Is It Time to Get into Gold Junior Mining Plays?

Philip Ker, a mining analyst for Canada-based Union Securities Ltd., says while current market conditions are affecting the junior mining space, they are also helping investors to identify low-risk opportunities and projects that may provide future value growth. In this exclusive interview for The Gold Report, Ker discusses how the industry will need to continue to see positive news, especially from senior and midtier producers, which should trickle down to the juniors.

The Gold Report: Philip, welcome. In a recent Union Securities research report, you wrote, “Despite global market volatility and foreign debt issues, we believe market valuations for mining companies, particularly in the precious metals sector, appear to be at incredibly low prices, on level with values seen prior to Q310′s commodity bull run. This is regardless of gold and silver being approximately 30% and 50% higher, respectively.” I agree that current share prices in the junior precious metals space are comparative to that timeframe, but we have been in a risk-off sector investing environment since last July, and you are operating in a high-risk sector. Share prices are low but without investors bidding up prices, how are we going to see a rebound in junior precious metals equities?

Philip Ker: We are seeing current market conditions affect the junior mining space, but also educating investors and helping them identify lower-risk opportunities in projects that are backed by strong management, and ones that can provide value growth in the future. We will need to see continuous positive news, particularly from the senior and midtier producers, at which point it should give more traction toward junior equities. I also expect mergers and acquisitions) activity to be a key factor for the juniors as a result of the strong balance sheets senior producers continue to build; as they look to replenish diminishing production portfolios they will target junior developers coming online.

TGR: Are you saying to stay on the sidelines at your peril?

PK: Not necessarily. It is more or less identifying the correct opportunity and the projects that are most targeted for growth that would be a good fit for a senior producer in its portfolio.

TGR: You recently made some changes to your outlook for metals within foreign exchange numbers.

PK: For my gold forecast, my long-term price remains the same at $1,000/ounce (oz). The main change has been in the short term where we see average prices being sustained slightly higher over the next one to five years. With respect to gold, we just slightly increased it over the next few years, as we see a higher average price to come. For silver, we were previously using a gold:silver ratio of 42:1. I felt that was a little high, so we are now using a 50:1 ratio going forward. For copper, our long-term price didn’t change. The slight decrease for 2012 was to reflect a pretty strong pullback in prices, but we remain quite bullish, as India and China continue to grow and develop their rapidly expanding economies.

TGR: Can we also have a specific 2012 price for gold, silver and the U.S. dollar?

PK: Sure. 2012 gold: $1,725/oz, silver: $34.50/oz, copper: around $4/pound (lb). Keep in mind that these are average prices over the year. For the U.S. dollar, over most of 2011 it was at par with, or subpar to, the Canadian dollar. What we have seen in the last quarter was the strengthening of the U.S. dollar, so we made adjustments to compensate for these changes within our models and in our target prices.

TGR: Any parting thoughts?

PK: I am pretty optimistic that we will see a strong market for 2012 and, particularly, I favor junior advanced exploration and development stories that can either be developed by the existing management groups or ones that would be targeted by a senior midtier company to fit its project portfolio for future production.

Philip Ker is a mining analyst for Union Securities Ltd., a company formed in 1963 that is now one of the largest independent brokerage firms in Canada. The company has offices all across Canada as well as one in London, England. He has field experience as an exploration geologist working across Canada on gold, diamond and base metal projects. He joined Union Securities in June 2011 after completing his Master of Business Administration degree in finance at the University of Alberta. He holds a Bachelor of Science degree in geology.

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  • Published On Jan. 29, 2012

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