Precious and base metal companies both have to obey the basic laws of physics and economics to be profitable. In this exclusive interview with The Gold Report, geologist turned analyst Vishal Gupta of Fraser Mackenzie shares names of small-cap companies that could successfully take advantage of unique mineralogy to produce profitable mines.
The Gold Report: You are an analyst and a geologist. Can you explain the fundamentals behind investing in base metals compared to precious metals?
Vishal Gupta: The fundamental difference is that base metals can be fairly straightforward in quantification when it comes to supply-demand balances. The world needs a certain amount of base metals to keep up its growth rate. Growing economies like India and China require base metals for their industrialization initiatives. For instance, copper would be required in electrical wiring and zinc would be required in steel galvanization. There is a specific purpose for base metals in industry.
Gold is valued more from a currency standpoint. There are actually very few uses for gold. That is why it is difficult to quantify the supply-demand balances for gold. This leads to the turmoil we see in the gold market. Any material piece of macroeconomic information that hits newswires will have some sort of an effect on the gold price because it is traded as a currency.
TGR: You have talked about how even when there is a downturn in global economies, jewelry demand remains. Why is that?
VG: I am originally from India and I lived in that country for about 16 years before moving to Canada. India is by far the biggest retail market for gold. The Indian wedding season, which runs from September to December, is typically the high time for gold markets. The reason for this traditional demand for gold in India goes back to what I said about gold being used as a currency. People in India treat gold as a commodity that holds its value better than paper currency. So when they give gifts of gold jewelry, it is because they want to invest in something that is going to hold its value. The result is that in lean times, when the markets are down and unemployment is high, people have that reserve in gold that they can take to the market and sell.
TGR: When North Americans think of investing in gold, we think of investing in maple leaves, gold bars, coins or other physical forms of gold. But in India, they think of purchasing a necklace, bracelet or gold earrings. Is it the same investment dynamic in a different package?
VG: That’s absolutely right. Gold has held its value better than paper currency in the past, especially relative to Indian currency. The Indian rupee has devalued significantly over the last few decades, so people put their faith in a physical commodity, such as gold, rather than the paper currency.
TGR: We’ve seen a lot of volatility in the U.S. stock market. We haven’t seen a whole lot of industrial growth, but the price of copper seems to be holding up right around where it is today at $3.74. Turning to the base metals, what is your outlook on the supply and demand fundamentals for copper going into Q212 and through next year?
VG: I always view copper as the leader of the pack when it comes to base metals. You’ll see in the past, whenever the base metals markets have turned around, copper is the one that has led the charge. We are going into a lean time for commodities right now. However, when the commodity markets do turn around in the next five to six months, driven by the traditional surge in demand for commodities during September/October, I would expect copper to again lead the charge for base metals. Copper is the London Metal Exchange’s flagship metal. Whenever we talk about base metals, we first talk about copper and then we talk about everything else.
TGR: What are the copper equities that most interest you?
VG: One is a base metals company, Foran Mining Corp. (FOM:TSX.V). Its flagship McIlvenna Bay project hosts a volcanogenic massive sulphide (VMS) deposit in the prolific Flin Flon belt of Manitoba-Saskatchewan, on the Saskatchewan side of the border. That region is traditionally known as HudBay Minerals Inc.’s (HBM:TSX; HBM:NYSE) backyard because the major miner has been mining zinc and copper there for over 100 years. Most junior explorers in the area typically form partnerships with HudBay simply because of the major’s regional processing power. Because most of the deposits that the juniors are finding contain 3–5 million tonnes (Mt) of very high-grade ore, these deposits are too small to make building their own plant possible. Foran Mining is currently sitting on a 22 Mt, high-grade zinc and copper deposit at McIlvenna Bay. Going forward, I expect the tonnage to increase to 30 Mt, which would make McIlvenna Bay several times bigger than your average VMS deposit in the Flin Flon belt. Therefore, I believe Foran’s deposit is substantial enough to warrant a stand-alone mining and processing operation, and it should not require HudBay’s partnership to go into production.
