The . . . → Read More: MLPs: Wall Street’s Best-Kept Secret: Yves Siegel]]> Despite depressed natural gas prices, investors in master limited partnerships (MLPs) leveraged to natural gas liquids can expect both excellent income and share price appreciation, says Credit Suisse Senior Analyst Yves Siegel. In this exclusive interview with The Energy Report, Siegel discusses his favorite MLPs and their winning formula for double-digit returns.

The Energy Report: Yves, what can investors expect out of MLPs between now and the end of 2013?

Yves Siegel: Steady as she goes. The yields for our group now are around 6%, and we expect distribution growth to be about 7%. If Fed Chairman Ben Bernanke is true to his word, we’ll continue to expect an environment of low interest rates for the next two years. So if you combine the yield and the distribution growth, we think investors could see low double-digit returns.

TER: How do distributions grow?

YS: When contracts roll over on terminal assets, they typically roll over at higher rates because they’re competing with new facilities. In order for companies to get a return on their facilities, they need a certain price. Storage at Cushing, Oklahoma, for example, is relatively expensive to build. When contracts roll over for those existing storage assets, typically those rates can move up to the prevailing rate for new construction. Distribution growth results not only from contract rollover but largely from new builds and investments that come online, either through greenfield projects or through acquisitions. The MLPs as a group have been able to grow distributions by investing capital in excess of the cost of capital. That’s been a winning formula for quite some time.

TER: Do you see real estate partnership investors shifting their attention to energy MLPs?

YS: I would suggest that retail investors who are searching for yield and invested in real estate investment trusts (REITs) are now looking at MLPs. I would also include investors who have historically invested in utilities. I think MLPs have been around long enough now that investors are feeling more comfortable with investing in the security.

TER: Returns on your MLPs coverage universe have been excellent in recent months, some experiencing double-digital total returns. With more demand and buying, do you expect yields to grow in addition to distributions?

YS: No; I think yields will compress. The current average yield is around 6%. I wouldn’t be surprised to see that reduced to 5.5%, the rationale being that stock prices move higher once the market sees healthy returns. Demand for income-oriented securities remains pretty robust. In a low interest rate environment, people continue to look for places where they can safely park cash as opposed to keeping it under their mattresses. I expect a combination of increased distributions and continued higher stock prices. The result would probably be net-net compressed yields.

TER: Do you expect to see initial public offerings (IPOs) for these types of MLPs this year?

YS: Yes, I expect to see new MLPs come to the market.

TER: Everything you’ve covered suggests good health in this sector. What is your investment thesis right now?

YS: The themes have been threefold: One, invest in MLPs that are well situated to participate in burgeoning shale plays, because as producers pursue these plays, they need the infrastructure to support further production.

Two, we think natural gas liquids (NGL) fundamentals are strong and will remain strong for the foreseeable future because NGL prices correlate with crude oil prices. NGLs are a byproduct of a natural gas production, and current low prices for natural gas are part of the cost of producing NGL. But crude oil prices are high, and that determines the revenue stream NGLs will produce. This all speaks to a very favorable margin opportunity. We would suggest that MLPs that have exposure to NGL fundamentals should continue to do well.

Three, we like this notion that MLPs can buy assets from their sponsors at attractive valuations that enable them to grow distributions. These dropdown stories will continue to perform well over the next couple years.

TER: Are extraction products from natural gas the most profitable part of natural gas production?

YS: Yes. As we speak, natural gas prices have fallen below $2.50/thousand cubic feet (Mcf). Natural gas is very depressed, but what’s keeping the economics favorable is the fact that some of these plays, such as the Marcellus shale play, produce NGLs along with the gas. The NGLs triple the actual realization on the commodity because of the liquids content. So that is a very, very powerful thematic right now.

TER: What are your preferred standards for MLP growth and income?

YS: Our approach focuses more on total return. Simplistically, an investor can buy a stock that’s yielding 8% but has 3–4% distribution growth, and he or she would probably have an 11–12% return. Conversely, an investor could buy a stock that’s yielding 5% and is growing 7–8%, and wind up with a 12–13% total return. Balancing total return with calibrated risk is the right approach. Don’t try to capture total return and take undue risk. Overall, the market pays for growth.

MLPs with more growth typically have much lower yields, so it’s not inconsistent for us to recommend Western Gas Partners, L.P. (WES:NYSE), for example, which is yielding below 5% but which we think will have double-digit distribution growth over the next couple of years. At the same time, we could recommend Boardwalk Pipeline Partners, L.P. (BWP:NYSE), which is yielding around 8% and is going to have much more modest distribution growth of 3–4%.

TER: Let’s segue into your top MLP picks.

