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?
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.
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.