Gold and the New Paradigm, plus some news
A longer snippet for you this week, starting with some In The News commentary and finishing with the first half of my editorial Gold and the New Paradigm.
The birth of a new gold bull market has changed the game - the trading strategies we've employed in the last few years no longer apply. This year, while things transition, investors need to move carefully, watching for opportunities and ensuring they establish exposure to a range of gold stocks before the market really gets going.
This time next week I will be at PDAC. For anyone attending, I am presenting at the Newsletter Writers Session on Sunday, at 3:45. Alongside the presentation I am looking forward to four days of corporate updates, shop talk, and searching out new opportunities. Perhaps I'll see you there!
In The News…
Picking the Right Poison
Atlantic Gold (TSX: AGB) announced debt deals that will give it access to $135 million, enough to get its MRC gold project in Nova Scotia up and running. The deals are a $115-million debt package with Macquarie Bank and Caterpillar, which is a basic loan with a three-year payback period starting when MRC gets going, and a $20-million equipment finance package.
Good stuff. Even better when you realize Atlantic Gold is a $35-million market cap junior.
The news says two things to me. First, there is money available for the right projects and people. Despite its small size, Atlantic got the cash it needed because its project offers good economics, a safe jurisdiction, a manageable size, and sensible engineering. And the debt package bears an interest set at the Canadian Dealer Offered Rate plus 5%, which is very reasonable.
To get such a good rate, Atlantic also agreed to a forward sale contract for 215,000 oz. gold at CAD$1,500 per oz. (about US$1,000 per oz. using current rates). That brings up the second point: accessing cash requires picking your poison. This forward sales contract limits Atlantic’s upside if gold rises – but it gives the company the cash it needs today.
What were Atlantic’s other options? The two obvious ones are more expensive debt without a gold sale contract or equity that would entail major dilution. The cost of servicing the more expensive debt could well erase any upside if gold gains. An equity raise to cover even a quarter of the cost to build MRC would double Atlantic’s share count.
Money is never free. Atlantic picked the best poison available and now can get to work building its gold mine, which is expected to produce 87,000 oz. gold annually for eight years.
TerraX Continues to Hit High Grade in Yellowknife
TerraX Minerals (TSXV: TXR) reported some high grade hits from two initial holes into a new target at the Yellowknife City gold project.
The Mispickel zone returned 9 metres of 12.87 g/t gold and 7 metres of 23.6 g/t gold, from steeply dipping zones underneath trenches that returned good gold mineralization last year.
Two more holes were drilled 50 metres to the south and assays are pending. Three of the four holes contained visible gold.
As the name intentionally implies, TerraX’s project sits just 5km north of the city of Yellowknife in the Northwest Territories, Canada. It also surrounds two historic gold mines, Con and Giant, that collectively produced 14 million oz. gold over 60 years from ore averaging 16 g/t gold.
This is a high-grade camp – but an underexplored one. Pollution questions and labour strife drove Giant and Con into closure and then a series of bankruptcies meant the Yellowknife City gold project sat unexplored for years.
In 2012 it became available and TerraX jumped on it. A treasure trove of historic data set it going and in 2014 the company started drill testing some of its many targets.
Results to date have demonstrated some serious potential. The Barney Shear zone, which is the extension of the structure that both Con and Giant tapped in to, returned an intercept of 6.4 g/t gold over 22.4 metres. At Crestaurum, the most tested area and home to three parallel gold shoots, one drill hole included 5 metres of 62.9 g/t gold. Herbert-Brent, a new discovery last summer that seems to offer replacement-style gold rather than vein mineralization, produced 11 metres of 7.55 g/t gold in channel sampling.
There is lots of ground to cover and many targets to assess. TerraX has $4 million in the bank and plans to spend $1.5 million on drilling this year.
TerraX has a nice share structure, with just 67 million shares issues. Management and staff own 15% of the count and Osisko Gold Royalties owns 17%, as well as an option to buy a 1% net smelter royalty. Osisko paid $1 million for the option and would have to pay another $2 million to exercise it.