YS: Well, what we like about Boardwalk Pipeline Partners is that it has a very steady revenue stream tied to its interstate pipelines. With new management in place, we think 2011 was perhaps an inflection point for the company to try to focus more on growth. It has done so by buying storage assets from Enterprise Products Partners, L.P. (EPD:NYSE) and signing a gathering agreement with Southwestern Energy Co. (SWN:NYSE) in the Marcellus. We think there is an opportunity to accelerate the growth in distributions if management is successful. If management falls short of that goal, I think investors would still be happy with the safety of the yield.

The other company that’s within that interstate pipeline business model is El Paso Pipeline Partners, L.P. (EPB:NYSE). That stock came under a little pressure when Kinder Morgan Energy Partners, L.P. (KMP:NYSE) announced that it was buying El Paso Corporation (EP:NYSE) last year. I think El Paso Pipeline Partners was unduly punished because investors felt the distribution growth would slow. It is going to slow, because instead of having all of El Paso’s pipeline assets migrate into the MLP, now some of those assets will be migrating into Kinder Morgan. It’s almost a truism that the growth at El Paso Pipeline Partners is not going to be as robust because those pipelines will be moving into a different entity. However, we still think El Paso Pipeline Partners will be able to grow its distributions at 9%, and in fact, Kinder suggested as much. So we think a 5.5% yield and 9% distribution growth over the next couple of years is a good formula for success and a good formula for total return potential.

When you think about the other theme we spoke about, the strength of the NGLs, Targa Resources Partners, L.P. (NGLS:NYSE) fits into that. We like Targa because of the investment opportunities, the integrated model it’s pursuing within its midstream business and its very good management team.

We also like DCP Midstream Partners, L.P. (DPM:NYSE), which is another NGL story, but it’s also a dropdown story. There is the MLP, DCP Midstream Partners, and its sponsor, DCP Midstream LLC (DPM:NYSE), which is 50% owned by Spectra Energy Corp. (SE:NYSE) and 50% owned by ConocoPhillips (COP:NYSE). DCP Midstream Partners will continue to see assets migrate to it from DCP Midstream, helping to finance its growth while it pursues its own organic growth.

Then, within the dropdown stories and also in the midstream space, it’s hard not to mention Chesapeake Midstream Partners, L.P. (CHKM:NYSE) and Western Gas Partners, which I mentioned earlier. Both of these MLPs are owned by exploration and production (E&P) companies—Chesapeake Energy Corp. (CHK:NYSE) for Chesapeake and Anadarko Petroleum Corp. (APC:NYSE) for Western. The upstream parents are investing millions of dollars on building infrastructure to connect their wells, and the MLPs are helping to finance that via the dropdown. In the case of Western, it is having some good organic growth in the DJ Basin on top of what it can expect to acquire from its parent. We think Western and Chesapeake give investors nice, double-digit growth.

For investors who are looking for more safety, or simply more mature MLPs, Enterprise Products Partners LP probably represents the best in class, being the largest MLP and having a vast footprint within the U.S. spanning NGL, crude oil and refined petroleum products. It covers the whole spectrum, and it has an excellent management team. It has an excellent balance sheet and a great formula for 5% steady distribution growth as far as the eye can see. Enterprise is a real core holding and one that we would like to have in any MLP portfolio.

TER: Over the past 52 weeks Enterprise is up 15%, and it’s up 2% over the past four weeks. With a $43B market cap, what are its growth prospects?

YS: Well, it is investing $3–4B annually in organic growth projects. Let’s not forget that it will cost billions of dollars to build U.S. energy infrastructure that supports shale play development. We think that a majority of that spending is being done by MLPs and Enterprise is a good case in point. That runway is probably pretty long, meaning infrastructure spending should last several years. That bodes well for the MLPs that are investing the capital and should be generating returns that support distribution growth.

It’s not only the size of the company that matters, but the ability to execute projects efficiently and cost effectively, using existing assets in some cases that provide leverage. For example, Enterprise will be using some of its existing pipeline and its right-of-way in order to realize its planned ethane line, stretching from the Marcellus to the Gulf Coast. The joint venture crude pipeline that it is doing with Enbridge Energy Partners, L.P. (EEP:NYSE) from Cushing to the Gulf Coast makes use of an existing pipeline there. It is reversing the Seaway pipeline at an extremely reasonable cost, which speaks to your point that there are not many companies out there that have the infrastructure or the entrepreneurial spirit to go after these projects.

TER: Are there any other companies that exhibit this entrepreneurial spirit?

