Comments Post PDAC
What a week it was! Another PDAC is in the books. And a good one. It was undoubtedly small - fewer booths, attendance of just 22,000 compared to an average of 29,000 over the last five years - but the buzz was inarguably better than last year.
I comment on my PDAC impressions after going through the mining news events of the week. As usual, news flow ramped up during the world's biggest mining conference so there was lots to talk about, and all I got to were the four biggest stories.
Others also deserve comment. Canamex Resources (TSXV: CSQ), for example, published a PEA showing how they could turn their Bruner gold project into a 46,500-oz.-per-year producer for a capital cost of just US$33.4 million. If built the mine should be able to generate a 39% after-tax internal rate of return and operate for six years. It would be a simple oxide heap leach operating on patented land, which eases permitting considerably.
Those are pretty good numbers. The asset and company are small for my tastes but Canamex deserves credit: it not only survived the bear market but advanced its asset to the point where it supports an economic PEA. If the team can now establish a path to production, starting with accessing the cash needed to take the next step, its share price may well respond. This is, after all, a simple gold project in Nevada, one of the most desirable mining jurisdictions in the world.
That's one example of interesting news. There was no shortage: companies arrived at PDAC armed with new drill results, property deals, exploration plans, financings, and resource estimates.
Deal flow was the most exciting part. I go through three new deals below (Silver Standard buying Claude, Endeavour buying True Gold, and Lundin moving on Timok), but financings were also hot. Pretium raised US$130 million, Franco pulled in an oversubscribed US$920 million, and Kinross raised US$250 million. I like to see money moving. This sector seizes up otherwise.
No wonder PDAC-ers were pumped. Or cautiously optimistic, in the very least. Now, on to this week's snippet from the Maven Letter. If you enjoy these snippets, consider a free trial subscription.
In The News...
NexGen Energy Stuns
The maiden resource estimate that NexGen Energy (TSXV: NXE) released on March 3rd stunned the market…just as I predicted.
“The maiden resource estimate is due out shortly. The resource will impress with its size and grade. This is a stock to buy today, before that resource comes out.” The Maven Letter, February 24th, 2016
The resource is 201.9 million lbs. U3O8, in 3.48 million tonne grading 2.63% U3O8. Within that, the higher grade A2 Core zone contains 120.5 million lbs. U3O8, in just 410,000 tonnes ore rock grading an incredible 13.26% U3O8.
Arrow is now the third largest undeveloped uranium deposit in the Athabasca Basin. Counting the mines at McArthur River and Cigar Lake, it is the third largest uranium deposit in the basin.
What matters more than that is that the resource is already out of date. Data input was cut off at the end of October. The winter drill program kicked off at the start of January and has already delivered some incredible results, including 92 metres grading 13.51% U3O8 in hole 63c2. Other good numbers out of the first winter drilling results include 48.5 metres of 11.15% U3O8 and 48.5 metres of 6.97% U3O8.
Importantly, all of these hits extend beyond the known edges of the A2 core zone, suggesting this significant part of the resource will expand.
To put ongoing potential into context, consider that NexGen drilled the discovery hole at Arrow in February 2014. Twenty months later, the team had outlined 202 million lbs. What might they uncover given another year?
Remember, Arrow comprises four stacked sub-vertical shear zones starting just 100 metres below surface. The deposit (I get to use that word now!) sits in competent granodiorite rocks just outside the basin, not the sandstone rocks within the basin that are far more difficult and costly to mine.
Given its location on the southwest corner of the Athabasca Basin, the one argument against Arrow is its distance from a mill. Uranium facilities are expensive to build, so the thought has long been that the ‘ideal’ Athabasca discovery is within trucking distance of an established mill.
With this maiden resource, NexGen has shown that Arrow almost certainly has the size, grade, and characteristics to support its own mill. Moreover, exploration has really ramped up in the area in recent years; the Arrow mill could also serve any other mines that get developed in the area. Such a setup would also generate toll milling income.
It’s early to talk about development plans, but it is important that Arrow is an asset that seems to make real economic sense – and that after just a maiden resource.
I already bought more. This stock has run, I know, but there is a lot of upside left.
Silver Standard Buys Claude Resources
Silver Standard Resources (TSX: SSO) is adding a new Canadian gold mine to its portfolio by buying Claude Resources (TSX: CRJ) for $337 million. Adding Claude’s Santoy mine and Seabee mine complex in Saskatchewan means Silver Standard will churn out 390,000 oz. gold equivalent in 2016, at an average cash cost of $735 per oz.
The deal will see SSO issue 0.185 shares and pay $0.01 for each CRJ share, valuing Claude’s shares at $1.65 apiece. The offer is a 25% premium based on 20-day volume-weighted average share prices.
