Éric Lemieux: New Golden Oldies
Source: Brian Sylvester and Karen Roche of The Gold Report 5/17/10
When The Gold Report last interviewed Laurentian Securities Analyst Eric Lemieux, he talked about his favorite explorers, especially in the James Bay area, with its exploration plays and favorable geological, geographic and social fundamentals. Eric is back with more on Canada's junior gold sector in this exclusive interview.
The Gold Report: What are Laurentian Securities' short- and long-term projections for the gold price?
Éric Lemieux: Laurentian's short-term price forecast for 2010 is in the range of $1,150 per ounce. This will increase slightly in 2011, remain the same in 2012, and then decrease. We basically did a yearly forecast 'til 2014. In 2015, our long-term gold price is in the range of $900, which I believe is above consensus. I believe it's a fair price. We are gold bulls "light," if you like.
TGR: What are some factors that you believe are going to lead to a decrease in the price of gold in the long-term?
EL: A perception of the state of the economy. I think the belief that we can sustain an ever-increasing gold price is perhaps flawed in this case. The factors that could bring downward pressure on the gold price are the normal supply and demand basics. As analysts we're generally more conservative than less. Having said that, I think what we have to realize that is this is a conservative long-term price forecast; this can be readjusted as time goes by.
TGR: Most of the companies you cover are in Québec. The Québec government recently amended its taxation scheme to levy some new taxes on producing companies and remove some tax breaks for junior explorers like the ones you cover. How do you think these measures will affect Québec's reputation as a mining-friendly jurisdiction? In particular, how's it going to affect the juniors?
EL: The overall perception is that Quebec will still be considered a favorable mining jurisdiction. Quebec was very pro-mining in terms of its fiscal regime. There was a readjustment that needed to be made. I think everybody in the industry realizes that there was a lot of pressure on the government from outside the mining industry. When we compare Quebec with other jurisdictions in light of the increase in the price of commodities, perhaps the (tax) regime was too favorable to the mining industry. Overall, I think the mining companies can work around the changes.
TGR: Even the juniors?
EL: For junior exploration, my take on the levy is that what they're doing on the modifications to the mining rights will be sort of a wash in the sense that there will be negatives, yes, but there will also be some positives. It sort of balances out.
There are always taxation issues, but there's also the question about whether you can bring a project forward in a stable regime where you know that the laws, the rules, will stay pretty much the same. I think Québec has a track record of being very stable.
TGR: Are you discounting juniors based on the new tax changes?
EL: It won't have a material impact, so I'm not discounting the juniors. If things take a downward turn in terms of exploration, I think the Québec government is flexible enough to change the new system. I think companies still believe Quebec is a very favorable regime.
TGR: The last time you spoke with The Gold Report, you told us about companies like Midland Exploration Inc. (TSX.V:MD) and Eastmain Resources Inc. (TSX:ER). Could you please provide us with an update?
EL: In January, Goldcorp Inc. (TSX:G, NYSE:GG) revised its mineral resource for the Eleonore gold project in the James Bay area. The overall resource went to 9.4 million ounces from 5.3 million ounces. I still believe that this is an emerging mining camp that it is wide open.
Midland is very active in the James Bay area. Midland has generated projects more on the eastern side of the James Bay and has a partner, Agnico-Eagle Mines Ltd. (TSX:AEM;NYSE:AEM), which is quite a feat when you look at it. Midland also has properties in the general area of the Eleonore deposit, which it acquired by being attentive to what's going on in the area play and picking up lapsed claims. Midland is also generating new projects outside the James Bay area with rare metals and some base metals plays. They have applied the partnership model very astutely; I think Midland is creating shareholder value.
TGR: Does Midland have other partnerships aside from the one with Agnico-Eagle?
EL: It has a partnership with Osisko Mining Corp. (TSX:OSK). It has a partnership with North American Palladium Mines (TSX:PDL;NYSE:PAL). Recently, it signed a partnership with Zincore Metals Inc. (TSX:ZNC) for its base metals project in the Gatineau region. It's a very dynamic company and it's something I appreciate in junior exploration companies. The ones that are dynamic lead the parade. I think Midland is able to go into regions and say, "Hey look, this area hasn't been really well explored and let's explore it and generate some interest."
TGR: What's your 12-month target price for Midland?
EL: It's $1.75.
TGR: That brings us to Eastmain. Talk about its Eau Claire project.
EL: Eau Claire is in the James Bay area, south of Eleonore. It's one that they've done quite a lot of work on in the last five years but have been focusing more on the open-pit part of the project. The expectation now is to have a new mineral resource estimate by the end of June.
TGR: How large do you expect the estimate to be?
EL: It could almost reach the 1-million-ounce target in terms of an open-pit scenario. Having said that, there could be an underground portal to get to the underground continuation of the mineralized zones. It's a deposit that is very wide open at depth. It has very narrow veins but it's very high grade. The gold is there. If you look back 10, 15 years ago, to access that project you had to either fly in with a plane or helicopter. Now you can go up there with your pickup truck.