YS: ONEOK Partners, L.P. (OKS:NYSE) has an excellent management team, and it is also a play on the burgeoning NGL market. I would also mention Magellan Midstream Partners, L.P. (MMP:NYSE), which is focused on crude and refined products pipelines.

TER: Both of those companies have had tremendous runs recently; ONEOK is up 39% over the past 52 weeks, while Magellan is up 21% or so.

YS: Both of those stocks have good growth characteristics and excellent management teams, but investors might want to wait for a better entry point before buying. They’ve certainly had really terrific runs.

Sunoco Logistics Partners, L.P. (SXL:NYSE) is also doing its bit to take advantage of getting ethane out of the Marcellus. It is also helping to de-bottleneck the amount of crude oil that’s trapped at Cushing by moving crude production from the Permian Basin down to the Gulf Coast instead of north to Cushing. I put it in the same sort of category, as it has a good management team, strong balance sheet and very good growth prospects. All those good things are reflected in the stock price, so a better entry point might be worth waiting for.

TER: Sunoco Logistics has pulled back a bit over the past four weeks, but not much.

YS: I’d just like to stress the fact that the companies in the MLP class are very transparent because of cash flow. It’s a very good pass-through structure for getting cash back to shareholders in a tax-efficient manner.

TER: If you had to pick one of these MLPs as a very favorite, what would it be? Or should investors choose a basket of MLPs?

YS: My thought is that investors are best served by diversifying within a basket of MLPs. I don’t think MLPs are mispriced securities, so you’re not necessarily going to have outsized returns, nor do I think investors who are looking at the bond and stock markets could really expect outsized returns. For the equity market, if investors could see a 6–8% type of total return, they should be pretty happy.

TER: Yves, we haven’t seen any large gains in the price of crude over the past six months, and we have certainly seen the price of gas depressed. If energy commodities began to strengthen, what kind of an effect would that have on these MLPs?

YS: It would affect different sectors in different ways. With the gathering and processing companies, most of the contracts are for a percentage of proceeds. The MLPs do a pretty good job of hedging their commodity risk out one to three years. But in a strong NGL- and crude oil-pricing environment, net-net they would benefit. Low natural gas prices are positive for gas processing margins. However, some intrastate pipelines would see diminished volumes if drilling slows down in dry gas areas. If crude and gasoline prices were to get too high and gasoline prices get too high, refined petroleum product pipelines might experience some negative pushback because of declining volumes in their pipelines.

TER: Thank you for sharing your knowledge and time today.

YS: You bet. Thank you.

Yves Siegel joined the Credit Suisse Energy Research Team in June 2009 to cover the MLP and natural gas pipeline sectors. Immediately prior to joining Credit Suisse, Siegel was a senior portfolio manager at a New York hedge fund focused on MLPs. Prior to his buyside experience, Siegel had established a leading sellside MLP franchise, having spent more than 10 years at Wachovia Securities after prior sellside engagements at Smith Barney and Lehman Brothers. He has received both a BA and an MBA from New York University and is a CFA charterholder.

At 10:30 AM Eastern time, the weekly Energy Information Administration Petroleum Status Report will be released, giving investors an update on oil inventories in . . . → Read More: Economic Events on February 8, 2012]]> The Mortgage Bankers’ Association purchase index will be released at 7:00 AM Eastern time, providing an update on the quantity of new mortgages and refinancings closed in the last week.

At 10:30 AM Eastern time, the weekly Energy Information Administration Petroleum Status Report will be released, giving investors an update on oil inventories in the United States.

The benefits of federal workers are 48 percent higher than similar private-sector workers, on average.

The total compensation (wages plus benefits) of federal workers is 16 percent higher than similar private-sector workers, on average.

At 8:55 AM Eastern time, the weekly Redbook report will be released, giving us more information about consumer spending.

At 10:00 AM Eastern time, Federal . . . → Read More: Economic Events on February 7, 2012]]> At 7:45 AM Eastern time, the weekly ICSC-Goldman Store Sales report will be released, giving an update on the health of the consumer through this analysis of retail sales.

At 8:55 AM Eastern time, the weekly Redbook report will be released, giving us more information about consumer spending.

At 10:00 AM Eastern time, Federal Reserve Chairman Ben Bernanke will testify to the Senate Budget Committee on the economy.

At 3:00 PM Eastern time, the Consumer Credit report for December will be released. The consensus estimate is that there will be an increase of $7.0 billion in the consumer credit available, after an increase of $20.4 billion in the previous month.

Anyway we are getting there..  albeit slowly.  Read the PG piece today carefully please: Allegheny County reassessment favors properties with higher prices, review finds…. and the penultimate comment. :-0 Seriously though, I would concur with and beyond what the PG is observing . . . → Read More: Digging into the numbers]]> So I lied. I did. But don’t expect much more this week.

