. And in the last 90 days, it has expanded into Japan, Germany, Austria and Ireland. Demand response is an effective strategy for countries such as Germany that generate a high amount of renewable power. Renewables can be intermittent on the grid; demand response reduces this intermittency by filling in the gaps. 

TER: Is EnerNOC’s software proprietary? 

PM: Absolutely proprietary. A secret sauce, so to speak. 

TER: Does it have competitors? 

PM: EnerNOC has competitors in all its markets, but it is the largest demand-response provider in the world. In the U.S., it enjoys a 30% market share. There are other demand-response companies out there, but they are either not public, or they are not pure plays. Johnson Controls Inc., for example, runs a demand-response business, but it is a small part of a very big company. 

TER: Does EnerNOC pay dividends? 

PM: No dividends, though it throws off so much free cash that it could. The firm does have a very acquisitive track record, and most recently it has been implementing a share buyback program. 

TER: Do you have a target price for EnerNOC? 

PM: EnerNOC’s share price has doubled in the past year. Right now it is at $21/share and we have a $26/share target price on it. 

TER: What is new in solar power? 

PM: 2013 was a good year for the solar industry. It was a year of recovery after the tough years in 2011 and 2012. Two big swing factors in 2013 were China and Japan. China became the largest solar market in the world because the government dramatically ramped up domestic installation of solar. Japan became the second biggest market because it also prioritized solar adoption. 

There are various dynamics informing these new pro-solar policies by both of these nations. China wants to provide a backdoor bailout to its troubled solar manufacturers, but there is also an environmental element at work amid the epic pollution. Japan, on the other hand, is literally running out of power. After the Fukushima disaster and the shutdown of the country’s nuclear industry, it needs every watt it can generate, and solar is a big part of that. In 2013, global solar installations totaled approximately 35 gigawatts. That may not be dramatic, but it was up 12% compared to 2012 levels. 

TER: Do you have any picks in the solar power sector? 

PM: We like a billion-dollar company called Advanced Energy Industries Inc. (AEIS:NGS; AEIS:BSX). It makes inverters, the cash registers of solar energy systems. Inverters connect the generating system to the grid. Inverter manufacturing is a competitive market; there are a lot of players, including some new entrants. But it is experiencing a more benign form of competition compared to companies that make cells and modules. The gross margin structure for inverter companies is around 25% to 30%, which is double the typical margin for module makers. 

Advanced Energy is not 100% solar, though. It has a legacy semiconductor capital equipment business that makes up half of its revenue. The solar inverter business is the other half of revenue, but the solar part of the sales mix is growing much faster than the semi. We are looking for earnings of over $2 in 2014. The stock is in the mid-twenties and trading at a relatively moderate multiple. The firm is debt-free and throwing off a lot of free cash flow. Like EnerNOC, Advanced Energy is using some of that cash to make creative acquisitions. 

TER: I take it you’re not too bullish on module manufacturers. 

PM: Generally, no. Although we look at each company individually, the module assembly part of the value chain in the solar space does not excite me. Low-cost players can have slightly better-than-average margins, but it is a pure commodity market with very little technological differentiation. By contrast, a company like Advanced Energy has a lot of proprietary intellectual property. 

TER: What about residential and business delivery of solar power? 

PM: SolarCity Corp. (SCTY:NASDAQ) is the largest U.S. provider of residential solar systems. It is very well known for the success of its solar leasing model. Solar leasing is done by lots of companies, but SolarCity is the biggest. And SolarCity was one of the very best performers in cleantech in 2013. The stock has done amazingly well since its IPO in late 2012. Although it is certainly not cheap, there are many positive elements to the company, including a predictable recurring revenue model tied to its 20-year lease contracts. 

SunPower Corp. (SPWR:NASDAQ) has a footprint in module manufacturing and also in the residential solar leasing arena. I suspect that during the next 12 months there will be a slew of solar leasing firm IPOs. Given the multiples at which SolarCity trades, its competitors must be salivating to go public. 

TER: What about biofuels? Any picks there? 

PM: Biofuels have morphed into a broader arena called bioindustrials. Biofuel companies are now trying to sell high-value materials into specialty markets. Selling the higher-value products provides more profit than competing directly with petroleum fuels. For example, KiOR Inc. (KIOR:NASDAQ) is a cellulosic fuel company that was trying to compete with commodity fuels. Unfortunately, KiOR ran into operational difficulties last year. Given the current state of its operations and its rather strained balance sheet, I am not steering investors to the KIOR stock currently. 

Solazyme Inc. (SZYM:NASDAQ) is a more promising story at the moment. Solazyme is an industrial biotech company that uses algae technology to make high-value products. It is currently selling cosmetics in the skincare market. That is a very different market from the biofuel arena. These types of products have higher-value pricing and lower volumes. In the next few weeks, Solazyme will be opening the world’s largest algae-based oil production plant in Brazil. Eventually the company may get into biofuels, but that is not its present priority. 

TER: What about the more traditional oil and gas arena? 

PM: Raymond James’ view on oil prices is that there will be downward pressure on oil over the next 12 to 18 months. We are concerned about the possibility of an emerging global oil oversupply, particularly in the U.S., given the surge of domestic production. We are below consensus in our oil price forecast. In that context, the stocks that we generally prefer in oil and gas tend to be more defensive companies that have better capital discipline, pay dividends and buy back shares. In other words, we like companies that live within their means and have strong balance sheets and financial flexibility. These tend to be larger companies as a general rule. 

TER: Like whom? 

PM: I am a big fan of Chevron Corp. (CVX:NYSE). Its stock has been beaten down year-to-date. Not so much because of oil prices, but because the company is spending $11 billion ($11B) this year out of a total $35B dollar capital budget on two LNG megaprojects in Australia. Gorgon LNG is set to start up in 2015, and Wheatstone LNG in 2016. Because of these two megaprojects, Chevron is targeting nearly 5% annualized production growth in 2015, 2016 and 2017, which is by far the fastest in its peer group. And as production grows and capital spending flattens, the firm’s free cash flow metrics should improve significantly—which is why I really like this stock. 

TER: Any others? 

PM: InterOil Corp. (IOC:NYSE) is a special situation in oil and gas that has my attention. The company resides in the higher end of the risk spectrum and it is definitely far from a dividend story. It has a $3B market cap. It is a preproduction E&P company that discovered one of the biggest gas fields in the South Pacific more than five years ago. It is now developing the gas field through a partnership with Total S.A. (TOT:NYSE), which is a major oil and gas company based in France. 

Total and InterOil announced this partnership in December of last year and recently finalized all the terms. InterOil has received a $401 million cash payment for selling a portion of its gas to Total. InterOil will also have a stake in an LNG plant slated to be built as a part of the project. 

TER: Do you have a target price on InterOil? 

PM: InterOil’s stock is trading in the sixties, and we have a $100/share target price. High-risk, high-reward. 

TER: Thanks for your time today, Pavel. 

PM: Thank you. 

Pavel Molchanov joined Raymond James & Associates in 2003 and began work as part of the energy research team, becoming an analyst in 2006. He initiated coverage on the alternative energy/clean technology sector in 2006, followed by the integrated oil and gas sector in 2009. Molchanov has been recognized in the StarMine Top Analyst survey, the Forbes Blue Chip Analyst survey, and The Wall Street Journal Best on the Street survey. He graduated cum laude from Duke University in 2003 with a Bachelor of Science degree in economics, with high distinction, writing his senior honors thesis about OPEC’s oil output policies. 

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Source: Peter Byrne of The Energy Report  (4/3/14)

How Did High Flyers Turn into Soul Searchers? Maxim Analyst Jason Kolbert on the Highs and Lows of Biotech Valuations

After soaring more than 56% last year, the NASDAQ Biotechnology Index is down almost 15% in March. In this interview with The Life Sciences Report, Jason Kolbert of the Maxim Group points to increased approval rates and a better economic and regulatory environment as the fundamentals behind a revaluation that has occurred in the sector. Kolbert also reflects on recent concerns about pricing and policy changes that have triggered what he considers a normal, healthy correction in an otherwise robust and intact sector. 

The Life Sciences Report: In a recent Equity Research Industry Report, you said, “We believe a revaluation of the sector is underway.” What is causing this revaluation and what does it mean for investors? 

Jason Kolbert: The value driver in the biotech sector is better products with higher efficacy and fewer side effects, which in turn drives a higher rate of regulatory approvals. Historically, the biotechnology industry and the stocks in the space have had the essence of gambling—high risk and high reward. A company’s success and performance largely hinge on its ability to develop a pipeline of drugs and to achieve regulatory approval (i.e., survive the regulatory environment—in this case the U.S. Food and Drug Administration [FDA]). The fact that the number of FDA approvals for the past three years has been trending positively is a great sign for the biotechnology space. Forbes reported that the FDA has quickened its pace of new drug approvals, approving an average of 32 new drugs annually over the past three years, significantly higher than the historical annual average of 24 from 2000 to 2010. We believe these higher numbers may continue over the next few years. 

TLSR: Was the upward trend based solely on the number of drugs being approved? 

JK: Industry success hinges on much more than just quantity. The quality of drugs being approved makes a huge difference. 

TLSR: What are some examples of drugs that could be an improvement over the current standard of care? 

JK: Industry experts and the management teams of the companies we follow tell us that recently approved drugs like Gilead Sciences Inc.’s (GILD:NASDAQ) Sovaldi and Medivation Inc.’s (MDVN:NASDAQ) Xtandi, as well as those still in the pipeline, have the potential to offer significant improvements over existing alternatives, and bolster both industry sales and investor confidence. In the cell therapy space, we believe that Mesoblast Ltd.’s (MSB:ASE; MBLTY:OTCPK) Revascor andAthersys Inc.’s (ATHX:NASDAQ) MultiStem have the potential to completely change existing treatment paradigms. 

TLSR: Why does it seem that more of the drugs in the pipeline today are targeting rare diseases? 

JK: This is an important shift in the drug development field. These drugs are granted special status by the FDA. The result is limited competition, enhanced intellectual property life and an increase on the return on investment. Furthermore, these drugs are able to access a more favorable regulatory pathway designed for therapies that represent a significant advance over standard of care, or an overall benefit to society. The result is an accelerated development-and-approval timeline to market. With a growing portion of drugs fitting into this category, we expect to see further outperformance in the sector. 

TLSR: Why have we seen more merger-and-acquisition (M&A) activity recently? 

JK: The recent $25 billion acquisition of Forest Laboratories Inc. (FRX:NYSE) by major specialty pharmaceutical company Actavis Inc. (ACT:NYSE) may be partly responsible for the increase in valuations for related companies, such as Teva Pharmaceutical Industries Ltd. (TEVA:NASDAQ). A growing proportion of these large-cap pharmaceutical and biotech companies are engaging in M&A activities as they seek out size and achieve efficiency of scale. The large caps are often focused on smaller companies in the rare disease drug arenas for the reasons we’ve already mentioned, to help compensate for projected revenue losses resulting from the recent expirations of key patents. 

TLSR: The biotech initial public offering (IPO) market has been active in the last year after some lean years for new public company launches. What is behind that change? 

JK: We saw 37 life science companies go public in 2013, and 24 IPOs have already been underwritten this year. We see several underlying drivers. First, M&A activity has reduced the number of publicly traded small and or independent biotechnology companies. This limited supply has led to a high demand for small- and mid-cap names and, in turn, driven an oversubscription of many of the recent offers. This only encourages an already robust IPO market. 

We also note that generalist fund managers and even individual investors have been increasing their exposure to the biotechnology industry, driven by an increased risk appetite and eagerness to chase high-return profiles. The rise of stocks like Pharmasset Inc. (acquired by Gilead) helped drive this trend. The success of Intercept Pharmaceuticals Inc. (ICPT:NASDAQ) is another example of the risks and rewards that the sector offers to investors (which make it unique in the field). The significant outperformance of the sector and the IPOs over the past year have caused generalists who otherwise normally shun the volatility of the space to get involved, generating an even greater demand for new biotechnology IPOs. 

Last but not the least, the Jumpstart Our Business Startups (JOBS) Act allows companies to prepare IPOs and test the waters to determine interest. This is one of many factors that have effectively reduced risk for companies looking to go public. The act has been a catalyst for a large number of the offerings this year—offerings that have been accumulating in the pipeline over the last few years as companies had difficulties accessing capital markets. As such, an economic recovery, a favorable regulatory environment and the JOBS Act have fostered a robust IPO marketplace in the sector. 

TLSR: Has all of this good news come to an end? What has happened over the last week or so to cause the sharp pullback we saw in the space? 

JK: I think we are seeing a normal, healthy correction. Markets and sectors don’t go straight up. Biotech markets got a shock when letters from congressmen questioned the price of Gilead’s Sovaldi as an expensive new drug for hepatitis C. What these letters fail to take into consideration is the overall efficacy and pharmacoeconomic value of new therapies like Sovaldi, which work better and have fewer side effects than predecessors. 

TLSR: When can we expect a return to upward valuations based on the fundamentals you have outlined? 

JK: Predicting biotechnology cycles has been close to impossible. The sector performed well in the late 1990s and early 2000s, and poorly in the late 2000s, and it has come back strong these past three years. The performance of the space seems correlated to both the overall economic conditions and macroeconomic policies. When there is more liquidity, and thus more easy money in the market, people tend to be increasingly willing to bet on the biotech industry, hoping that at least one of the companies they invest in will receive FDA approval for a drug that will become a blockbuster, in turn driving outperformance and revaluation of the originator company. 

Despite the increase in success stories these last few years, just a small fraction of companies were developing new drugs. While a large portion of recent outperformance has come from successful drug innovation and higher FDA approval rates, it also resulted from favorable monetary policy. As monetary policies may shift, this could dampen enthusiasm for biotechnology companies. 

This ties into a concern about whether the sector has the ability to retain investor interest and confidence. Further events that could trigger weakness across the sector include price controls for what some people deem expensive therapies (such as Gilead’s Sovaldi), the pace of innovation and the outcomes of clinical trials, such as Vertex Pharmaceuticals Inc.’s (VRTX:NASDAQ) combination trials in cystic fibrosis. Clinical failures, slowing industry growth and increased regulatory risk remain factors to watch as new targeted therapies with high efficacy rates and fewer side effects also progress to the marketplace. 

TLSR: Thank you for your time and comments. 

