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Busy Days, Gold Getting Overshadowed, and Investors Across the Spectrum

Last week's Maven Letter had a series of short articles summing up the major themes I'm seeing in the mining markets today. Most of those notes are included below.

The Letter then continued with Part I of a complete portfolio review focused on identifying tax loss buying opportunities. Yes, you read that right: in my view, the selling focus this time of year is backwards and instead investors should be looking for stocks to buy.

Buys can either be fundamental value bets that are available at 52-week lows right now or can be seasonal trades - stocks that are cheap now but that will offer leverage to the mining sector's reliable Jan-Feb run. The buys in the second category are trades: prepare to sell in February after locking in 20 to 30%.

Enough chatter: on to the goods! As always, if you enjoy these Maven Monday articles consider subscribing to The Maven Letter here.


From The Maven Letter: November 15, 2017...

Busy Busy Days

It’s hard to explain how busy things are right now.

For one, it seems strange that business would be so busy when the markets are so boring. And yes, on the whole the mining sector is just chugging along. But zoom in and you see that overall pace comes from a list of small deals moving ahead – raising money, releasing results, and finalizing deals.

And those deals don’t have the luxury of choosing when exactly to make their moves. In a big picture sense, they believe we are in the early days of a new bull market and so are getting going. Zoomed in, ‘getting going’ requires a multitude of steps that happen when they happen.

I was talking with a company this morning that is raising money to drill its VMS target in Saskatchewan. Is right now the best time to be raising money? Perhaps not, but after spending the last year cleaning up the structure, installing new management, completing an initial drill program and expanding the resource, and doing a whack of geophysics and groundwork to delineate new targets, right now is when they need money.

Another company that I met with yesterday inked a deal way back in June to buy an advanced-stage copper-zinc asset in BC. A deal seems like a deal but in reality it’s taken until now to complete the technical report and then line up the stream and equity components. That means they too are raising money right now. When you’ve been working for five months to close a deal you don’t care if it might be a bit easier to raise money in six weeks – you just get it done.

And on it goes. Another interesting meeting this week was with a copper-focused project generator in BC that has been building its portfolio privately for several years and is now going public. That process got underway early in the summer but after endless hours with lawyers and bankers and investors, the trading debut is now finally nigh.

One takeaway from all of this is: it takes longer to get things done that we investors want to think. Exploration is almost the easy part of the game. The hard, time-consuming parts are closing deals, raising money, getting permits, organizing historic data, mapping, analyzing geophysics, staking ground, assessing opportunities, and earning social license.

Most of this work flies under the radar, the market only hearing about the end result of each effort. But efforts they are.

And they are very much underway right now. As efforts come close to fruition my phone rings, as my role comes when the story is about ready to be told. My phone has been ringing and I have been running from meeting to meeting for the last two weeks, returning to my desk in the evenings to sort through all the information gathered.

Identifying solid opportunities amidst it all is not easy. This is a weak time of year in the markets for exploration and mining equities. I certainly hold to my outlook that things will improve in January and February, as they reliably do, but it’s still hard to predict how stocks will perform until then. Will the market care about a deal finally closing, about a new company coming to trade, about a successful financing that fuels further exploration?

Tough to know. All you can do is trust your fundamental outlook - on gold, base metals, the overall markets, interest rates, and the like - and then make a bet.

Gold Well Grounded But Getting Overshadowed

Using lines of argument similar to those I’ve outlined here, folks at the recent Metals Investor Forum generally agreed that gold has good fundamental support.

  • Low to negative real rates: the Fed might be raising rates but (1) only very slowly and (2) not very high, because immense government, corporate, and personal debt loads mean debt service costs would strangle all growth should interest rates ever get above about 2.5%. Even with weak inflation that means real interest rates stay low; if inflation starts to go at all then real rates will rapidly turn negative. That lays a very strong foundation for gold.
  • Uncertainty: from politics to the markets, uncertainty abounds. On the political front a multitude of forces can ramp up at any moment, from Trump to protectionism, North Korea to Russia, tax reform to majority in the Senate. Economically, gold will gain in stature as concerns about the end of the epic bull market gradually and inevitably rise.
  • Central bank buying: aside from Venezuela, which seems to be dumping gold these days as it battles complete dysfunction, central banks are buying piles of the yellow metal. Global central banks added 111 tonnes of gold to their reserves in the third quarter, 25% more than in the same period in 2016. Russia and China lead the charge, which is not surprising given their now-open talk about gold-backed currencies as alternatives to the petrodollar and, more generally, gold as an safe store of value. The quote on this issue that’s making the rounds today came from Russian investment analyst Andrei Vernikov: “If US sanctions are expanded to block Russia’s assets invested in US Treasuries, gold will be a magic wand.”
  • Physical demand: attuned investors seem to be using this price point as an opportunity to buy physical. Chinese coin and bar demand hit the second highest volume on record in the third quarter, up 57% versus the same period in 2016. Bar and coin demand is also up notably across Europe and in certain Asian centers, including South Korea.

The obvious question is: if there is so much fundamental support, why isn’t gold going higher right now?

The answer is that gold is getting overshadowed.

If you can invest in FANG and confidently collect strong returns plus dividends, if you can buy cryptocurrencies and multiply your wealth overnight, if you can invest in the ballooning industry of legal marijuana, why would you invest in gold? It’s a very real question. These strong sectors are stealing investment dollars that otherwise could well have gone into gold.

Do we need the US markets to turn down and the Bitcoin bubble to burst and weed stocks to flame out for gold to go? No…but one of those would help!

