Mark Raguz: Technical Best of Breeds Still a Value

Wed, Feb 20, 2013

The market may be turning a blind eye to value, but Mark Raguz, an analyst with Pinetree Capital in Toronto, can see just fine. Companies with cash and strong management continue to go unrecognized, Raguz tells The Gold Report. He is targeting companies that are “best in breed” technically, and waiting for an uptick in the market to sweep them into higher valuations.

Mark Raguz: Technical Best of Breeds Still a Value

The Gold Report: Do you consider 2013 to be a stock picker’s market in the junior precious metals space?

Mark Raguz: It should be a stock picker’s market in the sense that valuations are currently skewed. The market is not doing a good job in deciding what stories to buy and what stories to remain invested in. This year could prove very illuminating both for overvalued and undervalued companies. The overvalued names could be exposed and the money will hopefully flow into undervalued names.

TGR: There are a lot of undervalued names out there. How is the market going to decide who gets the cash and who does not?

MR: Some projects stand out from a technical risk standpoint. Those are the ones that have the most merit.

TGR: Could you further define merit?

MR: It depends on the grade, the potential size of the systems and the prospects of mineability. Given our opinion of the precious metals markets, there are some opportunities out there that are worth pursuing.

TGR: What are you looking for before you invest your cash?

MR: It oversimplifies it to say good management, share structure, asset and cash position. At this point, there are many stories out there that seem to have all these things, but are not getting much traction. The last two years have shown us that the market does not care about the same old story. Investors are looking for an asset that can distinguish itself. But to distinguish itself, a company needs the upside potential of a very big system, relatively high grades for that particular type of deposit and reasonable prospects of mineablity even at early, data-limited stages.

TGR: What size and grade would make a project stand out?

MR: We just want to see opportunity—the upside potential to take it to a level where it becomes more than a small-scale production story. We are of the opinion that in small-scale production stories, the execution risk almost always outweighs the potential cash flow.

TGR: What were some of your biggest successes in 2012?

MR: Two of our largest successes were Queenston Mining Inc. and Prodigy Gold Inc. They are examples of stocks that remained undervalued through most of 2012 and presented strong technical merits.

The acquisition of Prodigy Gold by Argonaut Gold Inc. (AR:TSX) was announced in October 2012, and was followed less than a month later by Osisko Mining Corp.’s (OSK:TSX) announcement of the acquisition of Queenston Mining.

Pinetree was among their top shareholders. We were definitely pleased with the outcome as long-term shareholders.

TGR: What types of plays did Pinetree avoid in 2012?

MR: Names with financing risk. Perhaps a project proved to be underwhelming for the market and the asset is just not going to get financed. A prudent investor has to start considering an exit plan in that case.

TGR: Which precious metals companies are you most bullish on this year?

MR: We’re following Unigold Inc. (UGD:TSX.V) closely. The company’s flagship asset is located in the Dominican Republic, which is emerging as a destination for mineral exploration since the Pueblo Viejo mine reached commercial production earlier this year. Pueblo Viejo is owned by Barrick Gold Corp. (ABX:TSX; ABX:NYSE) and Goldcorp Inc. (G:TSX; GG:NYSE).

“Merit depends on the grade, the potential size of the systems and the prospects of mineability.”

In January 2012, Unigold discovered a zone more than a kilometer away from its Candelones project, which it named the Candelones Extension. Subsequent drilling throughout 2012 traced a wide zone of potentially open-pittable gold mineralization back toward the Candelones Zone.

Recently, the on-strike continuity of the mineralization positively surprised us as it appears that a fault-offset induced polarization (IP) anomaly is also mineralized as we move from the Candelones Extension back toward the Candalones Zone. This new zone returned 69 meters (69m) of 3.75 grams per ton. Follow-up drilling into this “Anomaly B” has been encouraging and the drilling is ongoing on this target.

TGR: It’s been a successful stepout drilling program so far. What about the size and scale of the Neita project?

