PI Financial's Goguen Has Latin Fever
Source: Brian Sylvester of The Gold Report 11/08/2010
PI Financial's David Goguen is vice president of Institutional Mining Sales, specializing in the mining sector. As part of his service to Canadian and U.S. resource-focused institutional investors, David evaluates and screens junior gold companies by initially dividing their enterprise values by total ounces. The result acts as a filter that either encourages David and his team to ask more questions about the company or to find other dance partners. In this exclusive interview with The Gold Report, David discusses PI Financial's recent institutional sales desk report titled Select Golds: Latin Focus and his methods of analysis.
The Gold Report: David, you recently published a report titled Select Golds: Latin Focus. Tell us about your report.
David Goguen: With the Select Golds piece we're tracking advanced explorers, emerging producers and junior producers in Latin America as they move through the development cycle.
One objective of our report is to look for ounces in the ground that are being undervalued by the marketplace. Among the junior producers, the market focuses less on enterprise value per total ounces and more on the basis of their ability to generate cash flow and earnings.
TGR: Can you define advanced explorer?
DG: Typically, advanced explorers have published a National Instrument 43-101 resource estimate that to some extent outlines the quantity and quality of the resource that is under consideration in the report. They generally have a sufficient number of drill holes into the resource that we're able to adequately define what it is and what its potential could be. As these projects become better defined, they move up the curve to become emerging producers and eventually junior producers.
TGR: How can an investor differentiate an explorer with good chances of success from an explorer that's unlikely to succeed?
DG: There are a number of factors that define a quality project. One should look at explorers seeking deposits in world-class districts. They should have a strategic land position with district scale potential and the possibility to host multiple deposits. Perhaps most important is whether or not these newly defined resources are on productive faults and large structures. Without these structures you're limiting your potential to find world-class deposits. The structures are very, very important.
TGR: You rank all of the companies in each category by dividing each company's "enterprise value" by each company's total ounces. How do you determine enterprise value?
DG: We calculate enterprise value by taking the company's market cap plus debt and minority interest, less its cash and cash equivalents. Enterprise value provides a more accurate reflection of the total value of the company. By then dividing the enterprise value by its gold ounces we are able to get a measure of what the market is currently paying for gold in the ground
TGR: That's a fairly simple calculation.
DG: It is. In situations where a company has a market cap that is significantly comprised of cash, our method tries to take the cash out of the equation so that we can look at what the market is currently valuing it at for its gold ounces.
The enterprise-value-per-ounce calculation is really a preliminary filter that gets us to ask additional questions and conduct additional due diligence. In the case of junior producers, it's going to lead to further analysis, including absolute and relative cash flow multiples and net asset values. With emerging producers, it's going to lead to greater definition in the various resource categories.
TGR: You manage to quantify quite a few things, but how do you quantify management, exploration upside, jurisdiction and things like that?
DG: Again, this report represents a screening process that leads us to ask additional questions and get into some of the qualitative elements. There a long list of factors we consider in our analysis. For example, we would evaluate the quality, diversity, geological background and experience of the management team. We would also research their track record in finding deposits and successfully raising equity. Of course, we would evaluate the corporate and financial structure of the company and where its properties are located to ascertain country and mining development risks.
TGR: Are there factors that these companies being taken over have in common?
DG: Certainly there's a theme within Mexico and elsewhere in Latin America at the moment, and what's being consolidated is the 70 to 100 thousand ounces-per-annum (Kozpa) producer.
We're coming out of an era where a company that was looking to grow through acquisitions was really not looking at companies producing less than 100 Kozpa. Now, with the gold price moving from $800 to $1,300, we're seeing that 70 to 100 Kozpa producer generating some $40 to $60 million in operating cash flow, depending on cash costs. These companies have now become much more attractive to anybody looking to consolidate through acquisitions.
TGR: From the other side, which companies are typically seeking these takeover targets? Is it the majors? Is it mid tiers? Is it both?
DG: No, it's the 100 to 150 Kozpa producer today that is recognizing the challenge of discovering another 150 Kozpa ore body and seeing the relative value in existing companies that have either just finished building or are in the process of building a 100 Kozpa mine.
TGR: Among these various groups-junior explorers, advanced explorers and junior producers-which group has the greatest potential for share price appreciation?
DG: I think as a group we've seen that the advanced explorers have probably the lowest valuation on a per-ounce basis. But the continued expansion of the existing resource by 50%, 100% or even 200% through drilling generally brings a lot of additional value to shareholders. By expanding a resource into something in the 1-3 Moz. range, these companies are going to become potential acquisition targets.
A number of these companies with a dynamic enough resource may not make it to a junior producer but may get taken over in the advanced explorer stage.
TGR: How about some parting thoughts on this particular report and these kinds of companies?
DG: The Metals Economic Group recently published a report that said $11.5 billion will be spent on exploration in 2010-that's a 44% increase from 2009. That work, coupled with the work that's taken place since 2005 when we had a large number of junior company financings, and even more financings in '06 and '07, is starting to bear fruit five years later-after we've had second, third, fourth passes at understanding these new discoveries. That money has allowed junior companies to have their "Eureka" moments in terms of doubling and even tripling the size of their resources through a better understanding of the geological controls on those resources.
That's a powerful theme that's taking place and that is going to feed Select Golds' advanced explorer category. A lot of those discoveries are happening in Latin America. They're happening in countries like Argentina. They're happening in Peru. They're happening in Colombia. They're happening in Ecuador. They're certainly happening in Mexico. Those are the areas where we're going to see a new breed of advanced explorers come in and continue to populate our Select Golds list.
TGR: David, sounds like some exciting opportunities ahead. Thanks for your time.
David Goguen, CFA, vice president, Institutional Mining Sales, has been focused on the mining sector at PI Financial for 17 years. David has 20 years of investment experience servicing institutional and private client portfolios.
David's focus includes Select Golds– advanced, exploration, emerging producers and junior producers. David earned a BA in economics from Carleton University and holds the Chartered Financial Analyst designation. David services Canadian, U.S. and international institutional clients.
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