David Goguen: Finding Real Value in the Ground

Source: George Mack of The Gold Report 02/02/2011

PI Financial Institutional Sales VP David Goguen sees real potential for share price appreciation in select mining companies with expandable resources. Through their quantitative research report Select Golds, Dave's team, including Associate Brodie Dunlop, are focused on Latin American explorers and producers. But they don't stop there; they continue to search the globe for companies moving through the industry lifecycle of advanced explorers and emerging producers all the way up to junior producers. In this Gold Report exclusive, Dave and Brodie share a few mining plays that range in size from micro cap to liquid small cap that offer real opportunity to leverage the power of value.

The Gold Report: When you spoke with The Gold Report last November, you said you were looking for undervalued plays. Valued by what measure? The value unrecognized by the Street, or value that has yet to be developed and driven out of the ground in the form of ounces?

David Goguen: I think it's a combination of both of those things. It will be defined differently depending what category you're examining. In the case of advanced explorers, it could be a rapidly growing resource where the full scale and potential are not yet fully recognized in the marketplace. For emerging producers, value will be found very classically in that time period when the company is two-thirds of the way through a project build and not generating a lot of catalyst-rich news. That results in a bit of a sleepy period when oftentimes we see the share price drift to levels that represent very good value.

TGR: Gold has pulled back a bit. Are you currently telling your clientele this is a good time to buy gold mining stocks?

DG: Absolutely. We feel the gold price is going to be very well supported above the $1,100/oz. level, and we feel that the margins being afforded to gold producers in this $1,200–$1,300 gold environment have not been properly reflected in the valuations for these companies. There's still a sense that the gold price isn't sustainable at these levels, so there's a hesitation in the valuations being afforded to these junior producers. Therefore, they're trading at 3x–5x cash flow when, in fact, higher valuations are merited. These juniors are generating strong cash flow.

TGR: If gold did go down to that $1,100 support level, could the producers still maintain earnings growth to satisfy investors?

DG: Given the average cash cost of the eight junior producers we track is $478 an ounce, it would leave a very healthy margin on which to generate free operating cash flow.

TGR: Would it support quarter-over-quarter or year-over-year growth?

DG: In the instance of these junior producers, they're still ramping up production, so you're getting unit volumes that, in most cases, are growing quarter over quarter. Whether we're delivering 50% more production into a $1,300 or $1,100 gold price, I don't think it's going to make a tremendous amount of difference. It's still going to have a positive impact on the bottom line and result in growing cash balances that can be plowed back into production expansion or the development of new projects....

TGR: Tell us about some of the companies you like.

DG: Sure. Timmins Gold Corp. (TSX.V:TMM) represents a successful emerging producer that has transitioned to a bona fide junior producer. The company is now producing north of 20 Koz. gold per quarter at a cash cost of approximately $450/oz. It's trading at what we feel is an attractive valuation. Timmins continues to expand production at its San Francisco mine in Sonora, Mexico and it continues to expand both the resource and mine life. We believe Timmins is underfollowed and isn't properly valued to reflect gold prices north of $1,000.

TGR: The stock's up 74% over the past 52 weeks with a $300 million market cap—large enough to be bought by funds but not so small the shares are unmarketable.

DG: Excellent point; we're aware of that sweet spot in the marketplace. Market liquidity is a critical criteria for large resource investors. It's a sweet spot for investors in the junior gold sector as companies with market caps exceeding $300 million tend to draw a broader audience of institutional investors.

Timmins is continuing to pursue the acquisition of Capital Gold Corp. (TSX:CGC; NYSE.A:CGC; Fkft:CGU). Capital Gold has the El Chanate deposit, which is approximately 60–70 km. north of Timmins' San Francisco mine. The operations are fairly similar from a mine process perspective. Both are open-pit, low-grade heap-leach deposits that source a number of people and engineering services and consumables from Hermosillo, Mexico. So, we would envision some operating and personnel synergies being generated from the marriage of the two companies. Collectively, that would represent production of around 180–200 Koz. per year with a market cap in the $600M range. We believe that a merger would result in a revaluation of the combined company and would likely attract larger resource investors compelled by the operational diversity, improved liquidity and access to capital market funding....

http://www.theaureport.com/pub/na/8496