TGR: What's your target for Eastmain?
EL: My target for Eastmain is $2.25 based in great part on the Eau Claire deposit but also on the Eleonore South and Eastmain mine projects. The Eastmain mine project is located in the eastern end of the James Bay area. This was a small past producer back in the mid-1990s. In terms of an investment thesis maybe this isn't an old mining camp but it's one that was worked. Back in 1995, the price of gold was very low. The company that had (the Eastmain mine property) was MSV Exploration, which was a subsidiary of Campbell Resources. They had a winter road going up there but had an exceptionally warm winter, which made for a lot of difficulties. They basically left the project there but not because there was no gold. It was just that the price of gold was very low and they had sizable technical difficulties. It's a project that Eastmain will be very aggressive on. They have about 10,000 meters of drilling planned this summer.
The Quebec government planned Route des Monts Otish, from the communities of Chibougamau and Mistissini to the Otish Mountains (known as the Route 167 Extension). This is the road development project designed to ultimately reach the Renard Diamond Project and will pass by the Eastmain mine project. Again, this is tremendous pro-mining savoir-faire and changes project dynamics.
TGR: Is there a production royalty on that property?
EL: There is one, but it's for sale with the liquidation of Campbell Resources. It's one that I know Eastmain is pursuing. They are trying to get the best price. So it's something that's being negotiated with the liquidators. But it's not something substantial.
TGR: Another junior gold explorer we talked about last time but that is not in Quebec is Premier Gold Mines Ltd. (TSX:PG;FSX:P20). You set a target price on Premier of $5.25. Some say your estimate is low. Tell us about Premier and why you set the target where you did.
EL: I think of Premier as a junior explorer and developer because they have assets that are quite advanced. It has three core projects in northern Ontario. The first one is really Rahill-Bonanza in the Red Lake district. Premier also has an important project in the Beardmore-Geraldton area known as Hardrock, which has been in the news recently. It's one that Premier is aggressively pursuing both as an open-pit and underground target.
TGR: That area has a history of gold mining.
EL: To put things into context, back in the 1960s, the price of gold was very low and (what is now the Hardrock property) was let go and it remained under the radar. Premier reactivated it and has been able to show that there's mineralization continuity and that there's even more mineralization at depth and surface. Premier also has the PQ North project up in the Musselwhite area where Goldcorp has an operating mine. I think Premier is very well-positioned to develop some gold assets either in partnership with Goldcorp or by themselves.
I derive my target price basically by looking at Premier's three core projects, which, yes, is a rather conservative target but one I feel very comfortable with.
TGR: Of those three projects, which one holds the most promise?
EL: The Rahill-Bonanza project in the Red Lake district, which is a 50/50 joint venture with Goldcorp. It's located just west of the Red Lake-Campbell complex. Goldcorp is planning to do an underground tramway going from its Red Lake complex to Cochenour in the Bruce Channel area. That should go through the northern part of the Rahill-Bonanza property. That opens up tremendous potential to explore underground there. Knowing that they've had success defining new targets at Rahill-Bonanza, it is a very well located project that could hold some very good surprises in terms of multi-million ounce deposits. Also, I believe the Hardrock project, of which they own 70%, is one that might hold large, low-grade potential, especially in light of what Osisko Mining has done with Canadian Malartic, and what Detour Gold Corp.(TSX:DGC) has done with the Detour Lake project, and what Rainy River Resources (TSX.V:RR) is doing. I think that these large, low-grade area plays have become most interesting. I think Premier Gold with its Hardrock project in the Geraldton area is demonstrating another emerging past-producing area play.
TGR: What about Premier's management team?
EL: Premier Gold has very skilled management both on the technical side and on the management side. One thing that gave me a lot of comfort when I looked at Premier is the relationship they have with the technical people of Goldcorp. When I visit companies I like to see how they deal with their partners. When I visited the Red Lake area I found that Premier has a good relationship Goldcorp's technical people.
TGR: You made a pretty ambitious call on Detour Gold about a year ago. You said it would go to $17.50 and it's now above $24.00. Tell us why you like Detour and where it could go from here.
EL: Detour is one that has been on a lot of radar screens for the last two years. I looked at it and compared Detour Lake with Osisko's Canadian Malartic project, which has a lot of potential. I also got to know the quality of the team at Detour. Detour has been building a team that I think can bring that project to production. It could be a 10 million ounce plus deposit. Detour is capping the higher grades. It's something that we do in the mining industry when we hit a good intersection-cap it to a certain amount either between 20 grams and 35 grams per ton. I believe that when the ore is processed that this deposit will probably be an overachiever rather than an underachiever. I think they're building a solid project. It's one that will have its challenges but I think Detour is going in the right direction. When the feasibility study comes out in June, I think people will be impressed. As the saying goes, you may have an ugly duckling but that ugly duckling might turn out to be a great white swan, a golden swan.
