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Gold Mining in Latin America - 18 December 2012

A micro approach to finding the best companies...

LATIN AMERICAN Gold Mining firms are facing both growth and challenges. Heiko Ihle, senior research analyst with Euro Pacific Capital, examines the factors behind these trends. In this interview with The Gold Report, Ihle urges investors to evaluate mining companies based on three important features rather than on the performance of others in the region. 

The Gold Report: Heiko, you cover many companies in Latin America. One silver miner in Mexico is challenging an eviction notice from its property in Chihuahua, Mexico, which is causing a stir in the mining industry. Does that give you cause to reevaluate Mexico as a mining jurisdiction or is this an isolated incident?

Heiko Ihle: Mexico is a more challenging mining jurisdiction than the United States or Canada, but it's also a much easier place than Bolivia, for example. There are some common challenges with mining there. One of the companies I cover has some issues with the community in Oaxaca. This sort of thing happens all the time, and it's mostly business as usual.

TGR: What sort of gold and silver prices are you using in your models to evaluate these companies?

Heiko Ihle: I'm a stock analyst, as opposed to a macroanalyst, so I use conservative numbers: $1,600/ounce (oz) long-term gold prices and $34/oz long-term silver prices. In the long term, those numbers are likely to be a little too low, but they produce a margin of safety to our net asset value (NAV) and cash-flow models.

TGR: The silver companies you cover in Latin America are for the most part outperforming your gold companies. Does this make you more bullish on silver than gold, or are you evaluating specific cases and what those specific equities offer?

Heiko Ihle: I look at specific cases because the best gold company can't prosper if it can't get gold out of the ground at a decent cash cost. Similarly, the best silver company won't flourish if a community demonstration shuts down its plant. Again, I am an individual equity analyst; I look at the microeconomic company-specific factors and make my decisions accordingly.

TGR: What are three must-haves for the companies you cover? 

Heiko Ihle: The number one thing is good management. Bad management can run the best company into the ground. I've seen it in stocks that I covered and in stocks that I owned.

TGR: How do you quantify good management?

Heiko Ihle: If I speak with a management team and I get the sense that it doesn't understand what's going on, then that would put it into the bad management category. If it continuously disappoints, if it continuously over-promises and under-delivers, that would put it into the bad management category. I worry, too, if there is no coherent team—even if the CEO, CFO and chief geologist are great people, there is a chance that they do not work well together. It sounds simplistic, but I always pay close attention.

TGR: What are the other must-haves?

Heiko Ihle: A company must have a good asset. Even if it has great management, if a company doesn't have a good asset, nothing's going to be pulled out of the ground. It needs to have a decent land package with room for expansion. The grades need to be right. The type of ore needs to be right. It needs to be permitted or have decent progress toward permitting. The third must-have is a functional mill with potential for expansion. The chain is only as strong as its weakest link, and if one of these factors is broken, the whole system is going to crumble.

I do a lot of site visits to evaluate the mills. I look for spare capacity, and I go through all the geological reports for permitting. 

TGR: What segment of the precious metals market is going to provide retail investors with the best bang for their buck in 2013?

Heiko Ihle: I suggest people figure out what area they want to invest in, then narrow it down to a couple of companies. Go back to those three must-haves that I mentioned. Look into management, look into the assets and look into the permitting and the operational phase of the firm.

I would also say people should diversify. And if they just go across base metals, gold and silver, they will be doing themselves a favor. 

TGR: So your advice is to evaluate individual companies and divide the portfolio up by commodity. 

Heiko Ihle: Yes, and commodities shouldn't be your full portfolio.

TGR: Thank you so much, Heiko.

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The Gold Report, 18 Dec '12
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