Eric Lemieux, a mining analyst with Laurentian Bank Securities in Québec, is a realist, which makes his optimistic outlook for miners in 2014 that much more compelling. Lemieux believes that with the wheat separated from the chaff over the past tumultuous year, the truly strong companies have emerged. But you may be surprised by the jurisdictions he predicts will come to life in 2014. Lemieux makes some startling, but happy forecasts in this interview with The Gold Report.
The Mining Report: Eric, your top stock pick in 2013— Virginia Mines Inc. (VGQ:TSX)—outperformed the S&P/TSX SmallCap Index. What's your recipe for picking stocks in 2014?
Eric Lemieux: The secret to success in picking stocks in 2014 will be simple: management. The senior vice president of Laurentian Bank Securities, who recruited me, asked me a question during my interview way back in 2007: What was the most important element when I was looking at a company? I started to talk about some financial ratios, etc. He began to laugh. He said there are three things: management, management and management. I know that's easy to say, but it is true. It is the team that's behind the company. That's the most important secret for success.
TMR: What's your top pick for 2014?
EL: It remains Virginia Mines because the company has an exceptionally well-managed team and a focused business model. CEO André Gaumond has said he wants to be at the beginning of the food chain and the end of the food chain with a royalty portfolio. I think he is adamant about applying what he's good at and that's being a top explorer and being able to decipher royalty portfolio opportunities. He has always said he is not a producer and I respect that. So far he has been proven right. That should remain the same in 2014.
TMR: The royalty that you're referring to is Goldcorp Inc.'s (G:TSX; GG:NYSE) Éléonore project in the James Bay region of Québec, which should go into production in 2014. What's interesting is that some exploration done by Goldcorp seems to have delineated an entirely new zone of mineralization. What do you know about that?
EL: Goldcorp disclosed a new zone called 494, which would be about 500 meters (500m) north of the Roberto zones. It appears as a new ore shoot. It still has to be fully defined, but the hypothesis is that its geometry looks to be another Roberto. It's most interesting because it's not too far from the mining infrastructure that's being built. It could effectively double the size of Éléonore; which is also wide open at depth. That deposit is set to grow.
The key catalysts for the Éléonore royalty in 2014 are 1) new reserve and resource numbers that most likely will be disclosed by Goldcorp in February and 2) the start of production by the end of the year. There could be a major rerating of the value of Virginia's royalty. It is tremendous. I think it is going to be a world-class operation soon.
TMR: You're predicting an average gold price of $1,400/ounce ($1,400/oz) in 2014. That's down from the previous estimate of $1,750/oz. Nonetheless, most observers would call $1,400/oz optimistic given the current spot price. What gives you confidence that the gold price will rise in 2014?
EL: I'm fairly optimistic. The price of gold is gravitating around $1,200/oz, so there's a substantial difference. I'm looking at the global picture. Yes, the price of gold has gone down, but it's approaching a floor of production costs. By midyear the price of gold will be higher.
TMR: Many of the companies you cover operate in Québec, which just passed a new mining act. Is that good news for investors?
EL: By and large, all this is good news for companies operating in Québec. It's not perfect. There are a few irritants, but it is a middle ground—a relatively well-balanced law.
TMR: An application for a mining lease now requires a feasibility study. What do you make of that?
EL: Well, feasibility studies are necessary. A company needs to go through the steps of a feasibility study for the normal process of calling a mineral reserve and getting financing, etc. The industry has to realize certain levels of obtainment and it is a normal process to have feasibility studies to receive the proper permits to achieve the proper level. The new act (as amended) states that an application for a mining lease must be accompanied with a scoping study and market study; note that previous Bill 43 had proposed a feasibility study for securing second and third transformation. The new dispositions are fair and less burdensome.
TMR: Does Québec remain the best jurisdiction in Canada in which to operate a junior mining exploration company?
EL: I would simply say no, but I would point out the positive is that Québec has stopped dropping in the standings. We've gained clarity with the Québec mining law and royalty revisions. All in all, we're not the best jurisdiction anymore, but at least we're not falling down the slope. I would highlight, however, that Goldcorp's recent offer to acquire Osisko suggests that Québec has seen the worst, and perception is improving.
