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Toronto-based
Ubika Research is making a name for itself on Bay Street. The firm launched
its Gold 50 Index in February 2010 and by year-end, the high-potential gold
juniors on that list were up a combined 99%. Ubika Cofounder and Analyst
Vikas Ranjan returns to The Gold Report for a
discerning look at the ongoing turmoil in the Middle East, its possible
effect on metals markets and several promising junior explorers and producers
in this exclusive interview.
The Gold Report: The Middle East is always a
hotspot for geopolitical tension. Those tensions escalated recently when
Israel announced Iran was sending warships through the Suez Canal, which
hasn't happened since 1979. And Egypt's new military rulers decided to let
the ships pass. Is it safe to say that this situation has the potential to
radically move the gold price as a result of the safe-haven bid?
Vikas
Ranjan: The situation in the Middle East is very
fluid right now with many protests against autocratic governments. Opposing
parties will attempt to seize the moment, and that will likely make the
situation more volatile. This is creating a new risk in the market,
particularly due to its impact on the price of crude oil. But could the
situation have a dramatic impact on the price of gold? I doubt that. The
Middle East situation will probably continue to help the gold price because
risk is increasing—and it's a new set of risks. Some people always take
refuge in gold as a safe haven, and this will push gold prices higher in the
short term but probably not radically higher unless there is an all-out war,
which I doubt will happen. So, yes, there's support for gold already and
we'll see some near-term rise in the gold price.
TGR: Another factor
on the demand side is inflation. Consumer prices in the U.S. rose about 0.2%
in January, which is the fastest rise in more than a year. And China
recently published some data that suggest inflation is rapidly taking hold
there. What is Ubika's position on gold as an inflation hedge?
VR: Yes, inflation is definitely becoming a
major concern—at least in emerging economies like China, India, Brazil,
Russia and Argentina. Gold has traditionally been a strong hedge against
inflation as investors seek to hold hard assets like gold when paper
currencies depreciate due to higher inflation. If inflation takes hold, our
position is that it will be very beneficial for gold. Now, the question is:
Is there a real threat of inflation? It's absolutely a threat in emerging
markets.
In our opinion, the numbers are actually
understated. In many of these countries, the real inflation rate is much
higher than the official figures because emerging markets are growing rapidly
and are not seeing any let up in demand growth. However, developed countries,
especially the U.S., Eurozone countries and Japan, are struggling still. In
the short term, perhaps one or two years, we don't see a real threat of
inflation in developed countries because there's no real threat of
wage-induced inflation. Having said that, these countries have pumped up a
lot of liquidity into the system; so, ultimately currency-induced inflation
likely will take hold in a couple of years—that will be very beneficial
for gold.
TGR: So gold has significant demand drivers
both in the short and long term?
VR: Yes.
TGR: Gold recently brushed up against its
50-day moving average on the Comex. Where do you see the next resistance
level? Will it be above $1,400/oz.?
VR: Yes, I think so. If you look at the
trend over the last few months, gold is making a strong base at higher and
higher levels. Even after swift selling in the new year, after gold had made
a late run in 2010, it did not break below $1,300 on the downside and has now
made a nice comeback. If that level above $1,350 is sustained for a little
more time, I think the next move would be to test the levels around $1,500. I
wouldn't be surprised if gold breaks $1,500 by midyear.
TGR: That would certainly be good news for
our readers and most junior gold explorers. Ubika Research covers a number of
gold juniors. In your last interview with The Gold Report, you talked about La Quinta Resources Inc. (TSX.V:LAQ),
which at the time, was rebranding itself as a Nevada-focused junior with its
Easter property. What's happening with La Quinta now?
VR: La Quinta has made some good progress
since we last spoke. The company completed a summer drilling program last
year at the Easter Gold Project. The drilling program focused on the area
where there is an historical resource. La Quinta hit gold in every hole it
drilled and successfully determined the direction of the mineralization. I
visited the site in November last year and I was pretty impressed by the size
of the land package.