To me the deal highlights two points. First, Canada is one of the most desirable addresses in the world right now. With Claude and Lake Shore already gone, there are not that many Canadian mine operators with single mid-sized assets left. Richmont, Detour, Wesdome, and Kirkland Lake come to mind – and I would bet bigger fish are already eyeing these guys up.
Second, mid tiers that can do deals right now are getting things done. Silver Standard is already buying a company that is 66% more expensive than it was three months ago. If gold is indeed in a new bull market acquisitions will only keep getting costlier, hence getting the deal done today.
Lundin Moves on Timok
In a news-full week, this deal stood out. Lundin Mining (TSX: LUN) inked a deal to buy Freeport McMoRan’s (NYSE: FCX) stake in the Timok project, in Serbia.
Timok is home to the high-grade Cukaru Peki deposit, which has two segments. The upper zone hosts high-grade massive and semi-massive sulphide mineralization; the lower zone offers porphyry mineralization. The project is a joint venture between Freeport and Reservoir Minerals (TSXV: RMC). Freeport currently owns 55% of Timok but its stake rises to 75% upon delivery of a feasibility study.
The deal will see Lundin acquire 100% of Freeport’s stake in the upper zone and 28% of Freeport’s interest in the lower zone. Lundin will also own all of Freeport’s interest in the surrounding licenses that make up the Timok project.
The cost is significant: Lundin will hand Freeport US$262.5 million in stages. Half is due upon deal closure, US$20 million is paid as contributions to lower zone exploration work, US$45 million is handed over upon a construction decision, and US$50 million is paid upon commencement of commercial production. The remaining US$12.5 million comes recoupment of project expenditures.
There is one hurdle to the deal: Reservoir has a right of first refusal, which means if Reservoir makes a better offer within the next 60 days, Freeport has to take it. Reservoir is undoubtedly busy talking with interested parties about if and how to fund a counter offer.
The deal makes good sense for Lundin, which has considerable expertise underground mining high-grade copper-gold projects. In that sense it could be a good setup for Reservoir as well, as it would change out an indebted and slow major for an aggressive mid-tier miner as partner. Lundin will undoubtedly advance Timok more quickly than Freeport would have done.
Freeport has already spent US$25 million at Timok to date and, while Timok is a stellar asset, it doesn’t really make sense for the major. For one, the upper zone represents a small to mid-sized underground mining opportunity, which is not Freeport’s style. Secondly, Freeport is in serious financial trouble, so a deal that preserves its exposure to the part of the project that fits its style – the lower zone – while eliminating the expense of advancing the upper zone makes sense.
Endeavour Buys True Gold
Endeavour Mining (TSX: EV) is buying True Gold Mining (TSX: TGM), whose sole asset is the newly constructed Karma mine in Burkina Faso. And I mean new – True Gold started irrigating the heap leach at Karma last week and expects to pour its first gold by the end of the month.
The deal says two important things to me.
First, it is an endorsement of Burkina Faso as a mining jurisdiction. Endeavour is an African operator, with two mines in Cote d’Ivoire and one mine in each of Ghana, Mali, and Burkina Faso. The company’s permitted and development-ready Hounde project is also in Burkina Faso.
Endeavour clearly likes BK. Lots of geologists like its rocks, but Endeavour understands how to operate there.
That brings me to my second: this is a good deal for True Gold, because TGM has not had success operating in BK.
In early 2015 locals opposed to the mine rioted, causing damage at the site and forcing a construction shutdown. The backstory involved an aggrieved local group that stirred up opposition by claiming True Gold was tunneling underneath the local mosque, among other things. The details barely matter. What matters is that it happened, as that revealed significant local opposition to True Gold.
President and CEO Dwayne Melrose got the axe. True Gold poured huge effort into repairing relations. Within 6 months most of the management team had been turned over to new faces.
Construction got back underway four months after the attack. Four months after that, the country’s political risk reared up when a coup kicked out the interim president (reigning in the time between the resignation of long-time president Blaise Compaore and planned elections) and dissolved parliament. The coup was overturned fairly quickly and in late November a new president was voted in.
The markets rewarded the election and True Gold’s ability to patch up relations and complete construction. TGM shares doubled between November and early March. But despite the outward success – Karma is complete, gold is coming – True Gold’s negative backstory in Burkina Faso could well have come back to haunt them. Discord to that degree does not just disappear.
To me, that is why TGM went for the deal rather than following its own playbook, which was to have Karma act as a cornerstone asset to build a new mid-tier gold miner.
The deal will see Endeavour issue 0.044 shares for each TGM share. The ratio values TGM shares at $0.57 and represents a 33% premium based on each company’s 20-day volume-weighted average price.
The deal also resulted in new money for Endeavour, as the company’s major shareholder elected to exercise its right to maintain its 30% stake. To do that means La Mancha Holding will finance an $83-million raise.