How To Improve Your Project’s Economics
Two news releases out this week show what hard work, focused on the right objectives, can do to improve a project.
Continental Gold (TSX: CNL) published a feasibility study for its Buritica gold project in Colombia. Compared to the preliminary economic assessment published 15 months ago that looked at a 5-million oz. resource averaging 7.8 g/t gold, the new plan assumes a 3.7-million oz. reserve grading 8.4 g/t gold. The deposit ‘shrank’ because low confidence inferred resources cannot be included in reserves. In Buritica’s case, though, the inferred tonnes also carried the lowest grade, so excluding them increased the average reserve grade.
A higher reserve grade means Continental was able to reduce mine throughput to 3,000 tonnes per day (tpd) instead of 3,500 tpd while maintaining a planned output of 253,000 oz. per year over 14 years. Capital costs stayed put at US$389 million.
Buritica would be an underground mine with multiple ramps and a whole ore cyanide leach processing facility. The mine should be able to produce gold at an all-in sustaining cost of US$492. Using a gold price of US$1,200 per oz., the plan kicks out a 31.2% after-tax IRR.
This study is a major step for Continental. With a feasibility study in hand the company can now start searching for construction capital. Before the build gets underway, however, there is one major hurdle to cross.
That is permitting, a process that saw Buritica classified as a project of national importance and thus moved form local to national permitting. That delayed the permitting timeline while also introducing some questions around Continental’s success on the local level. Opinions are now widely divided on the likelihood of permitting success. The company maintains that the permitting process will wrap up successfully in the second half of this year.
The other hard-work-pays-off piece of news came from Goldrock Mines (TSXV: GRM), which updated the feasibility study for its Lindero gold project in Argentina. Lindero is planned as an open pit, heap leach mine that would produce 108,000 oz. gold annually for nine years and then produce at a lower rate from stockpiled ore for another few years.
The new study updates a 2013 feasibility that was good, but not great.
To improve the outlook, Goldrock made a host of small and large changes. The plan changed to contract power supply instead of an owner supplied and operated power station. The new plan relies on trucks to stack the heap leach for the first three years before changing to a conveyor, postponing the conveyor cost. Alternative heap leach pad liners and pad construction methods have been introduced. A different route for the road connecting the more distant open pit shortens the drive. And the new plan relies on more accurate construction and operating cost estimates.
These changes, each alone not that large, add up to a notably improved project. Using the same gold price of US$1,200 per oz., the after-tax internal rate of rate of return increased 5% to 26.5%. Capital costs remained little changed at US$167 million but the payback period declined to 24 months from 41.
It helped that Argentina recently eliminated its 5% export tax on mined products. New Argentine president Macri also let the peso float freely, which resulted in a quick 35% devaluation in late 2015. Goldrock did not incorporate this devaluation into its study, a conservative approach that I applaud, though capital and operating costs could be 7 to 10% less simply because of the currency move.
Neither Goldrock nor Continental is in the Maven portfolio. Nevertheless, I think both companies deserve recognition for adding real value to their projects by working through different economic, geologic, and engineering options. It’s not sexy work, but it pays off.
2016 Outlook Series: Gold and the New Paradigm
I am bullish on gold. That barely needs to be said: I spell it out regularly in my macroeconomic musings and, more generally, I left my salaried job to start my own newsletter 18 months ago precisely because I wanted to participate actively in the looming gold bull market.
What I want to do today is spell out in some detail how I see things happening over the next year and what to do about it.
Gold has taken off in the last two months. In January the reasons were pretty obvious: US markets declined almost daily for three weeks, putting risk atop investors’ radars. The safe haven that is gold was an obvious counter. This I have discussed at length.
In the last month, however, the storyline changed. US markets are even or a bit up compared to January 24. The US dollar is off, but only a touch. The safe haven argument for gold should have weakened…but gold has not lost its luster.