Current drilling is exploring only one known vein
system, and there is potential for others. We think La Quinta has a strong
technical team to carry out its well-defined exploration program that should
significantly increase the current NI 43-101 resource. Another very
interesting thing about the company is that the Easter Project is in a joint
venture (JV) with Fronteer Gold Inc. (TSX:FRG;
NYSE.A:FRG), with La Quinta earning its option to own a 65%
interest. Now, Newmont Mining Corp. (NYSE:NEM) just
announced a takeover bid for Fronteer. The gold sector continues to see lots
of mergers and acquisitions (M&A) activity, and a company like La Quinta
can do very well if it successfully executes its strategy and proves up a
sizeable resource base of, say, 500,000 to 1 million ounces (Moz.).
TGR: Do you expect Newmont to take a closer
look at La Quinta given that relationship?
VR: Yes, it's possible. Newmont also
announced it would spin off some of the exploration assets into a subsidiary
called Pilot Gold. We're not sure if it will spin off its Easter Project
interests once the company acquires Fronteer. But, even if it did, Newmont
still owns about 20% of Pilot Gold. Newmont would obviously have an eye on
these assets; it's very aggressive. Newmont is looking for ounces in the
ground. If the company finds a good-sized deposit it can mine economically,
why not?
TGR: La Quinta recently got a permit to do
some trenching on the Easter Property from the Bureau of Land Management
(BLM). Ultimately, that work will lead to more drill targets and more
drilling. When could we see a revised resource estimate from La Quinta?
VR: Our understanding is that La Quinta will
engage in a follow-up drill program very soon. I think the company should
have some results from that by May. Once La Quinta takes into account all of
those results internally, it will probably do an evaluation and include that
drill data. That would be an opportunity to revise the resource estimate. If
everything goes as planned, we could see a resource revision by late summer
or early fall.
TGR: I want to ask you about your target
price for La Quinta but you don't call it a target price. Ubika calls it a
"model price." Please briefly explain that.
VR: The Ubika "model price" is
based on our valuation methodology. We do not say that is our "target
price" because we are not in the business of offering targets or recommendations.
We just say that, based on our analysis, the company model price should be
$X.
TGR: So what's Ubika's model price for La
Quinta?
VR: Our model price for La Quinta is $0.23.
The stock trades about $0.08 currently, so there's a bit of upside based on a
very conservative assumption of the company's current resource and what we
think the resource could be in 12 months.
TGR: Another company you talked about in
that same interview was VG Gold. Since then, VG has merged with Lexam
Explorations. What did you make of that deal?
VR: We started coverage on VG Gold back in
July 2008 when it had a $20 million market cap. Once the merger with Lexam
Explorations was concluded, the new company emerged as Lexam VG Gold, Inc. (TSX:LEX; OTCQX:LEXVF;
Fkft:VN3A) and now the market cap is close to $225 million. More
and more investors are warming to the idea that Lexam VG Gold is moving in
the right direction. Mr. Rob McEwen, who is the former chairman and CEO of Goldcorp Inc. (TSX:G; NYSE:GG) and
probably one of the best gold mining investors on the planet, owns close to
30% of the company. He is also the non-executive chairman. By making that
investment and being on the board, he's basically saying that this is one of
the most-promising companies in the Timmins Gold Camp.
The merger allows Lexam VG Gold access to more than
$15M of Lexam's capital. This will really change the game for Lexam VG. Now,
it can significantly expedite its exploration program. This company could
become a company of choice for many people to get exposure to the Timmins
gold exploration play.
TGR: Lexam VG's focus is the Paymaster
property, which is part of the past-producing Paymaster mine. Do you think
that's a possible takeover target by a company like Lake Shore Gold Corp. (TSX:LSG), which is
operating near Timmins and generating a lot of cash flow?
