₪ David Pescod's Late Edition October 17, 2007
AN INTERVIEW WITH WENDELL ZERB,
MINING ANALYST, CANACCORD CAPITAL CORP.
(As of October 16, 2007)
We’re here with Wendell Zerb, the mining analyst with Canaccord Capital and with the bumps in the markets we’ve seen in the last few months, a huge correction followed by a nice upward move recently, it’s time to get upto-snuff with Wendell on his thoughts on the markets.
David Pescod: I guess Wendell, we have to start with your look at some of the commodities out there that you follow and which ones you have hopes for and some that you might worry about ...
Wendell Zerb: The first thing to consider is that we are in a very good environment for all the metals. Across the board, the global growth aspect of things has driven the metals and even though there have been some concerns of slowing in the U.S. economy, overall, the demand that’s been created throughout India, China and other parts of the world has continued to drive the demand side of the metals. As a generality, that part of the equation looks just fine. The second component that is helping the metal industry is obviously on the supply side and the years and years of lack of exploration has contributed to fewer projects being as far along developed as you might normally have had under a more reasonable market conditions. That, also combined with the fact that the probable assets that could actually be mined, are in a position today where the permitting aspects of those operations take just that much longer.
In addition capital commitments are onerous in some cases and that’s keeping some of the different operations from coming on stream as quickly as what might have happened years ago. Things look good for the metals and that translates from the base metals over to the precious metals side, which also has many attractive conditions in place. We have lots of liquidity in the system with the U.S. Fed dropping rates recently. The large current account deficit is also overhanging the US$ and bodes well for a further decrease in U.S. dollar.
The demand side has been strong for gold especially from growing economies that have improving GDP’s such as China, and especially India. Again, the supply side from the gold standpoint has been growing modestly.
You take that into account and then you add in the typical geopolitical factors and the overall outlook for gold remains strong.
Specifically, I think gold looks strong moving forward over the next year. From a fundamental standpoint, Copper also continues to look strong over the next year. There is short-term supply surplus that could affect prices, but what really stands out for the metals is once you start getting into 2009/2010, you get past some of this short term overhang and probable mining operations must come on stream in order to keep up with the forecast demand. Therefore, even though there’s going to be some bumps along the road, metals prices to me, look fairly attractive over the next five years.
D.P: Let’s take a look at two of the stories that you’ve been following and suggesting and shame on us for not mentioning VMS Ventures (VMS), way back down at $0.30 and $0.40 when you were talking about it. But at the time, the market was beaten up and we just didn’t pay attention. Now that’s it has flown, what are your thoughts on that play?
W.Z: It took some time for investors to catch on to the VMS story (not formally covered). What caught our attention was one drill hole that intersected Cu mineralization in central Manitoba. The fact that the company originally put out visuals on the core they drilled, and the fact that it just took some time for people to recognize that it was an extremely high grade intersection, really was the opportunity. Today VMS has a market cap of about $140 million and there is some potential that they control only 30% of this particular discovery, so fundamentally, it looks like it’s ahead of itself at these levels. But what does stand out about VMS, is that it is still very early and they will be starting a follow up drill program within the next couple of weeks. There should be new intersections into this mineralized zone and given the fact that it has great infrastructure, the company does not need a monster deposit in order to make this potentially viable. Fundamentally, yes, a little ahead of itself, but typically that’s what happens at this early, speculative, stage.
D.P: One story that you’ve been following for awhile and have hopes for is Globestar Mining (GMI), which suddenly is not that far away from being a producing mine in the Dominican Republic, with some potential for nickel as well.
W.Z: Globestar is a good story (company) that I formally cover. The company is putting a small copper operation into production that will produce about 30 to 40 million pounds of copper a year at reasonable cash costs, but really it’s a growth story and what’s driving a good part of the valuation is the exploration ground that they have in the Falcondo Nickel Belt. The Falcondo Nickel Belt is a 90 km long belt of Ni bearing rocks. The Northern part of it is owned by Xstrata (formerly Falconbridge), which have a large mining operation, and a pyro-metallurgical facility where they are processing nickel saprolite mineralization. The story for Globestar is that they have the whole southern part of the Falcondo belt. Very little exploration has been completed on it and although it doesn’t have quite as large a geological potential as the northern half, there is some very interesting mineralization that’s close to the border with Xstrata. So there could be some opportunities for Globestar to build the resources there and some strategic opportunities with Xstrata. The company is also looking at being able to process whatever resources they develop there by themselves. So the combination of a small copper operation combined with the speculative upside on the nickel, makes this a story we like.
D.P: What kind of targets would you associate with Globestar Mining?