I also follow Arian Silver Corp (AGQ:TSX.V; AGQ:AIM), a company active in Zacatecas, Mexico. It trades more than 1 million (M) shares/day on the London’s AIM Exchange. Arian Silver has a 120 million ounce (Moz) silver resource in Zacatecas. In the next year or so, I expect the resource to increase to about 140 Moz.
TGR: What’s the market cap of Arian?
VG: Arian’s market cap is about $95M currently.
TGR: So you really do focus on the small caps.
VG: Yes. My educational background and my work experience are in geology. As a geologist, I believe my maximum value add is analyzing companies at a very early stage where I can use my knowledge to estimate which of the junior companies’ assets have the best odds of becoming producing mines and generating cash flow in the future.
TGR: So you think both Foran and Arian have the mineralogy to be successful mines?
VG: Yes. That is why I cover these two names.
I have been to Arian’s property myself. I see a lot of potential. The resource could conceivably go from the current 120 Moz all the way to the 200–250 Moz range. The next catalyst in Arian’s development is going to be a scoping study on a sovereign mill. It is considering mill options ranging from 750 tonnes per day (tpd) up to 2,000 tonnes per day (2 Ktpd). That decision is going to be made in the next two to three months. Once that decision is made, I would estimate about 18–24 months for this large-scale production scenario to be put into operation.
TGR: Are there other juniors in that area that could be potential acquirers that would use Arian’s ore and put it through their own mill?
VG: Mexico is prime silver country. The best possible scenario for Arian to build shareholder value would be to actually put its own mill into production. That saves it all sorts of operating costs. Obviously, the up-front capital expenditure (capex) is going to be significant. For 750 tpd, you’re looking at about $15–20M in capex; for a 2 Ktpd mill, you’re looking at about $50–55M in capex. But once that investment is in place, I think the benefit to Arian shareholders is going to be tremendous. At a 2 Ktpd production scenario, it is looking at producing about 4.0-4.5 Moz silver/year. That is very significant cash flow.
TGR: How is Arian planning to finance that mill?
VG: If Arian settles on the 750 tpd scenario, a $15–20M capex could potentially all be done through equity financing. But if Arian goes for that $50–55M capex associated with a 2 Ktpd mill, then it will probably pay for it through a combination of debt and equity.
TGR: We didn’t really discuss the investing scenario behind silver. Are you equally bullish on the copper, silver and gold commodity spaces?
VG: I think silver is a very undervalued commodity right now. The market seems to follow what the gold price is doing but silver has so many industrial uses that you can view it as a precious metal or a base metal. Many of the silver names, including First Majestic Silver Corp. (FR:TSX; AG:NYSE; FMV:FSE), are just starting to come into prominence. Very few silver-only production companies exist today. What is out there is starting to get the value that traditionally has been reserved for gold and base metals.
TGR: What other names do you like either because they are potential acquisition candidates or possess particularly good deposits.
VG: There are a couple of companies that I visited down in Arizona about a month or so ago. One is Redhawk Resources (RDK:TSX; QF7:FSE; RHWKF:OTCQX). It has about 3.5 billion pounds (Blb) of copper in the ground currently at its flagship Copper Creek deposit at a grade of about 1% copper. Management is expected to release a new resource estimate in the next couple of weeks that could push the total resource to about 5 Blb copper. That would put Redhawk on the radar screens of all the consolidators operating in the region.
Arizona is prime copper country. Freeport-McMoRan Copper & Gold Inc. (FCX:NYSE) has five operations there. In the adjoining state of New Mexico, it has another couple of operations. ASARCO LLC (AR:NYSE) has two to three operations in that area as well. BHP Billiton Ltd. (BHP:NYSE; BHPLF:OTCPK), Rio Tinto (RIO:NYSE; RIO:ASX) and Quadra FNX Mining Ltd. (QUX:TSX), now KGHM International Ltd.—all of these players are in the area. They are all looking for sizable copper deposits and, at 5 Blb in-situ copper, Redhawk meets this criteria. I think the mineability of it has to be determined by a major and not by Redhawk itself. I don’t think a junior like Redhawk will be the one to actually put Copper Creek into production because the capex requirements for something like this would be well in excess of $1B.