VR: Probably not because we think VG has
similar potential. Lake Shore's market cap is $1.5 billion and it has a
little more than 3 Moz. in known resources and reserves. VG already has gold
resources of roughly 1.5 Moz. Lexam VG has four properties that it's going to
drill vigorously this year; it'll add a lot of value at these gold prices. VG
is getting about $140/oz. in the market in terms of market cap, whereas a
company like Lake Shore gets about $550/oz.
Now, I acknowledge that Lakeshore has 1.8 Moz. in
the measured and indicated (M&I) categories and has already commenced
small-scale production, which is fueling strong interest in the company.
However, there's still a big valuation gap in terms of VG going to the next
stage. I think this company's market cap has the potential to go to $1
billion in a couple of years if it successfully executes its exploration
strategy and expands its gold resource base.
TGR: Really?
VR: Yes. The potential is there, considering
the vast support it has and all the exploration potential of its four
properties—all of which are close to past- or currently producing
mines. You couldn't ask for a better address than Timmins.
TGR: What about Goldcorp as a potential
suitor?
VR: Goldcorp is more likely, but I think a
company like Lexam VG Gold would probably hold out for a longer time and
build more value before agreeing to be acquired.
TGR: So, in the meantime, Lexam VG will
continue to derisk Paymaster and its other properties through drilling and
further exploration.
VR: Yes, exactly. It'll keep exploring,
building resources, moving resources from the inferred category into M&I
and, potentially, move resources into reserves as the company evolves. That
will build value because, on average, you may get $75–$100/oz. in the
market for inferred resources but $150–$200/oz. as you move those
resources into the M&I category.
TGR: And we know Goldcorp is willing to pay
high prices for ounces in the ground given the $3.5 billion it paid for
Andean Resources. What's the Ubika model price for Lexam?
VR: Lexam breached our model price
handsomely. We're reviewing that price because a lot has changed since we
first came out with it two years ago. Our new model price on LEX is $1.87.
TGR: Let's move on to the Ubika Gold 50
Index comprising 50 high-potential junior gold explorers. The companies on
that list were up a combined 99% in 2010. Why did you start your index?
VR: We had quite a few very promising junior
gold explorers and companies under coverage, so we decided to launch an
index. As you know, it's not easy to find a list of 50 promising companies in
the junior gold exploration space. We launched it in February 2010 and it has
done very well.
TGR: Could you give us a few of the Index's
more promising names?
VR: There are quite a few, we have extensive
coverage on some of these companies. HY Lake Gold Inc. (CNSX:HYL; Fkft:HYK) is
a good example. It's a small-cap junior explorer active in Ontario's Red Lake
District, one of the most prolific gold belts in Canada and home to Goldcorp
and Rubicon Minerals Corp. (NYSE.A:RBY; TSX:RMX).
Some of the other companies in that area include Claude Resources Inc. (TSX:CRJ; NYSE.A:CGR)
and Premier Gold Mines Ltd. (TSX:PG).
We believe Hy Lake has one of the best properties
packages in Red Lake and is one of the most undervalued and unheard stories
out there. The company trades on the CNSX Exchange—an exchange for
juniors in Canada—but it filed a listing application with the TSX
Venture Exchange and is expecting that listing very soon. That will change
the company's profile. The market is taking notice already and Hy Lake's
market cap actually tripled during the last year to about $20M. But perhaps
the most interesting thing about Hy Lake is that its flagship property, Rowan
Property, is a JV with Goldcorp. Hy Lake has already earned its 60% option
and soon it will be announced that Hy Lake is the operator of that project
with Goldcorp having a 40% stake. There aren't many junior gold explorers
that have Goldcorp as a JV partner. We think it's a very neat story with
strong projects and a strong management team. The company's worth watching,
as it charts a new course in its corporate evolution. We think the year 2011
could be a transformational year for Hy Lake and a year of strong growth.
TGR: What's your model price for Hy Lake?
VR: It's $0.81 and it trades around
$0.45–$0.50 right now.
TGR: What are a couple of other Index names?