Jason Kolbert has worked extensively in the healthcare sector as product manager for a leading pharmaceutical company, as a fund manager and as an equity analyst. Prior to joining Maxim Group, where he is head of healthcare research, senior managing director and biotechnology analyst, Kolbert spent seven years at Susquehanna International Group, where he managed a healthcare fund and founded SIG’s biotechnology team. Previously, Kolbert served as the healthcare strategist for Salomon Smith Barney. He is often quoted in the media and is a sought-out expert in the biotechnology field. Prior to beginning his Wall Street career, Kolbert served as a product manager for Schering-Plough in Osaka, Japan. He received a bachelor’s degree in chemistry from State University of New York, New Paltz, and a master’s degree in business administration from the University of New Haven. 

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Source: Editors, Streetwise Reports  (4/2/14)

Looking for 1,000% Gains? Resource Investor Oliver Gross Has Some Junior Mining Names for You

The bottom is in, declares Oliver Gross of Der Rohstoff-Anleger (The Resource Investor), and the bulls are ready to charge. In this interview with The Gold Report, Gross says that the woefully undervalued juniors will exploit their leverage advantage, with best-in-class companies gaining as much as 500% to 1,000%—or more. And he lists more than a dozen gold, silver and copper companies most likely to soar. 

The Gold Report: Gold has fallen in the second half of March. Why? 

Oliver Gross: I think it’s a correction after the strong rally since December. And the situation in Ukraine has quieted down. We’ve also seen a strong uptrend since the beginning of 2014 and now it feels like a healthy consolidation. 

TGR: Since December, we’ve had a very significant rise in gold equities. What is the cause? Gold rising from $1,180/ounce ($1,180/oz)? Or is it a cyclical change? 

OG: It’s a combination of bottom-building in the gold price and the end of the bear market, which resulted in one of the heaviest selloffs ever. The gold equities [NYSE Arca Gold BUGS Index (HUI)] to gold price ratio hit a multidigit low in 2013 (HUI:Gold). We have a solid double-bottom formation in the gold price in place and the end of the selling pressure from the gold exchange-traded funds (ETFs) and exchange-traded products. 

We also see continuous strength in the physical gold market, especially the huge buying power from China, now the world’s largest gold consumer and producer. And you can assume that China isn’t a speculator regarding its aggressive purchases, but rather a prudent long-term investor. Maybe it has already developed a gold-backed yuan currency model that could be the new world currency. 

The first quarter is always very important for equities. More and more market players have now realized the tremendous performance potential in gold mining stocks and joined the recent rally. 

HUI:Gold Ratio (1996–2014) 

Looking for 1,000% Gains? Resource Investor Oliver Gross Has Some Junior Mining Names for You
Looking for 1,000% Gains? Resource Investor Oliver Gross Has Some Junior Mining Names for You


TGR: The NYSE Arca Gold BUGS Index has risen even as the broader market has been shaky. What do you make of that? 

OG: It wasn’t a surprise, as valuations in the gold mining sector were not far from complete depressions. In addition, the gold producers have reformed after the big selloff in their equities. We have noted a significant change in business philosophy and a newfound drive to create a more robust and sustainable business model. The gold producers have successfully changed their focus from growth at any cost to maximization of profitability, growth in capital efficiency and real shareholder value. 

The gold producers’ income margins at price levels around $1,300/oz are still extremely slim. So there is a fantastic leverage in place, and with higher gold prices, the margins are going to explode. With a new gold bull market, which could lead to gold prices far above $2,000/oz in the next two to three years, we might see new, all-time highs in the NYSE Arca Gold BUGS Index. But I believe the next bull market rally will be more specific and focused on the best-in-class stocks. 

TGR: Could we see the broader equities markets taking substantial losses, even as precious metal stocks increase in price? 

OG: That would make sense, as we have had a very strong bull market in the broad equity markets and a very tough bear market in precious metals and other mining stocks. 

TGR: The Market Vectors Junior Gold Miners ETF (GDXJ:NYSE.MKT) has risen significantly higher than the majors. Does this surprise you? 

OG: The Market Vectors Junior Gold Miners ETF fell from an all-time high of nearly 180 points at the end of 2010 to a historic all-time low of only 29 points at the end of 2013. So its strong rally didn’t surprise me. Most important has been the astonishing rise of trading volume. This is the key in every turning point. The juniors, with their low valuations, usually have far higher leverage, and that is the reason why we see even more volatility in both directions. 



It’s a very good sign that the juniors have outperformed the majors, as appetite for risk in the junior mining space is essential. We have seen a strong increase in financings and financing volumes in the junior gold equities market during Q1/14. That’s a very healthy development. 

TGR: There was a significant drop across the board in gold and silver equities in March. Was this mere profit taking, or have we reached an intermediate plateau? 

OG: It really feels that we have seen the bottom now, and the bottom-building process always takes some time. The next few years will be a very attractive period to invest in high-quality resource companies. 

TGR: How do you determine the price buy limits for the stocks you recommend? In other words, why are stocks good buys at one price and not another? 

OG: When it comes to choosing mining stocks, I put a strong emphasis on deep research and fundamental analysis. This is crucial in a market where more than 80% of all junior mining companies will ultimately fail. It’s all about quality and investors always have to be very, very picky in selecting picks that could become their favorites. 

After my thorough due diligence and conversations with managements and fund managers, I select my favorites, which I buy for the middle to long term. The other crucial factor is timing. For instance, you could have invested in the best-of-class companies from 2011–2013, and it wouldn’t have made any difference, as the whole sector was punished. But when the timing is right, which seems to be now, it doesn’t matter if an investor buys a great junior mining company at $1 or $1.50/share. 

TGR: What are the specific criteria you seek in your research and analysis? 

OG: I seek experienced and excellent management teams with strong track records and large networks; companies with healthy cash balances, solid financing outlooks and tight share structures with patient and successful investors; and projects that are decent-sized, attractive and well-located with exploration and expansion potential, projects that are economic even in low metal price environments. Aggressive project-development schedules are also very important. I also want to see strong and clear ambitions. 

TGR: What gold companies come to mind in this respect? 

OG:Columbus Gold Corp. (CGT:TSX.V) is led by very smart and prudent people. Most are well-versed geologists and genuine resource experts. Additionally, they have experienced financial experts and a strong network of investors and supporters. Columbus is developing one of the most promising early-stage gold projects in South America, the Paul Isnard project in French Guiana. 

Paul Isnard already contains a 5+ million ounce (5+ Moz) deposit. Exploration potential is outstanding. The resource contains a higher-grade ore body with decent grades of about 2 grams/ton (2 g/t) gold. The whole deposit is very flat and the continuity and quality of gold mineralization are favorable. There is still a lot of work to be done, but I see solid potential for a large-scale, very profitable gold mining operation. 

Columbus’ management acted to avoid heavy dilution yet develop its project on a fast track by making a deal with the Russian company Nordgold N.V. (NORD:LSE), one of the top 20 gold producers worldwide. It speaks for itself that four substantial gold companies are already involved in Paul Isnard: Nordgold and its well-capitalized project partner, the French producer Auplata S.A. (ALAUP:PA), mid-cap producer IAMGOLD Corp. (IMG:TSX; IAG:NYSE) and Sandstorm Gold Ltd. (SSL:TSX.V; SAND:NYSE.MKT), which bought a lucrative net smelter return last year. 

TGR: What else do you like in that region? 

OG: In Guyana, there is Sandspring Resources Ltd. (SSP:TSX.V) and its Toroparu project, which has 10 Moz gold and decent copper credits. I have tracked this company for years and decided to recommend it after its agreement with Silver Wheaton Corp. (SLW:TSX; SLW:NYSE). This is a game changer. I hear that Silver Wheaton selected Sandspring over 50 other juniors with decent gold assets. 

The overall economics of Toroparu project are pretty good, with a solid return on investment. It has great support from the Guyana government. With the Silver Wheaton agreement, Sandspring now has the funds to reach the feasibility stage. I also like the company’s high insider holdings, more than 25%. This is a perfect leverage play for me at its current valuation, as it will benefit greatly from what we expect will be a significant upturn in the gold price. 

TGR: What other regions do you like in South America? 

OG: I like the Antioquia Department in northwest Colombia, which is still widely underexplored. This is home to Continental Gold Ltd.’s (CNL:TSX; CGOOF:OTCQX) Buriticá project, one of the world’s best. It already boasts 6+ Moz of over 10 g/t gold and will soon publish a new resource estimate. I believe it will ultimately contain 10+ Moz. This could be a huge cash cow. 

Continental Gold has a great management team with a fantastic track record, including CEO Ari Sussman and Chairman Robert Allen, the company’s largest shareholder. In December 2012, Continental raised CA$86.3 million (CA$86.3M), a truly outstanding amount for a junior gold company. This financing avoided dilution and enabled one of the largest gold exploration programs in South America. With a current cash balance of more than CA$100M, the company is perfectly positioned to bring Buriticá to feasibility and the final milestones in the permitting process. 

TGR: Do you like any other companies in Antioquia? 

OG: Not far from Buriticá, Red Eagle Mining Corp. (RD:TSX.V) has found a lucrative, 5+ g/t gold ore body at its Santa Rosa project. Its key deposit, San Ramon, has very attractive economic numbers, even at lower gold price levels, and a fantastic return on investment. Also, there is great infrastructure access, which leads to positive cost reductions. Red Eagle is on track to reach feasibility this year. It also has great exploration and expansion potential at its huge flagship property. 

What really makes this special is the low capital expense (capex) of about CA$85M. Financing shouldn’t be a problem, as Red Eagle is backed by two financially sound, strategic investors that own more than 30% of the company. The first is Liberty Metals & Mining Holdings LLC, which is a daughter company of the insurance giant Liberty Mutual of Boston. The second-largest shareholder (after management) is Appian Natural Resources Fund L.P., a new mining-focused fund that is led by two successful former J.P. Morgan bankers. 

Red Eagle’s CEO, Ian Slater, is a smart and talented manager who has put together an amazing team that is doing fine community work in Colombia. 

TGR: This is a stock that is trading at only $0.335/share. 

OG: Absolutely great leverage there. It did its IPO at $1.25. 

TGR: Do you like any gold companies in Brazil?

OG:Brazil Resources Inc. (BRI:TSX.V; BRIZF:OTCQX). Its genius chairman is Amir Adnani, the mastermind behind Uranium Energy Corp. (UEC:NYSE.MKT). Brazil Resources is his new darling, and he has huge ambitions. The company has a strong team of resource experts and well-connected finance people, as well as an excellent share structure and shareholder structure. It is backed by the Brasilinvest crew, which has attracted funds of more than $16 billion ($16B) since its establishment. 

Other prominent investors and backers of Brazil Resources are the Casey Group and Sprott. So it’s a pretty good sign that most of the outstanding shares are in strong and highly qualitative hands. 

Brazil Resources owns a huge and promising land package of gold mining concessions in Brazil, including a multimillion-ounce gold resource with plenty of exploration potential. 

In addition, the company holds a highly interesting land package next to Fission Uranium Corp.’s (FCU:TSX.V) Patterson Lake South discovery in Saskatchewan. This project is in a lucrative joint venture with a uranium major, AREVA SA (AREVA:EPA), so it could be a very profitable offtake. 

One my friends from Vancouver is a strong supporter of this story: Mr. Gianni Kovacevic is a great investor with a huge network and the chief editor of The MEDAP Letter, which has Brazil Resources in its resource portfolio. 

With Brazil Resources we have a great team, very attractive projects, sufficient funds, first-class investors and a strong schedule. These are the fundamentals I want to see in a junior gold story. 

TGR: You mentioned ambitious management. Which other teams come to mind? 

OG: Two gold juniors I follow closely are True Gold Mining Inc. (TGM:TSX.V) and Pilot Gold Inc. (PLG:TSX). Both companies are led by the masterminds of Fronteer Gold, which was acquired by Newmont Mining Corp. (NEM:NYSE) in a $2.3B deal. The former president and CEO of Fronteer is Mark O’Dea, one of the most skilled managers in global junior mining. He is now the executive chairman of True Gold and the chairman of Pilot. Both companies are backed by first-class strategic investors and mining companies and have great financials. I really like the business philosophy and the strong ambitions of the stunning head management here. 

TGR: What can you say specifically about these companies and their projects? 

OG: True Gold is developing in Burkina Faso one of the most promising and profitable gold projects worldwide: Karma. It is already approaching mine financing and the start of construction. In gold mining today, it’s all about margin, and True Gold owns a margin leader with district-sized potential. 

Pilot Gold has had a very impressive gold discovery at its Kinsley Mountain project in Nevada this year. This could be a world-class gold deposit comparable to Fronteer’s Long Canyon deposit. In Turkey, the company is developing the huge TV Tower project, which is in a joint venture with resource giant Teck Resources Ltd. (TCK:TSX; TCK:NYSE). TV Tower seems to contain several decent gold, silver and copper deposits and has great development and exploration potential 

TGR: Do you like any other African companies? 

OG: My favorite among the major gold producers is Randgold Resources Ltd. (GOLD:NASDAQ; RRS:LSE). And I have a Buy rating on explorer Legend Gold Corp. (LGN:TSX.V), which has just joint-ventured with Randgold in an amazing land package below the biggest gold mine in Mali. 

TGR: And elsewhere in the world? 

OG: I have a Buy rating for junior producer Timmins Gold Corp. (TMM:TSX; TGD:NYSE.MKT). Its San Francisco gold mine in Mexico is one of the lowest-cost producers in the world. And I have a Buy rating for developer Dalradian Resources Inc. (DNA:TSX) in Northern Ireland. Its Curraghinalt project is one of the highest-grade gold projects in the world. 

TGR: You favor very few silver companies as compared to gold. Why? 

OG: When things get serious, gold is the best storage of wealth and the best protection against turbulence. Silver’s role will always be a combination of industrial metal and investment asset. And most silver supply comes from base metal mines as a byproduct, so its producers don’t really care about the silver price. 

Moreover, the silver market is extremely tight and thus even more so than gold subject to manipulation by the likes of J.P. Morgan, Goldman Sachs, HSBC and other influential players in the paper markets. I try to play the trends regarding the gold-silver ratio, which remains extremely high. If this trend reverses, I will buy more silver and silver mining stocks. 