Anyway we are getting there..  albeit slowly.  Read the PG piece today carefully please: Allegheny County reassessment favors properties with higher prices, review finds…. and the penultimate comment. :-0 Seriously though, I would concur with and beyond what the PG is observing in their ward by ward level analysis. In fact the regressivity of property assessments is a bit starker than you can see when looking ward by ward as they do. Ward by ward tend to even out what is clearly true that the new assessment values are progressively more under assessed (or is the semantics better described as regressively more) for higher valued properties. By the time you get to $300K properties it becomes undeniable yet those are some of the angriest people out there.. at least from whom I hear from directly.

BTW.. note also relevant PG letter to the editor today on topic.

This is entirely an artifact of self-selection, but it is remarkable how many home owners in Shadyside and Squirrel Hill or environs have talked to me about how their own properties were overassessed. Look at the Post Gazette numbers and you begin to see what is incontrovertible that pretty much everything valued over 150K (I would put the point lower actually) is under assessed. As you get into higher valuations the level of underassessment can be quite large. You can go back and look at my own graphing of sales value to new assessment numbers and for properties valued over 100K or so there just are very very few sales in 2010 that came in at values below new assessment values.  Virtually all sales transactions are coming in above the new assessment values and far above the old assessment values.

Just a point in passing, but note the clear PG point: “properties that recently sold for between $100,000 and $150,000 were, on average, accurate.”

What the PG analysis does not get into at all is how under assessed the higher valuations are in the current assessments. I think equally incontrovertible is the observation that the base-year assessments currently in use higher valued properties are far more under assessed than in the new numbers. I wish they dug into the comparison of old assessment values to current market values which they mostly skipped in the piece today. But I suspect they will be at this for some time. I do with they did this separately for residential and commercial parcels, but that is more judgment call than anything else. Just lots of different things going on in commercial markets than residential markets in the region.

A point in there is what we should all be focusing on. There is no doubt that the county’s preferred method of ‘fixing’ assessment values though the appeals process is just not a fair way to fix more than extreme cases. If there are systematic problems you want to do it uniformly because the access to quality appeals is going to be highly self-selected with income. I hope someone tracks the appeals process to see if any value changes make the inequity issues being observed better.. or if things wind up worse in the end.

Also with appeals there is a bigger deal. One of the big problems with the political rhetoric of late is that I am speculating most school districts and municipalities are being spooked out of doing their own fiduciary responsibility and appealing the obviously low valued assessments. Just as individuals will appeal their own valuations to get a fair assessment.. if no taxing body appeals the obvious underassessments there are significant tax revenues being left on the table. But I bet the political climate prevents that routine administrative action from taking place. How big a deal could it be? Well.. just looking at the Post Gazette’s own data.. just looking at the 14th ward alone it says the average underassessment to market is 9% on an average market value of 287K. I’ll add a number that there are 10,718 parcels in the 14thWard… so you can do the multiplication of what the total value lost to tax revenues is notionally if you want. That is just one ward mind you. Someone should do the calculation of what the tax revenue lost in the current base year assessments is for the same set of properties which is going to be a much bigger number.   Maybe the county should be assisting local school districts in identifying potentially over assessed parcels and assisting with those appeals. Probably not.

Which gets to my comment in that. Property per property the underassessment of the higher valued homes has a far bigger impact on tax revenues at the end of the day. So even fixing half of that underassessment will result in millage adjustments that will in the end benefit lower valued homes that I bet are proportionally higher to lower valued parcels.

and at the end of the day we just miss the forest for the trees.  Set aside the level of accuracy in the assessments, new or old, take a look at that table and the average sales value of property in Knoxville!   Isn’t that the story here in the big picture.

For the folks really parsing this.  I like the fact the PG looked at the most recent sales, though I wold prefer folks parse commerical and residential parcels separately. There just are some very different things going on in commercial markets here than in a lot of our residential neighborhoods.  Also from what I read in the court filings the cutoff of sales data for this assessment happened early in 2011 and more reflects valuations from 2010 or before.  Given there is little dispute some neighborhoods are seeing appreciation in the most recent years, it begs a situation where some folks might really want this assessment to conclude quickly.  If we do this next year again those in appreciating neighborhoods may see even bigger changes than they are seeing now.  At least that is what the PG’s version of this all is saying to me.

and for thos really wondering..  it’s Newark airport.. what else am I supposed to do? Those who have been here understand. Though I have to say it is a far nicer terminal than when I first flew through 30 years ago flying Peoples Express and buying the ticket on the plane.  Can you imagine what TSA would say if someone tried to restart that business model?!

