Gold Miner Ignores High Gold Prices

Fronteer Gold CEO Mark O'Dea says he likes high gold prices but is evaluating opportunities at $900 gold to make money.
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Fronteer Gold


is making money despite the fact that it's not producing any gold.

The junior gold miner earned 7 cents a share in the last quarter, but not through gold production. Instead, the company sold small noncore assets and invested in the competition in order to make money.

Fronteer has $175 million in cash and no debt and continually invests a portion of that extra money -- $3 million to $5 million -- into other gold companies that have attractive projects but aren't necessarily practical to buy or partner with.

The company primarily has three gold mining projects in Nevada that should be producing by 2014. Shares are up 86% year to date. The stock has seven buy ratings and just one hold with an average price target of $9.33.

I sat down with CEO Mark O'Dea at the Denver Gold Forum to delve into the company's growth strategy

Do you think that Fronteer can really sustain this monster stock rally and growth rally that it's had



: You know I think when investors are evaluating which horses to back or which companies to get involved with we're seeing a trend towards higher quality in terms of grade and profitability, financial robustness. You look at the underpinnings of Fronteer and we've got excellent cash positions, we've got an industry leading balance sheet, we've got projects that are high quality.

We're in jurisdictions that the market likes. We're a team that's been able to execute on our plans well. We've got no debt, we've got a nice tight capital structure and all those things have combined

to really build confidence for investors that this is a company that is sustainable, it's a company that's been able to build

an engineering growth business. There'll be ups and downs in the market and there'll be ups and downs in the share price reflected by underlying commodity fluctuations and volatility.

What are your cash costs


We're in the process of wrapping economics around two projects right now. Long Canyon we did a preliminary economic assessment (PEA) on it about two years ago when the project was a lot smaller. Things will scale up and with that scale-up cash costs will become lower as the unit costs go down. At the time we did the PEA our cash costs were $350 per ounce. It was a project that paid back in a little over a year with 66% rate of return.

Now when I was reading up on your company I was a little confused as to your long-term strategy. Do you want to be a producer or do you want to be a company that goes, develops assets, produces but really wants to sell those assets at a premium to companies hungry for gold. What is your business model


We are very much focused on transitioning from an exploration and development company to a company that operates successful mines. We built the team to do that, we're fully built now with our development and operational team, our business development unit. We've optimized our portfolio over the last couple of years selling noncore assets

and really honing in our focus on jurisdictions where we can operate and make a difference ... We've recently sold two projects in Turkey and that's not because we didn't like the projects or because we didn't want to become an operator we did that so we could reallocate ... those funds to our core projects that we do operate in Nevada.

So when do you expect to be a full-fledged producer


We've got three projects that we're sequencing out. Our first project is Sandman, that's a joint venture with

Newmont Mining

(NEM) - Get Report

. Our second project is Long Canyon and our third project is Northumberland so between late 2012 early 2013 through to late 2014 we see these three projects coming on stream.

In the meantime, what are your finding and development costs like


Actually drilling costs are coming down; I'm not sure if that's a function of competition out there. We were surprised this year to see a lot of our drilling costs in Nevada go down which has meant that we have been able to increase our drilling budgets and drilling amounts. We scheduled 45,000 meters of drilling at Long Canyon this year and we've been able to get 70,000 for the same cost.

So are you going to focus on the projects you have or are you going to look to buy other assets once you get off the ground


We feel full right now. We've recently announced the proposed acquisition of our joint venture partner called


which is a company that owns a 49% interest in our flagship project which we've operated for the past three years called Long Canyon. With that consolidation comes 100% ownership of, we believe, one of the best-looking projects in Nevada currently.

A large chunk of our corporate focus and financing ... is going to be on developing that project and moving it as quickly and as efficiently as we can through to production. We don't feel a compulsion or a need to beef up our pipeline. It's full, it's robust.

What about the other side, what would be your exit strategy? Would you be looking to capitalize on this consolidation trend we've been seeing? I mean you are partnering with Newmont


It's not part of a pre-planned exit strategy at all and joint ventures have been part of our growth strategy from day one. I think it's good, prudent risk mitigation. Let's share the upside, but let's share the downside too with some joint venture partners. While we like to have 100% ownership of our flagship projects, we're also very comfortable in a joint venture situation with senior companies that have got expertise in producing in other jurisdictions.

So what's your gold price target for the long term


You know it's a good question and we look at things through the lens of downside protection rather than upside

but we

do believe we are in a long sustainable gold price environment. Gold's doing what it's supposed to do, it's reacted very, very well to the financial crisis and it was a flight to security and wealth preservation so it's behaved like it should. That being said, our focus is really on building our resources on projects that can sustain economic viability at lower gold prices so we're not evaluating opportunities through a $1,200 lens we're evaluating them through a $900 lens.

What does $1,300 gold then mean for you then, is it just a number


It doesn't really matter. It means that our projects are going to be that much more profitable. It's exciting.

What are some of the trends are you noticing coming out of the Denver Gold Forum


I believe there are a couple of trends. There's a trend towards quality. So the transactions that are being done these days, and it feels very much like the acquisition cycle is beginning,

that those acquisitions are all gravitating towards the high quality assets. We're not seeing the lower quality assets underpinned by lower grades and higher cash costs really being transacted on right now. So I think that there's recognition that if deals are going to get done, they're going to get done on the higher grade, higher quality projects.

Do you feel like the community is weeding out the lower grade miners


I think there is a recognition that if there is a correction in the gold price, and I'm not predicting that there's going to be, but if there is a correction in the gold price that those would be the first projects to go on the shelf and that maybe you don't want to own them.

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