TGR: It sounds as if you are sympathetic to the manipulation argument made by the Gold Anti-Trust Action Committee (GATA). 

OG: COMEX is the biggest gold exchange in the world and has by far the most influence on daily and short-term gold prices. J.P. Morgan and the others I mentioned are the biggest players in COMEX, and we can assume they have the biggest influence on daily and short-term gold prices. Facts don’t lie: J.P. Morgan and other big financial players control more than 80% of all precious metals derivatives and you can assume that these influential players always know about the crucial positioning at the COMEX. 

It seems that these players are always doing the opposite of what they say publicly. For example, Goldman published a gold report in 2013 in front of the huge selloff. It made more than $500M in this selloff, then turned around and reinvested heavily in gold. So it also made millions in the recent gold price recovery. Goldman has recently invested more than $80M in the SPDR Gold Trust ETF. We can assume that Goldman and J.P. Morgan are, in fact, long on gold. That also demonstrates to me that the gold price bottom is in. 



TGR: Which silver companies are you keen on? 

OG: I like two. The first is Wildcat Silver Corp. (WS:TSX.V). It is led by Richard Warke, the man behind the glorious Ventana Gold story, which was bought out for $1.56B in 2011. 

The company is developing the Hemosa project in Arizona, which has the potential to be the only large manganese producer in the U.S., as well as one of the largest silver producers in North America. 

Hermosa will reach the feasibility stage this year. Its economics are solid, and it should be a big cash cow, considering the next bull market and anticipated higher silver prices. Insiders own more than 30% of Wildcat. The company has also attracted Silver Wheaton as a strategic investor. Wildcat offers one of the best leverages on the silver price in a portfolio. Its valuation is far below $0.50 per silver ounce. 

TGR: And the second is? 

OG:Santacruz Silver Mining Ltd. (SCZ:TSX.V; 1SZ:FSE). This could be another First Majestic Silver Corp. (FR:TSX; AG:NYSE; FMV:FSE). Santacruz already achieved production at its Rosario mine in Mexico and has a tremendous portfolio of promising Mexican projects. I think Santacruz has the right people to succeed. 

TGR: Which companies stand out in the junior copper sector? 

OG: I like two in Arizona and one in Nevada. My favorite is Augusta Resource Corp. (AZC:TSX; AZC:NYSE.MKT) and its world-class Rosemont copper project near Tucson. Richard Warke is a director. Augusta is currently in a takeover battle with its largest shareholder, HudBay Minerals Inc. (HBM:TSX; HBM:NYSE). I believe that Augusta is worth more and remains a Hold recommendation. Mostly likely, a higher takeover price will be reached. When Rosemont gets its final construction permit—this should happen in Q2/14—it will lead to a lucrative revaluation.

TGR: What’s the other in Arizona? 

OG:Curis Resources Ltd. (CUV:TSX.V; PCCRF:OTCPK) and its Florence copper project. Like Augusta, Curis is in the final phase of the permitting process. I see excellent potential here for a revaluation after it gets its final permit. Florence will be a highly profitable copper mine with strong investment returns and an attractive and financeable mine capex. This story is led by the successful Hunter Dickinson Inc. mining crew, and the company has a very tight share structure. 

Curis is employing a revolutionary in situ production method at Florence. It did its homework thoroughly and had great samples from BHP Billiton Ltd. (BHP:NYSE; BHPLF:OTCPK), one of the former operators. Especially interesting is the recent strategic investment by major copper producer Taseko Mines Ltd. (TKO:TSX; TGB:NYSE.MKT). So Curis is a promising potential takeover target. 

TGR: What’s your Nevada copper pick? 

OG:Nevada Copper Corp. (NCU:TSX) and its Pumpkin Hollow project. In view of its last cash balance, its overall valuation is extremely low—its enterprise value is really choked right now. But with the strong support of its largest shareholder, Pala Investments, it will be able, in my opinion, to put the first phase of its project into production. There is also tremendous development and expansion potential here. 

TGR: Do you think that the recent downturn in gold equities might scare off investors who have become gun-shy since 2011? 

OG: The last three to five years in gold, especially junior mining, have been really traumatic and unnerving for investors. I really hope, however, that they will not be unduly influenced by the high volatility in these markets and sell after a 30% or 50% rally when there’s potential for a 300% to 1,000% rally. 

We have just seen the bottom. The cyclical nature of this market should lead to gains in best-in-class mining stocks of 500% to 1,000% and more. Investors must be not only long-term ambitious but also patient. 

TGR: Oliver, thank you for your time and your insights. 

Oliver Gross is a passionate resource expert, prudent investor and adviser with more than 10 years of experience in the mining and junior sector. He is the chief editor and analyst of the newsletter Der Rohstoff-Anleger (The Resource Investor), which specializes in the global junior resource sector. It is backed by the GeVestor Financial publishing group, the largest online publishing house in Germany. 

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Source: Kevin Michael Grace of The Gold Report  (4/2/14)

Robert Cohen’s Three Drivers for the Gold Price in 2014

Like the rest of the market, Dynamic Funds is being choosy as it shifts cautiously from bullion to equities, in what Vice President and Portfolio Manager Robert Cohen describes as “baby steps.” In this interview with The Gold Report, Cohen explains his method of analyzing miners and discusses companies that offer good prospects. 

The Gold Report:Low interest rates, a cornerstone of recent modern Western economic policy, have proven positive for gold over the last several years. What do you see as the three primary price drivers for gold this year? 

Rob Cohen: The primary price driver is global liquidity. That is fed by balance-sheet expansion in many Western countries and foreign exchange reserves, typically the result of trade deficits built up in countries such as China. 

Number two is real interest rates. The Federal Reserve could tighten rates, but we don’t know where inflation will be. Negative real rates are very good for gold. Mildly positive real rates are not harmful for gold. Positive real rates above 2% can stall the gold price. 

Number three is geopolitical crisis. Strife can get priced in and out of the gold price. 

We also believe that gold should maintain its purchasing power to oil. Over the last 40 years one ounce of gold typically bought 15 barrels of West Texas Intermediate oil. That ratio has been knocked down to about 13:1. I would expect some reversion closer to 15:1 this year. Taking that ratio in isolation would mean that gold is underpriced by about US$200/ounce (US$200/oz). 

In 2013, the gold price was knocked out of whack with respect to other hard assets, driven by the 900-tonne liquidation in the gold exchange-traded funds (ETFs). The damage was probably a US$200/oz drop in the gold price. 

We suspect that the massive amount of gold liquidated by the ETFs were driven by hedge funds and speculators. The gold ETFs have over one million investors, who for the most part have hung onto their gold holdings. It was the fast money that appears to have left and, therefore, we do not expect to see a repeat of last year from the rest of the investor base. 

Between 2004 and 2012, the ETFs built up 2,600 tonnes of gold. Putting that into context, that made the ETFs the fourth largest holder of gold behind U.S., Germany and the International Monetary Fund. In one year, 900 of those 2,600 tonnes were liquidated. If a central bank the size of Germany’s liquidated 900 tonnes of gold in one year, it would have made a lot more headlines. ETFs are now the sixth largest holders of gold, after the abovementioned entities and Italy and France. So far in 2014, the ETFs are back into accumulation mode, which implies that the investors are once again seeking this asset class. 

TGR: Wasn’t some of that 900-tonne selloff offset by gold buying in China? 

RC: It had to be mopped up somewhere and, in our view China is a natural buyer. If China is serious about making the renminbi a global reserve currency, part of the formula to get there is to build up gold reserves. The U.S. gold reserve is about 8,300 tonnes. As far as we know, China has approximately 1,000 tonnes, hence we believe that China will need significantly more gold as a percentage of its foreign exchange reserves. 

To put this into perspective, the whole gold market in a given year is about 4,300–4,400 tonnes. Approximately 2,500 tonnes come from new mine production; the rest is aboveground stocks moving around. Central banks, no matter how aggressive, can accumulate only in the hundreds of tonnes annually. Hence it could be a multidecade project for the Chinese to accumulate the gold it needs. The ETF liquidation last year would have been manna from heaven for China, allowing it to accumulate a few more hundred tonnes. 

Jewelers also stepped in and bought gold on the pullback in price. As the Chinese middle class expands, the per-capita consumption of physical gold has increased. 

The year 2013 was an anomaly. The 900-tonne selloff harmed the market to a large degree. Gold was due to go down last year on the back of a strong U.S. dollar. The herd mentality took the price drop to an extreme. 

This year, U.S. employment and industrial production data are showing some cracks. That is strengthening sentiment for gold, and it’s funneling down into gold equities. 

TGR: Ukraine, Crimea and Russia have been in the headlines. At the Prospectors and Developers Association of Canada conference, I spoke with Canada’s Foreign Affairs Minister John Baird. He said the situation in the Ukraine was the most troubling geopolitical situation since 9/11. Are you managing your funds differently in light of what’s happening there? 

RC: Not at all. We estimate that the situation in Crimea added approximately US$50–80/oz to the gold price. The price hit $1,380/oz and has already come back down. Our view is that the crisis has now been largely priced out for the time being. 

TGR: Your Dynamic Strategic Gold Class Fund, which is 57% vested in bullion, is up about 21% since January. Last year wasn’t as positive. How do you pitch your gold-based funds to investors? 

RC: The Strategic Gold Class Fund, founded in 2009, gives investors a mutual fund that can own up to 70% gold bullion, and hence we view this fund as being well suited for those investors looking for gold exposure, but who are less comfortable with taking on the individual equity risk. 

As far as the equity portion goes, we can expand and contract that depending on our view of the gold market. If the gold equities are building strong legs, we migrate the fund into gold equities by selling bullion and converting it to equities. 

Typically, the fund is 30–70% bullion, skewed to the conservative side. Today, with 57% physical gold, we’re in the middle. Although the market has been strong year-to-date, we’re not ready to hand over all that bullion and put it into equities just yet. We have trimmed the gold position in baby steps. 

Being in Canada, we also have the option to hedge or not hedge the Canadian dollar on that physical bullion. When the Canadian dollar is rising we are likely to hedge to give investors a better return. When the Canadian dollar is weakening, we want to have more of a U.S. dollar return. If you’re naked on the hedge, you get the Canadian dollar exposure. In other words, if the Canadian dollar has fallen 10% year-to-date, even without a change in the gold price, you would see a 10% gain in the gold price in Canadian dollars. 

TGR: Do you see a lot of value in gold equities right now? 

RC: On a broad level, many equities are trading near fair value at current spot prices. Some are more expensive, but it’s usually a case of paying up for quality. Some of the junior companies are lagging, but investors remain cautious and conservative. Sentiment has moved a lot this year, but there’s still way more liquidity in the senior companies. 

Smaller companies, even those that have performed well in the context of the total market capitalization, might not come back so easily. The market is building legs very slowly and investors are being choosy, especially on the exploration side. Companies with interesting discoveries are generally doing better than those at the grassroots level. 

TGR: One ongoing saga is Goldcorp Inc.’s (G:TSX; GG:NYSE) bid to take over Osisko Mining Corp. (OSK:TSX), which Goldcorp seems likely to win. What does that transaction tell potential investors in the gold space? 

RC: I’m not sure Goldcorp will win. The timing of the bid has resulted in some interesting dynamics. In January, the gold price was starting to move up and the Canadian dollar was moving down. This strengthened the Canadian dollar gold price. 

A company with less leverage to the gold price was bidding for a company with more leverage. Hence, Osisko’s year-to-date performance has been no better than its peer companies without a bid on them. Osisko is up 61% year-to-date. Kirkland Lake Gold Inc. (KGI:TSX) is up 59%, Lake Shore Gold Corp. (LSG:TSX) is up 65%. Osisko is trading in the middle of the pack and some investors could therefore argue that the stock may have performed better without a bid. 

Part of the reason for this is that the bid itself is not an all-share bid; it’s CA$2.26 cash plus 0.146 Goldcorp shares. In January, had the gold price gone down, the Goldcorp shares would have gone down, but the CA$2.26 cash would have stayed the same. The cash would have represented a put option and made the bid look more attractive in a downward-trending gold market. 

The opposite happened: The gold price has increased substantially and the cash component has gone the opposite direction. Instead of acting as a put option, it becomes a cash drag. The bid no longer looks as interesting, given the improved gold price. The market price is reflecting this, and the shares are trading above Goldcorp’s offer. 

At the time of the bid most shareholders balked at the idea of tendering. Those who did sell probably lacked confidence that the gold price would continue to rise. The buyers would have been arbitragers. 

TGR: Osisko has come out with a revised mine plan. 

RC: The revised mine plan pegs a lot more value on the Osisko shares than they’ve been given credit for in the market. It puts pressure on Goldcorp to revise the offer. 

I don’t know if Goldcorp will succeed. It depends on where the shareholding now lies. We don’t know how many shares have traded since the bid or to what degree. It’s in the hands of the arbitragers. 

TGR: Is there a Canadian theme at work here? Osisko has a scalable Canadian project. The Canadian dollar is falling. 

RC: I don’t see this as a Canadian theme, but one could argue that the low-hanging fruit in politically safe countries has been plucked over in the gold sector and it’s harder for companies to find world-class deposits in Nevada or Canada. Acquisitions are one way for companies to stay in countries that have very strong mining laws, where it’s relatively easy to permit. 

My view is that the next generation of high return projects will likely pop up in West Africa or other jurisdictions with more political risk. 

TGR: What metrics did you pay most attention to in the Q4/13 results reported by the gold producers you follow? 

RC: I was interested in cash flow per share and the sustainability of those cash flows. We look at the quality of the cash flows on the horizon to capture a net asset value calculation. Two companies may have the same price to cash flow, but one has a significantly longer and more robust mine life, the other has high grades that are expected to drop after a certain number of years. 

For development companies we look at internal rates of returns (IRR) on the projects and their economic robustness. Single-digit or low double-digit IRRs don’t interest us much. We like to home in on projects with higher IRRs. We own perhaps six development companies that we like a lot. Otherwise we stick with producers, about 24 names in the entire fund. 

TGR: Are there silver companies among the gold? 

RC: A couple. We own some Fresnillo Plc (FRES:LSE). Tahoe Resources Inc. (THO:TSX; TAHO:NYSE) is a significant holding. We also have a bit of Fortuna Silver Mines Inc. (FSM:NYSE; FVI:TSX; FVI:BVL; F4S:FSE). 

