NOTE: Kwong-Mun Achong Low is a mining analyst with Northern Securities
with a focus on both precious and base metal equities. He previously worked
at a Canadian bank owned dealer and at a U.S.-based brokerage. Achong Low
obtained both his Master of Business Administration and Bachelor of Science
degree in mechanical engineering from the University of Toronto ***
"TGR: In a report, you suggest that Sunridge Gold is one of the more
misunderstood stories in the junior gold sector. What misconceptions about
Sunridge would you like to correct?
KAL: The biggest misconception is that Eritrea is a bad place to do
business. I visited the property in November and saw firsthand that it is a
very determined country working to put additional business-friendly
policies in place. The people are very friendly and hard working. The
United Nations Security Council clouded that view when it put further
sanctions on the country in December after some neighboring countries
accused it of supporting militant groups, but I think the accusations are
politically motivated. Russia and China both abstained from the vote. Also,
Russia went on record saying that the evidence of Eritrea's link to the
planned attacks in Addis Ababa was not conclusive.
TGR: But there is unrest in the region. Are you factoring that into a
discount rate?
KAL: Definitely. Whether it's true or not, the market does perceive
additional risk in Eritrea. We only use a multiple of 0.4x our net asset
value whereas other companies in our space could get from 0.5–1.0x.
TGR: What were your thoughts about the Asmara project when you visited?
KAL: It is very close to infrastructure. You can drive to the site in a
matter of minutes. The topography is very supportive of open-pit mining as
it is very flat with lots of room to put the mill facilities and tailings
pond. It's also very close to a willing workforce."
http://www.businessinsider.com/a-path-to-gold-production-kwong-mun-achong-low-2012-1
A Path to Gold Production: Kwong-Mun Achong Low
The Gold Report|Jan. 20, 2012, 3:00 AM
*The Gold Report: *Kwong, what are some themes or common ground within your
Buy recommendations in the junior mining space?
*Kwong-Mun Achong Low: *When I look to initiate coverage of a company, I go
through a checklist of must-haves with emphasis on the management team and
the assets. Excelsior Mining Corp. (MIN:TSX.V), Golden Predator Corp.
(GPD:TSX), Probe Mines Ltd. (PRB:TSX.V) and Sunridge Gold Corp. (SGC:TSX.V)
have solid management teams with proven track records and they've either
built and sold companies before or they have tremendous experience in the
countries that they operate in. All of those companies' flagship assets are
close to infrastructure, and they have a clear path to production. They're
not just speculative stories. They also have good streams of news to keep
investors interested and are supported by the commodities that they are
focused on, which are gold or copper.
*TGR:* Even very good news wasn't really moving share prices a lot in the
last half of 2011. Do you expect that to change in 2012? Will good drill
results move share prices this year?
*KAL:* I think so, but a lot of the speculation has come out of the space.
Really and truly, things were looking dire at the end of 2011, in part
because of redemptions of funds <#> and tax-loss selling. This year,
investors will look at the quality projects and, when good drill results
come out, they'll say, "Okay, we'll reward this company because it
continues with good news." I think share prices will respond to suit.
*TGR:* Are you more bullish on copper or gold in 2012?
*KAL:* The underlying fundamentals of both are still pretty good. Gold's
use as a store of value should be of real interest to investors because of
the ongoing quantitative easing and the loose monetary policies by central
banks that are devaluing major currencies. Historically, gold has responded
well to that.
For copper, our bullish case comes from supply-demand fundamentals. Many
commodity houses are forecasting a supply deficit for 2012. For instance,
stockpiles in Asia as tracked by the London Metal Exchange (LME) are at a
two-year low and heading lower, which is likely because China is buying and
stockpiling copper again. The broader LME stocks are at a one-year low and
also heading lower. That's really good for copper and gives it an edge over
gold this year.
*TGR:* But copper was down about 3.5% last year.
*KAL:* It just got caught up in all of the economic worries. When you go
back to basics, which are supply-demand fundamentals, copper is still a
really good story.
