August 6, 2008 e-mail: david_pescod@canaccord.com
AN INTERVIEW WITH THE COFFIN BROTHERS
ERIC AND DAVID
(As of July 31, 2008)
The mining markets have been a mess – it’s been a wasteland
over the last while, but the Coffin Brothers – David
and Eric have still been able to pick out a couple of winners
such as Goldsource Mines in last while. But there are
couple of questions that are obvious for the industry veterans…
David Pescod: This is a terrible mining market, when do
you see it turning and what could lead us out of it?
David Coffin: The when is more difficult I think. It’s a matter
of either perceptions about the role of the U.S. economy
leading the global economy changing, or simply an
assumption that the U.S. economy has turned a corner
and is healing again, would do it. The other possibility is
even without seeing perceptions about the US role changing
you do eventually reach a point where people start
stepping up to the sector for its own sake. We are starting
to see takeovers happen, certainly in the gold sector and I
think the same thing is coming with base metals. As that
happens the undervaluation of a lot of assets-rich juniors
will be taken into account and people will start buying
them again.
David Pescod: Eric?
Eric Coffin: My thoughts are much the same as Dave’s. I
thought some of the news out of Wall Street this week was
positive. It was nice to see Merrill actually managed to do
a deal although it was admittedly a really crappy deal. But
I was pleasantly surprised to see a sovereign wealth fund
was willing to put any money into Wall St. Since I don’t
know anybody else that has those kinds of cash pools
around, it’s probably going to have to be sovereign funds
that refinance those guys. The simple fact is, the US financial
industry is going to have to come up with another
couple of hundred billion dollars and that’s going to take a
bit of time. Until people feel more comfortable with the
major markets having bottomed, it’s obviously not going
to be easy to talk people into buying stuff at the spec end
of the market.
I’d like to say I can give you a date too, but obviously it is
going to take a while longer because it has to wash
through the market. The comments we’ve always made
is that the U.S. hasn’t been the world’s growth engine for
a while. We need the market to come around to the idea
that the world hasn’t necessarily come to an end even if
things are lousy in the U.S. for another few quarters.
David Pescod: One of the ironies about this whole
wasteland problem right now is that commodity prices
other than zinc and lead are actually quite good. We
have gold prices and silver prices doing quite well, some
of the others aren’t bad and oil prices are near record
highs too. What are your thoughts?
Dave Coffin: Zinc is a good case in point. Zinc producers
are not making money at current prices of $0.85 a
pound range. Zinc production, on average, is becoming
a losing proposition again. That will resolve itself since,
eventually, low prices will start to dry up supply and its
price will pick up. As for the others, yes, we are definitely
at record prices for copper, and for most precious
metals. But, while we still have punters in the junior
space they have refocused away from traditional juniors’
spaces and onto coal, onto fertilizers, onto iron ore,
which areas that traditionally don’t have many, if any,
junior players. The refocusing is for the simple reason
that right now these are the spaces where you can make
money.
Eric Coffin: It’s something that we’ve noticed several
times in the past year, that there is more than a little
irony to the fact. I’ve seen headlines left, right and centre
over the last three or four months about the commodity
“bubble” bursting and how the speculative money is out
of this stuff and that shows you that those run-ups were
just speculation. But, the parts of the sector that don’t
actually have openly traded markets where you basically
have contracts between buyers and sellers, i.e.: potash,
coal, iron ore – those things are all at record prices.
There is a big disconnect here - the market doesn’t seem
to recognize the fact that part of the commodity market
that’s the least affected and has the highest prices is the
commodities with little or no price input by speculators.
David Pescod: In your crystal ball, what kind of prices
do you have in mind for commodity prices down the
road?
Eric Coffin: I think it’s going to depend on how much the
rest of the world can keep growing.
I don’t see a lot more upside on the dollar in the short term
and I think we are likely to have prices more or less where
they are right now for a while and there may actually be a
bump up in precious metals prices if there is more nasty
news out of the U.S. economy.
David Pescod: It’s time to get to some of your success stories.