Silver is a double-edge sword. It will outperform gold in a strong market, but in a weak market it could underperform gold. 

TGR: What do you think of Tahoe’s Escobal mine? 

RC: The Escobal mine is fantastic. The knock on that stock is the fact that the mine is in Guatemala. Before Tahoe built Escobal, the company came through a lot of challenges from environmental groups. But Tahoe got it built. 

There are more than 360 million ounces of silver in this one project. A polymetallic silver mine is unusual. Escobal has zinc and lead. You don’t often find rock in the ground that’s worth more than $350/tonne. It’s really hard to come up with a higher quality investment. 

TGR: Fortuna didn’t meet the Street’s expectations for earnings per share, but it’s having a good year. Is there more upside left there? 

RC: We think that there’s upside left. Fortuna is well managed and it has a high-grade discovery in Mexico that will show up in near-term production. Some people will consider Fortuna politically safer. They might prefer Mexico and Peru over Guatemala, but that varies from individual to individual. 

TGR: This quarter, small-cap precious metals equities have been the sector’s best performers. Are these types of companies the sweet spot right now? 

RC: Yes, these names have done well in the risking gold price environment. As an example, Probe Mines Limited (PRB:TSX.V) has one of the better discoveries we’ve seen in Canada for a while. Its infill drilling results are coming in better than expected; that helped Probe go up 58% year-to-date. That story continues to unfold. I wouldn’t call it a slam-dunk just yet, but it is certainly worthy to be one of the 24 names we hold in the portfolio. 

TGR: Can you share other development names you hold? 

RC: Papillon Resources Inc. (PIR:ASX) is working in Mali. Orbis Gold Ltd. (OBS:ASX) has a new high-grade discovery in Burkina Faso. That is also where Roxgold Inc. (ROG:TSX.V) is working on a high-grade underground project. 

All three have robust economics and are finding more gold through extensional drilling or satellite deposits, which will enhance the economics. These projects should all have fairly fast payback periods, robust rates of return on capital employed and strong cash flows. All would be potential takeover targets for a big company looking for the best quality projects. Just as importantly, even if they are not taken over, these companies won’t have problems raising the capital needed to build their projects. 

TGR: Is it more likely that Roxgold will develop Yaramoko or that it will get taken out by someone bigger, like SEMAFO Inc. (SMF:TSX; SMF:OMX), which is next door? 

RC: SEMAFO would be a logical buyer, given the proximity to its Mana mine. I would give a takeover 50-50 odds. 

The three development companies I mentioned are also poised to develop their projects themselves. They can garner some really high rates of return and the projects aren’t overly complex. 

The producers may wait until the mines are in production and have demonstrated that they work before paying up. However, there’s more meat on the bone for them to buy in early. The producers might give up some of that in the meantime while the companies continue to derisk their projects. 

TGR: There’s been political tension in Mali, where Papillon is working. How much of a risk is that? 

RC: Papillon is in the southwestern part of Mali right up against the border, more than 1,000 kilometers away from the unrest in northern Mail. We are relatively comfortable with the risk, given the distance. 

TGR: What can you tell us about Orbis? 

RC: Orbis is a new story. Its market cap is about AU$77 million. Its Natougou project is in Burkina Faso. It’s high-grade, 3.5 grams per tonne (3.5 g/t), and open pittable. 

Orbis can run high grade for the first few years and get a very quick payback. The 3.5 g/t grade covers up the economics because of the high strip ratio. On the other hand, given that it is a flat-line deposit, there could be other opportunities. 

TGR: What companies that might appeal to more conservative investors are in your fund? 

RC: We scour the world beyond North American listings. We’ll look at stocks listed in London and Australia. That’s how Papillon and Orbis came into our fund. 

Randgold Resources Ltd. (GOLD:NASDAQ; RRS:LSE) is a key investment for us. It has a $7 billion market cap and has consistently delivered. 

We also own Goldcorp and Franco-Nevada Corp. (FNV:TSX; FNV:NYSE), which are both quality North American names. 

TGR: Franco-Nevada just announced a 10% increase in its dividend. What did you make of that news? 

RC: It’s positive news. I’d like to see more companies, especially royalty companies, raise their dividends if they can. It might bring a broader range of investors into the stock. 

Generally speaking, gold companies pay low dividends. If we can maintain a solid gold price for a couple of years, companies that can afford it should pay stronger dividends. I’d like to see them all pay dividends north of 2%. 

At this time, many of the miners recirculate their cash flows to build other projects, some of which have lackluster returns. 

TGR: Randgold announced earlier this year that it is debt-free, but that it will plow a lot of money into exploration. What did you make of that? 

RC: Randgold has $50–60M budgeted for exploration in countries like Côte d’Ivoire. It is also looking at land near Papillon’s project in Mali. The company has strict criteria for its exploration portfolio and has historically generated value through exploration, so I am not opposed to them spending money on additional exploration. 

By next year, Randgold will be into the cash flow harvest mode. It will have money for both exploration and a dividend enhancement. I would expect Randgold to have one of the leading dividend yields in a couple of years. 

TGR: Could you blue-sky gold for us? 

RC: Gold is still sporting a few of the bruises it got last year, although they are healing. Without any change in world affairs, we believe that the gold price could rise US$100–200/oz. 

There is fairly positive economic data coming out of the Western countries and overall strength in the broader stock market. Any significant catalyst that will erode fiat money purchasing power, such as falling industrial production, more unemployment or broader trade deficits, could take gold much higher. 

Gold moves when you least expect it. Investors should always have some gold in their portfolios for insurance. That’s the main purpose of owning gold. 

Profitability is the important thing for gold miners. Profitability is not only dictated by a gold price, it’s also dictated by cost levels. As long as the gold price behaves well with respect to cost inputs such as energy, oil, steel, chemicals and labor, there’s a profit margin to be eked out. For more than 40 years, the gold price has been well behaved with respect to all of those input costs. Last year was an anomaly. I think we are now seeing the profit margin being restored. 

Capital markets are also being more generous. Companies that have quality projects will have no problem accessing capital markets, be it equity or debt. 

TGR: Robert, thank you for your time and your insights. 

A mining and mineral process engineer by training, Robert Cohen is vice president and portfolio manager for GCIC. His experience in the mining industry is extensive and includes work as an engineer and a corporate development adviser for an international gold mining firm. Cohen completed his Bachelor of Applied Sciences in mining and mineral process engineering at the University of British Columbia in 1992. In 1998, he received his Master of Business Administration and, in 2003, he received his CFA designation. 

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Source: Brian Sylvester of The Gold Report  (3/31/14)

Conjuring Profits from Uranium’s Resurgence: David Sadowski

It doesn’t take a Ouija board to predict a rebound in the price of uranium: Global fuel stocks are insufficient, and unmet demand for uranium is growing. In this interview with The Energy Report, David Sadowski, a mining research analyst at Raymond James, explains the forces that will push the price of uranium, and the companies that are likely to benefit. Being selective, he says, will provide the greatest rewards. 

The Energy Report: David, the uranium price remains below the cost of production for many producers and the forecasts for uranium production are flat. Why are you optimistic about the uranium space? 

David Sadowski: In the current price environment, supply won’t be able to keep up with demand growth. That’s really the core to the uranium investment thesis. The cost of uranium production spans a pretty wide range, from the mid- to high-teens per pound for the cheapest in-situ leach mines in Kazakhstan, to $50–60/pound ($50–60/lb) for some of the lower-grade, conventional assets in Africa, Australia and East Asia. So we’re looking at about $40 to produce your average pound of uranium. That number is climbing on cost inflation and depletion of the best mines. 

The current spot price is under $36/lb, so many operations are underwater right now. That’s why we’ve seen numerous deferrals of projects and even shutdowns of existing mines, the most significant of which was Paladin Energy Ltd.’s (PDN:TSX; PDN:ASX) Kayelekera at the beginning of February. That’s on top of operations that are at risk for other reasons. In just the last few months, we’ve seen four of the world’s largest mines owned by Rio Tinto Plc (RIO:NYSE; RIO:ASX; RIO:LSE; RTPPF:OTCPK) and AREVA SA (AREVA:EPA) shut down on operational and political hiccups. Then you look at where the supposed growth is coming from over the next several years— Cameco Corp.’s (CCO:TSX; CCJ:NYSE) Cigar Lake and China’s Husab. Those are technically very challenging, too. All of this is occurring in a world no longer benefitting from a steady 24 million pounds per year (24 Mlb/year) supply of uranium from downblended Russian warheads. In short, the supply side is a basket case. 

Yet demand growth keeps chugging along. European Union (EU) and North American growth perhaps isn’t what it was a couple of decades ago. Pressure from competing energy sources like liquefied natural gas (LNG) in the U.S. is causing some operators to switch off their older, smaller reactors. But reactor retirements are being more than offset by new reactor construction not only in the U.S. and EU, but much more important, in Asia and in Russia. China, India, Korea and Russia are collectively constructing 70 reactors right now. 

TER: Japan and the United Arab Emirates (UAE) just announced a program to cooperate in developing nuclear technology. What’s the market significance of that? 

DS: There is a push toward nuclear in many of these nations in the Middle East. Not only do they have pretty strong population growth and urbanization, thus electricity growth is strong, but some of those oil-rich nations have cited a preference to sell their petroleum into the international markets rather than domestically. The UAE is a very large potential source of demand growth. It is constructing two nuclear power plants at the moment and is imminently going to break ground on two more. There are an additional 41 new nuclear reactors on the drawing board in the Middle East. So in the context of 434 operable reactors today, that’s a very meaningful amount of growth potential. 

Demand growth remains resilient, and supply is lagging behind. In just a few years, we think this will lead to a deficit that will quickly grow to crisis levels. That’s why we’re bullish. Uranium prices have to go higher to incentivize more supply to meet this looming supply gap. 

TER: Why hasn’t that happened yet? 

DS: There are just a few forces working against the price. Since the Fukushima accident in Japan, there has been a supply glut in the marketplace. There has been a decrease in demand, with a lower level of buying by some countries, like Germany, Switzerland and, of course, Japan. Additionally, some extra supply was coming out of the U.S. government. There is an extra amount coming from enrichment underfeeding. If you add all that up, there has been essentially more supply than is required, and that puts downward pressure on prices. It’s caused the utilities to take a step back from the market. 

TER: So do you think conditions in the market itself will materially improve? What will that look like? 

DS: For us, it comes down to when the utilities start getting involved again. While the utilities have been sitting on the sidelines over the last couple of years, high-fiving each other for not buying uranium in a declining price environment, their uncovered requirements in the future have actually risen quite dramatically. At some point, they have to resume long-term contracting to cover all those needs. Japan is a key catalyst. 

Japan’s reactors were slowly shut down after the Fukushima accident. Right now, none of them are operating. The country’s inventories have piled up to probably around 100 Mlb. Many of these utilities have asked their suppliers to delay deliveries of fresh uranium. That material ends up in the marketplace one way or another, so it’s having a price-dampening effect. In late February, however, the Japanese government announced its final-draft energy plan. Japan will restart at least some of its reactors to stop spending a ludicrous amount of money on imported fossil fuels. There are other economic and environmental benefits, but it’s the country’s trade balance that is really driving the restart push. 

It’s these restarts that we think will spur global utilities outside Japan to resume buying. The signal will be sent that Japan won’t be dumping its inventories, it won’t be deferring deliveries anymore and, by the way, there is not enough supply to go around in just a few years so you better start contracting again. That’s what we think is going to support prices. 

TER: That basic energy plan in Japan is a draft, but there is a lot of public opinion against it. You do think its prospects are good? 

DS: Consensus is that the plan is going to be approved by the cabinet by the end of March. The opposition is highly regionalized, and many pockets of the country are actually very pronuclear. Nuclear, obviously, provides a lot of jobs and generates a lot of tax revenue in these regions. 

TER: Raymond James has revised its uranium supply-demand balance and anticipates a growing supply deficit beginning in 2017. What is the case for investing in the industry today with a payoff so far in the future? 

DS: A shortfall beginning in 2017 doesn’t mean prices don’t move until 2017. In fact, in a healthy market, they should have moved already. But, again, it comes back to the utilities. They view the nuclear fuel market and their own fuel requirements as a game of risk management. 

Today, many utilities are sitting on near-record piles of material, so there’s not a great deal of risk to the utilities with respect to supply availability over the next couple of years. However, as these groups start to look out beyond that period to 2017, 2018 and so on, they’ll realize that it could become more challenging to get the uranium they need. Given that the utilities typically contract three to four years in advance, we’re very close to that window where we expect buying to ramp up again and prices to move upward. Again, critically, we expect Japanese restarts to be an important catalyst in that resumption of buying. We expect first restarts in H2/14 with a half-dozen units online by Christmas. So from an investor’s point of view, we’re already seeing the benefit of this outlook. That’s been driving the uranium equities upward over the past couple of months. 

TER: You’re forecasting spot uranium prices averaging $42/lb in 2014, but three months into the year, the price is still struggling to break $36. What will drive it over $42? When do you expect that to happen? 

DS: We think the move this year is likely to happen toward the end of this year, as Japanese restarts spark a return of normal buying levels by utilities. The uranium price should really start moving in 2015. 

TER: What indicators should investors look for in watching the uranium price trend? 

DS: One of the best indicators is Uranium Participation Corp. (U:TSX). Since the fund’s inception, this stock has been a remarkably accurate predictor of where the uranium spot price is headed. When Uranium Participation’s share price is above its net asset value (NAV), the market is baking a higher uranium price into its valuation of the stock because the NAV is calculated at current uranium prices. For even more precision, you can divide the company’s enterprise value by its uranium holdings for a rough dollar/pound estimate on what the market is ascribing. So right now, we calculate the fund is implying $40/lb, and that’s over $4 above the current spot price. This is by no means a bulletproof measure, but absent a black swan event, history tells us that this could be the destination for the price in the near future. 

TER: You have said you see $70/lb as the price that will incentivize new mining. What should investors do while they’re waiting for the price to reach that level? 

DS: Buy uranium equities. It’s that simple. We think prices are going higher, so buy uranium stocks well ahead of the upswing. 

TER: Do you have a target time that you expect the price to reach that level? 

DS: We’re looking for the price to reach $70/lb in 2016. We forecast prices flat forward at $70 from that year onward. 

TER: Which mining companies are the best investment prospects in this environment? Which are the weaker ones? 