VR: Another company we recently started
coverage on is Gowest Amalgamated Resources
Ltd. (TSX.V:GWA)—another very promising junior working in
the Timmins area. Gowest has a high-potential property called the Frankfield
Easter Gold Project, located near current and past-producing gold mines. It
already has an NI 43-101-compliant resource base of 0.5 Moz., which we expect
will increase significantly once the company gets a revised resource estimate
based on recent drilling data. What we like about the Frankfield project is that
the mineralization shows very impressive continuity. You won't often find
deposits like that. The grades are very consistent, 6–7 grams per ton
(g/t), and it's open at depth in all directions. We really like the company.
Gowest has real potential to build the resource base and move those inferred
resources into the M&I category. That will really build value.
TGR: Who's involved in management there;
anyone noteworthy?
VR: There are some people who came from a
company called Castle Gold, which was sold about two years ago. But those
guys started Castle Gold from scratch and ended up selling it to Argonaut Gold Inc. (TSX:AR) I believe for
$150M or close to that. Greg Romain is Gowest's CEO and Darren Koningen leads
the exploration team. We like management's no-nonsense approach, which
focuses on building ounces and exploring the right way.
TGR: What's the Ubika model price on Gowest?
VR: It's $0.80, and it currently trades at
around $0.32–$0.33.
TGR: Perhaps one more before we let you go,
Vikas?
VR: Sure, I'll give you two. One is a
Colombia-based junior gold explorer called Seafield Resources Ltd. (TSX.V:SFF). We
initiated coverage in November 2010. The interesting thing about Seafield is
that it's the largest landholder in the upcoming gold exploration belt called
Quinchia District. Its Quinchia gold-copper project is within the Mid Cauca
porphyry corridor, the site of a number of large new open-pit gold
discoveries. There is an up-and-coming gold belt there with several very
promising companies in that region, including Medoro Resources Ltd. (TSX.V:MRS). And
Seafield has a land package that is kind of in the same neighborhood.
Quinchia is becoming increasingly important. Last month, Seafield announced a
major intercept of 449 meters of 1.3 g/t on the Miraflores target. That's
like half a kilometer of 1.3 g/t, which is fairly good grade.
TGR: Is that true width?
VR: Actually, the intersection was 449
meters of 1.3 g/t. Obviously, it included some sections that were very high
grade but the average grade was 1.3 g/t. Just last week, Seafield announced
some follow-up drill results from other holes on the same target and, again,
very encouraging results. That is just one of the targets; it has several
others on the property and already has an NI 43-101-compliant resource of
close to 800,000 oz. (800 Koz.) Based on the recent drill results, we believe
there could be a multimillion-ounce deposit at various targets on this
property. Seafield trades at a very low level versus its peers, but we think
that will change as the company expands its resource base and moves further
along the exploration curve.
TGR: What's your model price on Seafield?
VR: For Seafield, our model price is $0.79;
but based on the recent drill results and the other things that have happened
in the last few months, we may come out with an updated model. It's currently
trading around $0.45.
TGR: And one more?
VR: Another company we have been following
for some time is Paramount Gold and Silver
Corp. (TSX:PZG; NYSE.A:PZG). This high-profile company has
multimillion-ounce, advanced-staged projects in Nevada and northern Mexico
and already has more than 4 Moz. in NI 43-101 resources.
TGR: Are those inferred resources?
VR: Its resources are in both inferred and
M&I category. Paramount is not under full coverage but we've been
watching this company and know a fair bit about it. It's exploring in an area
populated by established gold companies like Goldcorp, Alamos Gold Inc. (TSX:AGI) and Gammon Gold Inc. (TSX:GAM; NYSE:GRS). We
think Paramount has the potential to become the next big thing, in terms of
an advanced-stage gold explorer. It already has a $500M market cap, and we
think it'll likely go to the next stage of becoming one of those high-profile
companies like Lake Shore Gold, for example. The management team is very
strong and has been doing a great job of understanding the geology. Paramount's
immediate neighbor is Coeur d'Alene Mines Corp.