Goldsource was an amazing discovery that you guys
have featured over the last few months in the Hard Rock
Analyst. With their accidental discovery of coal in Saskatchewan,
it’s had a huge run; you’ve had your subscribers
take profits, what next?
David Coffin: I think we continue to watch the progress. It’s
still very early. The specifics for the region in terms of what
the basins in which the coal formed look like are still being
determined. The quality of the coal has had a first pass
which indicates it is “reasonable to good” if you will, similar
to Wyoming which ships about 300 million tons a year. So
our basic take is how much of a Wyoming-like commodity
might be available for development, and then is there any
higher quality coking level coal that could be sold on an
international basis? In short, right now it’s a matter of how
big will it get? Understanding the geometry of the subbasins
will come together with Goldsource’s work and,
eventually, other people’s work. As this proceeds we will
get a better handle on the overall potential of Goldsource,
and also what the potential of other players might be.
David Pescod: How would you rate it right now? A buy or a
hold?
David Coffin: Right now it’s a tricky situation. It’s literally a
hole by hole equation. We know they are testing a third
point on a triangle, which is a start for some proper sense of
how large the potential could be and what the geometry
looks like, but you are still going to need to do more work to
really understand the scale. The stock has had a very rapid
run, but that’s the nature of new discoveries. You tend to
get a series of ups and downs in the discovery company
until the market gets a firmer sense of what the project
should be worth, and then it will settle in a bit. We are not
telling people to rush in at this point. We have taken profits,
and then for our traders told them to come back in last
week. Right now the message is we have to wait and see
what the next few holes look like to get a firmer sense of
where we are at before we could say much else.
David Pescod: Another story you guys have been quite
fond of and has done well for you is Hathor Exploration, ironically
one of the few uranium players left that’s having any
fun.
As far as the U.S. goes, the housing markets have pretty
much gone into the basement. It might go a little bit
lower, but probably not a lot but the turnaround won’t
happen quickly. Asia has managed to hold up reasonably
well. Exports will be the one bright spot for the U.S.
so obviously there will be people buying stuff somewhere.
We haven’t seen big supply expansions inventory levels
aren’t climbing that quickly for most metals. It looks like
most of the base metals will stay at about the levels we
see now. We might see a little more weakness in copper
going forward because it’s the one that held out the longest...
Zinc, nickel, lead are all back to levels where Dave
pointed out miners aren’t making much money. I think
this cycle is different from previous ones. I think one of
the ways it is different is that I don’t think large mining
companies will accepts years of loss making production.
There is not going to be a lot of base metal production
coming on stream at current price levels.
With coal and iron ore, a lot of the pricing behind that
stuff comes back to infrastructure build out. I’d like to
think there will be more infrastructure expansion in the
developed countries in the next few years – certainly
most of them need it desperately and historically, infrastructure
is one of the best public investments there is.
You can actually make the argument that part of the reason
for China’s success is the fact that they recognized
that and have thrown tons of money at infrastructure for
the last few years and intend to keep doing it. If that continues,
we will see pretty good prices for iron ore and
coal. Coal might see a bit of a pullback in the next coal
year. There were some weather effects in terms of this
year’s pricing in terms of terrible storms in Australia.
But even so, they are close to capacity in terms of shipping.
Potash is the same story. For all intents and purposes
the potash sector is an oligopoly. The few companies
that produce over half the world’s potash have made
no bones about the fact that they are not planning to
build more mines unless current high prices are sustained.
As for precious metals the story is the US dollar and gold
production has actually been falling for the last three or
four years. As far as the dollar goes, it’s had some
bumps lately on better economic news and so have oil
prices. And we might see a little more of that, but still,
given the fact that the Feds just announced they are going
to extend their lending window into January, I find it
hard to believe you are going to see that on the one hand
and interest rate increases on the other hand.
They are now in a very broad-brush pattern of testing a new
district. The stock is in a very volatile, up and down pattern
because nobody knows what the ultimate valuation is going
to look like.