*TGR:* Northern Securities' 2012 Top Picks List includes Golden Predator
and Probe Mines, but not Sunridge or Excelsior. What factors put Golden
Predator and Probe above the others?
*KAL:* At the time we chose those two names to highlight, the stock market
was more volatile and investors were in a real risk-adverse mood.
Golden Predator stood out because it's in the Yukon, which is a good mining
jurisdiction. It has near-term production potential and current cash flow
from its royalty portfolio. In a real cash crunch, it would come out OK.
Probe Mines, in Ontario, came on the scene with a really good resource
update. It has a good opportunity for more resource growth, which puts it
on a short list of takeover candidates.
*TGR:* Would it surprise you if the companies not on the top picks list
outperformed those that are?
*KAL:* No, not at all. Both Sunridge and Excelsior are solid companies with
robust assets. Sunridge has four polymetallic deposits in close proximity
to one another. The biggest deposit <#>, Emba Derho, is of world-class size
by itself. It's a 62 million tonne (Mt) volcanic massive sulphide (VMS)
deposit with almost 0.6 million ounces (Moz) gold, nearly 1 billion pounds
(Blb) copper and 2 Blb zinc. Something that size could attract takeover
potential as well.
Excelsior's preliminary economic assessment (PEA) on the Gunnison copper
project in Arizona in December really impressed me. It could advance its
project quickly to production and I would put it on a short list for
potential acquirers given the project economics.
*TGR:* What in that PEA did you find particularly interesting?
*KAL:* It's expecting annual production of 85 million pounds (Mlb) copper
for a capital expenditure of $240 million (M). Not many companies could do
that. If it builds a sulfuric acid plant for $85M, it could get its cash
costs down from a projected $0.94/pound (lb) to about $0.68/lb. That could
make it one of the lowest cash-cost producers in the copper space.
*TGR:* It plans to use in situ recovery, which involves drilling holes into
a land mass, injecting liquid into those holes and then pumping it out and
recovering the metals in those liquids. Given the recent concerns regarding
fracking in the oil and gas space, do you expect getting environmental
permits could pose a problem?
*KAL:* I'm not concerned with Excelsior getting its permits because the
same process has been successfully permitted and used in the past in
Arizona during the 1980s and 1990s. In situ recovery is often misunderstood
because it's not commonly used in the copper industry though it is quite
common in the U.S. uranium industry. When at full operation, more of the
dissolving liquid is removed than is pumped into the ground. That creates a
cone of depression where the basic physics of high and low pressure
prevents any fluid from traveling where it's not supposed to go.
*TGR:* What catalysts are going to push Excelsior, which currently trades
around $0.57/share, to your 12-month target of $2/share?
*KAL:* It intends to do a prefeasibility study by the end of this year. To
do that, it will have to continue with its hydrology and metallurgical
studies. Even though the initial tests came back positive and show a good
case for in situ recovery, investors would be happy to see more detailed
tests confirming those results. That should push this toward the target.
*TGR:* Golden Predator, which is the largest holder of active exploration
properties in the Yukon, receives royalty payments from a property
portfolio in Nevada. What sort of cash flows are those royalties creating
and how is Golden Predator using that cash?
*KAL:* The land package and the royalty portfolio are two of the best
things about Golden Predator. It already has cash flow coming in, which
could be used for general and administrative expenses or to offset large
financings. We expect about $1M in royalty payments this year, gradually
increasing to about $8M by 2015. Also, as the company has done before,
non-core segments in the royalty portfolio and land package could be
monetized for additional gains.
*TGR:* Golden Predator released some results from the Sleeman zone on the
Brewery Creek project in the Yukon recently. One hole returned 35.1 meters
(m) of 1.63 grams per tonne (g/t) gold and 136.72 g/t silver. Within that
intercept, there were 20m of an even higher grade intercept. What were your
impressions of those results?
*KAL:* They were quite good. It's not often that we see a sizable silver
intercept at Brewery Creek, but that adds another dimension to go along
with the gold. One of the holes on the westernmost part of Sleeman returned
some decent results as well, showing that the zone is still open in all
directions. That step out hole would not be included in the resource update
at the end of January. Because of this, and the over 100 holes to be
assayed, the company is planning another resource update for the middle of
the year.