MR: The continuation of the gold mineralization from Anomaly A to Anomaly B potentially doubles the strike length of the mineralized zone at Candelones Extension. The company should complete its 40,000m drill program on Candelones and Candelones Extension this year, and is anticipating the completion of an NI 43-101 resource. We’re quite excited.

“Investors are looking for an asset that can distinguish itself.”

The company will likely also drill test-delineated targets in the vicinity of Candelones. It also has more than 20 untested IP anomalies on the southern portion of the Neita concession. It also has further IP work to do in the north. It’s a fairly large land package.

A lot of interesting upside is still to be tested this year and moving forward. The company remains well financed, which remains a key investing criteria. Minimizing the financing risk is important as we prove its dimension.

TGR: This project stands out not only because of the prospectivity of the region, but the size and scale of it could mean it’s a significant system.

MR: The upside potential is definitely in the multimillion-ounce range. If it were open-pittable that would be fantastic. It has yet to be seen, but it is holding together so far.

TGR: The next catalyst will be that resource estimate. Do you think it might get a bump from a good drill result or two?

MR: This is one of the rare stories where the market is definitely following drill results. The initial hole into Anomaly B was exciting because, whether or not that mineralization continued on the other side of the faulted anomaly, there’s a lot of drilling coming back before the resource. Any upside on that is also a potential catalyst.

TGR: Let’s examine some jurisdictions. Mexico is often considered a safe jurisdiction, but some states in Mexico are safer than others. Which ones provide you with the greatest comfort as an investor?

MR: I travel to Mexico often. To gauge jurisdictional risk, we look at projects on a case-by-case basis. Issues that we consider are if the project lies in an area used for the cultivation of marijuana or opiates, or is on or near a narcotics shipping route. It’s hard to get a feel for other issues, such as banditry and kidnapping. It’s possible for the average investor to minimize risk by limiting investments to known mining areas with current production.

TGR: What states do you like?

MR: Guerrero is an emerging jurisdiction. Osisko has begun to acquire a vast swath of ground in an emerging gold belt in Mexico. While the company currently remains tightlipped about where exactly this staking is occurring as it finalizes land extensions, we believe that it’s taking place around Goldcorp’s producing Los Filos mine in Guerrero. That assumption is based on Tarsis Resources Ltd.’s (TCC:TSX.V) option a few weeks ago.

One of our favorite projects is in Chihuahua. Chihuahua is off the beaten path, away from transshipment narcotic points but in a producing gold belt where several key players, including Grupo México (GMEXICOB:MXN), are actually producing. The livelihood of the people in the region is solely based on mining.

TGR: Reflecting on what we’ve spoken about, are there some specific names that are interesting right now?

MR: International Northair Mines Ltd. (INM:TSX.V) is a name that, in our opinion, is undervalued and potentially provides an opportunity for rerating through near-term catalysts. What began with three distinct silver mineralized zones at its flagship La Cigarra project in Chihuahua started to develop into a large, mostly continuous strata-hosted unit through stepout drilling between zones. Northair initiated an aggressive drill campaign last year and expects to have an initial resource this quarter.

In late 2012, the company strategically expanded its land package at La Cigarra. While the initial land package encompassed the entire 2.4-kilometer (2.4km) trend that will be drill-tested ahead of this initial resource, it potentially restricted an optimal open-pit scenario and limited upside along strike.

The land package extension resolved these issues and increased the strike potential to around 6 km, as well as added several other mineralized targets to the project.

This expanded upside potential along with the consistent drilling results ahead of the initial resource are reasons we believe this project stands out.

“It’s possible for the average investor to minimize risk by limiting investments to known mining areas with current production.”

And, again, Osisko Mining is a larger name that we like closer to home. The Queenston Mining acquisition was poorly understood and thus poorly received by the market. That was compounded by some operational teething late last year that continues as the company ramps up to full production at its flagship Malartic mine. Therein lies the opportunity.

The Queenston transaction, while fair to both parties, is accretive to Osisko due to the potential to expand the production scenario at Upper Beaver, where the company brings key ex-Cambior underground mining expertise to the table.