The Gold Report: . . . → Read More: Gold Juniors Poised to Rebound: Joe Mazumdar]]> Economics and politics. Accretion and repletion. Mergers and acquisitions. Joe Mazumdar, senior mining analyst with Haywood Securities, sees all of these as catalysts for a rebound in the junior gold space in 2012. In this exclusive Gold Report interview, he reveals the names of companies he expects to take off.

The Gold Report: What is the consensus among Haywood analysts on what 2012 will bring for mine commodities, particularly precious metals?

Joe Mazumdar: Last year, risk aversion was a common market theme. In 2012, some of the same global economic concerns, such as the ongoing Eurozone crisis and the future of the euro, will continue to draw attention. But we also believe there is potential for positive economic indicators, primarily from the U.S., where there have been upticks in manufacturing and GDP growth. Also, unemployment in the U.S. is down to 8.5%, generating some consumer confidence. Recently, GDP growth for Q411 came in at 2.8%, which was slower than consensus forecasts—3%—but still the strongest in over a year.

Political factors will play a role in 2012. There could be a change in leadership among four of the five permanent members of the U.N. Security Council. The presidential election will be a key focus of the U.S. and global market. There are also presidential elections in Russia, France and Mexico. There also may be a changing of the guard in China in the latter part of 2012. The potential for changes in leadership in these key nations will generate a bid to market volatility in 2012.

Beyond gold and silver, our preferred commodity sectors include copper, iron ore and coal. Gold continues to be adversely affected by its own volatility, which continues to tarnish its reputation as a safe-haven asset. We note that during 2011, U.S. Treasury securities, the most liquid safe-haven asset, was a preferred recipient of capital investment, providing a ~10% return, its highest annual return since 2008 when it was 14%.

TGR: Will the strengthening American economy have an adverse effect on the gold price?

JM: Yes, the gold price quoted in U.S. dollars will be hindered by any U.S. dollar strength based on economic growth and increasing consumer confidence. In the current environment, gold, quoted in U.S. dollars, is still holding up well at price levels over $1,700/ounce (oz).

We note that the Federal Reserve said recently that it remains concerned about the “vigor” of U.S. economic growth and pledged to maintain low interest rates until at least 2014. The latter is a positive for gold prices.

In the medium to long term, increasing confidence levels in U.S. economic growth we believe will drive higher capital investments domestically and potentially raise inflation expectations, which would be a positive for gold.

TGR: What about silver and copper?

JM: We see copper on the brink of a rebound in 2012. The London Metals Exchange inventories are at low levels and Chinese imports of refined copper accelerated in the latter part of 2011. Copper is covered by Stefan Ioannou/Kerry Smith of Haywood Securities and they highlight a structural tightness in the copper market as supply growth remains constrained while a portion of future production growth resides in higher geopolitical risk jurisdictions. They note that the GFMS has estimated a deficit of 372 Kt copper in 2011 and forecast yet another deficit for 2012, 101 Kt.

Chris Thompson covers the silver sector for Haywood Securities and has commented that despite the growth in investment demand over the past five years, silver is still very much an industrial metal. Volatility, he believes, will be underpinned by potential contradictory moves by those who see silver as an industrial metal and others who seek it as an investment asset.

TGR: Did the junior mining sector hit bottom in 2011?

JM: Within the current cycle, I think it has hit bottom. For me, the question remains: What are the catalysts that will move individual stocks up within the sector?

For a number of the majors, growth has been increasingly difficult to achieve given the higher amounts of reserves they must replete on an annual basis. Companies such as Newmont Mining Corp. (NEM:NYSE) have been offering higher and more levered dividend payout structures to attract investors.

In 2012, we see the potential for more merger and acquisition (M&A) activity, specifically in the junior to intermediate sector, given the plethora of small-cap stories in the gold sector. Producers have performed better with respect to their paper in 2011, compared to development stocks, and boast healthier balance sheets. M&A activity will be driven not only by a desire for growth but also motivated by financing risk to capture any synergistic opportunities such as sharing infrastructure and the potential to merge critical skill sets. There is a paucity of people who can bring projects into production and operate them. Merging structures and management is very important right now in the junior and intermediate sector. Without it, a lot of these companies with development assets may continue to struggle.

TGR: Do you expect the Kinross Gold Corp. (K:TSX; KGC:NYSE, Not Rated) write-down to have an adverse effect on M&A?

JM: Large projects that are required to move the needle in the growth strategy of a large gold producer have a scale and scope that naturally expose them to significant execution risk. So, in a nutshell, escalating capital costs for projects of this magnitude are nothing new.