*TGR:* Golden Predator has a number of properties. Do you think as these
sorts of results come back that it will begin to focus more on Brewery
Creek than the others?
*KAL:* It already is focusing mostly on Brewery Creek given its near-term
production potential possible because of its past-producer status. So
Brewery Creek is both an exploration story with the good drill results it
keeps returning and also a development story that could see itself in
production by the end of the year. The other properties will also see some
drilling this year and could add production growth a few years down the
line, but they are not the focus now.
*TGR:* What other catalysts are you expecting to take Golden Predator to
your 12-month target of $1.60/share?
*KAL:* It still needs to come out with some engineering tests on the
existing heap-leach pad to see if a quick production start-up is possible.
Those are due in the next few months and if they continue to show that it
can start production sooner than most people think, that should really push
the stock up.
*TGR:* Golden Predator has made some management changes. Do you think those
are positive?
*KAL:* Definitely. It hired a chief operating officer and a chief mining
engineer, which shows that it really is gearing up for production.
*TGR:* Probe Mines has gone from being primarily a chromite play to a gold
play. The junior now sits with a resource of almost 5 Moz at the Borden
Lake project in Northern Ontario. In 2009, Osisko Mining Corp. (OSK:TSX)
bought out Brett Resources Inc. (BBR:TSX.V), which had a resource of
similar size in Northern Ontario. It's a distance away, but there are some
similarities. Do you believe Probe is a takeover target?
*KAL:* I think so. Probe really has reinvented itself and capitalized on
its grassroots Borden Lake gold discovery. It is expecting another resource
update later on in this quarter, which should get it past the critical 5
Moz mark and put it on the radar for intermediate and senior producers. The
orientation and structure of the ore body are close to ideal for mining a
low-grade, bulk-tonnage deposit. A lot of that resource will end up
mineable, and that's what companies are looking for.
*TGR:* Have you visited that project?
*KAL:* I have. Dave Palmer, the chief executive officer, really keeps a
close eye on what's going on there and he regularly takes analysts and
investors up to the property. What I really like about the project is that
it's about a 15-minute drive from the airstrip and the town of Chapleau,
and you can walk straight from the road to the drill rig.
*TGR:* What are some catalysts we can expect in 2012 for Probe?
*KAL:* Apart from the updated resource, it also has some further
metallurgical studies and drill results coming due. What I like about
Borden Lake is that there are some really good geophysics in the northern
part of the property that show that it could have another main Borden Lake
deposit there. It's drilling that now and if successful, that could easily
double the resource.
*TGR:* Are you saying it could hit 10 Moz?
*KAL:* It could, but it may not this year. If it hits some good results up
to the north, it could get really big.
*TGR:* If that's the case, then it must be a takeover target.
*KAL:* For sure.
*TGR:* In a report, you suggest that Sunridge Gold is one of the more
misunderstood stories in the junior gold sector. What misconceptions about
Sunridge would you like to correct?
*KAL:* The biggest misconception is that Eritrea is a bad place to do
business. I visited the property in November and saw firsthand that it is a
very determined country working to put additional business-friendly
policies in place. The people are very friendly and hard working. The
United Nations Security Council clouded that view when it put further
sanctions on the country in December after some neighboring countries
accused it of supporting militant groups, but I think the accusations are
politically motivated. Russia and China both abstained from the vote. Also,
Russia went on record saying that the evidence of Eritrea's link to the
planned attacks in Addis Ababa was not conclusive.
*TGR:* But there is unrest in the region. Are you factoring that into a
discount rate?
*KAL:* Definitely. Whether it's true or not, the market does perceive
additional risk in Eritrea. We only use a multiple of 0.4x our net asset
value whereas other companies in our space could get from 0.5–1.0x.
*TGR:* What were your thoughts about the Asmara project when you visited?
*KAL:* It is very close to infrastructure. You can drive to the site in a
matter of minutes. The topography is very supportive of open-pit mining as
it is very flat with lots of room to put the mill facilities and tailings
pond. It's also very close to a willing workforce.
