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Solid Gold Picks

Mar 2nd 2011 at 4:02 AM

Toronto-based Ubika Research is making a name for itself on Bay Street. The firm launched its Gold 50 Indexin February 2010 and by year-end, the high-potential gold juniors on that list were up a combined 99%. Ubika Cofounder and Analyst Vikas Ranjan returns to The Gold Report for a discerning look at the ongoing turmoil in the Middle East, its possible effect on metals markets and several promising junior explorers and producers in this exclusive interview.

The Gold Report: The Middle East is always a hotspot for geopolitical tension. Those tensions escalated recently when Israel announced Iran was sending warships through the Suez Canal, which hasn’t happened since 1979. And Egypt’s new military rulers decided to let the ships pass. Is it safe to say that this situation has the potential to radically move the gold price as a result of the safe-haven bid?

Vikas Ranjan: The situation in the Middle East is very fluid right now with many protests against autocratic governments. Opposing parties will attempt to seize the moment, and that will likely make the situation more volatile. This is creating a new risk in the market, particularly due to its impact on the price of crude oil. But could the situation have a dramatic impact on the price of gold? I doubt that. The Middle East situation will probably continue to help the gold price because risk is increasing—and it’s a new set of risks. Some people always take refuge in gold as a safe haven, and this will push gold prices higher in the short term but probably not radically higher unless there is an all-out war, which I doubt will happen. So, yes, there’s support for gold already and we’ll see some near-term rise in the gold price.

TGR: Another factor on the demand side is inflation. Consumer prices in the U.S. rose about 0.2% in January, which is the fastest rise in more than a year. And China recently published some data that suggest inflation is rapidly taking hold there. What is Ubika’s position on gold as an inflation hedge?

VR: Yes, inflation is definitely becoming a major concern—at least in emerging economies like China, India, Brazil, Russia and Argentina. Gold has traditionally been a strong hedge against inflation as investors seek to hold hard assets like gold when paper currencies depreciate due to higher inflation. If inflation takes hold, our position is that it will be very beneficial for gold. Now, the question is: Is there a real threat of inflation? It’s absolutely a threat in emerging markets.

In our opinion, the numbers are actually understated. In many of these countries, the real inflation rate is much higher than the official figures because emerging markets are growing rapidly and are not seeing any let up in demand growth. However, developed countries, especially the U.S., Eurozone countries and Japan, are struggling still. In the short term, perhaps one or two years, we don’t see a real threat of inflation in developed countries because there’s no real threat of wage-induced inflation. Having said that, these countries have pumped up a lot of liquidity into the system; so, ultimately currency-induced inflation likely will take hold in a couple of years—that will be very beneficial for gold.

TGR: So gold has significant demand drivers both in the short and long term?

VR: Yes.

TGR: Gold recently brushed up against its 50-day moving average on the Comex. Where do you see the next resistance level? Will it be above $1,400/oz.?

VR: Yes, I think so. If you look at the trend over the last few months, gold is making a strong base at higher and higher levels. Even after swift selling in the new year, after gold had made a late run in 2010, it did not break below $1,300 on the downside and has now made a nice comeback. If that level above $1,350 is sustained for a little more time, I think the next move would be to test the levels around $1,500. I wouldn’t be surprised if gold breaks $1,500 by midyear.

TGR: That would certainly be good news for our readers and most junior gold explorers. Ubika Research covers a number of gold juniors. In your last interview with The Gold Report, you talked about La Quinta Resources Inc. (TSX.V:LAQ), which at the time, was rebranding itself as a Nevada-focused junior with its Easter property. What’s happening with La Quinta now?

VR: La Quinta has made some good progress since we last spoke. The company completed a summer drilling program last year at the Easter Gold Project. The drilling program focused on the area where there is an historical resource. La Quinta hit gold in every hole it drilled and successfully determined the direction of the mineralization. I visited the site in November last year and I was pretty impressed by the size of the land package.

Current drilling is exploring only one known vein system, and there is potential for others. We think La Quinta has a strong technical team to carry out its well-defined exploration program that should significantly increase the current NI 43-101 resource. Another very interesting thing about the company is that the Easter Project is in a joint venture (JV) with Fronteer Gold Inc. (TSX:FRG; NYSE.A:FRG), with La Quinta earning its option to own a 65% interest. Now, Newmont Mining Corp. (NYSE:NEM) just announced a takeover bid for Fronteer. The gold sector continues to see lots of mergers and acquisitions (M&A) activity, and a company like La Quinta can do very well if it successfully executes its strategy and proves up a sizeable resource base of, say, 500,000 to 1 million ounces (Moz.).

TGR: Do you expect Newmont to take a closer look at La Quinta given that relationship?

VR: Yes, it’s possible. Newmont also announced it would spin off some of the exploration assets into a subsidiary called Pilot Gold. We’re not sure if it will spin off its Easter Project interests once the company acquires Fronteer. But, even if it did, Newmont still owns about 20% of Pilot Gold. Newmont would obviously have an eye on these assets; it’s very aggressive. Newmont is looking for ounces in the ground. If the company finds a good-sized deposit it can mine economically, why not?

TGR: La Quinta recently got a permit to do some trenching on the Easter Property from the Bureau of Land Management (BLM). Ultimately, that work will lead to more drill targets and more drilling. When could we see a revised resource estimate from La Quinta?

VR: Our understanding is that La Quinta will engage in a follow-up drill program very soon. I think the company should have some results from that by May. Once La Quinta takes into account all of those results internally, it will probably do an evaluation and include that drill data. That would be an opportunity to revise the resource estimate. If everything goes as planned, we could see a resource revision by late summer or early fall.

TGR: I want to ask you about your target price for La Quinta but you don’t call it a target price. Ubika calls it a "model price." Please briefly explain that.

VR: The Ubika "model price" is based on our valuation methodology. We do not say that is our "target price" because we are not in the business of offering targets or recommendations. We just say that, based on our analysis, the company model price should be $X.

TGR: So what’s Ubika’s model price for La Quinta?

VR: Our model price for La Quinta is $0.23. The stock trades about $0.08 currently, so there’s a bit of upside based on a very conservative assumption of the company’s current resource and what we think the resource could be in 12 months.

More of this interview on Jutia Group

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