On the other hand, Hathor is working in one of the most established
uranium camps in the world, and the world’s most
important high-grade uranium mining district. They have
put a lot of money up front to establish targets by, to some
degree, rethinking the exploration process, and they have
had to put stock out to do that. They made their discovery
and are now moving away from the original discovery area,
step by step, to determine the overall size and quality of the
deposit that they’ve discovered. They have a ready-market
for the deposit – it’s a matter of saying how large it is, what
the quality is, and with that determining its bottom line value
and therefore share pricing. The company does huge volumes
every day, so I think the other thing about Hathor is,
with uranium prices seeming to have bottomed (again the
opposite of coal pricing), that Hathor is going to start to
move up simply because it’s one of the few juniors that the
market will go to for gains in conjunction with a rise in uranium
prices. The market knows the Hathor asset exists and
it is more just a matter of finding out what Hathor’s ultimate
value should be as the discovery is fully evaluated.
David Pescod: You two are an amazing combination…the
Coffin Brothers, because Eric stays home in Vancouver,
watches all the paperwork and stock trading, while David is
out on the road visiting country after country and taking
first-hand looks at the mining projects around the world. So
Dave, we are curious, which countries would you consider a
safe investment these days because I suspect there would
be a couple on your “avoid” list?
David Coffin: Most of the Western hemisphere is comfortable
at different levels. There are a few countries in Central
America that I avoid because of potential versus hassle
value.
David Pescod: Which country would you avoid?
David Coffin: Venezuela. I’m cautious about though not
totally avoiding Columbia, but the markets just aren’t ready
to be there yet. I avoid Russia. I avoid places like Romania,
Bulgaria and a number of African countries, for now, in part
because they are still pulling legal frameworks together.
But with all of that said, with a place like the DRC, the
Congo, which is extremely mineral rich and therefore offers
up a good longer term potential, their issue of just coming
out of civil war and are still forming the law might be viewed
as an advantage.
Eric Coffin: Hathor is one we like a lot and continue to
like a lot. It’s another one of these great discoveries and
its impressive both in terms of the holes they’ve pulled,
but it’s also impressive in terms of the way it developed.
They applied some new technology in terms on 3-D seismic
on top of all the other surveys they did. They are
drilling right now. There was a lot of consternation about
summer drilling because of apparently it’s not an easy
place to do it, but we talked to them and they say the
drillers don’t seem to have any complaints or big problems
in terms of getting recovery or getting holes done.
The last hole was a great step-out. We remind people as
we do in the publications that these sorts of deposits in
Athabasca are quite small in terms of footprint, so when
you get a 20+-metre step out with radiation counts they
put out a couple of days ago, that’s a very impressive
hole. We have to wait for chemistry just like they do, but
counts like that, it’s pretty apparent that’s going to be a
very good hole.
They are still drilling and moving towards the northeast.
Essentially, they are moving along a fairly large registivity
gravity anomaly and just getting to the guts of it now,
so I would say hole 30 and 32, the two long intersections,
those are very encouraging. If they can pull a few more
holes anything like that, they are rapidly going to build
some pounds there. I think it’s a really good story. One
other thing I would add to the Goldsource thing is that
that just isn’t enough coal analysis yet, but I think
they’ve done the first two holes and it’s probably grading
better than Wyoming, but I’d also point out (as we have
in the publications) that you are dealing with a pretty big
area here and it’s going to be quite interesting to see
what happens when the other players get into their drill
programs. It doesn’t seem to be an area that has seen a
lot of exploration even in oil and gas. It’s really an open
book, and hence the reason for the interest in it.
David Coffin: The two discoveries are a nice contrast in
how exploration gets paced in mining and how the juniors
operate within it. Goldsource is a company that was
very light on stock, and had a major discovery, as you
said, accidentally during a diamond exploration program.
Fortunately, it also had the right people in the executive
office who had a coal background and who quickly did
the research to figure out if there was potential with this.
They decided there was, and carried on and were able to
finance at a high price because there was very little stock
out – the valuation did grow quickly, but that is because
the corporate structure positioned the company for an
extraordinary price gain on a discovery revaluation.