Furthermore, in our opinion, the bulk open-pit potential of the camp has not been systematically tested and the expertise to complete such a program and the ability to finance such exploration puts Osisko in an interesting position moving forward. As it ramps up at Malartic, a project that is admittedly behind schedule, we should see a continuation in the positive grade facilitation as it enters into a higher-grade zone later this year.

TGR: One of the reasons the market was a little cool to Osisko’s acquisition of Queenston was because it wasn’t the first time Osisko had ventured into Ontario to buy a promising gold resource. It did this before, with Brett Resources’ Hammond Reef project, and Osisko had to take a write-down on that. What’s different about Queenston?

MR: The key difference between the two projects is the grade. The grade at the Upper Beaver is top tier, whereas Hammond Reef may have its challenges.

TGR: Are there any other Canadian names you’re watching these days?

MR: Gold Canyon Resources Inc. (GCU:TSX.V) is also one of the companies we feel is misunderstood by the market. The company recently came out with a 5-million-ounce resource at grades that were well above its peer group.

The exploration potential beyond the current resource is very large. However, the stigma behind this name is that the deposit itself is under a lake. The Street has discounted the name thinking that the capital expenditure (capex) will be too high or that the deposit will never be permitted.

“We believe the current market conditions are providing an opportunity to invest in ‘best of breed’ projects at undervalued levels.”

The company is aiming to have a preliminary economic assessment (PEA) released this spring, which could bring a lot of clarity to the possible positive economic nature of this deposit. It will also probably address the lake permitting timeline and capex.

TGR: This has been done before in Ontario. Mines under lakes have been successful in the past, such as at Red Lake. Why doesn’t the market believe that this can be done?

MR: The scenario here is an open-pit bulk tonnage mine, so it would have to dam and drain the lake rather than go underneath the lake.

TGR: That definitely is a distinguishing point.

MR: There are definitely two camps on The Street: One being this can get done and one being this can’t. We think the PEA is going to clear that up. There is a fear that the capex will be billions of dollars, but we’re not of that opinion.

TGR: Are there any other names you’d like to introduce to our readers?

MR: Waymar Resources Ltd. (WYM:TSX.V) may be under the radar of many investors. The company has an option to acquire 100% interest in the Anzá project, located west of the Antioquia Department in Colombia. Initial drilling into the Aragón fault has been encouraging. Soil samples on the project have delineated quite a few targets that are away from the fault.

Waymar has recently just completed a geochem program on a large portion of the northern half of the project. We are seeing some significant anomalies that are not associated with the fault, which has had the encouraging mineralization. There could be the potential for some sort of adjacent alteration. Initial scout drilling on the high-grade geochem targets is expected this year and could be interesting moving forward, given the scale of those anomalies.

TGR: Do you have any parting thoughts for our readers?

MR: We believe that the current market conditions are providing an opportunity to invest in technically “best of breed” projects at undervalued levels. These are still of technical merit and there is an opportunity to acquire good projects for fair values. Our thesis moving forward is to separate out those projects that stand out from a technical perspective and a financing-risk perspective.

TGR: Thanks, Mark.

Mark Raguz is an analyst with Pinetree Capital Ltd . He was previously in research at GMP Securities and was the president of New Texmont Explorations Ltd., a private company involved in mineral exploration. He has served as a director of various TSX Venture listed companies. Raguz is a graduate of the Lassonde Mineral Engineering Program at the University of Toronto.

Want to read more Gold Report interviews like this? Sign up for our free e-newsletter, and you’ll learn when new articles have been published. To see a list of recent interviews with industry analysts and commentators, visit our Streetwise Interviews page.

1) Brian Sylvester 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: Pinetree Capital Ltd., Argonaut Gold Inc., Unigold Inc., Goldcorp Inc. and Gold Canyon Resources Inc. Streetwise Reports does not accept stock in exchange for services. Interviews are edited for clarity.
3) Mark Raguz: I personally and/or my family own shares of the following companies mentioned in this interview: International Northair Mines Ltd. I personally and/or my family am paid by the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this interview.

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