Michael Campbell: Eric Coffin is of Hard Rock Advisories is with us now. He and his brother David have had a tremendous track record in looking at opportunities in the mineral market, the gold/silver market. Eric you were just in the big PDAC Conference (Prospectors & Developers Association) in Toronto. What’s the feel there? Is there tremendous optimism right now in that center.
Eric Coffin: It was the usual madhouse and even for the PDAC it was an unusual madhouse. One of Dave’s comments was that I think it was the second day it took him 40 minutes to get his coat out of the coat check. It was completely insane. It’s a very old conference and for most of it’s history it was really an industry conference, it wasn’t really an investment conference. That’s sort of been tacked onto it, and you see so many people coming from so many parts of the world now. There’s still a lot of fund managers, there’s still a lot of money that wants into this sector.
There’s a sort of old tale in the sector about the PDAC curse and the basis of that curse is simply that so many people try to get attention that the PDAC, that anyone that’s got any kind of interesting news puts it out right before the conference, so you kind of get this lull of news after it. So things might be a little bit quiet going forward, but certainly there are a lot of happy people. The guys who are the producers are just swimming in money, there’s going to be a lot of M&A. There’s already been a lot but there will be a lot more.
Michael Campbell: I would suspect that certainly seniors are looking to replenish some of their production, and of course it’s going to be pretty attractive to buy a smaller company who has already done all of the geological work and maybe need the financial. Do you suspect that that’s going to intensify then?
Eric Coffin: Yes I think it will. With the gold and other metal prices the price of buying those assets in the market has gone up. Big companies like to tell you that now they’d rather find the stuff themselves, but if you are at the scale of a Barrick or a Newmont, replacing your reserves every year and trying to put together a 15 or 20% growth rate is enormously difficult, and in fact almost impossible to do it unless you’re basically out on the M&A trail almost constantly.
Michael Campbell: Well one of the things that I find interesting is to know the process that they are undergoing to figure out assets that they think are worth acquiring because I’m not sure that it shouldn’t be exactly the same approach for what individuals are looking for. That’s what you do at HRA Advisory; you guys have been around a long time and you’ve been in a real salad days kind of environment here. You’ve had about 60 stocks from your list since 2003 when gold started to move, average gain about 250%.
What kind of companies is HRA Advisories looking for which would be very similar to what companies are looking for when they’re planing on purchasing whole companies?
Eric Coffin: There’s two or three areas we’ve been focused on lately; gold and silver obviously is one of them. You’ve got this sort of hierarchy of companies in all of the mineral sectors and different companies are looking for different things. Again, if you go back to a Newmont or a Barack, companies on a mass scale normally want production scale at a given mine. In other words, they don’t want to have to buy 40 mines to add a million ounces when they can buy three mines to do it. So generally what they want is scale, they want big, something that looks like it can produce 2 or 300,000 ounces.
That said, there’s a whole different tier of companies below that that are quite happy to go out looking for companies that can have deposits that can do 30 or 50 or 80,000 ounces a year. We look at both types and when you look at deposits the way to think about it really, the way these companies think about it, is it’s just how many ounces can they produce, and what is the margin on those ounces? So in other words a company that has a deposit that’s 23 million ounces and it looks like the economics are that they can produce gold at a cash cost of $800 an ounce, the company next to it might have two million ounces and maybe they can produce at a cash cost of $400 an ounce. Well obviously company X, the acquirer that comes along to look at these two companies, which one are they going to pay more for? They’re going to pay more for the one with the lowest cash cost.
So that’s the combination we like to see because those are the ones where you get the highest value per ounce. In this kind of environment with high prices a company that’s successful at adding and finding ounces in a deposit that looks mineable for 10 or 20 or 30 dollars an ounce can make a pretty good buck turning around and selling those ounces for $100 or $150 or $200 to a major.
The other area we have been looking at and spending a fair amount of time on is some of the commodities stuff; we’ve covered a few iron ore deals, we were really lucky with the Consolidated Thompson, we hit on that when things are really ugly in 2009 at about $2.5, it just got taken out at $17. We’ve got a couple of earlier stage companies that we’ve added just recently. Iron ore is very interesting, that is because it’s kind of the definition of how different this sector is in this kind of a secular bull market; 10 years ago, 20, 30, 40 years ago you simply would not have seen juniors going after iron ore deposits, it just never happened. And the simple reason for that was it all but impossible for a company of that scale to go in and prove one of these billion ton deposits and have any hope of ever putting into production, because there was just no way they could make that leap in financing.