TGR: Before it becomes a trumpeter, Detour is going to have to raise something close to $1 billion to bring it into production.
EL: Yes, it's a lot of money that they have to raise, but when you look at Detour and their shares outstanding, even fully diluted, they're under 80 million. In comparison, Osisko at the same point of development had three times or four times as many shares outstanding. That's something about Detour Gold that we have to highlight. Management knows it has a tight share structure and it intends to keep it that way, as much as possible, so that when it is a producing gold company it has very good earnings per share. My understanding is that management is looking at perhaps some loans through some suppliers (to fund development). So they have some scenarios that could keep the share structure very tight and still be able to raise the amount needed to build it. That's something that could differentiate Detour from other mid-tier gold producers.
TGR: How many total ounces are there?
EL: Right now, they've got 8.8 million ounces of proven and probable reserves. If you want an overall resource, in all categories, and based on the whole land package, it's about 22 million ounces. And this is a project that's still growing. The next step is to get the gold out. The next catalyst will be the feasibility study in June.
TGR: Is Detour a more likely takeover target than Premier?
EL: That's a hard call to make right now. When you look at both companies, I would say it's 50/50. There are still challenges in terms of the Detour Gold play. The price tag would be much more expensive. So perhaps, effectively, Premier would probably be more of a potential takeover target than Detour.
TGR: What's Detour's market cap?
EL: It's around $1.6 billion. Like Osisko, I think bigger companies are looking at it and just waiting to see the next milestones. This is something that is very volatile and it could change. I think that gold might spurt up and we could potentially go through a summer where there's lots of M&A activity. I believe the Detour Gold project could be one on the wish list.
TGR: Both Detour and Premier have new projects in old camps. Do you look more favorably on junior companies with projects in old camps or is it more about drill results or management or other factors? How do you assess juniors?
EL: It's a combination of a lot of things. Management is the first thing I look at. I like companies that take initiative and are not followers. To me, companies that do that should have a premium. After that I look at the quality of the projects and the drill results. The quality of the projects is a function of what's going on where they're located. I have seen in the last few years companies coming up with projects in what I would call past producing or forgotten mining camps. These companies have come up with interesting concepts that often lead to successful exploration programs. I look at the Beardmore-Geraldton area. I think about PC Gold Inc. (TSX:PKL) in the Pickle-Crow area of northwestern Ontario. Detour Lake was a past underground producer; now they're looking more at the open-pit potential. Going and revisiting old camps is a worthwhile endeavor in some situations. Not all of the companies will turn out to be successful but I think some of them will because it's just the nature of our industry.
TGR: We've talked about a number of junior companies that probably would find their way onto the radar screens of investors specifically looking to play the juniors. What are some junior gold explorers most people have never heard of?
EL: There's Quebec-based Adventure Gold Inc. (TSX.V:AGE). It has a portfolio of properties in the Val d'Or camp and in northern Québec in what I would say is the extension of the Detour Lake fault structure on the Québec side (of the border). Midland Exploration also has a project there called the Casault project. That area has been very much underexplored. I believe that when Detour has advanced its Detour Lake project people will start saying "Hey, look at this, this is an interesting area play."
Another small one is NioGOLD Mining Corp. (TSX.V:NOX; OTC:NOXGF.pk). It is basically around Osisko's Canadian Malartic camp. Again it's the quality of management that for me rings a bell. Likewise, Cartier Resources Inc. (TSX.V:ECR) is assembling an impressive portfolio of properties in the Val d'Or and Chibougamau areas. I know that the people behind NioGOLD and Cartier are good geologists. I think that's most important.
Éric Lemieux, MSc, P. Geo., is a Mining Analyst who joined Laurentian Bank Securities ("LBS") in January 2008. Prior to joining LBS, Éric worked for nine years as a consultant responsible for applying Regulation NI 43-101- for the Autorité des marches financiers ("AMF") as well for the New Brunswick Securities Commission. Éric had previously worked at the Montreal Exchange and prior to that had managed exploration projects for Cambior, Noranda and Soquem. Éric holds two master's degrees, one in Mineral Economics from the Colorado School of Mines (1997) and in another in Metamorphic-Structural Geology from Laval University in Quebec City (1992). Éric holds a B. Sc. in Geology from Laval University (1989).
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1) Brian Sylvester and Karen Roche of The Gold Report conducted this interview. He personally and/or his family own shares of the following companies mentioned in this interview: None.
2)The following companies mentioned in the interview are sponsors of The Gold Report or The Energy Report: Detour Gold Corp., Goldcorp Inc., Midland Exploration Inc. and Eastmain Resources Inc.
3) Eric Lemieux: I personally and/or my family own shares of the following companies mentioned in this interview: Agnico-Eagle, Midland, Adventure Gold, NioGOLD and Cartier Resources. I personally and/or my family are paid by the following companies: None.
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