Gold Stock Picks and Uranium Outlook from Canaccord Genuity’s Joe Mazumdar

Canaccord Genuity Senior Mining Analyst Joe Mazumdar believes gold equities will continue to do well in 2014, underpinned by a resurgence in M&A activity, although the market for these stocks will continue to be volatile. Mr. Mazumdar also provides some of his top picks in the space as well as his outlook for uranium and why he prefers exploration companies in these jurisdictions.

Joe, please tell me a bit about your firm and your role there?

Canaccord Genuity  is a global, full-service non-bank investment firm involved in sales & trading, Corporate Finance and Research. The Research department covers 1,000 companies from diverse sectors from Aerospace/Defense to Transportation.

My role as a Senior Mining Analyst is to cover the junior mining sector based out of Vancouver. Our current coverage universe is mostly in the gold and uranium sectors. In our bi-monthly Junior Mining Review, we cover a watch list of about 10 names, which includes uranium, gold, and base metal companies. Within the same publication, we take the opportunity to publish our detailed site visit notes to companies’ assets.

Share prices of select uranium juniors have done well so far in 2014. Is it too late to jump into some of these names? Should investors wait for a pullback?

We continue to observe the dichotomy between the near to medium term and the long term market for uranium. In the near term, recently broker average prices have fallen to US$34/lb U3O8 and long term prices have fallen to US$47/lb U3O8, suggesting that there is still a lot of inventory overhanging the market due, in part, to the uncertainty related to the nuclear industry’s place in post-Fukushima Japan. 

Lower prices in the near to medium term will lead to under-investment in the sector hampering growth over the next decade just when Chinese led Asian demand (ex-Japan) will grow exponentially creating a supply shortage. This theoretical long term squeeze should drive up U3O8 prices. Exposure to this scenario lies within the exploration companies exploring for uranium in stable geopolitical areas. We prefer stable jurisdictions like Canada (Athabasca Basin) and the USA, as growth over the past decade has been from the less than stable jurisdictions of Kazakhstan and Niger, among others. To secure and diversify their supply chain, we believe production from these stable jurisdictions may warrant a premium from nuclear power facilities.

Do you think gold equities will outperform the gold price this year?

So far they have. As I view my computer screen, the gold price is only up ~7% year-to-date to just below US$1290 per ounce in a volatile market whereas proxies for senior gold and junior gold equity plays are up 18-21% over the same period.

Gold equities outperformance versus the gold price is due to the high, albeit seasonal, betas to gold prices that gold equity plays are enjoying, especially the junior market. The senior’s index (S&P/TSX Global Gold), according to our calculations had gold betas of 1.8 during Q1 and Q3 of 2013 and 1.6-1.7 in Q1/14. The beta to gold for the juniors is, as expected, even higher. In Q1/13, Q3/13 and Q1/14 betas for the junior gold index (GDXJ) were well over 2.0.

The positive sentiment in gold equities is underpinned by a resurgence in M&A activity. We note it remains a buyer’s market. Another positive is the increase in the total gross proceeds from equity financings since October 2013 in the mining sector with highs in February and March 2014.

Some of the stocks that we cover that have outperformed the junior mining index year to date ( GDXJ, +21%), include Golden Queen Mining Co. Ltd.  (TSX: GQM, +105% ytd), Castle Mountain Mining Company Limited (TSXV: CMM +104% ytd), Asanko Gold (TSX: AKG +41% ytd), Roxgold Inc. (TSXV: ROG +39% ytd), Goldrock Mines (TSXV: GRM +34% ytd) and Midway Gold Corp. (TSX: MDW +33% ytd). In the gold sector, we have only two stocks that have underperformed Dalradian Resources (TSX: DNA +18% ytd) and Orezone Gold Corp. (TSX: ORE +7% ytd) the junior mining index.

To summarize, a majority of our coverage has done well but that performance is tainted by the fact we have seen from our in situ gold database performance, companies with assets that are challenged in the current gold price environment that have also done as well or better. These companies represent very high betas on out-of-the-options on gold price. We note that the assets tend to be in North America.

So although there may be a geopolitical myopia in favor of North America no other level of discrimination is apparent other than the higher the beta, the better. What we seek are companies that can offer investors an underlying asset that generates double digit returns at current gold forward curves with a management team that can execute their development plan. Those assets, we believe, can attract an underlying M&A bid and alternatively engage financing to build. If we pick the right assets that work under this gold price environment, they can attract more reasonable financing terms so they are not going to have to go to the royalty streaming companies or alternative investments that tend to be higher costs.