W.Z: Today, our twelve-month target is $2.65, currently trading at $1.90. There is still considerable upside from here. To go beyond our current target, we have to continue to see the resource potential growing on the company’s Falcondo nickel play, and of course they’ve got some great exploration ground associated with the Maimon copper play. Additional speculative upside is possible, but it really comes down to the company executing on it exploration programs.
D.P: I guess one of the stories of the day that has definitely attracted market attention, volume, and youname-it, is Noront Resources (NOT) and their discovery in the James Bay Lowlands. I look at the capitalization of the company though; this is approaching $3/4 billion.
Obviously, some people must think that they’ve already found another Voisey Bay or something?
W.Z: Again, Noront Resources is another story that we have followed closely from the initial descriptive phases of the core. Our take is Noront has discovered a nickel/copper magmatic segregation-style deposit. From the drilling thus far, it looks as though they are dealing with a north/south striking body and so far, they’ve outlined it over about 150 metres of strike length.
It’s steeply west dipping, it’s plunging to the south and if our interpretation, combined with what the company has been describing is right, it looks as though they’ve outlined thus far, or have the potential to have outlined thus far, something between two to four million tonnes. Four million would be on the aggressive side and two million would probably be a little bit more reasonable.
Nevertheless, it’s fairly high grade mineralization. It is still open to the south, but if you take a look at those dimensions today, fundamentally, the stock looks to be ahead of itself at a $600 million market cap. So if you use the top end of what I’ve just described (4 million tonnes), this is a company that might have 300 million lbs of nickel equivalent mineralization. If you compare its market cap today to what other companies would be trading at, realistically (just based on the fundamentals today) maybe a $200 to $300 million market cap would be more reasonable. That being said, we know how these speculative stories come together. It’s trading ahead of itself, people are speculating, and the company has strongly been promoting this particular project.
It is ahead of itself and could continue to stay ahead of itself depending on how the exploration results work out. Moving forward, I would expect both negative and positive news to drive the stock. Expect volatility.
D.P: Why don’t we get to your favorite exploration plays of the day?
W.Z: We have talked about a couple of them – Globestar Mining is certainly an interesting story. One story that I have talked about for some time is Northern Peru Copper (NOC). This is a company that has the Galeno copper project in Peru. One of the reasons that I think it’s attractive, even at these current levels (which is about $10.80) is that we have seen a rash of takeovers, or some sort of option agreements on most of the major copper/gold plays that were held by juniors.
I’ll just name a couple: Northern Dynasty’s Pebble project has been partly acquired by Anglo. NovaGold’s Galore Creek has been bought into by TeckCominco. Rio Tinto has taken an equity position in Ivanhoe Mine’s Oyu Tolgoi Cu-Au project in Mongolia. So a lot of these significant copper/gold/porphyry systems that were held by juniors have either been taken over or they are now partially in the hands of major mining companies.
Northern Peru and its Galeno project stands out as one of the better remaining opportunities. I think it’s just a matter of time before it’s actually taken out and depending on a number of different circumstances, we see a take over price somewhere around the $14.00 to $17.00 range for this company.
D.P: Any other exploration plays we should be watching?
W.Z: There are a number of different exploration plays that are of interest. Certainly one of the top plays out there, from another takeover standpoint, would be Aurelian Resources (ARU). It has 13.7 million ounces, and it’s likely just a matter of time before a Major gets comfortable with Ecuador. We have a $13.00 target on Aurelian and a Speculative Buy rating.
From the very small cap area, there are some other stories of interest. We do not have any formal coverage on these names, but just from a cursory, high level standpoint, Celtic Minerals (CME) is involved in some interesting stuff in Voisey Bay. El Nino Ventures (ELN) has some interesting plays in the Congo. Pediment Exploration (PEZ) has an interesting gold project in Mexico and Antares Minerals (ANM) has hit some interesting copper mineralization in Peru. Those are some names we are looking at or we think are interesting.
D.P: Those are more for those that like speculation, but now let’s get to our favorite question ... If you could only buy one stock today, what would it be?
W.Z: You always get me on this one Dave, don’t you?
D.P: It’s a tough one to answer, but because so many people have different time frames, different expectations, but it does focus a person’s attention.
W.Z: If you are looking from all aspects of the industry and not just in the small cap story, I would go with Northern Peru Copper.
D.P: Is there anything else you wanted to have asked or answered?
W.Z: It looks like all cylinders are running in the junior mining sector. Strong volumes on the TSX Venture indicate there are huge amounts of capital being deployed in the sector, and there’s additional capital on the sidelines that appears ready to be deployed. If we continue to get any of these additional catalysts like a Noront or VMS, we could continue to see good speculative runs in the junior mining sector.
D.P: We thank you very much for your time Mr. Zerb and all the best in the mining sector!
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