Cherry Picking Undervalued Junior Gold Miners
Commodities / Gold & Silver Stocks Oct 21, 2010 - 04:11 AM GMTBy: The_Gold_Report
Junior resource companies have been on a wild ride since 2009 and Mickey Fulp, the author of The Mercenary Geologist newsletter, thinks most of them are as overvalued as they've ever been. In this exclusive interview with The Gold Report, Mickey discusses the handful of undervalued plays he's unearthed in an overvalued gold market.
The Gold Report: We spoke earlier this year after equities had a wild ride in 2009. You made the comment that you didn't see many undervalued junior resource companies. When we spoke again in April, you said many of these juniors were at an all-time high. What's your feeling about the junior sector now that we're in October?
Mickey Fulp: Good companies have gone even higher in value right now. The entire junior gold sector is overvalued. You need to look for specific undervalued companies within that sector.
TGR: Are there many undervalued companies at this point in time?
MF: Investors have to cherry pick them. There are not a lot of them, so due diligence is imperative. There are some new issues coming out that offer value.
TGR: If the junior market is overvalued overall does that mean the entire peer group is overvalued?
MF: Yes, I think in the gold sector particularly. I define peer groups both by commodity and stage of the project. For instance, let's take gold. Advanced gold explorers would be a peer group. Those generally have National Instrument 43-101 resources, which gives me an opportunity to calculate the market cap per ounce of gold in the ground. That's one way to define undervalued companies with respect to their peers.
TGR: What are some of these undervalued companies that you're looking at, at this point?
MF: I cover three undervalued companies in the gold space right now.
Amarillo Gold Corp. (TSX.V:AGC) is an advanced explorer in Brazil with more than 1.5 million ounces of 43-101 qualified resources in two projects. I will be in the field in Brazil looking at their projects when this interview appears.
Goldgroup Mining Inc. (TSX:GGA) has the Cerro Colorado mine, which has been cash-flow positive 14 of 15 quarters since going public. They have two advanced exploration projects with resources: Caballo Blanco in southeast Mexico and San Jose de Gracia in western Mexico. Goldgroup is undervalued based on a per-ounce-in-the-ground valuation.
Finally, Otis Gold Corp. (TSX:OOO; OTCBB:OGLDF) has the Kilgore project in southeast Idaho and is currently drilling and expanding a resource. You do a per-ounce calculation and it's undervalued with respect to the entire peer group.
TGR: How is it that these companies are so undervalued when gold is taking off?
MF: Let's go case by case.
Amarillo Gold has great management and a tight share structure. It has never really done any marketing. Part of the reason I initiated coverage is to get the word out on this company. I have a vested interest as a founding shareholder of the company from a reverse takeover in late 2003.
Goldgroup Mining is a relatively new company. It grew out of the reverse takeover of Sierra Minerals Inc. this spring and I was a founding shareholder of that company. It has $20 million in the bank and more than 1 million ounces of resources in two projects, plus an ongoing profitable mine. Goldgroup is probably undervalued because it's a new company and not a lot of people know about it yet.
Otis Gold is also a relatively new company that really got going about a year ago. We expect it to expand its resource at Kilgore.
A lot of times, the cure for being undervalued is simply a matter of marketing and getting the word out to savvy investors.
TGR: How long does it typically take for a relatively new company to get some traction?
MF: That really depends on their investor relations, marketing and business development plans. Some companies emphasize these and others don't. These are important parts of the equation, in addition to fundamental criteria, such as share structure, people and projects. Some companies come right out of the gate with well-known management and they go flying off the chart. Other companies, with perhaps lesser-known management with not much of a track record behind them, may not fare so well initially. Newsletter writers certainly can play a major role in a company's initial acceptance by the market.
TGR: Do you think these companies should get their story out there or is there value to keeping it under wraps until they progress a project?
MF: I think you always need to get your story out. I certainly advise the companies I follow to do that—I am an economic geologist but I've been in the business end of this industry for nearly 20 years. So, whether they want to hear it or not, I usually put in my two cents about how I think they should manage their company, how they should market it, and how they should develop it.