TMR: What would you say is the best jurisdiction?
EL: This is an ever-evolving element. What is considered the best jurisdiction today could not be so a year from now. Québec is a case-in-point. It was one of the best jurisdictions a few years ago and it slid down. At least with the passage of the royalty and mining law, the worst is over.
TMR: Despite your optimism for precious metals, you've rolled back almost all of the target prices on the companies you cover, some by as much as 35%. What prompted that action?
EL: General market sentiment has obliged me to remove or decrease substantially my exploration goodwill, which was a proxy of the quality of the teams, the quality of the projects and the general market sentiment. I had to bring that goodwill down, and for certain explorers I had to completely remove it. Having said that, companies that are well managed, have a good portfolio of projects and are able to sustain a minimum of activities will be poised to bounce back eventually. Although I brought down the target price, I kept my recommendations. That's a powerful statement. I just needed to effectively downsize some of the expectations.
TMR: What are some of the companies you cover with speculative buy ratings?
Midland has more than $4 million ($4M) in its coffers. That is not a lot compared to other strong companies, but Midland uses the partnership model so its exploration costs are quite low as its partners are funding the programs. Partners for Midland are the likes of Teck Resources Ltd. (TCK:TSX; TCK:NYSE), Agnico-Eagle Mines Ltd. (AEM:TSX; AEM:NYSE) and the Japanese consortium JOGMEC. Midland has the financial capacity to maintain some level of good activity. That's a testament to a well-managed company.
TMR: Which of its projects are you most excited about?
EL: There are a few of them. You never know which one will be the star that will finally emerge. Maritime-Cadillac, a partnership with Agnico-Eagle, is right beside Agnico's Lapa mine, which has just a few years left of production. Agnico would want to sustain, or at least continue to build on, the infrastructure that it has invested in there. Anything that's found in the Maritime-Cadillac project will probably go through the Lapa head frame.
The Éléonore Centre project is 100% owned by Midland, but it could eventually find a partner. It's working slowly but surely and as Goldcorp's Éléonore mine is about to go into production; that whole area will reignite interest once people realize Éléonore is a world-class deposit. Any acreage around there will gain value directly. Midland will have to decide if it wants to find a partner before it drills Éléonore; it has the financial capacity to do that. No matter what happens, that area will light up from Éléonore's conservative production of 40,000 to 60,000 oz of gold in 2014.
TMR: Tell us about what those potential partners could look like.
EL: Midland has a diversified portfolio of properties: a palladium-platinum project in the northern part of the Labrador Trough near Kuujjuaq, some base metal projects in areas not known as mining camps, some early-stage zinc projects. Midland has a lot of arrows in its quiver. Any time some of these arrows could attract some attention. It also has a track record of good relationships in current and previous partnerships. Midland is well positioned to find new strategic partners for its different portfolio of projects.
TMR: Let's delve into Balmoral.
EL: Balmoral has done a very good job in amassing a strong portfolio of properties in the Detour Trend. Balmoral is a shining star right now in Québec. The company was nominated as the prospector of the year in November 2013, a testament to the good work that CEO Darin Wagner and his team are doing.
The Martiniere project along the Detour Trend holds some more surprises. The drilling Balmoral has done—about 90 holes—has shown that there's a gold system there. The deepest hole, at about 400m, is just scratching the surface.
Balmoral is well positioned to continue to work in 2014, with about $8M in cash and equivalents. It has a hot project, the financial capacity, a good team and the geological knowledge—it's a very well-positioned project in 2014.
TMR: Balmoral received a $6M private placement in October. Did that surprise you?
EL: A little bit. I found the timing a bit questionable. Having said that, when the money is on the table, maybe you take it.
TMR: Have some of the struggles at Detour Gold Corp. (DGC:TSX) trickled down to Balmoral?
EL: The Detour story has had a major impact. The whole area has lost its shine with the difficulties (for example a slower ramp-up) going on at the Detour Lake mining operations. There's a direct impact for Balmoral, Midland and Adventure Gold Inc. (AGE:TSX.V), which is another company I cover.