DS: They say a rising tide floats all boats. We think all the uranium stocks are probably going higher, or at least the vast majority of them. But we also believe being selective will provide the greatest rewards. Most investors should be looking at names with quality assets, management teams and capital structures. 

Among producers, our preferred companies are focused on relatively high-grade projects with solid balance sheets and fixed-price contracts that can buffer them against near-term spot price weakness. After all, we think the spot price could remain weak for most of the balance of 2014. 

On the explorer and developer side, the theme is the same—companies with cash and meaningful upcoming catalysts and, again, in good jurisdictions. But if you can tolerate an increased level of risk, I’d be looking at companies with lower-grade assets in Africa. Those are probably the highest-leveraged names out there. 

TER: What other favorites can you suggest? 

DS: Our top picks at the moment in the space are Fission Uranium Corp. (FCU:TSX.V) and Denison Mines Corp. (DML:TSX; DNN:NYSE.MKT). 

Fission has been a top pick in the space for some time. We have a $2/share target and a Strong Buy rating. We view Patterson Lake South as the world’s last known, high-grade, open-pittable uranium asset. It has immense scarcity value. There are not very many projects in the world that can yield a drill intersection of 117 meters (117m) grading 8.5% uranium, as hole 129 did in February. There is only one project in the world where you would find an interval like that starting at 56m below surface, and that’s Fission’s Patterson Lake South. It’s in the best jurisdiction, has a management team that has executed very well and has huge growth potential. We think that property probably hosts over 150 Mlb uranium. We would be very surprised if the company was not taken out at some point in the next two years. 

Denison is another story we like a lot. We have a $2/share target and Outperform rating on the stock. Denison has the most dominant land holding of all juniors in the world’s most prolific uranium jurisdiction, the Athabasca Basin in Canada, the same region as Fission Uranium’s Patterson Lake South. The company will run exploration programs at 20 projects in Canada this year, including an $8 million ($8M) campaign at Wheeler River, the world’s third-highest-grading deposit, which continues to grow in size, and with a new understanding of its high-grade potential uncovered last year. 

Denison has a stake in the McClean Lake mill, which is also one of its crown jewels. It’s the world’s most advanced uranium processing facility, and it’s located a stone’s throw from hundreds of millions of pounds of high-grade Athabasca uranium deposits. It’s a big part of the reason why we think Denison will get bought out at some point, particularly given that to permit and construct a new mill in the basin would be a herculean task. Denison has a very strong management team and cash position and, once again, big-time scarcity value. It’s one of the only three North American uranium vehicles exceeding a $0.5B market cap. Denison has been and will continue to be a go-to name in the space. 

TER: What is another interesting name in your coverage universe? 

DS: UEX Corp. (UEX:TSX) owns 49% of the world’s second-largest undeveloped, high-grade uranium asset in Shea Creek and 96 Mlb in NI-43-101-compliant resources. It’s the biggest deposit with that kind of junior ownership in the Athabasca Basin. It’s a strategic asset and the company’s main value driver. But with the uranium price where it is, the company is also focusing on shallower assets near what is now the southern boundary of the Athabasca Basin, closer to Fission’s Patterson Lake South. We’re really interested to see what comes of the Laurie and Mirror projects this year. 

We have a $0.60 target price on shares of UEX. 

TER: Is any of that influenced by the fact that it has a new CEO? 

DS: The target price is not heavily influenced by the recent change in CEO. I think the outgoing CEO, Graham Thody, did an excellent job. I’m very hopeful that Roger Lemaitre will continue that trend. Under the new CEO, I would anticipate that the company may ramp back up the level of work intensity at Shea Creek, to build on the achievements of AREVA and the UEX team as well as Thody. But given Lemaitre ‘s background, including his experience as head of Cameco’s global exploration, I wouldn’t be surprised to see UEX extend its view beyond the Athabasca Basin as a potential consolidator in some other jurisdictions that may be lagging behind a bit on valuation. 

TER: You raised your target for Cameco from $25/share to $26/share. Are you expecting the rise to continue there? 

DS: Despite the recent run-up in shares, we think there’s a good chance of further strength. Cameco is the industry’s blue-chip stock. It’s the one everyone thinks of when they think of uranium. Given its size and liquidity, it is the only stock many of the big institutional fund managers can invest in. With that backdrop, we think it’s going to be the first stock for fund flows as the space continues to rerate, especially as we get more confirmatory news about Japanese restarts and as Cigar Lake passes through the riskiest part of its ramp-up. We think it should be a very good 24 months for the company. 

TER: What other companies do you like in the uranium space? 

DS: We recently upgraded Kivalliq Energy Corp. (KIV:TSX.V) to an Outperform rating. Our target price there is $0.50/share. The company has been a laggard in the last few months, but it has Angilak, a solid asset in Nunavut with established high-grade pounds and huge growth potential. Current resources stand at 43 Mlb, but we think there is well over 100 Mlb of district-scale potential. The company is derisking the asset by moving forward with engineering work, like metallurgy and beneficiation, ahead of a preliminary economic assessment potentially later this year. We’re also excited to see what comes with the newly acquired Genesis claims that sit on the same structural corridor that hosts all the mines of the East Athabasca Basin. 

We also like Ur-Energy Inc. (URE:TSX; URG:NYSE.MKT), on which we have an Outperform rating and $2.20/share target price. This stock has been on a major tear. We continue to expect great things from Lost Creek in Wyoming. Early numbers from the mine, which just started up in August, have been hugely impressive to us, a testament to the ore body and execution by management. And the financial results should be equally strong, given the company’s high fixed-price contracts. In all, it’s a solid, low-cost miner in a safe jurisdiction, which we think should be in a good position to grow production organically or, using cash flow, buy up cheap assets in the western U.S., a region ripe for consolidation of in-situ leach uranium assets. 

TER: Do you have any parting words for investors in the uranium space? 

DS: I would just say we think the uranium price is going higher over the next 12–24 months. So in anticipation of that upswing, we recommend investors take a hard look at high-quality uranium stocks today. 

TER: You’ve given us a lot to chew on. I appreciate your time. 

DS: It’s my pleasure, as always. 

David Sadowski is a mining equity research analyst at Raymond James, and has been covering the uranium and junior precious metals spaces for the past seven years. Prior to joining the firm, David worked as a geologist in western Canada with multiple Vancouver-based junior exploration companies, focused on base and precious metals. David holds a Bachelor of Science in Geological Sciences from the University of British Columbia. 

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Source: Tom Armistead of The Energy Report  (3/27/14)

Strong Commodities + Weak Dollar = Canadian Energy Investing Bonanza: Chad Ellison

Chad Ellison of Dundee Capital Markets is gearing up for a red-hot Canadian energy sector. Commodity price strength and weakness in the Canadian dollar are creating a discount in Canadian oil and gas explorers and producers. In this interview with The Energy Report, Ellison elaborates on why he’s excited to be an energy analyst again, and names companies with strong economics and management teams likely to reward energy investors.

The Energy Report: Chad, is there a major investment theme that you expect to dominate 2014?

Chad Ellison: From our perspective covering the Canadian exploration and production (E&P) sector, the dominant theme is going to be the weakening Canadian dollar and its relation to higher realized commodity prices. We’ve recently been seeing strength in both natural gas and oil. Western Texas Intermediate (WTI) has increased and Canadian differentials have come down.

TER: What’s your 2014 price deck for WTI and Brent, especially in light of stronger economic data from China?

CE: We currently forecast $92.25/barrel ($92.25/bbl) for WTI and $105/bbl for Brent.

TER: Last year, the price differential between AECO Hub and NYMEX natural gas futures proved to be a significant investment theme. Should investors expect that differential to be a major investment theme again this year?

CE: I don’t believe it’ll have the same impact this year. Last year, the AECO blowout was caused by a change in the toll structure on the Canadian natural gas Mainline and gas volumes from Alberta essentially being displaced by cheap Marcellus gas. TransCanada Corporation (TRP:TSX) increased its interruptible service tolls, which caused shippers to fill up storage in Alberta rather than pay the fees to ship down the Mainline. However, we saw an increase in parties signing up for long-term service over the winter, which has worked to reduce the interruptible tolls to a more normalized level. While we may see some potential for volatility in the summer, we shouldn’t expect anything as dramatic as last year.

TER: The cold winter has left gas inventories low. How long do you think it will take to replace those inventories?

CE: It’s tough to say. U.S. natural gas has already returned to previous production levels after the freeze-offs from the cold weather. That said, full replacement of those depleted inventories will be dependent upon weather and demand. If it’s not abnormally hot, inventories will be back in the mid-range by the time injection season is done in November. But if gas prices do persist higher, we could see a lot of gas-to-coal switching, as that looks pretty favorable at this time.

TER: Do you expect the Henry Hub price to drop even more dramatically than it has over the last few days once the Western winter and the polar vortex ends?

CE: Yes, that’s a possibility. The forward strip still shows a decline in spring and a return to the $4 level in summer, but natural gas storage will be below 1 trillion cubic feet (1Tcf) for the first time since 2003. That’s a lot of gas that has to be replaced.

It will depend on the weather. If the recent cold winter is followed by a hotter-than-normal summer, we can expect to see increased power demand, which will slow the rate of injection and could cause high natural gas prices to persist.

TER: The Henry Hub price of roughly $6/million British thermal units ($6/MMBtu) is about 50% higher than it was a year ago. Are we going to return to those former prices or is it going to be somewhere in the middle?

CE: It will be somewhere in the middle—we’re forecasting an average of $4.15/MMBtu for 2014. The storage indications mean that prices will be in the $4 range, but I can’t see them going down significantly until a lot of that natural gas in storage is replaced.

TER: How are the companies in your coverage universe gaining greater exposure to higher natural gas and crude prices? Are you seeing increased price hedging as commodity prices rise?

CE: A large portion of the companies in our coverage universe are fairly well hedged already. When the gas price started to turn, companies locked in a lot of their volumes. As you look out on the forward strip for natural gas, the price does decline pretty dramatically in the spring. Although we’ve seen high prompt-month gas prices, it hasn’t allowed companies to lock in that level for the full year.

TER: Despite higher crude prices, majors like Exxon Mobil Corp. (XOM:NYSE) and Chevron Corp. (CVX:NYSE) are seeing their margins shrink due to higher costs. Does that underperformance allow companies in your coverage universe to find more time in the spotlight, or is there cost creep and trimmed margins in your space, too?

CE: Most of the companies in our coverage universe are smaller junior and intermediate companies. These companies have smaller programs that allow them to be more nimble in deploying capital. We haven’t seen any significant cost increases, and several of our companies have even reported successful cost reductions. However, if strong commodity prices continue, I expect we will see increased capital budgets on the other side of spring break-up, which could put some upward pressure on service costs later in the year.

TER: When picking companies, do you look for those with an ideal mix of oil and gas?

CE: At the moment, I prefer 60% oil-weighted names. Until this past winter, I would have said the oilier, the better—a lot of the 90%+ oil-weighted companies have traded at significant premiums. But we are now seeing a lot of demand for gas exposure, and companies that are a blend of oil and gas are benefiting on both sides. However, in the medium term, we’re still far more constructive on oil than we are on gas.

TER: The Canadian dollar has fallen dramatically over the last six months. How is the situation affecting the Canadian juniors you evaluate?

CE: Companies are essentially paid in U.S. dollars, but their costs remain in Canadian dollars, so the current environment has shaped up to be a big win for Canadian producers. We’ve also seen oil price differentials narrow since Q4/13. As a result, we’re expecting the majority of our coverage universe to post strong cash flow in Q1/14.

TER: Some of the companies that you cover were having trouble raising cash. However, Tamarack Valley Energy Ltd. (TVE:TSX.V) recently raised $60.2 million ($60.2M) in an equity offering. Is capital more readily available now than it was last year?

CE: Yes, some capital returned to the space in Q4/13, with a host of companies raising money for acquisitions, acceleration and debt reduction. Overall market sentiment seems to have improved, but it’s still selective. The favorite names enjoy access to capital while other names trade at a discount valuation, making it difficult to raise money.

TER: Tamarack is your top pick. Why does it merit that status?

CE: First of all, Tamarack has a topnotch management team and has consistently been one of the top operators in the Cardium play. Management remains diligently focused on cost control and has been successful in driving down costs for the company’s key plays, which significantly increases the rates of return and economics of those projects.

Second, the company greatly expanded its inventory late last year with a farm-in agreement with a major, which covers more than 110 net sections of Cardium rights and increases its potential Cardium drilling inventory to more than 10 years. Its recent equity raise gave it the ability to accelerate drilling and earn all the lands that it deems prospective as part of the farm-in.

Third, the company still trades at a relative discount to its peers. We forecast it to have top growth rates of 30%/share next year while maintaining one of the cleanest balance sheets in the space. While other oil-weighted juniors with these properties trade at 6x debt-adjusted cash flow, Tamarack is just more than 4x.

TER: Would you call it a value play?

CE: Absolutely, it’s been a value story for a while. Between the farm-in, the equity raise and an acquisition it made last year, Tamarack ranks as one of the best, in my opinion. I think it’s only a matter of time until it enjoys that premium valuation, hence our Top Pick recommendation.

TER: Most of your coverage leans toward light oil, but Rock Energy Inc. (RE:TSX) is riding the revived fortunes of heavy oil. Does Rock have any more room left to run?

CE: Rock Energy has had a great run, but it still has further upside potential. The company is yet again trending ahead of its guidance. Current production is estimated to be about 4,500 barrels oil equivalent per day (4.5 Mboe/d). That compares to management’s full-year estimate of 4.1 Mboe/d and our forecast of 4.275 Mboe/d.

The company should also be able to take advantage of a pending royalty break at its Mantario oil pool for proceeding with a polymer secondary recovery scheme. Essentially, two-thirds of corporate production is being charged at 25–30% royalty today. That number could drop to 1% in 2015, which could see 2015 cash flow/share come in north of $2 based on our initial estimates.

The company has also been having some strong initial success in delineating its Viking light oil play, which has added some significant inventory. We’ll be looking for an update on these items when the company reports its year-end results in late March.

TER: The company is planning to drill 27 wells in 2014.

CE: And that number could grow. The company is ahead of budget on production, and commodity prices are stronger. Management has indicated that it would like to drill one well per section on its Viking acreage to delineate the rest of the land base there, which will go a long way to derisking it and potentially making it a more attractive takeover target.