TGR: There's a lot of speculation right now from some newsletter writers and analysts calling for another market pullback. As an "economic geologist," do you forecast a pullback? If so, will it also impact the precious metal equities?
MF: The world economic situation is a house of cards. It has been since a year before the financial crisis really came down upon us.
I dabble in macroeconomics and probably know enough to be dangerous. Certainly, the markets are shaky. They are very subject to volatility and mini-panics. Do I personally see much difference from the months after the financial crisis? No, I don't really think so. The stock market had a "September to Remember." We would expect a coming pullback from that, or a healthy correction.
October is often times a bearish month. I look at the markets as still very risky but probably no more than at any time since a year before the financial crisis when the first bad subprime news started to hit the market.
TGR: Is there an inherent risk since you view the gold sector as overvalued?
MF: Certainly. With gold prices reaching record levels, equities and especially the junior explorers will tend to run up faster than even the price of gold. That's risk, and that's why careful due diligence of junior gold explorers is so important in order to pick undervalued companies with respect to their peers. If there is a pullback, the companies that are undervalued now should benefit at the expense of those that currently are overvalued.
TGR: You've given us some examples of companies that are undervalued relative to their peers. Are there other companies you're following in this sector?
MF: I follow Animas Resources Ltd. (TSX.V:ANI) and am also a shareholder of Animas. It has had disappointing drill results at Santa Gertrudis, Mexico, but has added to its business model by taking on two joint ventures in Nevada with a company called Nevada Sunrise Gold Corp. (TSX.V:NEV). The Golden Arrow property is being drilled now and is a Round Mountain-type target.
Perhaps as interesting to me is a property in eastern Nevada called Kinsley Mountain. I was first on the ground there in 1978. We did stream sediment sampling and found some robust anomalies. I recommended staking it to the company I was working for at the time, but they turned me down. It became a small gold producer. What's intriguing is it's a Long Canyon lookalike. Long Canyon is the deposit discovered by AuEx Ventures, Inc. (TSX:XAU) and recently taken over by Fronteer Gold Inc. (TSX:FRG; NYSE.A:FRG).
Also, I cover some prospect generators, such as Almaden Minerals Ltd. (TSX:AMM; NYSE:AAU). Last time I spoke with you in July, I gave your readers a sneak preview of the next company I was going to cover and that was Almaden Minerals. At the time, it was a $0.90 stock. Since that time, it has been as high as $3.36, trading today at $3. That's a plus-three bagger. That's been my big winner this year.
I like the prospect generator model. Another company I'm involved with and like very much is Eurasian Minerals Inc. (TSX.V:EMX). It just announced it is raising $17.5 million. It had very good news on drilling at their Grand Bois property in Haiti. I was on the ground there about a year and a half ago. That's a joint venture with Newmont Mining Corp. (NYSE:NEM). They also have announced two new designated projects with Newmont in northwestern Haiti. They discovered what looks like a very robust copper/gold porphyry system that has as large a footprint as Newmont's giant mine in Batu Hijau, Indonesia. As you can imagine, Newmont's quite pleased with these results.
Millrock Resources Inc. (TSX.V:MRO) is a prospect generator in Alaska and Arizona with joint venture partners including Vale S.A. (NYSE:VALE), the giant Brazilian metal miner, and Kinross Gold Corp. (TSX:K; NYSE:KGC).
A company I've just gotten involved with is Tarsis Resources Ltd. (TSX.V:TCC). Tarsis is a prospect generator in the hottest area play on the planet—a very cold area but hot for gold—the Yukon. It just so happens to be a sister company of Almaden Minerals, which is the longest-lived and perhaps the best prospect generator in the sector.
TGR: Tell me why Millrock and Tarsis have become appealing to you.
MF: They are prospect generators and that model works very well for juniors. Essentially, assemble a very good geological team with expertise in a particular deposit type and/or area. You generate new ideas, new projects and attract joint-venture partners to explore them past the initial reconnaissance stage.
With that model, somebody else is spending their money on the company's project. Of course, the company gives up a majority amount of the project. But by doing that, it can be a zero-sum entity, taking in as much money as it puts out every year and preserving the company share structure. That adds to the longevity of the company as a viable junior explorer because it doesn't have to keep going to the market and dilute its shareholders with repeated equity financings.