Finally, the deal is a reminder of something else: remember management’s connections. Christian Milau, who joined TGM as president and CEO a year ago, came from Endeavour. David Laing, who joined as chief operating officer in June, had spent many years with Endeavour.
Personal connections make it easier to initiate talk of a deal and to negotiate the terms. The groundwork was there for anyone who thought to watch for it.
In the end, kudos to True Gold. The market has not applauded Endeavour for the move as yet: EDV shares have lost ground for six sessions following the news, for a loss of 17%.
On The Macro
Reporting from PDAC
The energy at PDAC was intense. Everyone I spoke to was busy, whether they were looking to buy properties, sell assets, identify streaming opportunities, or find companies in which to invest. Corporate teams that have struggled for years to fill financings had investors walking up asking to participate in any upcoming private placements.
The dealmakers of our sectors couldn’t fit enough into their days. These are the guys who make it happen behind the scenes: they identify opportunities and figure out how best to bring them forward. Sometimes that means finding money and bargaining for the asset themselves. Sometimes it means figuring out which existing company would be a good fit and then helping advance the pairing with time, money, expertise, or connections. These guys were literally running around the show. They were buying old mines, investing in exploration stories, meeting government reps to advance permit applications, and introducing their new stories to investors in their network, all the while keeping one eye peeled for new opportunities.
Sure, there was some hesitation around the gold price. It makes sense: we had January rallies in 2012, 2014, and 2015 and they all fizzled. Even I admit that only time will truly tell whether this is it. But the general consensus was: this is it. There are too many eroding global conditions for gold not to gain.
The US bull market is over. Japan went to negative rates and the Yen rose, demonstrating that central banks – the forces that have dictated market movements for years – are no longer in control. If central banks aren’t leading the charge, markets have to start reflecting reality, which ain’t great. Signs of economic weakness are flashing in the US, while the EU is so weak as to need yet another round of stimulus. Add to all that a European banking crisis, serious risk of debt defaults from the masses of emerging market businesses with US-dollar debts, cheap oil and all of its fallouts, currency wars that are creating deflation and risk for savers, and rising political risk from Turkey to the United States.
Each of those conditions could alone lift gold. All of them together create a perfect gold storm. Reality will be somewhere in between, depending on how big each force gets.
What To Do
I’ve said this before, but I am more sure of it following PDAC (and want to repeat for new subscribers): the plan to profit has two steps.
- Make a wish list of stocks you want to own for a gold bull run. Choose stocks that cover the exploration-development-production-royalty spectrum because that by definition creates a range of risk levels and timelines to expected outcomes.
- Buy each when it makes sense. For the miners and top-tier developers that have already moved up, wait for gold to pull back. It will do so – bull markets are made of higher highs and higher lows, so enter on a low. I expect one or two pullbacks between now and the end of summer. For explorers that haven’t gained much yet, exact timing matters less – but still buy now. Positioning now has you ready if a deal pops up or if explorers as a group start to gain, which they will at some point. If you agree with me that the bottom is in for gold, there is little downside to buying today…but lots of potential upside.
In time we will also position in other commodities. Regular readers know I am bullish on uranium, expecting a notable price move to get underway in the next 12 months. In addition I intend to increase exposure to copper and zinc. All of these are somewhat on the backburner at the moment, however, as the pressure is on to position in gold.
Positioning is an ongoing process. The decision to move on any given stock combines that stock’s individual performance with metal movements. Gold might pull back some this coming week, given the performance of the S&P. That would work out well and I would be sure to identify which of the standout stocks listed below should be bought first.
But it might not. As I’ve said before, when gold goes bull it stops playing by the rules. Net long and short positions, correlations to the US dollar, ratios with major indices or other metals – all these metrics work well to explain gold’s moves in a bear market, but they fall apart when gold goes bull.
And it’s worth noting that gold did technically enter a bull market on March 4, when a close at US$1,277.50 per oz. represented a 22% gain over gold’s low of US$1,049 on December 17.
Now, there is no guarantee that a technical bull market will continue and become the kind of gold bull market we all want. But it’s inarguably a starting point, largely because a technical bull market attracts mainstream attention. The kind of cash inflow that creates can turn a gold bull run into a self-fulfilling prophecy.
Maven subscribers then got access to my list of show standouts, companies that piqued my investment interest. If you are interested, consider a free trial subscription.
Once again, it's great to hear your pearls of wisdom in the mining sector that translate into income and profits. Now that we are in the nascent stage of this commodities bull market, everything that the retail investor can learn in order to maximize profits is education today that will be worth a fortune tomorrow.
Thank you so much for this important insight. It makes complete and makes the decision complex....The newsletter is incredible, your insight is very fun to read.