TER: What rate of success has Rock had with previous drill programs of this scope?

CE: It has been successful in all the wells that it’s drilled at the Viking project. Additionally, it has an exploratory program that is looking for other pools similar to its Mantario property, and management is budgeting about a 30% chance of success. The company reported a new pool of discovery in its last operations update for a new Lloydminster pool and we anticipate further details as we hear about its Q1/14 drill program.

TER: Rock has been rumored to be a takeover target for some time. It was rumored when shares were trading below $2, and the price is above $4 today. Who are the potential suitors?

CE: A larger company would be interested given the low-decline nature of Rock Energy’s production. Its first well at Mantario came on at 80 barrels per day (80 bbl/d), and two years later it’s still doing 80 bbl/d. It would provide a nice platform of free cash flow that a company could redeploy elsewhere, either to fund drilling or a dividend.

Given its interest in heavy oil, most speculation about a potential acquisition has pointed to Twin Butte Energy (TBE:TSX, Not covered). However, Gear Energy Ltd. (GXE:TSX, Not Covered), which had its initial public offering (IPO) last year, is another candidate. The Viking light oil discovery has opened Rock Energy up to a lot of other potential consolidators, including Whitecap Resources Inc. (WCP:TSX.V), Raging River Exploration Inc. (RRS:TSX.V), and the private company, Teine Energy Ltd. (Not Covered).

TER: Tell us about some other compelling narratives in your coverage universe.

CE: RMP Energy (RMP:TSX) is one of my favorite names right now. The company recently had a milestone catalyst with the successful completion of its pipeline and infrastructure project at Ante Creek on time. To date, it has had tremendous success drilling a Montney oil pool at Ante Creek, which has produced some of the best economics in the basin. Production had been hindered by takeaway capacity, but this was recently remedied with the commissioning of the company’s pipeline expansion in March.

We estimate there are more than six wells with capability of 1 Mboe/d each, with another four in various stages of drilling or completion in Q1/14. Compared to prior production levels, which were probably around 7.5–8 Mboe/d, there’s going to be a steep ramp up as this pipeline comes onstream. We believe that its 10 Mboe/d guidance is ultraconservative, and production could be well above 12 Mboe/d in short order.

We recently sat down with management, and I was impressed with its level of preparation to handle the increase in volumes. The company has a dedicated, 24-hour trucking terminal that will be able to take any volumes that won’t go down the Pembina mainline.

TER: What sort of cash flow are you estimating?

CE: I’m forecasting production of 11.0 Mboe/d, so I’m ahead of where management is, but ultimately still behind where I think it will end up. That means cash flow/share of $1.31 in 2014, increasing to $1.69 in 2015.

TER: What other companies catch your eye?

CE: Surge Energy Inc. (SGY:TSX) is a dividend-paying company that’s pursuing a strategy to moderate the pace of development. It is looking to reduce its decline profile in order to maximize free cash flow to fund a dividend and reduce risk.

Since Paul Colborne took over as Chief Executive Officer and President, he’s cleaned up the balance sheet, executed on five oil-weighted transactions and focused on cost reductions that have increased the company’s netbacks 32% since Q1/13.

The company is set to grow 3–5%/year (by management’s estimates and our forecast) and offers an attractive 9.4% yield. It is paying debt down to provide greater returns and is cheap compared to some of its peers.

TER: Tell us about the company’s recent exploration success.

CE: Surge’s Valhalla Doig wells were some of the best producers in the basin last year. The company managed to extend its Valhalla play further north, which in turn expanded its inventory. The company is only planning on drilling three to four wells per year in the play, but with initial production capabilities of more than 600 bbl/d, it makes it pretty easy to replace declining production.

TER: And finally?

CE: Finally, Cardinal Energy Ltd. (CJ:TSX) is another dividend-paying company. The company just had its IPO in December and is led by the former Midway Energy Ltd. management team. Cardinal was designed to be the ultimate in sustainability. It has a low decline rate of less than 15% on legacy production.

Cardinal has a low payout ratio and, standalone, the cleanest balance sheet in the entire sector. The company is currently drilling two horizontal Glauconite light wells at its key play, Bantry in southeast Alberta in Q1/14. If results can emulate Cenovus Energy Inc.’s (CVE:TSX; CVE:NYSE, Not covered) offsetting activity, the economics look very compelling.

We believe that with a clean balance sheet and a decent valuation, Cardinal’s team is well positioned to acquire additional assets that fit the company’s low-decline model. The $0.65 annual dividend is currently yielding about 5%, although we believe there is room to increase this along with acquisition activity.

TER: With the declining dollar and narrowing differentials, is it fun to be an energy analyst?

CE: Absolutely. It has been challenging over the last few years, but when you look at the strength of commodity prices, the weakness in the dollar and the comparative discount that a lot of Canadian energy names trade at compared to their U.S. counterparts, it sets up for a very compelling investment in the Canadian energy sector. The key is to find the companies with strong economics on their plays and a management team that’s likely to outperform their guidance. We still see a lot of upside from these levels.

TER: Thank you, Chad.

CE: Great talking to you.

Chad Ellison joined Dundee Capital Markets as an energy analyst in November 2012. Prior to Dundee, he was with Canaccord Genuity’s research team with a focus on Canadian domestic junior and intermediate companies. Ellison gained experience providing financing for E&P and oilfield service companies from 2005 to 2010 with GE’s financial services arm. He holds a Bachelor of Commerce degree in finance from the Haskayne School of Business at the University of Calgary.

Want to read more Energy Report interviews like this? Sign up for our free e-newsletter, and you’ll learn when new articles have been published. To see a list of recent interviews with industry analysts and commentators, visit our Streetwise Interviews page.

Source: Peter Byrne of The Energy Report  (3/20/14)

Apply Market Savvy to Bear Market Debris; Uncover Biotech Treasures: Cleland and Ireland

Starting a new investment company and investing in very small biotechs can be a minefield. Because the business is fraught with bad science and liquidity traps, it takes insight and industry experience to ensure investment capital doesn’t drop down a foxhole. Roadmap Capital CEO and Founder Hugh Cleland is in the process of negotiating the minefield now. In this interview with The Life Sciences Report, Cleland and Stephen Ireland, Roadmap Capital principal and healthcare partner, discuss five growth names with merit plus two brief bonus picks.

The Life Sciences Report: Hugh, could you tell me why you formed Roadmap Capital?

Hugh Cleland: I wanted to build a team with deep domain expertise in healthcare/biotech and fundamental technologies—two areas where Canada’s investment community has not traditionally focused. There is no shortage of innovation in Canada, but the long bull market and bubble in the resource sector sucked enormous amounts of capital and expertise out of those sectors, leaving a trail of undercapitalized and undervalued assets in its wake, particularly in the private and micro-cap areas of healthcare and technology. I have assembled a team—we are now up to 8 people—that can help me scrounge through the bear market debris left behind in those two sectors.

TLSR: Hugh, it seems you’re on your way. You’re raising money now. My understanding is that you plan to close your first fund on June 30, 2014. How much in assets will you have under management in this fund? What is your goal?

HC: Right now, in Roadmap Capital, we’re just under $50 million ($50M) in total assets. By June 30, we expect that to be in the $75–100M range—hopefully higher.

TLSR: Can you manage $100M efficiently in micro-cap stocks?

HC: Absolutely. But we’re not just investing in micro-cap stocks. We’re putting a lot of new capital to work in private companies, both those we expect to stay private for the life of the investment, as well as those we expect to bring public within the next six to 24 months. In fact, we will go so far as to be involved in company formation, and also in helping companies go public.

TLSR: Why invest primarily in Canadian companies? If you were exclusively a resource investor, and looking for deep value as well as growth, this is understandable, but in the life sciences sector, where the goal is huge growth, why limit yourself to Canadian stocks? Is it about tax advantages? National pride?

HC: I should point out that the new fund has made investments in the U.S. already, and will continue to do so. But we are focusing primarily in Canada. Frankly, it’s about where we see the best opportunities and risk/reward ratio. There’s no shortage of innovation in Canada, but the long, drawn-out bear market that the Canadian tech and healthcare sectors went through for much of the last decade has left many interesting companies valued at levels far below what is available in other countries. To give you an example, we’re putting money into a company with a $2.5M pre-money valuation. Comparable companies in the States would be valued in the $30–40M pre-money range currently. And we have invested a small amount of money into a private stem cell company called Hemostemix. It is raising money at a $25M pre-money valuation, when its best public comparables in the U.S. trade at valuations in the $200—400M range. It comes down to where we see the best valuation opportunities and risk/reward for our investors right now.

TLSR: Stephen, will you do continuing diligence on current portfolio companies as well as diligence on proposed new additions to your portfolio?

Stephen Ireland: In terms of priority, the focus will be on new diligence activities for companies that we’ve identified as potential investment opportunities. But there will be ongoing diligence obligations for companies already in the portfolio. We want to make sure that milestones in business plans are met, intellectual property portfolios maintained and clinical trials executed to best affect company value. Performing diligence on new companies and companies already in our portfolio is part and parcel of our skill set collectively.

TLSR: Stephen, you’ve been in the pharma and biotech industries for more than 25 years, including serving as former senior vice president for business development at North Carolina-based TransTech Pharma Inc., a private biotech company with a lot of strategic partners in drug development. You understand what goes on in a private company. After you sign a confidential disclosure agreement with a private group, do you feel like you know what to look for in a company that does not make quarterly public filings?

SI: Absolutely. The very early, basic discovery-stage science varies from company to company and target to target, and is often shaped by personalities of the founding scientific staff. Once a compound moves into animal trials and, more important, into human trials, there are certain studies regulatory agencies expect a biotech to do. Based on my experience, I have a good idea of the questions to ask to access data at each stage of development, and how to analyze those data. I’m also very familiar with deals biotech companies do with academics, contract research organizations, contract manufacturing organizations and licensing partners, which enables me to evaluate their business obligations and opportunities.

TLSR: Stephen, you’ve been deeply involved in hands-on negotiations between companies big and small. My understanding is that you have led the charge on deals potentially worth in excess of $3 billion ($3B) with Pfizer Inc. (PFE:NYSE) and Forest Laboratories Inc. (FRX:NYSE). Is it fair to say that you might also be involved in business development as far as negotiating between your portfolio companies and the companies you’ve had experience with in the past?

SI: I hope I’m able to facilitate that. I believe my experience adds value to the various processes companies undertake to either sell their assets in a merger-and-acquisition (M&A)-type transaction, participate in outlicensing activities or partner for skill sets that they may not have.

TLSR: Hugh, let’s talk about Cynapsus Therapeutics Inc. (CYNAF:OTCQX; CTH:TSX.V).

HC: It’s been fun. We are up with Cynapsus 280% in Canadian dollars since I mentioned the company in my June 2013 interview with The Life Science Report. It was at CA$0.34/share then, and it’s still just a micro cap, with a CA$45M (basic) market cap today. We continue to be very excited about the company and where it’s going. Of course, these situations are not without risk. But Cynapsus appears to have a very strong risk/reward benefit. I would point to the work of senior biotechnology analyst Jason Napodano of Zacks Investment Research on this stock. He initiated on the stock last June when it was $0.30/share, made it a top pick for 2014 when it was still below $0.40/share, and reiterated that it was one of his best ideas just last month. It was gratifying to see someone with his experience and skill come to the same conclusion that Roadmap Capital has.

TLSR: Cynapsus successfully completed its phase 1b trial with APL-130277 (sublingual thin film strip formulation of apomorphine). The product demonstrated plasma levels of apomorphine that are consistent with those obtained from subcutaneous injections of Apokyn (apomorphine hydrochloride injection; Mylan Inc. [MYL:NASDAQ]). This product will ultimately have to show efficacy in actual Parkinson’s disease (PD) patients who are experiencing “off episodes” (hypomobility or “frozen” states), won’t it? What is the next catalyst?

SI: The company will finish dosing the 25mg strength of APL-130277, then will embark on APL-130277 efficacy studies, the first of which will be in an Apokyn-naïve patient population, I believe.

Cynapsus has development options from a regulatory perspective. It can go down a pure bioequivalence pathway and show the sublingual strip formulation has equivalent pharmacokinetics (PK: absorption, distribution, metabolism and excretion) as subcutaneous Apokyn injection, or it can go after superior safety, along with efficacy. Obviously, if Cynapsus can demonstrate superior safety and efficacy, it will put the product in an even stronger position in a market that is already forecast to be in excess of $700M per year.

TLSR: Do you expect this company to go out on a trade sale in a year or two, or do you expect to see this product commercialized with a partner while it’s partly under Cynapsus’ control?

SI: Positive clinical data will make APL-130277 a very attractive asset for specialty pharma or large pharma, and I expect Cynapsus will be targeted for M&A activity before it gets a chance to commercialize the product.

TLSR: A new drug application (NDA) submission to the U.S. Food and Drug Administration (FDA) is anticipated in 2016. Will we see a launch of this product in 2016?

SI: If things proceed as we expect, yes. It depends on when exactly the submission goes in.

The data package will be fairly straightforward because apomorphine is a known molecule, and its mechanism of action is well understood. It’s just the route of delivery that’s different. The company has compelling PK data from its phase 1 study, suggesting plasma levels are proportional with dose, and the delivery method achieves levels in an important range between the minimum efficacious dose and the minimum dose associated with adverse events. PK profiles I’ve seen suggest that not only does the product get into this range, but it also maintains plasma levels longer. This could mean its activity in patients may have a more sustained duration, which is certainly not the case with the subcutaneous version of the molecule. This all points to a favorable review from the agency, and I think it’s quite possible APL-130277 could launch in 2016.

TLSR: One of the great selling points of Cynapsus’ sublingual strip is that when a patient is having an off episode, rather than trying to handle an injection, the patient may be able to get the drug under the tongue. Therefore, families might be less afraid to leave a patient alone for a while. Do you imagine this is an issue the agency will take into consideration when APL-130277 is up for approval?

SI: Yes. These patients suffer poor quality of life because of these off episodes, and have difficulty self-administering injections. We need therapies that offer these patients a higher quality of life and better ease of use, and I think APL-130277 sublingual strips hold promise in both of these regards.

TLSR: Hugh, do you see Cynapsus shares getting another double or triple from current levels?

