Why Miners With Positive Cash Flow Deserve Your Attention: Philip Ker

TGR: You also mentioned Newstrike and its Ana Paula project, which, as you mentioned, was recently acquired by Timmins Gold. You visited the project back in late 2014; what were some of your key takeaways from that tour?

PK: Ana Paula is definitely located within a prospective gold belt. I could see Goldcorp Inc.'s (G:TSX; GG:NYSE) Los Filos mine off in the distance while touring both Torex Gold Resources Inc.'s (TXG:TSX) El Limon project and Ana Paula. To me, that demonstrates the potential along trend and the Guerrero Gold Belt remains relatively underexplored, including Ana Paula and surrounding land claims being acquired by Timmins Gold. Ana Paula is a high-grade—2.24 grams per tonne (2.24 g/t)—gold system with a potentially low stripping ratio (2.6:1) that is expected to average 116 Koz of annual gold production over its eight-year mine life. This is a very attractive project and a good bolt-on asset for Timmins to possess and develop under its new growth initiatives.

TGR: Torex Gold Resources is not a company you cover, but it recently had some personnel kidnapped in Guerrero, Mexico, where companies you cover operate. What effect is that having on the area?

PK: Well, I spoke with Newstrike management when the situation escalated and they let me know that at the time it was still business as usual for them. On my tour to El Limon, we did have security personnel with us en route to the project site but I really never felt as if I were in any danger. Additionally, we met some of the locals who were very friendly and excited for new mining development in the region. Newstrike presented itself with great community relations and staff working in the local township.

TGR: You briefly mentioned Canada's exposure to falling oil prices. Are companies you cover going to see tangible cost reductions due to lower oil prices in 2015?

PK: Fuel is generally 5–10% of direct mining costs for producers. Although it's nice at the pumps for the general public, most producers with significant gas or diesel consumption typically have bulk contracts at lower prices already locked in. Depending on the renewal cycle of those contracts, there isn't really much to gain. The producers in my coverage universe all have access to grid power and are not dependent on diesel-powered generators. In this metal price environment every bit counts, as margins for producers continue to be under pressure with declining metal prices.

TGR: What is your current price deck for gold and silver, both in the near and long term?

PK: PI Financial has $1,250/oz gold and $19/oz silver based on an average gold-to-silver ratio of 73, which is historically above the five-year average of 58. We use these prices as our near and long-term prices within our models.

TGR: What were some of Philip Ker's greatest equity hits in 2014?

PK: My top pick in 2014 was Klondex Mines Ltd. (KDX:TSX; KLNDF:OTCBB). As of late-February, it was up 36% over the previous 52 weeks. Another is Lake Shore Gold, which I initiated coverage on in 2014. It was up 32% over the same period.

TGR: What are some consistent themes among those companies?

PK: Both Klondex and Lake Shore are generating significant free cash flow from their respective underground operations. They've also made significant discoveries that suggest their mine lives at their operations can be extended. Their balance sheets have strengthened significantly in 2014 and each company continues to target and expand on new mineralized zones. The 144 Gap Zone near Lake Shore's Thunder Creek underground infrastructure is looking extremely positive in its early days of exploration. The company plans to target that discovery aggressively over 2015.

Klondex made several discoveries on the western portion of its Fire Creek operation consisting of the Karen, Hui Wu and Honeyrunner veins. These veins are already attributing to ~40% of the current production coming from Fire Creek. Even with positive operations, both Klondex and Lake Shore are giving investors an appetite for more, allowing their value to remain strong in times of turbulence.

TGR: A recent research report suggests that you expect gold production to jump significantly for Klondex in 2016. What accounts for that?

PK: It's essentially the ramp up of its Fire Creek project in Nevada. Management is expecting to receive its full environmental impact assessment approval later in 2015 and that will allow the company to operate above and beyond its current small miners permit in Nevada and process greater amounts of ore from that deposit. Over 2015, underground development is expected to expand significantly with the number of working faces to increase from 18 to 30. That should get Klondex well above 300 tons per day and begin targeting 150 Koz of combined gold-equivalent production from both its mining operations.

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Disclosure:

1) Brian Sylvester conducted this interview for Streetwise Reports LLC, publisher of The Gold Report, The Energy Report, The Life Sciences Report and The Mining Report, and provides ...

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