KENWOOD, CA (The Gold Report) –
The Gold Report: In a recent National Post article about gold’s rising price versus the languishing prices of gold equities, Mining Reporter Peter Koven quoted Peter Marrone as saying, “. . .people rely on net asset value to value gold companies, and the calculations don’t seem to rise so dramatically because the long-term gold price used by analysts is at a deep discount to the current price. . .there’s a tendency to say, ‘I’m not taking advantage of the equities because they’re not reflecting the current gold price.'” As an analyst, what’s your view?
Michael Starogiannis: I think Peter is correct in that the long-term gold price deck used in net present value (NPV) calculations is relatively sticky. But a lot of people also use a cash flow multiple to value companies. Cash flow isn’t relevant for junior exploration companies, but it is relevant for junior producers. I think pricing, to some extent, reflects fluctuations and the steep gold price. If you combine valuation methodologies, including NPV and cash flow multiples, you should see some fluctuations in the junior-producer space.
TGR: But do you think Marrone is right? Could there be something else behind those languishing prices?
MS: I think it also reflects the part of the cycle we’re in; we had a very busy fall and winter with respect to the number of new equity raises in the space. If you use the show-and-tell analogy, all the companies told us their stories. The markets have raised money for them and now they’re trying to show us what they can do with it. We’re in that pause stage, as companies begin their summer drill programs and sink those big equity raise dollars into the ground, into mine development or building new mill facilities.
TGR: But you’re referring more to smaller rather than large companies. As the news cycle picks up and drill results come in, do you expect to see a rise in the juniors share prices?
MS: Provided that the gold price remains in the $1,400-$1,500/oz. range, the juniors should start to come back in earnest. All of that deployed capital will have been put into the ground and results will start showing which projects are of merit and which will fall by the wayside.
TGR: In your five years as an analyst with Fraser Mackenzie, you’ve seen a lot of market fluctuation. How does what we’re seeing now in the funding cycle compare to what was going on in 2007?
MS: Overall, the market is fairly efficient right now, particularly in valuing gold stocks. We’re benefitting from having gone through a little bit of a retracement, as we did in 2008 when the juniors pulled back and the market got a bit savvier. Prior to that 2008 blip, the valuations in the junior space were getting a bit ridiculous. Now, the valuations in gold stocks reflect the true value of the companies.
TGR: Prices for precious metals typically fall off in early summer before strengthening in August and into the fall. How would you recommend playing the precious metal sector now, in terms of junior equities?
MS: Many of our companies under coverage have a drilling and news flow hiatus this time of year, which coincides with a drop-off in commodity prices. For investors who believe in commodity prices coming back in the fall and in the long-term health of those commodity prices, the early summer months might be the opportunity to pick up some bargains.
TGR: You’re based in Toronto and cover many Canadian-based companies with gold and silver projects. What role does Canada play in the global gold market today?
MS: I have a biased view because I’m based here and I don’t see a lot of the work that’s being done elsewhere. But I believe Toronto and Vancouver are powerhouses in financing the junior sector, in particular. But more than just financing, a lot of the companies are headquartered here. That means much of the technical talent resides, or is based, here. So, Toronto and Vancouver, and Canada in general, play a very important role in advancing projects in the junior space-particularly on the precious metals side.
TGR: Michael, thank you for your time and your insights.
Michael Starogiannis is an analyst for Fraser Mackenzie covering the metals and mining sector. He is a professional engineer and a graduate of the University of Toronto with a BASc in geological and mineral engineering. He started his career as a consulting geotechnical engineer working for Golder Associates on a variety of projects entailing rock mechanics, hydrogeology and tailings. Since finishing his MBA at the Rotman School of Management in 2001, he has held roles in equity research, private business and investor relations. He has prior experience researching the gold and precious metals sector for several Canadian broker/dealers.
Article published courtesy of The Gold Report – www.theaureport.com