Economists attribute the resource industry as a key reason why Canada's economy has remained relatively healthy (compared to other parts of the world). The resource industry is a key part of the Canadian economy but that doesn't mean every resource company is a good one.
At the PDAC Conference (in Toronto from March 4th through March 7th), investors met hundreds of resource companies vying for attention and investment.
Investors also heard resource industry experts provide insight and evaluation on these resource stocks. One of those experts was Paul Burton, who writes for GFMS World Gold. Paul Burton was in the mining industry as an engineer and has been in the mineral economics side of the business for most of his career. We've provided highlights of his talk below. Where possible, quotations are used directly from his presentation but some may have been slightly edited without changing the meaning.
Mr. Burton's talk was divided into four parts. First, he talked about current market conditions, then he gave investors a rough guide to evaluating gold company investments, then he provided an overview of gold mining activity in Ontario and Quebec. Lastly, he finished with a long list of companies that investors might want to take a closer look at.
Mr. Burton started by talking about current market decisions.
He said: "We've got a high gold price, of course, and predictions are for bullish gold prices for some time to come. We've got record exploration spending – something like $18 billion last year. Gold production is up the third year running. We are starting to see the benefits of this high gold price." He added one interesting piece of information that investors may not have realized: "There aren't many new discoveries but a lot of old projects now looking much more economic at these gold price levels."
In addition to the high gold prices and active exploration, there is something else going on in the market, too, which provides a significant opportunity for investors: "You've got a huge number of exploration companies active and there's a poor market valuation for explorers and producers. And there's a lack of cash for explorers. So if you believe the gold price – and we think it will continue to be strong for the next 18 months – it's a good time to find undervalued stocks."
Further supporting the idea of undervalued stocks is the growing disparity between metal prices and prices of companies that explore or produce those metals: "In 2008, the gold price picked up very quickly. But equities came off even more so and haven't recovered. And since the beginning of last year, they've actually been trending [downward]. There's a huge divergence between what the metal is saying and the value of the equities of the gold producers. If you think gold prices are going to continue going up, this represents a major buying opportunity."
The second part of Mr. Burton's speech had to do with providing a model to help investors evaluate gold companies. He called it "The Six D Model of Mining" and described it as "a novel way of looking at what the status of the company is."
He divided up the lifecycle of a mine into six "D's" and covered different aspects of each stage.
"Detection is the earliest stage," he said. "There's some geophysical work. Funding is usually private. Management should have a geological background. Key results should look at targets. Investors who want to invest early may need to buy warrants."
The second stage is Discover. In this stage, companies have "initial drill results and some idea of potential. Funding is sometimes from the market, perhaps listed on the TSX-V. Look at drill results; investors will look to trade on drill results."
The third stage is Definition and it is divided into two sub-stages: "Definition 1 is when they have resource and get some idea of the size. Look at results and increases in results. And Definition 2 is when they have a prefeasibility study so we're getting some first evaluations. Look at Capital and Operating cost. Trade on resource results, but some investors will hold during the fallow period during this stage and the next stage."
The fourth stage is the Design stage. During this stage, companies determine the design of the resource and how they will mine it. It's "the definitive feasibility study. Often, companies will be looking to banks for funding at this stage. There's much less risk for banks at this stage. You'll be looking to see a sensible plan around how much the project is going to cost. Pay attention to operating cost."
Development is the fifth stage. "This is where they start to build the mine. This takes a lot of money. Look to ensure the company has the funding. Look to see who has been appointed to do the engineering and build the mine. You're looking for permitting. Some investors will want to buy more and hold during this stage."
And the sixth stage is the Depleting stage: "That's when the mine is actually working and depleting its reserves. When you go into production, the project is basically de-risked and the market starts to valuate that. At this point, they're hopefully making a lot of cash to reinvest back into the ground. Look at cash costs and cash flow. Investors may want to hold and/or take profits during this stage."
Investors can use this Six D Model of Mining to determine what stage a company is at and then they can start focusing their due diligence more effectively.
