Chris Thompson: Gold and Silver Miners that Can Make Money Now

Source: Kevin Michael Grace of The Gold Report (8/13/14)

As much as we'd all like significantly higher silver and gold prices, Chris Thompson of Raymond James doesn't expect them. The good news, he argues, is that the relative stability now characterizing the market permits investors to make informed decisions about which companies can build value and demonstrate cash flows at today's prices. In this interview with The Gold Report, Thompson lists a handful of gold and silver miners prepared to do just that.

 

The Gold Report: In your previous Gold Report interview of Dec. 31, 2013, you predicted 2014 prices of $1,400 per ounce ($1,400/oz) for gold and $25/oz for silver. Do you think that gold and silver can still meet those prices this year?

Chris Thompson: Those figures referred to the high side of the anticipated trading range for both metals. Today, our prediction for the high side in 2014 is $1,350/oz for gold and $22/oz for silver. In other words, we see silver potentially trading up to $22/oz this year but do not imply in any way that we expect silver to average $22/oz this year.

TGR: Several recent Gold Report interviewees have expressed surprise and even astonishment that the deteriorating global political situation combined with continuing weak U.S. economic performance has not resulted in significantly higher precious metals prices. What's your view?

CT: We think gold and silver have performed relatively well this year and showed strength toward the end of the second quarter. My feeling is that stronger gold and silver prices that we have seen earlier than anticipated this year is a reflection of global political tensions and maybe just a reminder that we are not out of the woods as far as U.S. economic performance is concerned. Earlier is better, and so we look for gold and silver prices to retain most of their gains in the third quarter.

TGR: After gold fell significantly under $1,200/oz, there was a loud chorus to the effect that gold had been overvalued and overbought for a long time. Has this negative atmosphere been dissipated?

CT: It was not just gold bullion that was hurt by this negative atmosphere. It was the gold-mining companies—in fact, the entire gold industry and its participants.

TGR: Could you elaborate on that?

CT: What we're seeing at the moment is a restoration of market credibility, especially from the mining company side of things. The mining industry enjoyed for a long time a never-ending climate of strengthening metal prices; that was reversed last year. As a result, companies have had to deal with this reverse by slashing costs, revising their operating plans and, frankly, delivering what investors have always wanted from them: real growth and the generation of real cash flows at current metal prices, not growth at any cost.

TGR: The Dow Jones and the S&P 500 have continued to hit record highs even as many worry about a bubble. Does it surprise you that precious metals equities have done so poorly in the last three years compared to the broader indices?

CT: Not at all. Because of their dependence on ever-higher metals prices, the investment appetite for precious metals equities has been muted. Investors and institutional clients have in fact made money bynot investing in precious metals. As you suggest, however, our view is that perhaps clients should start looking for quality, precious metal-focused stories that are arguably undervalued today. Indications are that clients have been giving the precious metals sector a second look.

TGR: Do you think that the broader indices are in bubble territory?

CT: My view is that it's all about real return. It doesn't matter what the commodity is or what the company is. So long as companies can offer real returns from doing what they do, and there's a value opportunity in what they can deliver. Companies aren't overvalued, regardless of sector, if they deliver real returns. Also, investors have to be realistic about what returns to be satisfied with.

TGR: With regard to offering real returns, how difficult is it for mining companies to make money at $1,300/oz gold and $20/oz silver?

CT: There are companies that can make money at those prices and others that will struggle. It comes down to two criteria. The first is a management team that can demonstrate the ability to reduce costs and keep them low. The second is deposits that make sense in today's metal price environment: good grades that come without significant technical challenges.

TGR: What's your favorite junior gold company project?

CT: Asanko Gold Inc. (AKG:TSX; AKG:NYSE.MKT). We initiated coverage a couple of months ago primarily because of the company's management team. The company has brought together two projects in Ghana, the Obotan and Esaase projects, into one large potential operation. Capital expenditures for Phase 1 of the Asanko gold mine are only $295 million ($295M). Phase 1 is fully funded and fully permitted for construction and production.

TGR: Asanko shares are trading around $2.70. Your 52-week target price is $4. On what do you base this valuation?

CT: We derive our value assessment in this instance from a net asset value estimate at a 5% discount rate. For Asanko, we see initial production occurring in Q2/16. For that year, we forecast 160,000 ounces (160 Koz) gold production at an all-in cash cost of about $900/oz. We see that increasing the following year, obviously a full year of production, to over 200 Koz at similar all-in cash costs. Then, ultimately, when the project fully ramps up, we see both projects, Phases 1 and 2, offering the potential to deliver over 400 Koz gold production by 2020. Recognizing our metal price forecast of $1,350/oz and a 5% discount rate, this operational and development scenario warrants a value of $4/share, in our opinion.

TGR: You previously predicted several 2014 sector outperformers in silver. Have these companies met your expectations?

CT: Fortuna Silver Mines Inc. (FSM:NYSE; FVI:TSX; FVI:BVL; F4S:FSE) and Tahoe Resources Inc. (THO:TSX; TAHO:NYSE) have absolutely met my expectations. First Majestic Silver Corp. (FR:TSX; AG:NYSE; FMV:FSE) has lagged the sector somewhat because of operational redesigns currently occurring at two of its key operations in Mexico. We do, however, see a good value opportunity here and expect First Majestic to catch up somewhat to its peers.

Fortuna is a rare example of a company that operates two mines in two countries efficiently and cost effectively. One of those mines has had tremendous exploration success through the discovery of a new high-grade zone.