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Mining's Inefficiencies Become Opportunities

One last plug for the Metals Investor Forum: If you will be near Vancouver on the weekend, come down to the Hotel Georgia for two days of mining and exploration talk, investment ideas, and face time with management teams. I'll be there alongside Eric Coffin, Brent Cook, Brien Lundin, Jay Taylor, and Jordan Roy-Byrne - and a strong group of companies selected from our portfolios.

You have to pre-register: click HERE to reserve your ticket!

And now for something slightly different. Usually Maven Mondays are a snippet from my subscriber letter, with some added commentary. This week I'm instead providing an article I wrote on Friday that hasn't yet been published elsewhere. It's about why there are some incredible opportunities in our sector right now - but beware, because there are also a lot of bad ideas out there masquerading as opportunities.

I hope you enjoy. As always, if you'd like to hear more from me - and know what stock I'm buying and selling - sign up for a free trial subscription to The Maven Letter.


“It’s the inherent inefficiencies of the capital market system that create these opportunities.”

That’s a quote from a broker I chatted with recently. It stuck with me because it captures why certain exploration stocks are suddenly moving – and reminds me that more such moves will come.

The broker was telling me about a financing. I checked the company out. The asset had a few interesting characteristics – location, grade, and exploration potential – but the available information was terrible. The corporate presentation had last been updated in 2014.

A few months ago, I would have been completely uninterested. But a few months ago, we were still in a bear market for gold. Capital was only available to the select group of companies that had maintained momentum through five hard years. Everyone else was stuck.

With no money, exploration companies could do no work. Some assets got dropped because carrying costs could not be met; other assets got very dusty sitting on a corporate shelf and getting zero attention. Investor relations people found work in new sectors. Brokers shifted their attention to technology, marijuana, and other functional arenas. Mining’s company makers – the guys who pull together people, projects, and money to get a good new thing going – hung up their hats because nothing worked.

Now it’s all changed. Today those folks are busting themselves to get all their ideas going before the rebound takes off. Assets are being dusted off. Investor relations people are getting rehired. Money is available again, which means explorers can explore, developers can advance, and miners can acquire.

When gold goes, major miners are the first to respond. Their share prices have done phenomenally well this year; Kinross is a good example, up 160%.

Along with majors went the small group of companies that managed to maintain momentum through the bear market. Their share prices levered off gold’s gains in January and are now up 100% or more year to date. Examples include Kaminak Gold, Integra Gold, and Newmarket Gold.

It is easy to look at those charts and think, “Well, I missed it.” And yes, anyone who did not invest in late 2015 missed this part of gold’s rally.

But a gold rally has many parts.

A second wave has gotten underway more recently. Gold consolidating at its stronger level for two months has created confidence this is not a seasonal move but the beginning of a new gold bull market.

Mining’s movers and shakers have been awaiting this for years.

These are the guys who spent the bear market gaining ownership of prospective projects, eyeing juniors with good assets but bloated share structures or debt, connecting with successful management teams or technical groups that needed a new vehicle, and telling their contact lists to be patient.

None of that worked generated any pay. On the contrary, it costs money to do all this research, navigate these channels, and prepare these assets, companies, and people for a fresh start.

But now those starts are starting.

Check out Aurvista Gold.

At first glance, it looks like another example of a missed mining gain. But closer inspection shows some important differences compared to the earlier charts.

First, notice that AVA didn’t start to move until April. The other charts started two months earlier.

Second, its advance is much sharper, tripling in three weeks versus doubling over several months.

Third, I would argue that AVA is not an example of a gold story finally earning the valuation it deserves, which one can argue is the case for Kinross, Kaminak, Integra, and Newmarket. Instead, Aurvista is moving because new people are breathing new life into a story that has been dead in the water for years.

I could go into the details around Aurvista…but instead how about a few similar examples?

All of these are companies where new interest, from another company or from an active investor or because of asset qualities, has brought its share price back to life.

The first move in gold and gold equities already happened. If you missed it, the important thing to remember now is that this is a stepwise process.

The current step involves bringing broken companies back from the brink. That means fixing broken share structures, rejigging entrenched management, and raising some cash.

Aurvista, for example, raised some money. Yes, such raises are dilutive – but without some cash a company remains stuck. To get a company unstuck requires providing a bit of capital and letting a determined team demonstrate that it can lever that cash into a real share price move via exploration or acquisition success. If it works, they can raise the next bit of cash at a higher price and continue the process.

The investors who back these initial financings take on a lot of risk. Success hinges on the company achieving something noticeable with that first bit of capital. If the sampling or trenching or drilling does not hit into something interesting, the game might be up. If the idea was to acquire a particular asset, better hope the deal closes. If management was dishonest and the cash goes to pay overdue bills, the investment is likely lost.

But if it works the rewards can be big, especially because the initial investment carried such a low cost base. Aurvista’s raise offers hard units at $0.06 apiece, with each unit comprising a share and a full 18-month warrant exercisable at $0.10. The new people involved in the story are talking it up to sell the raise and that alone has moved the price to $0.12 from $0.04.

There is zero guarantee of success, for Aurvista or any of these newly revived stories. But the return of confidence and capital to the mining sector means good assets and quality teams are getting another chance.

Investors have to be very careful. Everyone selling a financing right now will tell you the team is experienced, the asset is great, and the stock could go to the moon. A few stocks will. Many will not.

As long as you understand and accept the risks, however, the early stages of a new gold market are pretty fun. Mining’s movers and shakers are still working to get their new vehicles going, which means there are still lots of early stage entry points available if you have your ear to the ground.

And we have the bear market to thank: entry points are cheap because, as that broker said in our conversation: “It’s the inherent inefficiencies of the capital market system that create these opportunities.”

Advancing an asset from prospect to discovery to deposit to development to production takes decades. Mining’s cycles are shorter than that. That mismatch means every asset goes through bear markets. Lucky assets just advance slowly in the bad years; most assets lose steam completely or go backwards as continuity is lost, permits expire, limited capital forces shifts in focus, and a much-slowed pace hurts efforts to gain social license.

Many assets have gone backwards over the last five years. That is a lot of inefficiency that needs addressing. Not every project or team deserves another shot, but a good number do. If you can understand what went wrong last time, you can assess whether the project, company, or team is worth reviving.

If the answer is Yes, our inherently inefficient system has created an opportunity.

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I am really impressed with your very high quality work as well as the Quantity. Your communication skills are outstanding. Thank you very much indeed for being a source of sense and wisdom in these unprecedented times.

-CB (April 17, 2020)

Thanks Gwen. Always enjoy your views. Tough market to read short term. Long term metals / energy look very strong.

-NH (October 2022)