The M&A opportunities I refer to are at a scale that would be accretive to a junior to intermediate company from a growth perspective and offer opportunities to capture synergistic value. From a valuation perspective, many companies with development stage assets are trading well below their underlying asset valuations. M&A activity allows also for some consolidation in the junior sector given the plethora of small-cap gold plays.

TGR: Did you make any adjustments to your investment thesis following the dip in precious metals equities late in 2011?

JM: In our top picks, which we put out on Jan. 9, we focused on producers generating cash flow and developers with permitted or on a clear path-to-permitted projects in low geopolitical risk jurisdictions.

One pick was Midas Gold Corp. (MAX:TSX, Not Rated), whose flagship asset, the Golden Meadows project, hosts a global resource of 5.8 million ounce (Moz) in the Yellow Pine Stibnite area on a large land package (11,600 hectares) in west-central Idaho, a re-emerging gold district. The company is working toward an updated gold resource estimate before the end of Q112, leading to a preliminary economic assessment (PEA) by Q312.

TGR: Can you give us another name on your list?

JM: Yes, Midway Gold Corp. (MDW:TSX.V; MDW:NYSE.A, Sector Outperform, CA$3.25 Target Price). It has the Spring Valley gold project, an intrusive-hosted gold deposit with a global resource, we estimate at over 5 Moz, in a district close to Lovelock, Nevada, where Barrick Gold Corp. (ABX:TSX; ABX:NYSE, Sector Outperform, CA$61 Target Price), is earning in up to 70% by 2013 by cumulatively spending US$38M.

From a metallurgic perspective, the gold is free, not occluded in pyrite and potentially amenable to be economically extracted via a heap-leach process. Barrick, the joint-venture operator, is currently drilling the edges of the deposit to find out how big it could be. This means the near-term news flow will be linked to drilling results and less about a resource update in 2012.

Midway has a portfolio of projects that it is capable of bringing on-line. Its Pan project, a low strip open-pit, heap-leach gold project in Nevada, has submitted a completed bankable feasibility study and a plan of operations. Its Gold Rock project, only 8 kilometers from Pan, is in an earlier stage where we anticipate a resource by Q112 with additional drilling in Q2–Q312, leading to another resource update by Q412 and a PEA by 2013. Additionally, Midway is working a low-sulphidation, high-grade gold project in the Tonopah District.

Midway has a portfolio of projects and is assembling a team to build and operate them. Its COO, Ken Brunk, formerly with Newmont and Romarco, is very familiar with the permitting process and developing/operating projects in Nevada. I believe the company can manage this project pipeline of financeable projects in the low geopolitical risk jurisdiction of Nevada.

TGR: Your target price for Midway is $3.25, up $0.25 from your last report. With that many projects in the development stage, it seems that Midway would be a prime takeover target, especially given its joint venture with Barrick.

JM: Barrick is looking at a number of projects in Nevada, some of which are billion-dollar-plus projects that would add significant ounces to its production profile including Spring Valley, Goldstrike and an expansion at Turquoise Ridge. I believe that Spring Valley may be a target for Barrick going forward as it has potential to contain a +5 Moz global resource and lies in Nevada where Barrick has a significant infrastructure and asset base.

However, the other components of the company’s portfolio, which include smaller open-pit, heap-leach projects, such as Pan and Gold Rock, that could potentially produce between 70–90 thousand ounces (Koz)/year, would not move the needle for most majors. These smaller projects do generate cash flow and are more readily financeable by a company the size of Midway. They could also be attractive to an intermediate operating group looking at accretive transactions with junior developers.

TGR: You cover Orvana Minerals Corp. (ORV:TSX, Sector Outperform, CA$2.25 Target Price), which is in production at its Don Mario mine in Bolivia and its El Valle-Boinás/Carlés (EVBC) mine in Spain. From June to October 2011, gold grades there increased incrementally from 1.4 to 2.17 grams per tonne (g/t). Nevertheless, Orvana’s throughput at EVBC is below your forecast. Results at Don Mario in Bolivia also were below estimates. Is this a make-or-break year for Orvana?

JM: It is a critical year for the company. Bill Williams, formerly Orvana’s vice president of corporate development, is now the CEO. He is an ex-Phelps Dodge vice president and has been instrumental in generating the revised technical reports on both operations, EVBC and Don Mario Upper Mineralized Zone (UMZ), while advancing the Copperwood project. We believe his appointment reflects the company’s focus on getting the operations back on track.

Orvana is currently in the process of re-benchmarking both EVBC and Don Mario UMZ. For Don Mario—an open-pit mine with an upper mineralized zone containing a lot of copper, as well as gold and silver—Orvana has delivered a new life-of-mine forecast that addresses the difficulty of getting copper out using a leach precipitation flotation circuit on a much bigger scale than has been used before. The Don Mario operation also has been troubled by high costs of reagents for the circuit, which has raised the processing costs.