Having said that, the target is of a higher grade on the Québec side. So far, Balmoral has been hitting high grade. Midland's drilling last winter with Osisko Mining Corp. (OSK:TSX) did not hit a homerun, but it was a solid single. Smoke could lead to fire. All in all, the Québec Detour Trend will be able to hold its own in 2014.
While the Detour Lake operations have had an impact, it's more of a step back to eventually take two steps forward.
TMR: Detour Gold recently closed its mill and scaled back its guidance again for 2013.
EL: Detour is going through hardships. Ramping up a mining operation takes time and there are always some surprises. I still believe that it has the capacity to make this a winning proposition. There'll be hiccups, but it should be able to press all the wrinkles and make this a viable operation.
TMR: What about outside of Québec?
EL: Every jurisdiction has its issues and Ontario is no exception, but overall it is one of the better places in the world to work. Goldcorp and other majors are there, but there is still mining to be done in Ontario.
Premier Gold Mines Ltd. (PG:TSX) is in Ontario. The company's assets in the Red Lake and Geraldton areas and its Hardrock and Trans Canada projects are sitting on solid footing. It also has projects in Nevada. Premier has the financial capacity to remain active. It's my understanding that in 2014 Premier will come out with a scoping study for the Hardrock project, which will be able to move quickly into the prefeasibility stage.
TMR: What did you make of the initial resource estimate on the Helen zone, which is part of the Cove project in Nevada?
EL: It was a little bit below my expectations, but it's important to underpromise and overdeliver in this business. The Helen zone was Premier's first resource estimate. It is an improvement from what was done previously by Victoria Goldfields, which was a terrible saga where the company had to restate its numbers. Premier's numbers should be rock solid. There's potential to increase that internally, in infill drilling and with some proximal works. I feel comfortable with the Helen zone for the Cove property.
TMR: Is that the same case for Eastmain Resources Inc. (ER:TSX)?
EL: I have to confess that there was some disappointment over the pace of work in 2013 and 2012. I've always been quite forthright about thinking Eau Claire is an excellent project, but I'm still in the dark about how Eastmain can mine it. It's something that I've been pestering management about for the last few years. There was an expectation that there would be a new mineral resource estimate in 2013 and that hasn't come out yet. Eastmain did put out a press release recently saying that it had retained mining engineer Serge Bureau, who has a background with Barrick Gold Corp. (ABX:TSX; ABX:NYSE), as a special adviser. It's very positive news that Eastmain realizes the importance of bringing Eau Claire to the next level. I take a lot of comfort in Serge Bureau counseling Eastmain CEO Donald Robinson and his team on how to best advance Eau Claire, as well as the Eastmain-Ruby Hill project.
Eastmain is focused in the James Bay area near Éléonore, again the area that I believe might reignite. Éléonore will become a world-class operation and anything that's around there will gain from that. Hopefully Eau Claire will be able to monetize that.
TMR: What's going to keep you optimistic in 2014?
EL: I'm optimistic. It was a difficult year for the mining industry in 2013. The fundamentals are still strong and the long-term story is solid. I believe that this will be able to set in during 2014. Companies have been tightening their belts and streamlining operations. Juniors are going back to the basics. There's no more waste. There's been a reality check. The companies that have been able to survive and sustain a minimum of operations and activities are going to be set for 2014.
The mining industry is a necessity. There's always a reason to go out and search for metals and commodities because the population continues to grow and needs resources. It may be through electronic devices. It may be through food or infrastructure. The overall portrait is interesting and positive. I'm optimistic for 2014.
TMR: Thanks for chatting today. I've enjoyed it.
EL: You're certainly welcome and as we say in French—merci!
Eric Lemieux is a mining analyst who joined Laurentian Bank Securities in 2008. He worked for nine years as a consultant responsible for applying Regulation NI 43-101. He has worked at the Montreal Exchange, and prior to that managed exploration projects for Cambior, Noranda and Soquem. He holds two masters degrees, in mineral economics from the Colorado School of Mines and in metamorphic-structural geology from Laval University.