After a tough 2011, Mark Raguz and his colleagues at Pinetree Capital are looking at the junior resource sector with renewed optimism. In this exclusive Gold Report interview, he names some of the plays that are fueling that sentiment, from gold names in Northern Ontario to silver names in Mexico.
The Gold Report: Mark, what do you think will determine Pinetree Capital Ltd.’s (PNP:TSX) success in 2012, especially regarding the junior resource sector?
Mark Raguz: What we need to see is the embracing of less risk aversion and the desire of investors to move further along the liquidity curve toward the junior resource space. There are signs this is starting to happen. In the meantime, we believe we can add value by drawing on our expertise in the resource sector and filtering out the best names, whose value might be realized over time.
TGR: How do you determine the best names?
MR: We see things very early and we look at a lot of different names. Finding the gems becomes a lot easier as we have a lot of experience in this area and a lot of comparables to use because of the amount of companies we look at. My goal is to draw out the best management teams with the best assets, given our exposure to most of the names in the space.
TGR: Based on your experience in previous cycles, when does capital tend to return to the mine commodities sector after a dip?
MR: These cycles tend to work in 18-month spurts. You get a good 12-month run, but at some point fantasy gets ahead of reality and the juniors tend to take a breather. Of course, when the exuberance goes away, so does the liquidity. This leaves a lot of investors trapped near the top, holding a lot of paper. The subsequent liquidation takes up to a year and a half. There are a lot of indicators suggesting that we have gone through this phase and that interest in juniors is reviving again, as gold in particular appears to be ready for another leg.
TGR: What makes you think gold is ready to advance another leg?
MR: Late last year a lot of liquidity dried up. People got off their positions and this was exacerbated by tax-loss selling. A lot of our names got beaten up. In January, we started to see many of those names return to levels that we feel are more in tune with a renewed positive cycle.
TGR: Are there certain events, perhaps a debt deal in Europe, which might bolster the gold price?
MR: I think the debt deal will be helpful, but maybe not for the reasons you might think. The risk of a successful deal comes with a question: If Greece does not have to pay, why do I? The Irish are asking it; the Portuguese and the Spanish will soon be asking the same thing.
The possible, immediate consequence is a sharp spike in gold, silver and other commodities, along with a flight from currency, falling equities and debt valuations or even maybe a banking crisis. While it probably would not last long, it could be long enough to shake things up.
While this might play a role in investor behavior, generally speaking, confidence will continue to return to the market. It has definitely started to in the last couple of months. So, solving each political event will definitely help, but I do not think it is critical.
TGR: Why should investors return to the junior resource sector now?
MR: Geopolitical issues notwithstanding, the fundamentals driving supply-and-demand imbalances have not changed. Consider Fukushima. That took a bite out of the invested capital in the uranium space but Japan is continuing with nuclear power, as is China. For the first time in a very long while, the U.S. just approved a nuclear plant. All of that bodes well for the fundamentals, which I believe are why investors should return.
TGR: What themes might retail investors be able to target in the space this year?
MR: Stick with the fundamentals. Certain commodities will face different supply-and-demand imbalances over the next decade, the uranium story being among the most acute. We see no evidence of demand for precious metals subsiding. In the last few weeks, we have seen some buoyancy in the iron ore names in our portfolio. Those are some things I like going into 2012.
TGR: You have many positions in small-cap companies seeking gold in Northern Ontario. Which ones does Pinetree believe are well positioned to perform in 2012?
MR: I really feel that this jurisdiction is one that is occasionally mistakenly overlooked; I really like Northern Ontario as an exploration jurisdiction. Prodigy Gold Inc. (PDG:TSX.V) delivered consistently, with a 40,000 meter (m) infill drill program in 2011. It both reduced its strip ratio and added ounces. This equated to a very robust preliminary economic assessment (PEA) in December 2011. It has outlined another ambitious 60,000m drill program for 2012. It will be a mix of drilling for resource delineation and resource expansion. This provides Prodigy Gold the potential to increase ounces heading into a Q412 feasibility study. A recent financing left it well capitalized; it has four rigs turning now and is trying to source three more. I think it’s a great story.
Gold Canyon Resources Inc. (GCU:TSX.V) also stands out. Relative to other Canadian bulk tonnage stories, we expect the grade at its Springpole deposit to exceed that of its comparables. An imminent resource update will leave it well positioned to meet analysts’ upside expectations when it releases its PEA this fall. I would not be surprised by a PEA of 6 million ounces (Moz) with a high-grade starter pit and stout economics, given the success to date.
Queenston Mining Inc. (QMI:TSX) continues to deliver drill results. Its positive drill results near surface at Upper Beaver are beginning to show unexpected potential for open-pittable ounces. The drilling here continues to extend the Upper Beaver laterally and to a depth of 1,200m. This is likely to be Queenston’s maiden producing asset. We just saw an initial PEA here in the last few days that was robust and left the bulk of 2011 drilling to be added in the future, potentially sweetening the economics.