We had originally forecast an annual production profile of 10–15 Koz per year of gold and 10–15 million pounds (Mlb) of copper. We are now looking at a production profile of 9–10 Mlb copper and 8–9 Koz of gold, whereas Orvana is still signaling 13 Mlb of copper and 12 Koz of gold. In Q411, the Don Mario UMZ operation produced 2.5 Mlb of copper and 2.3 Koz of gold, which is a positive. Now, it has to consistently achieve its new benchmarks over the next few quarters so the market can gain confidence in its operational abilities.

At Orvana’s flagship, the EVBC gold-copper project in northwest Spain, the operational issues have been related to head grades. Underground bottlenecks have hindered the company’s ability to blend higher grade feed to the processing plant. We anticipate that a shaft will be in place by April/May 2012, which should alleviate some of the bottlenecks. We had originally forecast that the feed grade, at steady state levels, would be in the area of 5 g/t. However, revised guidance indicated that it would be lower, 3–3.5 g/t gold, which also conspired to lower our target. We anticipate a revised technical report for EVBC prior to March 2012 with updated life-of-mine forecasts.

Orvana’s Copperwood project in upper Michigan is a 50 Mlb/year copper project, now in bankable feasibility study, and Orvana is seeking to permit this year. Even with up to 800 Mlb of copper reserves, we believe that the Copperwood asset is not being valued at its current price levels as Orvana has been heavily discounted in the market due to poor operational performance.

TGR: Given the lower recoveries and production estimates at Don Mario UMZ released in late January, you lowered your target price by $0.15 to $2.25. Yet you still give it a sector outperform rating. Why?

JM: Due to the heavy market discounting related to disappointing results from both operations over the past few quarters, Orvana still provides about a 100% return to our target from where it is trading right now. I continue to believe that management can redeem themselves by achieving the revised benchmarks consistently over the next few quarters. As Orvana meets its goals, I believe the market will appreciate the cash flow being generated, worry less about its working capital position and give the company credit for its advancement of the Copperwood project.

TGR: Prodigy Gold Inc. (PDG:TSX.V, Sector Outperform, CA$1.20 Target Price) recently published an updated PEA on its flagship Magino gold project in northern Ontario. Your model for Prodigy, using the updated PEA, projects a 20,000-ton/day operation, producing 222 Koz of gold per year over 13 years at total cash cost of roughly $775/oz. That would generate annual earnings before interest, taxes, depreciation and amortization margin of more than 50%. Yet, your target price of $1.20 is only about 40% above where Prodigy is trading. Why so conservative?

JM: Given that gold indices provided a negative return in 2011 ranging from 13% to 20%, I think that a positive 40% return to target is probably not conservative in the current market environment. With respect to the valuation, I have adjusted for the technical and execution risk of the study level (PEA) and the fact that I have modeled a larger mineable resource base than that used in the December 2011 PEA. As a company derisks the project from PEA to a feasibility study, I revise the multiples applied to the asset valuation.

Prodigy is planning a significant drill program of 60,000m in 2012 to infill/upgrade and expand the resource base while condemning areas for locating site facilities. We also anticipate an updated resource by Q312 leading to a feasibility study by Q412.

TGR: Do you expect a takeover offer for Prodigy?

JM: I try not to work off the takeover model because it is highly uncertain but focus on the underlying valuation. While I do believe that the Magino asset would be a good takeover candidate for an intermediate, I think that there are opportunities for consolidation and capturing some synergies with Richmont Mines Inc. (RIC:TSX; RIC:NYSE.A), which has an underground operation that abuts Prodigy’s land package. Consolidation would probably be a good idea, given that Prodigy could have underground targets within the same host rocks as Richmont, which has a fully permitted and functional process plant.

TGR: In your last interview with The Gold Report, you talked about Revolution Resources Corp. (RV:TSX; RVRCF:OTCQX, Not Rated). You said it was looking for analogs of Romarco Minerals Inc.’s (R:TSX, Not Rated) Haile Deposit in the Carolina Slate Belt. What’s happening with Revolution now?