Gold’s gains in 2016 have changed the game. Two months ago, we were still in a sideways mining market. The Maven investing strategy was based on that context: I grouped buys into three categories based on realistic performance expectations in a sideways market.
- Short term trades: A sideways market is made of some stocks gaining and other losing. Keeping close tabs on the sector and on certain companies creates the opportunity to identify who is gaining and when those gains will happen. Such information enables short-term trades (weeks to months timeframe) that can return 20 to 30%. News events, arbitrage opportunities, and seasonal trends fall into this category.
- Medium term buys: Cream of the crop companies can move regardless of the overall market and, when the market starts to improve, are the first and fastest to rise. As long as investors provide enough time – one to two years – the select group of top tier developers and producers will provide good returns. With some the returns could happen sooner, if a takeout happens.
- Long term holds: Explorers get little love until a new mining bull market is well underway – but when they go they can really go. Investors cannot expect big returns on these companies in the near term but in five years they will be very happy they positioned at the bottom.
That was the logic. Now, with gold signaling that a new bull market has begun, the logic needs to be updated.
My call to sell Mandalay Resources at $0.78 for a 22% gain is a perfect example. The call fit with my 2015 sideway market logic: we bought MND because it was a gold story that had been beaten down by tax loss selling. Tax loss hits often rebound in short order to a certain degree; gold has its strongest season in January. The information pointed to an opportunity to lock down a 20% gain.
Since my call to sell, MND has traded as high at $0.88. Our 22% gain could have been 37%. Had I known we were starting a new gold bull market, my expectations would have been higher and I would have waited for more before exiting.
I take heart that we did profit, nicely and in short order. But I take note that easy upside was missed.
To address that requires an outlook on what gold will do for the rest of the year. My take starts with a look back to 2009.
The recent flood of interest in gold is reminiscent of early 2009, when gold stocks took off on the heels of the financial crisis. Shell-shocked investors were nervous; many did not believe the initial rise would continue and waited for a pullback to get on board.
Except that no big pullback materialized. For a year pullbacks maxed out as 15% dips that quickly rebounded. Many speculators missed out on a very good rally because it started out faster than they expected.
I am not saying gold stocks are going to recreate 2009 this year. But they might. And there is little downside in being prepared for that possibility.
- If gold stocks go a la 2009, you are in.
- If they go sideways before really rising later, you are already positioned. In the meantime rallies can be used to sell some and pullbacks to reacquire, reducing your cost base. Assuming gold has bottomed, there is little downside risk to positioning now.
That being said, every position should come with a plan. So, for gold stocks, my new plan.
- Make a wish list of stocks.
- Watch for 15% pullbacks in gold and gold stocks (as per the GDX and GDXJ). I expect this to happen once or twice before the end of summer, with the first dip likely before May.
- Establish positions or add to positions already held on the pullback.
- Know what you expect out of each stock.
The Maven Letter continued with a discussion of risk versus timeline, how majors fit in, what this summer might bring, and how to move. There was also a new recommendation plus the usual set of updates from Maven portfolio companies. The essence of it was that the time to position is now, albeit carefully. However, I'm ending the snippet here to keep some content quiet!
Thank you for the update. I am actually quite glad that you are flexible with your letters to enable you to get your readers the best information. And, I appreciate your offer to join the premium newsletter. I hope to continue to build my portfolio, with the help of your newsletter, to the point where I am able to take advantage of your offer and join the pp world in the not too distant future. I have really enjoyed your newsletter, read it with interest and have aligned my commodity portfolio with your recommendations, which has worked out very well. You are clearly a very trustworthy person, which is not always commone in the world of commodity investing. Thank yo for doing what you do so the small retail investor/speculator like me can have a better chance at success.
Thank you so much for this excellent Maven letter. Your market analysis and logic is again exceptional. Your insights, knowledge and feel have given me a wonderful couple of hours. I am now planning my activity. I look forward to seeing you tonight on the Virtual Metals forum, I am pleased that you start first as I am a morning not a night person.
I hope you and your family stay well.