In all seriousness, these forces are acting as headwinds for gold. But they will not last forever. The US bull market will end, either gradually or suddenly. Bitcoin is a bubble and thus will too end, though I have no idea when. Marijuana is the most legitimate value opportunity of them all, I think, since it is a new sector opening up for investment, but in time its excitement will also abate.

As I’ve said before, there is a gaping risk and opportunity disparity between the US markets and the mining sector right now. When cracks start to appear in the bull market, worried investors will rotate into gold, igniting the exciting phase of the bull market.

In the meantime, fundamental support is keeping the yellow metal strong enough to support lots of exploration, deals, development, and mining.

The Whole Spectrum

Another interesting point that I noted at the conference in New Orleans and was reinforced last weekend is that engaged investors are looking for opportunity across the spectrum, from initial exploration to building, even operating, a mine.

Recent market success for stocks like Novo (TSXV: NVO), GT Gold (TSXV: GTT), and Garibaldi (TSXV: GGI) show that investors are very keen on new discoveries (not that GGI is a discovery, but I’ll leave that for today). The bear market ended almost two years ago, which means explorers have had just enough time to get organized, raise money, and start testing the projects.

In other words, work has been underway long enough that we’ve reached the stage where discoveries can start happening. Investors are keenly aware and want to be on board when the next discovery takes off.

But discoveries are by no means the only kind of play getting attention. Ask a group of investors what stocks they like best and these days half of the answers will be advanced assets. Below are some of the stories that keep cropping up:

  • Midas Gold (TSX: MAX): advancing the Stibnite project in Idaho to a production decision; feasibility study due 2018. Well into permitting process. 4.6 million oz. gold in reserve, plus a significant antimony credit with good metallurgy. A mine plan that produces 337,000 oz. gold annually for 12 years at all-in sustaining costs of US$616 per oz.

The argument: Stibnite is a large, advanced asset setting itself up as an acquisition target in this gold market. Low risk. Current status in the ‘boring’ phase (mid-feasibility and mid-permitting) means stock is inexpensive.

  • Northern Empire (TSXV: NM): advancing the Sterling project in Nevada. Fully permitted mine in production until recently. Previous owner (Imperial Metals) never paid it much attention and then got sideswiped by Mount Polley tailings dam disaster and sold Sterling. NM is exploring around and below the old pits and planning to explore the large trend extension to the north that has seen very little work.

The argument: Sterling is a permitted project with easy proven metallurgy and low costs. And Corvus Gold (TSXV: KOR) recently got a bunch of love for results from Mother Lode, which is a small claim package internal to NM’s ground. Once NM gets permits to drill its northern ground, odds are good it will hit the same gold. Then it will have both: the advanced deposits at Sterling and a new discovery in the north.

  • Columbus Gold (TSX: CGT): 45% owner of the large Montagne d’Or gold project in French Guiana, a joint venture with Russian company NordGold. This is a large, advanced gold asset set up as an acquisition target in this gold market. The buyer might be NordGold or another. Investors are also interested in Columbus today because shareholders as of December 11 will get stock in Allegiant Gold, the new company being spun out of CGT to advance its prospective portfolio of Nevada projects.

The argument: Montagne d’Or is a large, advanced gold asset with strong in-country support that is available for a deal. The Allegiant spinout will have a very nice portfolio of projects in Nevada that are ready to drill.

  • Integra Resources (TSXV: ITR): Maven readers know this story, since I wrote it up just last week. Newly listed company advancing the DeLamar and Florida Mountain projects in Idaho. DeLamar already offers 2.6M gold equivalent oz.

The argument: Integra is inexpensive in terms of enterprise value per ounce relative to peers, but resource count will soon grow significantly when Florida Mountain resource is added. Then exploration will get underway. Proven team.

What these stories have in common is a lower risk profile than explorers because of a defined valuation backstop, in the form of defined resources, access to capital, and demonstrated mineability. Those factors mean stories like this provide guaranteed leverage when the market gets going.

We are still in the early days of this mining bull market and that means there are lower risk ways to invest. Those will evaporate when the market gets going, but right now they are the talk of the town.

Time to Buy, Not Sell

The other theme of note from the weekend event is one I have been discussing for two weeks already: that these last months of the year are a time to buy, not to sell.

As I’ve said, the foundation of successful investing is to buy low and sell high. With that in mind, selling in November and December – arguably the weakest time of year for exploration and mining stocks – is a bad idea.

If you took down a big gain this year and want a tax loss credit to claim against it (and somehow don’t have any remaining from the bear market!) the time for tax loss selling is September. As the fall strong season peaks, look at your portfolio. Stocks that are not fulfilling your investment thesis, stocks that just haven’t managed to make it happen – sell them then. Take the loss, but lose less.

By mid-November, prices have slid and it’s time to look for buys. So many successful mining sector investors buy half a dozen good quality stocks between mid-November and end of December and sell them again in February or March, after riding the seasonal wave.

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You were 100% right in todays prediction. I bought in at the times you said, in the method you said (Twice) I have enjoyed the gains!

Thank you for your help and guidance as always.

-EB (April 12, 2020)

As a recent subscriber to your newsletter, I wanted to say thank you for all the amazing information and detailed analysis regarding the many companies you're invested in. I cannot begin to imagine how much time you put into your work. I am very new to investing in the mining sector and did quite a bit of research before selecting your newsletter over the many others available. I was nervous about signing up to anyone's newsletter as there is so much negativity on the internet about newsletter writers (e.g. pump and dumpers). Anyways, I'm feeling good about being aligned with you.

-GM (August 2019)