In the third section of his speech, Mr. Burton reviewed two reports about Ontario and Quebec gold mining. These reports were available at PDAC and are available for free at http://www.gfmsworldgold.com/reports.asp. (Investors should download those reports to review them in greater detail than what we could provide here). Mr. Burton provided a brief, high-level overview of each report and encouraged investors to get the reports themselves.
Highlights of the Ontario report include:
· There are many early-stage projects, which don't necessarily come through to depletion. The bad ones get weeded out.
· "Goldcorp is the dominant producer in Ontario, with three mines at about 1.2 million ounces producing per year."
· Investors can look at the design stage of the report to see what mines should be in production in the near future.
· "In 2014, we've got the Red Lake extension of Goldcorp coming in at over 250,000 ounces per year."
· "The biggest project is the Rainy River project, which has 4.1 million ounces."
Highlights of the Quebec report include:
· "There are quite a few projects at the early stage."
· "Agnico-Eagle was a dominant producer in 2010 with 464,000 ounces".
· "Generally, the mines in Quebec are much smaller than what we're seeing in Ontario. The biggest one coming on-stream will only be 100,000 ounces per year."
· In 2014, there's a project coming online in James Bay that will be the biggest gold project in the province.
In the fourth part of his speech, Mr. Burton listed companies that investors should watch for. Most of these companies are mining in Ontario and/or Quebec and Mr. Burton may be a shareholder in some of these companies.
The first company he talked about was Aurizon Mines (TSX: ARZ). "They have the people, property, project quality, and they have money to do what they want to do." He added that people, property, project quality, and sufficient money were the four things investors should look at initially before starting their due diligence on a company.
Detour Gold (TSX: DGC) was the next company he talked about. "I was onsite just a few months ago and the project is really coming along nicely. Everything is in place. I think you'll see a re-raising once it comes into production next year and everything is de-risked."
Mr. Burton also mentioned Prodigy Gold (TSX-V: PDG). "They have a number of good projects."
"Rainy River Resources (TSX: RR) has a very good resource and is at the pre-feasibility study stage. It has financing and a good project. Management changed a couple of years ago and they have a very good management in place," he said.
He continued listing several more companies in quick succession: "Rubicon Minerals (TSX: RMX) is right in the Red Lake gold camp. They have a large resource and it's high grade. Premier Gold Mines Ltd. (TSX: PG) has a couple of gold projects worth looking at. Lake Shore Gold (TSX: LG) has large resources, good grades, and are right in the Timmins camp and they are a producer. Queenston Mining (TSX: QMI) has many projects with large resources in the Timmins camp. Conquest Resources (TSX-V: CQR) has great locations for its projects in Red Lake and in Detour Lake. Globex Mining (TSX: GMS) has an interesting joint venture business model where they get others to pay for exploration. Virginia Mines (TSX: VGQ) they are proven mine-finders. They're a great team and they have many projects in good locations. Golden Valley Mines (TSX-V: GZZ) has a number of joint venture partners funding the exploration. Adventure Gold (TSX-V: AGE) has a number of properties, some good intersections, and has a joint venture with Agnico-Eagle."
Mr. Burton admitted that these were just starting points and not every investment would be right for every investor and that each investor should do their own due diligence.
Investors who want to buy into safe mining jurisdictions or want to leverage the success of Ontario and Quebec gold mining success can use Mr. Burton's list as a good starting point to find investment opportunities.
Aurizon Mines: http://www.aurizon.com/
Detour Gold: http://www.detourgold.com/
Prodigy Gold: http://www.prodigygold.com/
Rainy River Resources: http://www.rainyriverresources.com/
Rubicon Minerals: http://www.rubiconminerals.com/
Premier Gold Mines Ltd: http://www.premiergoldmines.com/s/Home.asp
Lake Shore Gold: http://www.lsgold.com/
Queenston Mining: http://www.queenston.ca/
Conquest Resources: http://www.conquestresources.net/
Globex Mining: http://www.globexmining.com/
Virginia Mines: http://minesvirginia.com/en
Golden Valley Mines: http://www.goldenvalleymines.com/
Adventure Gold: http://www.adventure-gold.com/home/en/