HC: My view lines up with Jason Napodano’s, and he sees a lot more potential than just a double or triple if this drug gets approved. We both like the risk/reward at these levels for a company that has a drug candidate with peak sales potential somewhere in the $600–900M range.

TLSR: What’s the next one you wanted to talk about?

HC: Let’s talk about BELLUS Health Inc. (BLU:TSX; BLUSF:OTCPK). BELLUS presented to our advisory board back in May 2013 and came out as one of the favorites. It was a particular favorite of advisory board member Harlan Waksal, who cofounded Imclone Systems Inc., which sold to Eli Lilly and Co. (LLY:NYSE) for $6.5B on the strength of its monoclonal antibody Erbitux (cetuximab; for head-and-neck cancer and metastatic colorectal cancer). Stephen spent a few months digging in. By the time he was finished with his deep due diligence, he was as big a fan.

TLSR: What grabbed your attention about BELLUS?

HC: One thing that really grabbed me was the enormous valuation disparity that has existed for a variety of very unusual circumstances. With BELLUS, you have a fully funded orphan drug candidate called Kiacta (eprodisate disodium, an orally available small molecule) that is in a phase 3 trial reasonably close to the end of enrollment. The drug is being tested in a lethal disease called AA amyloidosis, which affects 50,000 people in the U.S., Europe and Japan.

The company indicates expected peak sales of around US$500M, but our research suggests we could see peak sales significantly higher than that, perhaps as high as US$1B. Yet somehow, the company is still trading at a fully diluted enterprise value of less than US$35M. I have never seen a fully funded phase 3 asset with such a big market opportunity trade at such a ludicrously low valuation.

If you look at publicly traded orphan drug comparables in the U.S., it gives you an idea of the enormous potential upside for this stock. For example, Raptor Pharmaceutical Corp. (RPTP:NASDAQ) is an orphan drug company that successfully completed its phase 3 trial, and is now marketing its drug. Canaccord Genuity’s Ritu Baral estimates peak sales of US$160M in the U.S. and the European Union; Raptor’s market cap is now US$700M. Sarepta Therapeutics Inc. (SRPT:NASDAQ) is another orphan drug company, and is at a more comparable stage of development to BELLUS in that Sarepta does not yet have FDA approval, and is in the midst of studies that could lead to that approval. Sarepta’s enterprise value is currently more than US$800M.

TLSR: The final data collection date for BELLUS’ phase 3 trial is September 2016, according, but the company says enrollment of this 230-patient trial will complete earlier than originally anticipated. When could we see a launch of Kiacta?

SI: The study has enrolled faster than anticipated, and the company should complete enrollment by June. BELLUS will follow patients until at least 120 of them have had an event defined as a worsening of renal function. That’s the part that takes the time. It will probably be early 2016 before we’ll get a read-out. If the data are compelling and come out early enough in 2016, it’s possible the company could submit for approval the same year. I think it’s quite likely we’ll see approval and product launch in 2017.

I want to tie these timeframes into our “valuation gap” investment thesis. The thesis starts with the enormous valuation disparity: an enterprise value (EV) of US$35M for BELLUS compared to, for example, an EV of US$800M for Sarepta.

The fact that Kiacta is fully funded to the end of phase 3 means investors won’t get ambushed by a financing. The fact that the phase 3 data doesn’t read out until early 2016 (which would often be seen as a bad thing) means that the stock can gradually move up, filling the enormous valuation gap with minimal event risk for almost a full two years before the binary event occurs.

We also know that speculation as to the outcomes of phase 3 trials typically begins six months before a trial reads out; this would mean the ‘”read-out speculation” should begin in the summer of 2015. In the meantime—in the one and a quarter years between now and then—we fully expect the stock to be able to reach a still-cheap US$200M valuation, or $3/share. We think the fact it can make that move even before the read-out speculation begins, with no financing risk and no event risk makes BELLUS a particularly compelling investment. Our money is where our mouth is: The company is currently among the largest positions in the two Roadmap funds that are actively making investments.

TLSR: Which company did you want to speak about next, Hugh?

HC: I would like to touch on IntelGenx Corp. (IGXT:OTCQX; IGX:TSX.V). We’ve had more than 10% ownership in this company for quite a while; it wasn’t until the company did a financing in December 2013 that our equity went below 10%. We’re still very enthusiastic about the future for IntelGenx.

The company utilizes the FDA’s 505(b)2 pathway to develop already-approved drugs in new ways. There’s less efficacy risk and no toxicity risk. In fact, this is what Cynapsus is doing with apomorphine.

Recent developments suggest that IntelGenx is going to become a sublingual strip company, and its relationship with Par Pharmaceutical Companies Inc. (private) has become a company maker. It has a codevelopment agreement with Par on a generic version of Suboxone (buprenorphine + naloxone sublingual film; Reckitt Benckiser Pharmaceuticals Inc. [RBGPY:OTCPK]) for opiate addiction, for which it filed an abbreviated new drug application last July. In mid-January, the company announced it is working with Par on two more projects. For me, this announcement is a sign of something very special happening at IntelGenx. I believe this relationship gives IntelGenx upside somewhere into the US$3–10 per share range over the next two to three years, depending on what the other assets are. There are other drugs in the company’s pipeline, and we’re expecting another NDA to be filed this year. The two publicly traded U.S. comps, BioDelivery Sciences International Inc. (BDSI:NASDAQ) and Supernus Pharmaceuticals Inc. (SUPN:NASDAQ), suggest there is a valuation gap to be filled here, too.

TLSR: IntelGenx shares have doubled over the past year. Is this on the strength of revenue from its approved product, Forfivo (bupropion HCL extended-release; a dose reformulation of GlaxoSmithKline’s [GSK:NYSE] Wellbutrin XL)?

HC: I don’t believe that Forfivo was the driver; I think it was the Par relationship, as well as the NDA filing for the rizatriptan sublingual film for migraine. We’re expecting the migraine drug to be approved by the FDA in the next few months, and that will be another catalyst.

Frankly, Forfivo is a product that I’m encouraging the company to sell. I think IntelGenx can put the proceeds of that sale to better use in other areas, but I’m not sure the company wants to do that. It is nice to have a cash-generating asset within the company, that’s for sure. But I think if IntelGenx can get a lump sum for that asset above CA$10M, maybe up to CA$20M, it would be cash the company could put toward good uses.

TLSR: The buyer of Forfivo would have the overhang of that Paragraph IV Certification Letter IntelGenx received last August. The company says it intends to enforce its intellectual property rights and fight this thing. So it may be an inopportune time to attempt to shed this product.

HC: It very well may wait until after that’s resolved. But either way, Forfivo is no longer a driver for IntelGenx.

TLSR: So the drivers at IntelGenx are the rizatriptan sublingual film strip for migraine and the opiate-addiction product. Is that right?

HC: Correct. IntelGenx does, however, have a pipeline totaling about seven drugs, as well as the two additional projects with Par Pharmaceutical. The pipeline is deep.

TLSR: Could we hear about another name?

SI: I’d like to mention Immunovaccine Inc. (IMV:TSX.V). I’m a fan of immunotherapies for cancer, and think some cancers will ultimately be cured using some form of targeted immunotherapy. There are significant hurdles to overcome, including 1) how to defeat the defense mechanisms that tumors have developed to evade innate immune responses, 2) how to mount a strong CD8+ T-cell response in the tumor microenvironment, and 3) how to engender an adaptive, durable and sustained T-cell memory for the particular antigen.

Immunovaccine has a novel technology that addresses these issues in its DepoVax platform. The DepoVax vaccine is an antigen-plus-adjuvant combination that’s encapsulated in a liposome, which is then surrounded by an oil emulsion. The result is a depot release leading to sustained and specific immune response to the therapy.

In its phase 1 study, Immunovaccine has been able to demonstrate strong CD4+ and CD8+ T-cell responses and, in particular, specific responses to survivin, a well-validated negative regulator of apoptosis in many types of cancer. The company has good dose response data from its phase 1 study, and is preparing to launch two phase 2 studies with its DPX-Survivac therapy, one in ovarian cancer and one in glioblastoma.

TLSR: Stephen, are we looking at a very long development track with these vaccines?

SI: It’s certainly longer than those faced by other companies that we’ve discussed. Ovarian cancer is an orphan indication, and glioblastoma has very few therapeutic regimens that work. Intervention in each is typically surgical. Regulators are motivated to consider fast-track approval status for any company that can show compelling clinical data in these indications, and I think that’s what Immunovaccine is looking to do.

HC: Let me point out that there will be significant value-creation milestones along the way. Successful phase 2 results are often the largest value-creating events in the drug development cycle.

SI: I agree with Hugh. Positive phase 2 proof-of-concept data can be a tremendous value driver for a biotech company, and often is the trigger for M&A-type discussions with large pharma partners.

HC: That’s a good segue to iCo Therapeutics (ICO:CVE), in that iCo is getting fairly close to the readout of its phase 2 data for diabetic macular edema (DME).

We participated in a save-the-company insider round of CA$0.20 units a year and a half ago. We made a very good return on that investment, and we’ve continued to be big fans of the company for a variety of reasons. The company came through our advisory board process with flying colors.

TLSR: I understand that the company’s phase 2 iDEAL trial with iCo-007, an antisense oligonucleotide, is supposed to read out at the end of April. This is not a company-sponsored trial but rather an investigator-sponsored trial with 208 patients; randomized, but open label. I wonder how much stock you can put into those data when you see them?

SI: The trial has hard primary and secondary endpoints, the change in visual acuity and reduction in retinal thickening, respectively. Both are measured from baseline to month eight. If positive, the data will be robust. The company’s compound offers some advantages in terms of durability of effect over what’s currently on the market, potentially affording iCo a competitive edge. This study will indicate the magnitude of effect iCo-007 has on these endpoints.

I don’t foresee any negative consequences associated with iDEAL being investigator-sponsored. The study is being run at a top-level institution by expert clinicians in DME.

TLSR: This compound will certainly need a pivotal trial, won’t it?

SI: iDEAL has been rigorously designed and well executed, and the data could point to compelling efficacy. It’s hard to anticipate how regulators will react to the data until after it’s submitted. However, it is likely iCo-007 will require a pivotal study for approval in DME.

HC: I’d like to touch quickly on two more companies before we finish up. Tekmira Pharmaceuticals Inc. (TKM:TSX; TKMR:NASDAQ) was one that I highlighted back on June 27, 2013, when it was $4.76. It’s been a spectacular rocket ride. We think it will continue to be successful for investors. The two best U.S. comparables in Tekmira’s space are Alnylam Pharmaceuticals Inc. (ALNY:NASDAQ) and Arrowhead Research Inc. (ARWR:NASDAQ). These comps suggest Tekmira has plenty of valuation upside, even without further fundamental developments.

We became involved with CNS Response Inc. (CNSO:OTCMKTS) a while ago, and although it is already a winner for us, we expect much more. The company’s technology combines EEG brain scan data with a large database of prescription outcomes to improve the ability of physicians to prescribe the “right” medication for psychiatric disorders, without going through what is often a lengthy or unsuccessful trial-and-error process. The company website actually does a good job of describing what they do and why what they do is important.

The first big market that CNS Repsonse can address is post-traumatic stress disorder (PTSD). The Walter Reed National Military Medical Center is now leading a 2,000-soldier, multisite, randomized, controlled trial of the PEER system, focused on depression. If successful, this study should lead to widespread adoption of the CNS PEER system by the U.S. military, which seeks to reduce the horrifically high PTSD-linked suicide rate. Results are expected in Q2/14. If the trial is successful, CNS should trade at multiples of its current price.

TLSR: Thank you, Hugh and Stephen. I enjoyed it.

HC: Thank you very much.

SI: Thank you.

Hugh Cleland, BA, CFA, is cofounder, CEO, president, CIO and principal portfolio manager of the Roadmap Innovation Fund I and the Roadmap Trust. He is also portfolio manager, through a subadvisory contract between Roadmap Capital and BluMont Capital, of the BluMont Innovation PE Strategy Fund. Cleland earned a bachelor’s degree with honors from Harvard University, and his CFA designation in 2001. After graduating from Harvard, Cleland worked in the research department at Midland Walwyn Capital (subsequently Merrill Lynch Canada) as research associate to the senior telecommunications services analyst. From March 1998 to March 2001, Cleland worked at Interward Capital Corp., first as an analyst, and later as associate portfolio manager, specializing in technology equities. He was founding portfolio manager at Northern Rivers Capital Management, where he worked from May 2001 until Northern Rivers was acquired by BluMont Capital in February 2010. Together with Riadh Zine, he cofounded Roadmap Capital Inc. in August 2013.

Stephen Ireland, healthcare specialist and a principal with Roadmap Capital Inc., has been involved in the pharmaceutical, specialty pharmaceutical and biotech industries for more than 25 years. He was the former senior vice-president business development at TransTech Pharma. Ireland managed transactions in 2006 and 2010 with Pfizer and Forest Laboratories, respectively, valued in excess of $2B. Ireland received his bachelor’s degree in biological sciences with honors from Brock University, Ontario, Canada.

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Source: George S. Mack of The Life Sciences Report  (3/20/14)

Michael Gray: Is Goldcorp’s Bid for Osisko a Harbinger of a Gold Renaissance?

Optimism. Momentum. Buoyancy. Call it what you will, a positive current is running through the gold space. Macquarie Capital Markets’ Canadian Mining Equity Research Team Head Michael Gray deconstructs some of the factors contributing to that newfound energy. Calling out merger & acquisition activity as a nascent trend, he shares with The Gold Report some of the names that could be on a senior gold producer’s shopping list.

The Gold Report: Many described the mood at the recent Prospectors and Developers Association of Canada (PDAC) conference in Toronto as something close to cautious optimism. You were there. Can you give our readers three reasons to believe a corner has been turned?

Michael Gray: Number one is the gold price being in the $1,330–1,370/ounce ($1,330–1,370/oz) range. Few people expected that at the start of the year. Indeed, many were predicting gold below $1,200/oz. Number two, a number of companies have received a stay of execution. There is a fertile environment for raising capital. Equity deals and a number of small merger & acquisition (M&A) deals are being done. That leads to number three, and the most important, which is Goldcorp Inc.’s (G:TSX; GG:NYSE) bid for Osisko Mining Corp. (OSK:TSX). That is the kind of big M&A activity we haven’t seen for a long time.