*TGR:* Are there any majors operating in Eritrea right now?
*KAL:* None that I know are active in the area. There are a number of
Chinese companies with interest including the Shanghai Construction Group
that recently bid for Chalice Gold Mines Ltd. (CXN:TSX; CHN:ASX), though
the others have nothing as advanced as Sunridge or Nevsun Resources Ltd.
(NSU:TSX; NSU:NYSE.A) <
http://www.theaureport.com/pub/co/222>.
*TGR:* Does Nevsun have the cash flow to pull off a takeover?
*KAL:* For sure. It is producing a lot of gold at one of the lowest cash
operating costs in the industry. Last year it produced about 380 thousand
ounces of gold and the cash costs for the first three quarters were about
$285/ounce (oz). However, I'm not sure that, if it were to expand, it would
want to get another asset in Eritrea.
*TGR:* On the one hand, you're saying there's not as much risk as people
think, but in this example, you are intimating that there is still a
significant amount of risk there?
*KAL:* There is perceived risk. If a company like Nevsun has a main asset
there and it's not getting the full value that it should for it, then
there's no need to wait around for the market to clue in. It can just take
its cash and go after something that the market will recognize.
*TGR:* What should move Sunridge stock to your 12-month target price of
$1/share?
*KAL:* Of its four main deposits, it has combined three of them into one
prefeasibility study due out in about four months. The fourth deposit, the
Debarwa deposit to the south of Asmara, has a feasibility study due in the
next couple of months. As the market sees that there is real economic
benefit to these projects and there is a clear line to their production,
Sunridge should get rewarded for that.
*TGR:* Debarwa is really the crown jewel here, right?
*KAL:* It's the highest grade and it may be the closest to production,
though I think the crown jewel is Emba Derho, with 62 Mt of VMS.
*TGR:* What's the resource there?
*KAL:* It's almost 600,000 oz gold, 1 Blb copper and 2 Blb zinc at Emba
Derho.
*TGR:* What's the estimated production timeline there?
*KAL:* It could be as early as 2015. After the feasibility is completed, it
could start applying for its permits. Sunridge has already started talking
with government officials, so I don't think that will take as long as it
has for other companies, like Nevsun.
*TGR:* Are there any other companies that you would like to discuss today?
*KAL:* It's not one that I cover, but it is in a very stable country: Seafield
Resources Ltd. (SFF:TSX.V:) <
http://www.theaureport.com/pub/co/3085>. It is
advancing its Quinchia gold project in Colombia. It is expecting a resource
update at its Miraflores deposit by the end of this month and a PEA in a
few months. Quinchia currently has 2.5 Moz in global resource and with the
new management appearing settled, the relative valuation and news flow
makes this stock one to watch.
*TGR:* Do you have some parting thoughts for our readers?
*KAL:* Investors need to take the speculation out and do additional due
diligence because it's a stock-picking market. Investors need to look for
companies that have good news flow, really good management and an asset
that is good enough to put into production when they invest <#> in it.
*TGR:* Thanks.
*Kwong-Mun Achong
Low<
http://www.theaureport.com/pub/htdocs/expert.html?id=5195>is a
mining analyst with Northern Securities with a focus on both precious
and base metal equities. He previously worked at a Canadian bank owned
dealer and at a U.S.-based brokerage. Achong Low obtained both his Master
of Business Administration and Bachelor of Science degree in mechanical
engineering from the University of Toronto. *
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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: *Golden Predator Corp., Sunridge Gold Corp. Streetwise Reports
does not accept stock in exchange for services.
3) Kwong-Mun Achong Low: I personally and/or my family own shares of the
following companies mentioned in this interview: None. I personally and/or
my family am paid by the following companies mentioned in this interview:
None. I was not paid by Streetwise for participating in this story.
( Companies Mentioned: MIN:TSX.V, GPD:TSX, NSU:TSX; NSU:NYSE.A, PRB:TSX.V,
SFF:TSX.V:, SGC:TSX.V, )
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Received on Sat Jan 21 2012 - 09:50:10 EST
