Submitted by The Gold Report as part of our contributors program.
Gold Idol: Killian Charles’ Search for the Next Mining Superstar
Killian Charles, a mining analyst with Industrial Alliance Securities in Montreal, was tired of hearing how gold companies were doomed to failure because of the listless gold price. So he started “auditioning” companies for Gold Idol. In this interview with The Gold Report, Charles talks about what attributes got companies through to the next round and what got them sent home.
The Gold Report: I recently read a 63-page report Industrial Alliance published in December titled, “Gold Idol: Finding the Next Profitable Producers.” What prompted that theme?
Killian Charles: We were getting tired of seeing press releases and technical reports that focused largely on upward sensitivity analysis with elevated gold prices. Of course, projects look very good at elevated gold prices. We wanted to tone down the rhetoric a little bit and put them on even footing.
Investors think, “Oh my God, gold is $1,200/ounce ($1,200/oz) everything is going to die out there!” That statement does not apply to all projects, just as it does not apply to all mining companies or producers. Some producers will struggle at $1,200/oz, but some can continue making money. We hoped to find projects that could eventually fall in the latter category.
TGR: American Idol found talents like Carrie Underwood and Clay Aiken. What did you discover when you crunched the numbers in Gold Idol?
KC: There’s still a predisposition in this market for large projects with middling grades. We wanted to see if lower grades could be balanced with higher production rates. We also wanted to see if this also resulted in a higher net present value (NPV). The connection was there, but we were surprised by the link’s weakness. We had expected a solid correlation between the two.
We tried including strip ratio in the mix, which improved the correlation, but not dramatically. Investors shouldn’t just be focused on grade. There are so many different risks at a mine. I believe the impact of strip ratio can be underestimated. If the rock happens to be a little bit harder and a company is moving a lot of tonnage, the mining operating expense (opex) can quickly get out of control since it’s largely leveraged to the strip ratio.Dalradian Resources Inc. (DNA:TSX); Golden Queen Mining Co. Ltd. (GQM:TSX); Guyana Goldfields Inc. (GUY:TSX); Lydian International Ltd. (LYD:TSX); Midas Gold Corp. (MAX:TSX); Midway Gold Corp. (MDW:TSX.V; MDW:NYSE.MKT); PMI Gold Corp. (PMV:TSX.V; PVM:ASX; PN3N:FSE), which is now the focus of an acquisition by Asanko Gold Inc. (AKG:TSX; AKG:NYSE.MKT); Sulliden Gold Corp. (SUE:TSX; SDDDF:OTCQX; SUE:BVL); and Torex Gold Resources Inc. (TXG:TSX).
Then we had a second group that was more marginal. Their respective NPVs varied between $50M and negative $50M. These projects were on the inflection point and could go either way.
TGR: What are some likely candidates to move away from the cusp and into the first group?
KC: There are a couple of projects that with revaluation have a good chance to move up: Gold Canyon Resources Inc. (GCU:TSX.V), Romarco Minerals Inc. (R:TSX) and Sabina Gold & Silver Corp. (SBB:TSX.V; RXC:FSE; SGSVF:OTCPK).
TGR: What are the most interesting names among the survivors?
KC: The interesting ones are currently entering construction, which can limit financing risk. Guyana Goldfields stands out. It has almost all it needs to enter into construction and has a pretty simple mine.
PMI Gold is the focus of an acquisition by Asanko Gold. Fingers crossed that it’s going to work because Asanko’s and PMI’s projects are so close to one another it make sense to merge them.
Torex came out with very good numbers and is moving along nicely. Similarly, Lydian International’s project may have some political issues in the short term, but then it has clear development opportunities.
TGR: Lydian has a big gold mine in Armenia, which isn’t a well-known mining jurisdiction. What are your thoughts on that country?
KC: Mining in any country that doesn’t have a Western mentality toward investment can mean there may be misunderstandings, but that doesn’t mean that there’s going to be problems. Countries can say they’re against mining, but every single nation in the world has a mine of some sort in it. One hopes that there’s no corruption and the person a company is dealing with actually can make a decision and doesn’t expect a bribe at the end of the day. Luckily, most nations avoid that. Then again, I live in Quebec and even we seem to have problems with corruption! Mining companies can avoid a lot of unfortunate accidents as long as management is of decent caliber and the company is transparent.
TGR: What’s next for Lydian and its Amulsar project?
KC: There should be more information available about the permitting process and obtaining the mining license and the license to operate in the country. Lydian is also updating the feasibility report and moving onto financing.
TGR: Could you update us on some companies you have discussed with us in the past?
KC: There is Integra Gold Corp. (ICG:TSX.V), which was a single property with lots of potential but a lot of the ounces can feel separate even if they are close to one another. We’re finally seeing the story come together. The company updated its resource estimate. Integra is expecting to put out a preliminary economic assessment (PEA) in the coming weeks that will continue tying it into a single front. The location is still excellent and it’s still fairly high grade. Once the story comes together, investors are going to start paying attention to this simple project in a safe jurisdiction with what could be a textbook mine.
Another company is Clifton Star Resources Inc. (CFO:TSX.V; C3T:FSE), which is hoping to put out its prefeasibility report in the first half of the year. The company’s PEA only used a small portion of the entire resource because the project is proximal to the town of Duparquet, Quebec. Clifton Star wanted to avoid unnecessary complication with the municipality until it properly opened up a dialogue. It wanted to make sure that there wasn’t any misunderstanding that arose from a PEA that made an assumption that a portion of the town had to be moved. By avoiding that, it left 2 million ounces in the Measured and Indicated category that are starting right at surface and are easily mineable, so there’s great upside there if negotiations do work with the city. The PEA underestimates the potential of that project, but I like seeing a management team that does a top-notch job and doesn’t overpromise.
TGR: Do you think that eventually Clifton Star will produce concentrate or dor