RE:Read this interview;.........LSG is mentionedFor everybody's interest
TGR: Which type of mining stock do you like best?
JH: I have a particular affinity for the royalty and streaming sector. Its business model is superior to strictly mining. These companies offer the same upside potential as their mining-company partners—new discoveries, increased production, etc.—but royalty companies have mitigated downside risk because they have fixed costs as per their streaming contracts and aren't exposed to the cost overruns that are commonplace in the mining industry.
TGR: Which streaming company is your favorite?
JH: Sandstorm Gold Ltd. (SSL:TSX; SAND:NYSE.MKT). Its market cap is about $800M, and so it has tremendous growth prospects over the next four or five years. I am a big fan of its CEO, Nolan Watson, who was previously CFO of Silver Wheaton Corp. (SLW:TSX; SLW:NYSE). Although Sandstorm has recently experienced some hiccups, I rate Watson's business acumen very highly and believe the company will bounce back strongly during the next advance in gold.
TGR: What do think of Sandstorm's strategic alliance with Pinecrest Resources Ltd. (PCR:TSX.V)?
JH: Sandstorm bought 18% of outstanding Pinecrest shares. As a result, it gets a share of Pinecrest's Enchi gold project. This contains an Inferred resource base of 1 million ounces (1 Moz) gold, is open for expansion in all directions and is located in a mining-friendly jurisdiction, Ghana. In addition to buying equity, Sandstorm also gets the right of first refusal on any future streaming deals, which I expect it to pursue aggressively.
In addition, Watson hinted that Sandstorm could for the first time buy entire companies. With the junior sector beaten down and undervalued, having someone like Watson turning companies around could reap huge rewards for Sandstorm and for investors as gold climbs back to $1,800–1,900/oz. Sandstorm has over $100M, zero debt and $100M in an undrawn line of credit. I expect several exciting announcements between now and the end of the year.
TGR: Could you comment on some of the other royalty companies?
JH: Franco-Nevada Corp. (FNV:TSX; FNV:NYSE) is a more conservative play that I also like. It is better diversified than Sandstorm and has more exposure to platinum and palladium. It's a good stock to have in your portfolio, but investors willing to take on additional risk for greater reward might prefer Royal Gold Inc. (RGLD:NASDAQ; RGL:TSX).
TGR: What do you like about Royal?
JH: Sandstorm is up 65% year-to-date. Royal Gold is up 70%, making it one of the few stocks in the precious metals sector outperforming Sandstorm. Royal benefits from the commercial production begun at the Mt. Milligan mine in British Columbia owned by Thompson Creek Metals Co. Inc. (TCM:TSX; TC:NYSE), one of its streaming partners. During Q1/14 Royal generated income of $20M on revenues of $58M. That's more than triple the income from the same quarter last year despite gold falling around 20%. As production continues to ramp up at Mt. Milligan, we should see even greater Royal share appreciation in 2014.
I also like Royal's project pipeline. The company's most recent news is a 6.3% stream on Rubicon Minerals Corp.'s (RBY:NYSE.MKT; RMX:TSX) Phoenix gold project in Red Lake, Ontario. Royal got this for a $75M investment to finance construction. This is a late-stage project, with production expected in mid-2015 and returns for years to come. Royal Gold is a top performer this year, and I expect more of the same to come.
TGR: The Gold Report interviewed Pierre Lassonde, co-founder of Franco-Nevada, in May, and he argued that because "the silver space is smaller than the gold space," Silver Wheaton will eventually "run out of runway" and will be forced to compete in the gold space. Do you agree?
JH: I do. And perhaps in additional commodities as well. There is only so much growth Silver Wheaton can achieve strictly in silver, so it makes sense that it branches out into other commodities in search of deals that will be accretive to shareholders.
TGR: What's your favorite non-streaming gold company?
JH: Lake Shore Gold Corp. (LSG:TSX). I like companies that are high grade and low cost with a strong growth profile. Lake Shore has two mines in commercial production in Ontario: Timmins West and Bell Creek. Expansion of its mill to a capacity of 3,000 tons (3 Kt) per day was completed late last year. Gold production is expected to increase 27% in 2014, and Q2/14 production was a record 53,300 oz, up 70% year-to-year. Lake Shore is one of the best production growth stories, is located in a mining-friendly jurisdiction and has a strong management team. As such, I think it is a potential takeover target for a company like Goldcorp Inc. (G:TSX; GG:NYSE), so investors could see upside there.
TGR: What's your favorite non-streaming silver company?
JH: SilverCrest Mines Inc. (SVL:TSX; SVLC:NYSE.MKT) in Mexico. This is a high-grade epithermal silver producer with low costs. In today's environment, the value of these attributes cannot be stressed enough. The company is in the middle of the expansion plan that is expected to increase production by roughly 50% this year. It has a base-case internal rate of return of 88% on its Santa Elena expansion in Sonora. I also like its La Joya property in Durango as a pipeline; it has nearly 200 Moz silver equivalent (Ag eq).