In fact, that’s what Consolidated Thompson did, it put a deposit in production at eight million tons a year, and that kind of scale, that kind of revenue generating at today’s iron ore prices eight million tons a year you’re looking at over a billion dollars a year in top line revenue, that’s what the really big guys look for, that’s what they want. They want to buy things that can add substantial revenue to balance sheets and income statements that are already pretty huge. So the bulk commodities are pretty interesting to us, and they look like they’ve got legs now. We’re looking at a lot of stuff in the agricultural space, basically fertilizers, potash, things like that. And again, they have scale potential and we think that’s a story that’s not going to go away. With the wealth increase you’ve seen across the world one of the side effects, and it’s not really a good one, is that food prices have gone up a lot but as those prices for basic foods go up there is more room for farmers to maximize productivity with things like fertilizers. So we think the market is like that so it’s going to stay good for quite a while.
Michael Campbell: HRA Advisories is looking for opportunities throughout the world and that’s what I wanted to get to: how do you factor in geographical risk when you are looking at something Eric? It would seem to me that Canada and North America are in the cat-bird seats, South America has been a little iffy in certain countries, and I wanted to ask you about Africa. There’s some hot areas in Africa but should I be concerned as an investor about the geopolitical risk?
Eric Coffin: Africa is a tricky place, there’s a lot of different countries, a lot of them aren’t particularly stable, most of them aren’t democracies in any real sense of the word. There are areas that we like, we like West Africa in particular, most of the countries there are to some degree, and to a large degree in many cases democratic; they’ve been fairly stable, they don’t have a lot issues in terms of boundary issues between each other so you’re not getting those kinds of problems which are pretty common throughout Africa. It is an area that’s pretty welcoming when it comes to foreign investment. It doesn’t have a lot of really strong native industry that generates a lot of wealth, these are mainly pretty poor countries, and in their case most of these countries I think recognize that mining has been a really good thing for them, the gold sector in particular. It’s really quite amazing how much difference gold production has been able to make in some of these countries.
West Africa’s gold production has gone up about 70% in the last ten years, it’ll go up another 40 or 50% probably in the next five years. If you look at a country like Burkina Faso which is one country where we cover a couple of companies in, that’s an increase from essentially a standing start a few years ago. We were talking about adding 20 or 30% to their GDP just out of the mining sector and by local standards these are very, very high paying jobs. Plus these companies are going to be contributing a very large percentage of the tax base. So the countries are very much pro-mining, there’s lots of alluvial miners there so it’s not like something they don’t really know about. And if you look at what’s developing there’s one thing that’s interesting about West Africa. The rocks are basically the same as central Canada, very old greenstone rock. In West Africa’s case they haven’t been shaved off by glaciers 20 times so there’s lots more oxidation. Almost all the work done there in the past was very shallow drilling to drill of oxide deposits that would go into heap leaches; most of the mines right now are heap leaches.
What you are starting to see companies do and one example I’ll give you is Riverstone, a company that everybody probably knows that we follow, Riverstone has been drilling at their main project called Karma that’s got three different deposit areas in it. They just put out a new resource which was about a 70% increase, it’s gone from 1.1 to 1.9 million ounces that doesn’t include the last 30 or 40,000 meters of drilling. What you’re just starting to see them do now is drill below say 100 to 150 meters of depth. They’re going from the oxide down into the transition and the sulphide zones. In the past, companies would just basically stop when they started hitting sulphide. But one thing that’s changed with $1,400 gold is these companies can start looking at these deposits and saying: you know what, at these gold prices we can go in, build a plant, not just a heap leach but a mill, and start going after this one gram, one and a half, two grams stuff in sulphides and make really good money at it.
Another company we follow also in Burkina Faso called OreZone had a big jump a few months back and largely what they did was drill deeper and start including sulphide resources and I think you’re going to see Riverstone do that moving forward. You’re starting to see a lot of the companies there push their drilling deeper and I think what you’ll see is a lot of deposit enlargement over the next little while. A lot of these half a million/million ounce deposits have got room to go to a million/two million ounces. And the other thing that will happen in many cases you’ll see the grade go up because in a lot of these deposits the sulphide zones are actually higher grade than the oxide zones, the problem is sulphides are a little harder to get out. But at these gold prices, it’s worth doing and I think you’re going to see the gold. I think the 50% increase in gold production over five years, it could even be more than that, there’s a lot of deposits in that areas that are just getting drilled off. It’s a great area to be looking.