Which resource stocks do you like at this time and why? 

Our focus list names include Asanko Gold Inc. (TSX: AKG) and Dalradian Resources Inc. (TSX: DNA) but others I continue to favor with Speculative Buy ratings include Roxgold Inc. (TSXV: ROG), Orezone Gold Corporation (TSX: ORE) and Castle Mountain Mining (TSXV: CMM). We currently have a HOLD rating on both Golden Queen and Midway Gold but we still like the underlying asset and the management teams.

Asanko Gold Inc. (TSX: AKG) are managed by a team that, in our opinion, can deliver their permitted Phase 1 production profile from their Asanko Gold Mine with 4.8 million ounces of 2P reserves by in part employing their US$240-250 million working capital position and a renegotiated debt facility (US$130-150 million) by 2016. Next significant catalyst is a construction decision by June-July 2014.

Dalradian Resources Inc. (TSX: DNA) operates the Curraghinault high grade, underground gold development project in Northern Ireland. Concerns revolve around permitting. We have modeled a gravity and flotation circuit with no cyanide leaching at site to mitigate the permitting risk. Next significant catalysts include a resource update (Q2/14) and an updated scoping study (H2/14) along with results from their underground bulk tonnage sampling program.

Roxgold Inc. (TSXV: ROG) is seeking to develop the 55 Zone of the Yaramoko high grade underground gold project in Burkina Faso. This small (740 t/d) potential operation with a low upfront capital requirement (US$90-100 M) that could deliver 70-75 koz/y at C2 cash costs of US$540-550/oz. Applying our gold price curve, the project generates paybacks of less than a year.

Castle Mountain Mining (TSXV: CMM) is completing the acquisition of a former producing (open pit/heap leach) gold mine in southern California (Castle Mountain). The company has delivered an indicated resource of 2.56 Moz of Indicated material grading 0.94 g/t Au. Next significant catalyst is a scoping study in early Q2/14. Note the project is currently permitted to operate at a throughput level of about 8 Mt/y.

Orezone Gold Corporation (TSX: ORE) re-scoped its multi-million ounce Bombore gold project in Burkina Faso as an open pit, heap leach scenario. We are modeling a a 120-130 koz/y annual production profile at a C2 cash cost of US$740-750/oz over an 8 year mine life requiring about US$190 M in development capital. The next significant catalysts include metallurgical testwork and a feasibility study prior to year end 2014.

Are there any other minerals/metals that you think will do well this year?

Currently, we are focused on the gold and uranium sectors, which we discussed previously.

In the gold space, the end result of potentially rising interest rates, low inflation data and a shrinking US current account deficit was a resurging US dollar which had a negative impact on gold prices in mid-March 2014. In addition, recent worries over the strength of the Chinese economy, which represents the largest gold consuming nation, have also weighed on the gold price. We believe that the underlying volatility will not abate. The positives in 2014 year to date include the lack of significant ETF withdrawals with an increase in speculative activity. The latter underpins the gold market volatility.

We reviewed the latest offering (Q4/13) of the World Gold Council’s (WGC) gold market review, which was released in mid-February 2014. Overall gold demand was down (15% year-on-year) in 2013 as the ‘tug of war’ between positive physical demand flow for jewellery (up 15-17% y-o-y) and investment demand in the form of bar/coins (up 27-29% y-o-y) from Asia versus withdrawal of investment demand (ETFs, 880 t in 2013 alone) from the west continued unabated. We note that central bank purchases in 2013, albeit still positive, were down almost a third year-on-year.

The supply side in the gold market was generally flat to down slightly (2% year-on-year) in 2013 as lagged, higher (4-6% y-o-y) mine supply, net of hedging, was offset with lower scrap offerings (13-15% y-o-y) due to a lower gold price environment. Technically, the gold market in 2013 appears to have been in surplus (583 t) versus a balanced market in 2012. The gold price fell 28% in 2013 from its 2012 year end close and exited the year at a price of ~US$1,200 per ounce.

Going forward, an environment of limited ETF withdrawals with continued strong Asian led physical demand and no central bank selling would be a positive on the demand side. On the supply side, the lower gold price environment should create production shortfalls and delays in project development that will impact the market in the near to medium term, which we believe is also a positive for the gold price.

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