Jeff Killeen: Cash And Catalysts Rule The Day

JK: On the producer side, improving operations has been the biggest motivator for share prices. Although I expect a lot of the cost improvements in the gold mining space have already been incorporated into operations, the market is thinking about how sustainable those cost improvements might be. Companies that maintain lower costs through 2014, relative to where they may have been in previous years, are likely to get attention as investors think about 2015 performance and if they should consider increasing their estimates for company earnings and cash flow. Such a scenario could generate further share support for good operators. Of course, companies that realize further cost improvements in the second half of 2014 are also likely to get investors' attention.

TGR: What about developers?

JK: On the developer side, we're starting to see share prices get rewarded for good drill results, resource growth and even new discoveries. When we spoke back in mid-2013 I recommended that investors stick to the cash-and-catalyst mentality because an exploration stock needs to have a strong balance sheet and material near-term catalysts. That approach was the right one and I'd stick with that concept today.

"Pretium Resource Inc.'s Brucejack site should perform well."

In 2013, Premier Gold Mines Ltd. (PG:TSX) was one stock I highlighted as being a company with lots of cash and that would have meaningful developments over the following 12 months. In 2014 the company produced a preliminary economic assessment (PEA) and increased the total resource for its Hardrock project in northern Ontario. That has improved Premier's estimated return on paper. Meanwhile, Premier has increased the mineralized footprint and consolidated its Cove project with the neighboring McCoy mine in Nevada. Its strong balance sheet and the ability to unlock value in its assets are a big part of Premier's share price performance—it's up almost 80% year-to-date. That cash-and-catalyst requirement should still be prevalent in investors' minds.

TGR: Would you make any modifications to the cash-and-catalyst thesis given what has transpired between then and now?

JK: Cash and catalysts are not the only components that a company must have. The main project has to have gold grades that are amenable to the type of process it is proposing, and the economics have to work at current gold prices to have a realistic chance of seeing a takeover offer. A company definitely has to have a solid management team to navigate today's tricky financing waters or wisely allocate capital.

TGR: Which types of companies are seeing interest from institutional investors?

JK: My producer coverage is in the small to intermediate market cap in the gold space. The intermediate producers tend to have a higher beta to the bullion price so that segment of my coverage seems to have sustained greater institutional interest in 2014. Despite some merger and acquisition (M&A) activity in 2014, the general feeling among investors is that although M&A is likely to continue, it's expected to come in the form of smaller consolidations or the sale of noncore assets by majors. In that context, exploration companies are struggling to attract attention from the institutional market.

Investors are apprehensive to build meaningful takeout premiums into a company's share price. But the gold exploration stocks that are still on the radar for institutional investors are companies like Premier,Continental Gold Ltd. (CNL:TSX; CGOOF:OTCQX)Pretium Resources Inc. (PVG:TSX; PVG:NYSE)Pilot Gold Inc. (PLG:TSX) and Asanko Gold Inc. (AKG:TSX; AKG:NYSE.MKT). Those are developers under coverage that are getting the most attention from institutional buyers.

TGR: What are your top picks in the junior and midtier producer space?

JK: My top pick would still be B2Gold Corp. (BTG:NYSE; BTO:TSX; B2G:NSX). The company is spread out geographically, but it is continuing to incrementally improve the performance at the operations in production. B2Gold is going to bring on another leg of meaningful growth with the Otjikoto mine in Namibia later this year. Although the pace of acquisitions has been high over the last few years, B2Gold has been able to build a solid pipeline of projects—the next likely being the Fekola project in Mali. B2Gold will see fairly significant production growth over the next couple of years and that growth should come with improving costs. That's the kind of dynamic that investors are looking for given the concept that gold may stay range bound here in the near term.

TGR: You visit a substantial number of mining projects each year. Please share some of your takeaways from recent visits.

JK: In late August I visited Pretium Resources' Brucejack project in northern British Columbia. This was my third time there and my focus was to have a closer look at the underground bulk sample area of the Valley of the Kings deposit and see how both the geology and the mineralization compare with some of the interpretations and estimates Pretium has laid out. I looked at the stockwork veining that hosts much of the gold and silver mineralization and witnessed how the company has assessed its resource. I returned from the trip with an improved comfort level around the company's interpretations. Questions from the broader market about the realized mine grade will persist until it goes into operation, but nonetheless the site should perform well.

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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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