Michael Campbell: I’m talking with Eric Coffin, Hard Rock Analyst Advisories and by the way I want you to do this, go to www.moneytalks.net and you’ll see on the front page there it’s Africa gold week as we’re having a look at that particular area in a variety of ways. There’s a ton of producers that you will recognize names of in different areas; Harmony Gold or Plascer Dome has big areas down there, Gold Fields is a company that I have been in and out of for years. So there’s lots of companies that you know, but there’s also a very vibrant area for growth. Africa I think accounts about 30% percent of production right now in minerals.
Let me just ask you this Eric: with higher gold prices obviously a lot of different techniques and different properties become much more viable when you can get $1,400 an ounce and a cost basis at say $800, you can make a go of it; obviously if prices were lower for gold you wouldn’t be able to. But I want to ask: this whole area, is that really where the big action is going to be if you can choose the right properties?
Eric Coffin: I think that’s true. I know you talk to people on shows like this and you talk to people at conferences and people are a little frustrated with the majors, and there’s nothing wrong with them but one trend that we’ve noted over the past year/year and a half is you are seeing, and I’m talking gold producers here in particular, their PE ratio has declined over the last little while. It used to be that gold producers got outrageous PE ratios and held them for years and years, and part of the reason for that I think was people were buying it for the ounces in the ground on the assumption that you would make money on increases in the gold price and I think as the gold price has gone up you’re starting to see that premium come off of the producers.
So it’s a little harder for them to just get big leverage incremental gains from moves in the gold price. The big incremental gains come from basically investing in companies that find something and grow those resources and go from having no ounces in the ground to a million ounces in the ground. In percentage terms that’s where the big money is. It’s riskier obviously but I think if you can pick things that are already on that track and look like they can build resources they already have I think you can do very well at that end of the space. And there’s been so much money going into the juniors in the last six to eight months, there’s a lot of companies out there that are still juniors but they’ve got 10 or 20 or $30 million, they’re not going to run out of money or have to go back to the market any time soon.
I’ve just got a minute or two left here Eric. If you can just throw a couple of names out. If you can just give us a couple of names that maybe we can put on our radar screen?
Eric Coffin: Riverstone Resources is certainly one of them, they’ve got 1.9 million ounces now, it’s not expensive at all compared to its peers, and they’re still drilling. There’s going to be more ounces, they’ve already got more ounces in the can if you will and that they’re going to be drilling pretty much continuously through to the end of the year.
Another one that we’ve followed from much cheaper prices but still like and that you should have on your radar screen is the company East Asia Minerals and the reason for that is there’s two things coming in the short term: one is their first resource estimate, your guess is as good as mine but I’m thinking probably in the four or five million ounce range. But they’re also doing a transaction where they’re going to spin off a couple of new companies and both of these companies will actually have a million ounce plus gold resources in them so it’s going to be like a three for one…but the actual details will be announced I think in the next two or three weeks in terms of what the ratios and stuff will be. I’ll be keeping an eye out for that.
A couple of earlier stage ones that we follow, one is called Gold Quest, they’re down in the Dominican Republic. I‘d have that one on your screen because they should have a small gold deposit down there of about 400,000 ounces, they’re drilling that right now, shallow. In January they had some really nice drill results the last time they drilled it; they should have that first set of drill results from this drilling coming out probably in the next week or two I would think, and if they can recreate some of the best holes from the last one I think that one is going to probably really get some action.
And the whole Yukon play, we were surprised how much a lot of these stocks went up in February. We’d be calling an area play for a year and a half and we didn’t expect a lot of weakness, but a lot of the discovery stocks actually saw 52 week highs in February which is pretty amazing for Yukon explorers, there’s no news coming for months. But I certainly keep that area on the radar screen. One that’s a little earlier stage called Northern Tiger which we like, it’s another high grade story. Again, none are going to be generating actual drill hole news for at least a minimum of a couple of months, three or four months in some cases. But now is the time to get them on the radar screen and kind of pick your spot, and maybe pick up some cheap as the summer work starts.
Michael Campbell: Thanks Eric. Listeners, if you’re serious about investing in this area, Hard Rock Advisories is actually one of the most respected services for the depth of their research and that’s why we’ve got a special on www.moneytalks.net, go to www.moneytalks.net on the front page you’ll see African Gold Week. Click on that and just on the right you’ll see a special offer for HRA Premium Services. I think as I say you get Eric and David Coffin and people that they use on a full time basis looking for these opportunities. It’s a great deal: www.moneytalks.net; just click on African gold week and you’ll see the offer right there on the right hand side.