(TSX:CDM; NYSE:CDE).
TGR: Coeur d'Alene is a silver miner, so if
it's next door there must be silver in the deposit.
VR: There is silver in the deposit
but Paramount's project is more a gold-silver than silver-gold property in
terms of potential. But if you look at current silver prices, it's becoming a
very attractive play in itself.
TGR: Generally, when you find a gold-silver
deposit it contains significantly more silver than gold.
VR: That's correct, in terms of volume. The
known resources for Paramount are 4.5 Moz. gold and 12 Moz. silver.
TGR: And the model price for Paramount?
VR: Actually, we don't have a model price
for Paramount because it's not under full coverage. But, as I said, we are
watching this company closely. It's part of our gold index.
TGR: What should our readers expect to
happen with the gold price over the next 6–10 months?
VR: Gold is in a sweet spot right
now—it's a hedge against risk, a refuge for people who are worried
about risk. Then, down the road, you have inflation. I wouldn't be surprised
if gold keeps growing by 10%–15% on a yearly basis for the next few
years as it has for the last five or so. We started this year at $1,350/oz.
and the gold price could very well go to $1,500/oz.–$1,550/oz. by
year-end. Then, it could be looking to build on those gains. Don't be
surprised if you see gold around $1,800/oz. in a few years.
TGR: Thank you for talking with us today,
Vikas.
Vikas Ranjan is a management and investment
professional with over 15 years' experience in diverse areas of investment
management, finance, customer analytics and investment research. He is a
principal of Ubika Research, a specialized research
and analytics company with a wide range of small-cap clients and operations
in Toronto and Vancouver. His previous experience includes various management
positions in companies such as TAL Global Asset Management and Bank of
Montreal. He has a strong knowledge of financial markets and has researched
and analyzed companies in diverse industry sectors and markets. He holds a
bachelor's in economics (Hons.), masters in management studies from
University of Mumbai, India and an MBA in finance from McGill University.
Prior to cofounding Ubika, Vikas cofounded P2P Systems Inc., which was
acquired by Toronto-based technology company, Microforum Inc.
Ubika Research specializes in small-cap companies
where market capitalization amounts to less than $500 million and offers
fresh and timely market insights to end investors and market participants.
Ubika Research provides access to all research
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DISCLOSURE:
1) Brian Sylvester of The Gold Report conducted
this interview. He personally and/or his family own shares of the following
companies mentioned in this interview: None.
2) The following companies mentioned in the
interview are sponsors of The Gold Report: La Quinta, Lexam VG Gold,
Goldcorp, Rubicon and Argonaut.
3) Vikas Ranjan: I personally and/or my family own
shares of the following companies mentioned in this interview: Lexam VG Gold,
Hy Lake, Seafield and Gowest. I personally and/or my family am paid by the
following companies mentioned in this interview: None.
4) Ubika Research has received fees from the
following companies mentioned in this interview to provide research and/or
exposure coverage: Lexam VG Gold, Hy Lake, Seafield, La Quinta, Paramount and
Gowest. Ubika Corp. also has an agreement in place to receive options from
the following companies mentioned in this interview: Hy Lake, Seafield, La
Quinta and Gowest.
Disclosure: Except for the historical information
presented herein, matters discussed in this interview/document contain
forward-looking statements that are subject to certain risks and
uncertainties that could cause actual results to differ materially from any
future results, performance or achievements expressed or implied by such
statements.
Nothing in this interview constitutes an offer or invitation
to purchase or acquire any shares in any company or any interest therein, nor
shall it form the basis of any contract entered into for the purchase or sale
of shares in any company mentioned in this interview and report.
Ubika Research and SmallCapPower are both divisions
of Ubika Corporation and are not registered with any financial or securities
regulatory authority and do not provide, nor claim to provide, investment
advice or recommendations to readers of this report. For making specific investment
decisions, readers should seek their own advice. For full disclosure please
visit: SmallCapPower/disclosure.
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