Fraser Mackenzie: Five Must-Haves for Junior MininFive Must-Haves for Junior Mining Companies: Aleksandra Bukacheva
Source: Brian Sylvester of The Gold Report (9/14/12)
Aleksandra Bukacheva Valuation disconnects among producers, rising gold price and juniors facing funding crunches are among the factors fueling a spate of M&A activity. In her first exclusive Gold Report interview, Aleksandra (Sasha) Bukacheva, a mining research analyst with Fraser Mackenzie in Toronto, shares her list of likely targets and suitors in the zinc, copper and precious metals spaces.
The Gold Report: Sasha, what are four or five must-haves for investing in junior mining companies in today's market?
Sasha Bukacheva: To start, I prefer metal producers to developers and explorers, especially in this market.
In terms of specific criteria, number one is quality of the asset base. To me, that means mines with the higher grades and healthy volumes to sustain operations for at least 10 years. Second, I want companies that have manageable growth. A company should be able to deliver growth at a reasonable price and not overspend on a new mine with lower return on capital. Third, I like companies that are unique in some way: in their commodity exposure, exceptionally high grade or mine concentration in a friendly jurisdiction. My fourth criterion is a good management team; the assets are only as good as the people who run them. Fifth is low political risk; everything else being equal, a company with a project in Nevada is more appealing than the one in Ecuador. It's rare that you can find a company that fits all of these parameters, but it's a good frame of reference.
TGR: You cover several companies operating in Argentina. Do you consider Argentina to have low jurisdiction risk?
SB: No, I do not, but Argentina has world-class projects that you might not be able to source elsewhere. By world-class, I mean copper assets that are among the world's largest in the north and exceptionally high-grade precious metals deposits in the south, in the Santa Cruz Province.
"Argentina has world-class projects that you might not be able to source elsewhere."
Argentina has a fairly long history of mining. There have been years when the mining industry has done well and there are years, like 2012, when the government's policies and decisions have challenged the mining industry. Ultimately, my view is that regimes and policies change, but the quality of the asset base does not. I am willing to hold a company that has a good asset and accept higher political risk as a trade-off.
TGR: Did the European Central Bank's (ECB) move to buy government bonds on the open market change your outlook on the companies you cover?
SB: Absolutely. Everyone has been sitting on the sidelines waiting to see what will happen in Europe and China. The ECB's move was very encouraging. It demonstrates political will to inject stability and is an indication of a more concerted effort in Europe. Any additional stimulus in Europe or China would likely be encouraging for growth, which would be good for commodity prices, which in turn would be good for the mining equities.
TGR: Do you think it could raise the target prices of some of your companies?
SB: Most of my companies still have a way to go to reach my target prices. I am comfortable with my target prices because they are based on certain long-term price assumptions that forecast a slightly more stable world than the one we live in today. I have not changed my commodity prices either. I may revise my price deck in a few months if necessary.
TGR: In addition to the good news from the ECB, we may see more quantitative easing from the Federal Reserve. There also is a new round of merger and acquisition (M&A) activity in the small-cap junior precious metal space. Inmet Mining Corp. (IMN:TSX) has a takeout offer out for Petaquilla Minerals Ltd. (PTQ:TSX; PTQMF:OTCBB; P7Z:FSE). Endeavour Mining Corp. (EDR:TSX; EXK:NYSE; EJD:FSE) has an off-share offer for Avion Gold Corp. China's Western Mining Group has a bid out for Inter-Citic Minerals Inc. (ICI:TSX; ICMTF:OTCQX). Does this signal the start of serious M&A activity?
SB: It looks that way. It makes perfect sense because there has been a valuation disconnect between certain producers trading at higher cash-flow multiples and others trading at lower cash-flow multiples.
A lot of producers see higher gold prices as an opportunity to pull the trigger on an acquisition. But the rationales can vary a lot. Endeavour fits the scenario of an existing producer seeking to augment its production base. But Inmet is probably just trying to clean up the area around its proposed Cobre Panama mine.
TGR: Is there a pattern or theme among these takeover offers?
SB: In addition to the disconnect in valuation among producers, there is an even greater disconnect between companies with cash flow and those without. Juniors without a source of internally generated funds depend on the market for new equity, and investors are rather skeptical about their ability to source that.
TGR: Are the boards and the management teams of these junior companies now more amenable to takeovers, given the market?
SB: A lot of the juniors feel they are up against the wall and do not have a lot of choice. They have to either take an offer or discontinue their existence as a going concern. Given that choice, management will probably pick an offer that allows them to preserve some sort of value.
TGR: How many of the companies that you cover would you consider takeover targets?
SB: The first and perhaps most likely would be Trevali Mining Corp. (TV:TSX; TREVF:OTCQX). It is the only emerging junior zinc producer listed on the Toronto Stock Exchange. Trevali is commissioning a new mine in Peru in the next couple of months. It also has a portfolio of polymetallic deposits in New Brunswick, Canada, where it started mining earlier this year and it initially toll milled some of that ore at Xstrata Plc's (XTA:LSE) Brunswick facility. Recently, Trevali made a deal to purchase its own plant for its New Brunswick operation and expects to be producing zinc there in 12 months.
"To me there is more value in intermediates than in majors."
We as a firm are bullish on zinc. We believe that there is likely to be a zinc supply shortage in the next three years, which could be a tailwind for the price of zinc. History shows that every single junior zinc company that's made it into production, like Farallon Mining and Breakwater Resources, has been taken out within a few years of operation.