TGR: What makes Millrock and Tarsis appealing among all the prospect generators you could be following?
MF: For Millrock, the management, its projects and the partners they have. For Tarsis, it is a sister company of Almaden Minerals, so it's got people who have done it before—plus, it has management that is very involved as investors in the company. What makes it particularly attractive right now are its activities in the Yukon. The Yukon has been the place to be this year.
Both companies, especially Tarsis, were sorely undervalued when I invested in them recently.
TGR: Do these ideas represent good investment values relative to the risk in today's market?
MF: I think so. I'd say speculative value, not investing value, because this is speculating. Investing implies you expect to get some sort of ongoing return out of it. We hope for big returns but these are high-risk speculations.
TGR: I was recently at a conference where the big theme was the expectation that the markets were going to pullback and that the fiat currencies could potentially dissolve. Their recommendation was that investors should be holding physical gold as part of their portfolio. Do you agree with this advice?
MF: Always have and always will.
TGR: The traditional wisdom is to hold about 10% of your portfolio in physical gold. Should investors hold more than 10%, given today's volatile environment?
MF: I don't know that the environment seems more volatile to me than it has been for the last three years. I certainly own physical gold. Austrian economists generally tell you 10%. I always like to have at least 10%, but that varies with my net worth. I bought physical gold in the summer during what is historically known as the trough in gold prices in July and August. However, I'm not personally buying gold at $1,330 an ounce.
TGR: How about silver?
MF: The gold:silver ratio, which I watch quite closely, is starting to get close to pre-financial crisis levels. Silver is always more volatile than gold on these big run-ups and the big downticks. Silver is a bipolar metal. During times of financial distress, gold will usually do better than silver. During times of economic robustness, silver will generally do better than gold.
The "doom and gloomers" are saying the economy is going into a double-dip recession and the fiat currencies are going to hell in a hand basket. But relatively, silver has had a bigger run-up than gold.
TGR: A double-dip recession and trouble with fiat currencies should signal a time to make gold purchases, given your logic.
MF: Not necessarily; that depends on your trading philosophy. As a contrarian, I was buying silver when the gold:silver ratio was at 80 during the depths of the financial crisis. Why? Because silver was undervalued with respect to gold.
The gold:silver ratio would point that out, too. If we are in a time of economic duress, gold should be performing better than silver and it isn't. That would be an argument that there is underlying industrial demand for silver right now.
TGR: Interesting. Is there anything else that you'd like to share with our readers relative to precious metals?
MF: The junior resource sector is always volatile. If investors truly believe that the economy is coming into a double-dip recession, that fiat currencies are going to take us down and that we're arguably in a deflationary stage, I would suggest they go to the real money—gold—to preserve their purchasing power. However, I continue to speculate in the junior resource sector. I don't see any more problems now than we've had for the last two or three years. Readers should also realize that I'm talking my own book here and they must do their own research and due diligence to make smart speculations.
TGR: You're finding undervalued gems even in an overvalued sector, that's nice. Thanks, Mickey.
Michael S. "Mickey" Fulp is author of The Mercenary Geologist. He is a Certified Professional Geologist with a B.Sc. Earth Sciences with honor from the University of Tulsa, and M.Sc. Geology from the University of New Mexico. Mickey has more than 30 years experience as an exploration geologist searching for economic deposits of base and precious metals, industrial minerals, coal, uranium, oil and gas, and water in North and South America, Europe and Asia. Mickey has worked for junior explorers, major mining companies, private companies, and investors as a consulting economic geologist for the past 22 years, specializing in geological mapping, property evaluation, and business development.
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DISCLOSURE:
1) Brian Sylvester of The Gold Report conducted this interview. He personally and/or his family own the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Gold Report: Timmins.
3) Ian Gordon: I personally and/or my family own shares of the following companies mentioned in this interview:Timmins Gold, Golden Goliath, Millrock and Lincoln. My company, Long Wave Analytics is receiving payment from the following companies mentioned in this interview, for receiving mention on my website, Golden Goliath, Millrock and Lincoln Gold.
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