The company also has applications for underground drilling on the Upper Beaver. Concurrently, it is targeting an extension of Kirkland Lake Gold Inc.’s (KGI:TSX) high-grade South Mine complex through both a joint venture with Kirkland and in deep drilling below the AK deposit.
Your readers are no doubt aware of the acquisition potential of Queenston. I think it is well capitalized and if it delivers on key catalysts through 2012, it should perform well regardless of mergers and acquisitions.
TGR: Why is Northern Ontario experiencing such a renaissance now?
MR: Money tends to flow to the more glamorous jurisdictions, whether it be South America or Eastern Europe. Ontario has been kind of picked over. But given the volume of dollars going into exploration in Ontario, there is no doubt in my mind that a lot remains to be found. I would rather be here than anywhere else.
TGR: Moving south, Pinetree is heavily invested in silver plays in Mexico. Recently, Pan American Silver Corp. (PAA:TSX; PAAS:NASDAQ) took out Minefinders Corp. (MFL:TSX; MFN:NYSE) to gain a foothold there. Which silver names are positioned to create shareholder value?
MR: The Cream Minerals Ltd. (CMA:TSX.V; CRMXF:OTCBB; DFL:FSE) story is one we are very proud of. This is an example of how a sleepy story with a great asset can unlock value through drilling. The company is targeting a resource update on its flagship Nuevo Milenio project in Nayarit State this quarter. The combination of steady extension drilling and a strong silver price could put the upside potential well north of 100 Moz silver in all resource categories. I would expect the upcoming resource update to be in the ballpark of 75–90 Moz silver equivalent in all categories. This resource is one of the first to be completed on an independent basis and will shake out a lot of the negativity previously associated with this name.
We also follow Argentum Silver Corp. (ASL:TSX.V), which is drilling on its flagship Coyote property. Assay results from the first holes of a 19-hole program are expected shortly targeting five veins delineated from historical mining down to the water table. Chip and channel samples taken last year indicated the veins carried silver, so we are looking forward to the results in the next few weeks. The company is well financed to complete its current drill program and follow up on the test results. We are watching this one closely.
TGR: Is there an iron ore name you can talk about?
MR: We are long-time investors in Canadian Orebodies Inc. (CO:TSX.V). It recently released its initial resource of 230 million tonnes (MMt) at 35.15% Fe Indicated and 289 MMt at 35.47% Fe Inferred. The company could potentially process the ore on the Quebec side, where there is abundant hydropower. I believe the quality of the asset warrants the costs associated with re-handling. One could expect good things as it continues to drill adjacent targets.
TGR: Can you give us some plays that target niche commodities?
MR: Matamec Explorations Inc. (MAT:TSX.V; MRHEF:OTCQX) is a rare earth element (REE) company exploring the Kipawa deposit in southwestern Quebec, another great jurisdiction. The majority of the deposit’s value is carried by the heavy rare earths. The company recently released a PEA with a before-tax net present value of $606 million (M) and a $316M market cap. It signed a memo of understanding with Toyota Motor Corp. (TM:NYSE) that allows Toyota to earn 49% of the project for approximately $17.5M. Although we think the project is worth more than what Toyota will potentially pay, the appeal is the addition of significant metal expertise and the potential for full-debt financing and an offtake partner. We are waiting for this deal to be finalized in the coming months. The appeal of this story is not really the size of the deposit, but its potential to be the first North American heavy rare earth deposit to be brought online. Catalysts in the next 12 months are a finalized deal, drill results that will potentially add significant tonnage and a feasibility study.
TGR: Are you bullish on the REE space in general or just selective names?
MR: Last year we saw a little exuberance in the run-up of REEs, but I think there are fundamentals driving demand for REEs. As long as we’re positioned in the best-of-breed names, I think we will do well.
TGR: Is that an overarching philosophy with Pinetree? I ask because you hold positions in a number of companies that would not be considered best of breed.
MR: We are a long-term investor. It may seem that some of our names are not in that category, but we feel that as long as we look for quality assets, time will eventually be on our side moving into a positive cycle.
TGR: What is the timeframe for that?
MR: As I mentioned before, with these 18-month spurts, I think we are coming out of a period of reduced liquidity that tax loss selling exacerbated, which leaves us well positioned moving forward.
TGR: When you and your fellow analysts at Pinetree got together at the beginning of the year to map out strategies, what was the general feeling at that meeting?
MR: My biggest takeaway was the renewed optimism. Last year was a tough one for Pinetree, as you mentioned. Going into 2012, a lot of our core positions caught that bounce that we have been expecting for a long time. We are moving along with our core strategies.
TGR: Mark, thank you for your time and insights.
Mark Raguz is an analyst with Pinetree Capital Ltd. He was previously in research at GMP Securities and was the president of New Texmont Explorations Ltd., a private company involved in mineral exploration. He has served as a director of various TSX Venture listed companies. Raguz is a graduate of the Lassonde Mineral Engineering Program at the University of Toronto.