JM: Revolution still occupies a significant land package of 7,500 acres along a 25-kilometer corridor within the Carolina Slate Belt at its Champion Hills Gold project in North Carolina. It drilled 19,150m in 2011 and is working on a resource estimate in 2012. Currently, gold equity plays exploring in the Carolina Slate Belt are strongly tied to news flow from Romarco’s multimillion-ounce Haile gold development project in South Carolina and its ability to permit it. In an effort to diversify its portfolio, Revolution acquired a significant land package (~400,000 hectares) in two prospective regions in Mexico from Lake Shore Gold (LSG:TSX, Sector Outperform, CA$3.50 Target Price) in 2011. These assets host high-level low-sulphidation epithermal, gold and silver mineralization and we anticipate news flow from drilling results by Q1–Q212. The company wanted to present the market with multiple catalysts from a diversified asset base and this project has allowed it to achieve that goal.

TGR: In late December 2011, Eldorado Gold Corp. (ELD:TSX; EGO:NYSE, Sector Outperform, CA$19.00 Target Price), made a takeover bid for European Goldfields Ltd. (EGU:TSX; EGU:AIM), which has gold exploration and development properties in Greece, Turkey and Romania. Last year, you discussed Carpathian Gold Inc. (CPN:TSX, Sector Outperform, CA$0.90 Target Price) and its Rovina Valley copper-gold-porphyry project, which contains about 10.7 Moz gold equivalent in Romania’s Golden Quadrilateral. Does the proposed European Goldfields takeover make Carpathian Gold more attractive to larger suitors?

JM: Barrick’s private placement in August 2011 into Carpathian to fund additional drilling at Rovina Valley already speaks to the attractiveness of these gold rich porphyry systems to larger suitors. Mining activity in Romania is heavily linked to news flow on the permitting activities at Rosia Montana operated by Gabriel Resources Ltd. (GBU:TSX, Not Rated).

Eldorado Gold’s proposed takeover bid for European Goldfields does put in a bid for assets in Europe, however, the majority of European Goldfields’ assets are located in Greece (Olympias/Skouries) and less so in Romania (Certej). For me, the takeover trigger was related to the receipt of permits to develop its Greek projects in July 2011. Permitting of those projects took an extended period of time. A positive permitting environment in Europe bodes well for Carpathian at Rovina Valley and it will benefit from any positive news flow from Gabriel. The risks include royalty increases and potential free carried interest that the government wants to negotiate.

TGR: Royalties are going from 4% to 8%. That certainly is not positive, but to get those revenues the government has to permit the mines.

JM: Herein lies the rub. On Jan. 3, we lowered our target by $0.10 on Carpathian to $0.90 to accommodate an increase in the gold and copper royalties to 8% at Rovina Valley. However, on the positive side, by defining the mining royalty rates and the tax structure and negotiating a free carried interest, the Romanian government has shown its desire to have these companies invest in these projects and generate the revenue streams within a restructured rent-sharing framework. We note that the local government is also looking to privatize some state-owned mining assets to raise revenue.

TGR: What do analysts, investors and companies need to look out for in terms of geopolitical risk?

JM: I would highlight countries—emerging or developed—that are in economic dire straits with prospective geology whose mining sector is underdeveloped and has untested mining laws and poor infrastructure. Geopolitical risk carries a few facets including outright expropriation to creeping nationalism, which is linked inextricably to a company’s ability to develop/permit the project. These countries will continue to seek foreign direct investment to explore/develop these assets. Outright expropriation is difficult in countries where there is no mining history and a paucity of critical skill sets locally, unless of course it is looking to sell the asset to another bidder. Alternatively, the country may alter its mining laws to increase its share of resource rents derived from the exploitation of these assets. We have observed higher rent sharing globally via increased royalty payments, higher taxes and/or the introduction of windfall tax structures in countries such as Peru, Argentina and Romania, to name a few.

Assets in higher geopolitical risk jurisdictions must provide the investor a high return and quick payback commensurate with the elevated risk profile. Note that assets within higher geopolitical risk jurisdictions may be more difficult to finance and there may be a limit on potential takeover suitors, depending on their risk appetite. To properly risk adjust and quantify these uncertainties remains a challenge.

TGR: Is that because it is not going away?

JM: Let’s not forget that mining is a great way to get an injection of direct investment into an economy and generate employment. For example, high rates of unemployment in developed countries such as the U.S. and European countries are driving mining activity in places where permits have historically been difficult to attain.

TGR: Joe, thank you for your time and your insights.

Joe Mazumdar is a senior mining analyst with Haywood Securities in Vancouver. Previously, he served as director of strategic planning at Newmont Mining and was the senior market analyst for Phelps Dodge. He has held a variety of geologist positions with other mining companies including RTZ, MIM, North and IAMGold working in South America, Australia and Canada, rounding out ~20 years industry experience. He holds a Bachelor of Science in geology from the University of Alberta, Canada, a Master of Science in exploration and mining from James Cook University, Australia, and a Master of Science in mineral economics from the Colorado School of Mines, U.S.

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