Jeff Killeen: Cash And Catalysts Rule The Day

Jeff Killeen, mining analyst with CIBC World Markets, has spent much of 2014 on the road vetting junior mining projects. He says that the cash-and-catalyst mindset should remain prevalent for investors looking at explorer and developer equities, while improving operations has been the biggest motivator for producer share prices in 2014. In this interview with The Gold Report, Killeen offers his insight and hands-on perspective on several developers and producers with near-term catalysts.

The Gold ReportTwo years ago CIBC World Markets recommended taking a short position on a selection of gold stocks. What's CIBC's view on gold stocks today?

Jeff Killeen: We had put out a basket of names recommending some short positions, but at that time gold was trading at about $1,600/ounce ($1,600/oz) and there was little support for the price at that level. That dynamic doesn't seem to be at play in today's environment. We are maintaining our current recommendation: Investors should be at market weight with respect to their gold equity allocations.

"The gold exploration stocks that are still on the radar for institutional investors are companies like Asanko Gold Inc."

Many mining stocks have performed well in 2014 and the move has largely been motivated by several factors. First, gold bullion itself has found a footing. The gold price has traded in a range of $1,250–1,350/oz, which is fairly narrow compared to how gold prices have moved in the past three to five years. Investors are becoming comfortable with the idea that gold will remain range bound for the coming 12 months or more, and concerns that gold could drop significantly over a short period seems to be waning with gold seeing support around $1,250/oz.

While some profit taking on strong first half share performance is certainly justifiable, I continue to recommend buying gold stocks with a focus on companies that are currently generating healthy margins and could enjoy higher trading multiples as they gravitate up toward longer-term averages. I also like gold stocks that have underperformed relative to their peers in 2014 that are projecting improving operations or have meaningful catalysts in the near term.

TGR: What do you expect the trading range for gold to be through the end of 2015?

JK: Our gold price estimate for 2015 is $1,300/oz. Next year is likely to look a lot like 2014 with typical seasonal moves and maintaining that price range of roughly $1,250–1,350/oz for the year.

TGR: Do you think the Market Vectors Junior Gold Miners ETF (GDXJ:NYSEArca) will be up another 30% through the first eight months of 2015?

JK: That would be difficult. There could be stocks that realize some strong performance in the back half of this year and into next year, but I don't think it will be as broad based as we saw early in 2014.

TGR: In the near term do you expect gold buying to gain steam or have seasonal gold buying trends become something of the past?

JK: We've spent a lot of time tracking gold's seasonal price patterns over 5-, 10- and 15-year trends. Plotting the relative performance of gold prices over those periods shows a fairly consistent seasonal pattern. A move in the gold price in early June on the back of geopolitical tensions was unexpected and may have taken some of the steam out of a fall rally, but we need to realize that the typical fall rally is largely spurred by physical demand from the East. I don't see a reason why typical physical demand wouldn't materialize in 2014 and we expect the gold price to do well over the next few months.

"Pilot Gold Inc.'s Kinsley project has some of the better grades I've seen in Nevada in recent memory."

TGR: One division of CIBC World Markets uses quantitative models to identify predictive relationships and broad market trends. What are these models telling investors about small-cap gold stocks and the gold space?

JK: Our quantitative analyst, Jeff Evans, has been promoting the idea that gold stocks, especially the more volatile small- to mid-cap gold stocks, have high beta outperformance relative to the S&P 500 and the Toronto Stock Exchange given the current environment for stable or marginally upward moving interest rates over the long term. That's from a technical standpoint.

With that in mind, we have to be cognizant of the fact that we've seen better downside support and some strong moves in the gold price in 2014 that weren't necessarily expected and I'm sure that has helped move some gold stocks upward. But interest rates are having an effect on how people look at gold and gold equities, and using that as a trigger to buy or sell gold stocks makes sense to me.

TGR: In June 2013 positive news had largely stopped moving equity prices. You told us then that it would be temporary. What news is moving producer and developer equities in this market?

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Kevin Michael Grace conducted this interview for Streetwise Reports LLC, publisher of The Gold Report, The Energy Report, The Life Sciences Report and The Mining ...

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