Manitoba is a little different than Saskatchewan in terms of acquiring
the coal tenure in that Manitoba has a much larger seriousness
bond that goes up front with the application, so staking
there has been somewhat more limited. But as important
as the regional coal potential is that Bitterroot is drilling at a
very high-grade gold situation on Vancouver Island and doing a
bulk sample at the same location to look at near-term cash flow
potential from a small portion of the deposit. Bitterroot has two
or three other projects that will get drilled this year, both for
gold and on a uranium project in Michigan that Cameco is funding
at a grass roots level. In terms of another pick, I would
actually suggest a general look at the juniors that are undervalued
and begin thinking in terms of averaging down as a
strategy. Focus initially on new producers that are showing
you good cash flow numbers but have had share price deflation
due simply to the market’s risk aversion. That, on our list,
would be stocks like Sherwood Copper (SWC) and Minera Andes
(MAI) which is a gold/silver play in Argentina. They have both
pulled back with the other juniors despite having generated
their first few initial quarters of good cash flow. I would say
let’s call these two a pair – a base metal/precious metals pair –
since you’ve got two companies that are showing the cash flow
they had anticipated but have share prices pulled back much
below the bottom line expectations for them as each pays off
its development capital costs over the next six to 12 months.
David Pescod: Okay, the Hard Rock Analyst is having a little
get together we understand in about a week or so in Vancouver.
Eric Coffin: We are doing a subscriber-only afternoon with ourselves
and Lawrence Roulston who has been a good friend of
ours for many years and David Morgan. It’s taking place at the
Metropolitan hotel in Vancouver on the afternoon of August 8th.
Basically we are just going to give individual presentations on
where we think things are at in the market right now.
It will be a question and answer and some panel stuff and take
questions from subscribers. It is just a little get together and a
thank you for our subscribers.
We realize its local to Vancouver and short notice so I am hoping
to organize having it audio taped so we can post audio from
it on hraadvisory.com and pass it on to Lawrence and David so
our and their other subscribers can listen in. Subscribers of
ours, David’s or Lawrence’s who want to register or need more
information should contact Sabrina at
info@newsstandexpress.com who is organizing things for the
event.
David Pescod: Thank you very much Eric and David.
Being there now in a small way while the risk is high means
you get an opportunity for a very large gain once things are
functioning well. You do have to look at both sides of that
coin. While there are avoids, there is also a legitimate, high
risk, investment perspective that you go to places that are
in the dumps, just as you want to be going and buying commodities
when they are cheap. Countries can be viewed the
same way, as long as you are willing in their case to take the
risk that things never do improve.
David Pescod: Now comes the best part of any interview
such as this…what would be the two stock picks both of
you would have that would be at the top of your list at this
time?
Eric Coffin: Two each? You usually just ask for one?
David Pescod: We just want to see which brother is the better
stock picker…
Eric Coffin: I guess it depends on timelines. Dave and I will
probably agree on some of them. One of them certainly has
to be Hathor Exploration(HAT). Even with the current $3.00
price, I think it’s probably one of the safer bets out there.
We are very comfortable with the way the exploration is advancing.
It’s a great looking project. More drill holes to
come and I think it will get to the point where it will just get
lifted to a higher level. Another one that we talked about
recently that I like but it is a longer term one because it’s
going to have deliver some more results and the market is
probably going to have to care a little more about gold explorers
which it doesn’t seem to at the moment, but for that
reason it’s cheap and that’s Riverstone Resources (RVS), which
is one we started following a while back. It’s still trading at
about the same level. They have a good deal with Teck on
one of their projects that’s funded them.
They don’t have any money issues in the short-term and
they should see another transfer of money from Teck in the
next couple of weeks from that same deal. They are drilling
on one project; they just finished drilling on another. They
have started a 43-101 calculation and we are expecting a
million ounces plus in one of their projects. I think that if
the market comes around a little bit, exploration stocks like
these guys, could start generating results and new flow and
I don’t think you are going to get hurt buying it at this level.
David Coffin: You know that I hate this question! But I will
do it anyways. One, getting back to the Goldsource discovery
area, is a company called Bitterroot Resources (BTT). Bitterroot
has picked up some of the right geology for that coal
play, on the Manitoba side of the border. |