TGR: As far as equity deals go, how does your deal flow today compare to January and February 2013?

MG: I would say it’s night and day. There was very little activity in the markets for most of 2013. The tax-loss selling that happened toward the end of 2013 put the squeeze on the juniors and there was a marked increase in small-scale M&A during Q4/13. In early 2014 a stronger gold price combined with further M&A and sector outperformance generated more optimism. That momentum continues. It has been important to see more deals come through on equity financing. We’re seeing a healthy number of deals, many of them underwritten.

TGR: Is a gold price above $1,300/oz sustainable for 2014?

MG: Our house view is that the price will be softer in the second half of the year. However, a number of wild cards could come into play: increased buying of gold by China and the controversy over the official versus the unofficial gold sales in India along with the gold import tax dynamic, to name two.

TGR: Every Canadian small-cap gold producer was trumpeting the benefit of a weak Canadian dollar at PDAC. Is the impact of a $0.90 loonie really that much of a boon?

MG: It is as long as the operating costs and the sustaining capital costs are in Canadian dollars. Typically reagents and some materials are in U.S. dollars, so producers don’t get the same leverage on those costs.

For example, Richmont Mines Inc. (RIC:TSX; RIC:NYSE.MKT) has more than 95% exposure to the Canadian dollar as far as its operating costs, sustaining capital and exploration go.

We have to analyze it case-by-case, but we’re finding that the majority of the small-to-intermediate Canadian asset producers have great leverage against a weakening Canadian dollar.

TGR: Can you elaborate on the Goldcorp-Osisko merger?

MG: There are very few 500,000+ ounce/year (500+ Koz/year) assets out there for the seniors to buy, let alone in North America. Out of the 11 operating mines in Goldcorp’s portfolio, on a pro forma basis, Osisko’s Canadian Malartic asset would be among the top three production-wise, if the bid succeeds. This is the biggest dollar value deal we’ve seen for a long time.

It also speaks to Goldcorp’s increased focus on Canada, and with the Éléonore development project in Québec in particular, as it will be in production in November 2014. No question in our view, Goldcorp is highlighting the value of being exposed to a weakening Canadian currency.

Of all the seniors, Goldcorp has the best pipeline of quality assets. After getting through this particularly high initial capital cost (capex) year—2014—the Street will increasingly shine a light on Goldcorp, in our view. With Osisko in its portfolio, the light would shine even brighter.

TGR: Is this a harbinger of further M&A?

MG: Yes, in the sense that the seniors are looking to buy quality production and pipeline assets. If the Goldcorp-Osisko deal goes through, other producer targets in the 500+ Koz gold/year category in the Americas include Detour Gold Corp. (DGC:TSX) and in the eventual 300+ Koz/year category AuRico Gold Inc. (AUQ:TSX; AUQ:NYSE).

Among the 300 Koz/year undeveloped projects out there, Midas Gold Corp. (MAX:TSX) with its 100%-owned, 7-million-ounce (7 Moz) Golden Meadows project in Idaho, along with Torex Gold Resources Inc. (TXG:TSX) and its ~5 Moz, 100%-owned Morelos project in Mexico are attractive high-margin assets. We don’t cover Romarco Minerals Inc. (R:TSX), but its 4.8 Moz Haile project in South Carolina, certainly has 200+ Koz/year production potential.

Probe Mines Limited (PRB:TSX.V) hasn’t reached critical mass yet with its 100%-owned Borden Lake asset, but Agnico-Eagle Mines Ltd. (AEM:TSX; AEM:NYSE) has put its marker down for an equity interest in Probe. Probe has a compelling new high-grade discovery at Borden that signals that Canadian gold belts have lots more new, raw discoveries to give.

Latin America has struggled to some extent. Even in Mexico, the new mining tax reform package forced companies to make adjustments. In terms of M&A, precious metal assets in Latin America need to be carefully scrutinized.

TGR: Probe is aggressively drilling the new high-grade zone at its Borden project in Ontario. When do you expect Probe to issue a preliminary economic assessment (PEA)?

MG: Our analyst who covers Probe, Pierre Vaillancourt, believes Probe could be in a position to publish a PEA as early as before the end of 2014. Probe has plenty of cash and the ability to raise more. Its share price has defied a lot of investors who might have taken money off the table on its run up.

TGR: You have Outperform ratings on several Canadian producers. One is Richmont Mines, which had issues in 2013 with rising costs due to processing lower head grades. Is this a turnaround story in 2014?

MG: In our view, it’s definitely a turnaround story. Richmont found a new deposit of just above 1 Moz of approximately 10 grams per ton (10 g/t) gold immediately below its Island Gold mine near Wawa, Ontario. This deeper zone (Deep C) at Island Gold transforms the company from one that was living on a small reserve base to one with the potential for a 10-year mine life with higher margins.

Despite the issues on grade it encountered in the upper portions of the Island Gold mine last year, the company has ramped down to the top of its Deep C zone with nearly 1 Moz of high-grade ore. It is drilling that off to 20-meter (20m) centers right now. This is a perfect scenario: the development is getting put in place; Richmont just has to extend the ramp infrastructure, develop stopes and feed the mill with higher grades.

The true thickness of the Deep C zone averages 4.5m versus 2.7m in the upper portion of the mine. That will mitigate dilution, bring higher grades to the mill and increase production, based on our analysis.

TGR: What caused the problems in 2013?

MG: At the Island Gold mine, Richmont was mining lower grades in 2013 of 4.65 g/t; recoveries were also lower and milling costs were higher than expected. Its cash costs were fairly high at CA$946/oz in Q4/13. That grade just isn’t going to cut it at $1,200/oz gold once sustaining costs are added.

The high-grade Deep C deposit is the game changer. Approximately 60% to 70% of the drill holes have documented visible gold, at a depth between 450m and 1 kilometer. This can be a prolific vertical depth window in a lot of Canadian gold belts.

We believe that the more robust continuity and geometry of this Deep C zone, in terms of thickness and grade, make it a winner. Richmont is also starting to document parallel veins with good grades on the flanks of the Deep C zone, including those getting incorporated into the latest resource statement.

TGR: What other companies do you rate Outperform?

MG: Tahoe Resources Inc. (THO:TSX; TAHO:NYSE), which recently achieved commercial production at the Escobal mine in Guatemala and has issued production guidance of 18–21 Moz for 2014. The company has an A team at Escobal. It delivered with minimal slippage in the timelines. It also delivered on corporate social responsibility initiatives. Escobal is an underground mine where the company has brought to bear all the latest technology to ensure that it is an environmentally responsible underground mine as it lies in the region of a farming community. That was a really important box ticked for Tahoe.

TGR: Is Tahoe’s $75 million ($75M) debt an issue?

MG: It’s a minimal debt for the production profile and the cash flow we see coming from the asset. At the same time, we would expect to see management address the debt before instituting a dividend policy.

TGR: What other companies that you cover with Outperform ratings would you like to talk about today?

MG: MAG Silver Corp. (MAG:TSX; MVG:NYSE) is one of our high-conviction calls in the precious metals space. The Juanicipio project in Mexico, the joint venture between MAG Silver and Fresnillo Plc (FRES:LSE), is one of the best, highest-grade silver development projects out there. We visited the asset five weeks ago to confirm that the underground development access to the vein is progressing. It will take 3.5 years or so to fully access the ore and establish production at Juanicipio.

We believe this mine will have a production profile close to 15 Moz silver/year for the first seven years. Its all-in sustaining cash costs will be approximately $3/oz silver. The PEA shows a 21% internal rate of return at $10/oz silver. This is all on an initial capex of approximately $320M. MAG Silver has a 44% share of that to contribute.

TGR: There was talk about Fresnillo eventually buying MAG Silver out. What are you hearing?

MG: There is a lot of history there. Back in 2008, a “takeunder” bid caused some acrimony. There are different faces on the joint venture technical committee now. George Paspalas is now the CEO of MAG Silver; Octavio Alvidrez is CEO of Fresnillo.

From our vantage point, it makes sense for Fresnillo to consolidate the other 44% Juanicipio interest it does not control. It would have to be a friendly transaction, given that Fresnillo owns 17% of MAG Silver. Bottom line: things are more positive from a relationship point of view by our estimation, but that doesn’t mean a takeover is imminent.

TGR: You mentioned Midas Gold as a possible takeover target. What is the premise there?

MG: Midas Gold’s 7 Moz 100%-owned Golden Meadows gold project is an attractive asset and potential pipeline project for an intermediate or senior producer as it a North American asset that could be producing 300–400 Koz Au/year by 2019 or 2020. There are very few assets like this in North America. The closer Midas gets to submitting its environmental impact statement (EIS) and gets into Idaho’s joint review process (late 2014/early 2015), the more it will be on the radar screens of intermediate and senior mining companies, in our view.

Golden Meadows is a past-producing brownfield open-pit operation. The company will have some permitting challenges, including restoring a former salmon stream that currently flows into the Yellow Pine pit. However, it is our understanding that the environmental groups aware of the project recognize that mining the deposits at Golden Meadows will ultimately transform and remediate the legacy issues toward a more natural state at the end of its life as a mine and is a good news story.

Midas will issue a prefeasibility study in midyear. We estimate that the company will be in a position to submit its EIS and essentially put a pin in the project scope and permitting toward the end of the year. That might be the time for a producer to take on the project via M&A.

The other angle that we think is important is that we see Golden Meadows as a Donlin Creek analog. Both have similar geology, and Donlin Creek has more than 40 Moz of gold [in the Barrick Gold Corp. (ABX :TSX; ABX:NYSE) and NOVAGOLD (NG:TSX; NG:NYSE.MKT) joint venture]. We believe on this basis Midas’ Golden Meadow asset has the pedigree to be very big.

TGR: When it comes to taking positions in these companies, do you recommend accumulating on dips or taking full positions when possible?

MG: It varies by company. If it’s a high-conviction call and you take a 12-month view as we do, we would gain exposure to the best of breed assets, companies like MAG Silver and Midas Gold.

Among our Outperform ratings, companies we consider buying on the dips include Elgin Mining Inc. (ELG:TSX), which we recently moved from a Neutral to an Outperform rating. At 166%, it has one of the highest year-to-date returns in our coverage universe. Elgin is a bit of a show-me story when it comes to its Björkdal gold mine in Sweden.

TGR: Any final words of wisdom for us?

MG: Even though we’ve turned one corner, investors need to be aware that we could turn another corner—not necessarily a positive one. I think we should be very prudent. Focus on quality companies with low cost structures, attractive assets and good management.

TGR: Michael, thank you for your time and your insights.

Michael Gray is a mining equity analyst with Macquarie Capital Markets and covers a range of precious metal explorers and producers with an emphasis on North and South America. He is an exploration geologist and holds a Bachelor of Science in geology from the University of British Columbia and Master of Science in economic geology from Laurentian University. His career of more than 25 years in the mineral exploration business started with senior mining companies including Falconbridge, Lac Minerals, Cominco and Minnova where he worked throughout Canada and the USA. He co-founded Rubicon Minerals in 1996. He is also a past President of the 5000+ member BC & Yukon Chamber of Mines (now AME BC). Gray joined the mining analyst world in 2005 where he brought to bear his technical skills to identify new precious metal opportunities at an early stage with outstanding exploration potential; he has covered a number of these opportunities that were subsequently taken over by gold producers.

Want to read more Gold Report interviews like this? Sign up for our free e-newsletter, and you’ll learn when new articles have been published. To see a list of recent interviews with industry analysts and commentators, visit our Interviews page.

Source: Brian Sylvester of The Gold Report  (3/19/14)

Can the Rally in Biotechs Keep Its Momentum?

Can the Rally in Biotechs Keep Its Momentum?
Can the Rally in Biotechs Keep Its Momentum?
The last time we looked at Alexion Pharmaceuticals, Inc. (ALXN), the position was trading around $121.00 a share. Now, it’s $175.00 a share, and once again, the company reported outstanding financial results from its “Soliris” wonder-drug.

This stock has been a powerhouse wealth creator, and virtually every time we take a look at it, the share price is higher.

There has been and continues to be tremendous momentum with biotechnology stocks in this market. And a great deal of it is happening in the large-cap space, where price momentum, thanks to institutional investors, has been robust and often very consistent.

Previously in these pages when looking at Alexion Pharmaceuticals, we also considered Biogen Idec Inc. (BIIB). (See “How Risk-Averse Investors Can Capitalize on 2014’s Expected Record Drug Approvals.”) It’s a similar story in terms of the price momentum being experienced on the stock market. In our last update, the position was treading around $290.00 a share; now, it’s $325.00, representing another new record-high.

Strong trading action in biotechnology stocks is partially due to economic success within this specific sector, but it’s also a reflection of buoyant capital markets, or equities in particular. The speculative fervor that investors have for this sector has been unmatched in recent history.

The NASDAQ Biotechnology Index broke out of a 12-year price consolidation in 2011 and has almost tripled since. While there were some retrenchments in this index in the last few years, considering the inherent volatility in biotechnology stocks, the pullbacks have been minimal.

While monetary policy is favorable to equities, like it is currently, I’d say there’s further price momentum in a lot of these stocks, specifically those that are already existing winners.

Momentum investing is risky business, and it requires the rest of the marketplace to be buoyant. But investors have proven to go where the growth is, and it certainly is with this specific sector.

In good markets, buying high to sell higher is very much a useful investment strategy. The key is to know when to get out of that kind of trading.

With many of these stocks, even with well-established names, historic trading action reveals long periods of nonperformance, followed by very fast periods of tremendous capital gains. Amgen Inc. (AMGN) is the perfect example of this. The company’s stock chart is featured below:

Amgen ChartChart courtesy of

In any case, the action can be robust, both up and down. Therefore, historical price momentum is a useful indicator. With strong risk management and specific trading rules, biotechnology stocks are definitely worthy of consideration. The sector is, of course, 100% risk-capital only.

Leaders within the NASDAQ Biotechnology Index are likely to keep doing well, so long as there is certainty regarding the Federal Reserve’s monetary policy and there are no unexpected shocks to the system.

Operational momentum with companies like Alexion pharmaceuticals and Biogen Idec seems to be intact near-term; given current information, I see no reason why stocks like these two biotechnology stocks won’t keep ticking higher this year.

This article Can the Rally in Biotechs Keep Its Momentum? was originally posted by Profit confidential