TGR: But couldn’t one of the existing players in the area just truck the ore to its smelter because some operate already in the area.
VG: That’s absolutely right. That would save a lot of capex requirements and one of the reasons Redhawk is a prime acquisition target for a consolidator in the area that can take advantage of operational synergies.
TGR: Do you think permitting will be a problem? Augusta Resource Group (AZC:TSX; AZC:NYSE.A; A5R:FSE) has had trouble getting its Rosemont mine in Arizona permitted. Does Redhawk have aquifer permits in place, for instance?
VG: Yes, Redhawk does have this permit. And, Augusta has had permitting issues in the past, but recently received a key environmental permit—the Aquifer Protection Permit—for its Rosemont development project. Permitting could be an issue in any jurisdiction. You have to take things on a case-by-case basis.
As a jurisdiction, Arizona is full of open-pit copper mines. That says to me that it is a favorable jurisdiction for copper mining. There could be an odd blip here or there, but the overall scenario in Arizona is very mining friendly.
TGR: You’re an unusual analyst in that you’re bullish on gold and silver and copper. Do you have any other names in the junior space that are interesting to you?
VG: I was going to tell you about the second story that I saw in Arizona. The company’s name is Toro Resources Corp. (TRK:TSX.V). It’s a very small company; it’s trading at about a $4M market cap right now. I usually don’t visit a junior explorer that small, but this has what I call an enriched copper deposit; it’s a supergene blanket, which means it has a higher percentage of copper than most sulphides. This is leachable copper, not millable copper. The capex requirements for leachable copper are much lower than for millable copper.
Toro Resources has the Morgan Peak deposit in Arizona. Within a 5-kilometer (km) radius from it is BHP’s Pinto Valley, Rio Tinto’s Resolution copper mine, Freeport-McMoRan’s Miami mine, Quadra FNX’s (now KGHM International Ltd.) Carlota mine. The best part is that it is on a ridge about 800 meters in elevation higher than all of these other major consolidators in the valleys. All it needs is 100 Mt at 0.4% copper and it could put two valley fill leach pads right on top of the ridge, take the pregnant solution from the leach pad, put it into a pipeline and either go to Carlota’s SX-EW plant or Miami’s SX-EW plant just 5km down the hill. That scenario would save Toro on the overall capex requirements tremendously and would improve the economics of a potential future operation on the deposit. The mineability is very compelling for such a small-cap junior exploration company.
TGR: Interesting. That is certainly a new approach. Just do the leaching and then run it down the hill.
Any final words of wisdom about investing in today’s volatile markets?
VG: I know that the commodity markets have been in great turmoil. People say, oh, gold has fallen from $1,750/ounce (oz) down to about $1,670/oz and the commodities have started coming off now. That is not the case. If you compare where the commodity markets were in 2008–2009 and where the commodity markets are now, we’ve gone through a huge growth spurt. We have found a level where things have stabilized. $1,500/oz gold is ideal for a lot of companies and could lead to a lot more production coming online. Anything over $1,500/oz gold to me is beautiful. When you’re looking to invest in the commodity markets, it helps to have a longer term view. If you have a solid, longer term view on gold, copper or silver, you should make a lot of money.
TGR: Thank you so much, Vishal.
Vishal Gupta is an equity research analyst for Fraser Mackenzie, covering resource exploration companies in the base metals and precious metals space. He holds a Master of Science degree in geology from the University of Toronto. Prior to joining Fraser Mackenzie, he worked in the resource exploration industry as a consulting geologist with Noront Resources, Northern Gold Mining and Nuinsco Resources. Gupta entered the financial community in 2009 with Desjardins Securities as a base metals equity research associate, followed by a brief stay in mining corporate finance at Cormark Securities. Most recently, he held the position of equity research analyst at Dundee Capital Markets covering junior mining companies in the precious metals, base metals and uranium space.