No Raise & Notes from Beaver Creek
There was lots to discuss in last week’s letter, starting with the Fed’s decision to not raise rates. I also delved into the big themes I encountered at the Precious Metals Summit in Beaver Creek, which was a very valuable event.
Speaking of conferences: if you have time in late October, consider heading down to the New Orleans Investment Conference. It is a fantastic event with engaging speakers addressing a range of topics and great companies. To register, CLICK HERE.
Enjoy this week’s snippet from the Maven Letter. As always, if you like what you read here you should try the full service: sign up for a free trial HERE.
On The Macro: No Raise
Glad that’s over with. The Federal Reserve Open Market Committee once again held interest rates steady today. After exceptionally flat trading Monday and Tuesday gold started creeping up this morning, as traders finally gathered the gumption to place bets, and then jumped when the news hit.
The bounce puts the price comfortably back above US$1,300 per oz., a level that acted as resistance in the spring and early summer but turned to support in July. A break below support would have been notable, but instead gold has now defended itself above U$1,300 for the third time.
The announcement deserves some comment. In short, Team Yellen said the following (and I had the bracketed responses):
- US job market has continued to strengthen but isn’t good enough yet. (I’d say – the August number was terrible and the types of jobs, hours worked, and wages are not improving.)
- Economic activity has picked up. (Sort of, except in services, which is the most important sector of the US economy, and in manufacturing, which is in recession…)
- Business investment remains soft. (Yes, and has been for ages.)
- Inflation remains too low. (I’ll get to this one – pushing hard to achieve precisely 2% inflation is like eating candy as quickly as possible to beat your sister and then being surprised when you get sick.)
- “The case for an increase in the federal funds rate has strengthened but [the committee] decided, for the time being, to wait for further evidence of continued progress towards its objectives.” (Read: hike in December, unless things get ugly.)
- Things are not ugly, but they sure aren’t pretty: the Fed expects GDP growth to average just 1.8% this year and 2% in 2017 and 2018. (The Fed has reduced its GDP growth forecast after every quarterly meeting this year. Reality keeps cutting into their early year optimism.)
- The committee was not unanimous: three members dissented, wanting to raise today. Dissent in favor of hiking, especially from some of the more dove-ish members of the group, increases the odds we will see a hike in December. (It is very unlikely at the next meeting, which is a week before the election.)
- Even if odds of a December hike increased, the Fed actually lowered its long-term interest rate forecast. The change was small – 2.9% from 3% - but it suggests less faith in the US economic recovery in the long run.
Nothing surprising. Gold’s reaction is also not surprising. And my prediction is that gold will now start moving up again, especially if the broad US markets fail to rally notably on this extension of easy money. That’s quite likely: GDP growth of 2% or less for the next few years doesn’t support a sky-high stock market, a reality that is increasingly rearing its head.
Lack of physical supply and the chance that inflation could rear up are other arguments that add to the rationale for gold going bull. Today’s rates decision clears the path for two months where the price can move in reaction to economic data, politics, and market moves but without endless talk of interest rates. Thank goodness for the respite.
Notes from Beaver Creek
I spent last week at the Precious Metals Summit in Beaver Creek, Colorado. It’s a fantastic conference that arranges meetings between junior companies and the funds, banks, and significant investors who want to hear their stories.
I came away with several thoughts I think worth sharing.
Majors Are On The Hunt
Talking to execs from juniors at the show one comment surfaced over and over: they had overwhelming interest from majors. What that means is major miners – Newmont and Barrick and Goldcorp and Agnico and all them – requested meetings with these junior companies to assess their projects, with an unmasked eye towards making deals.
The amount of interest makes sense. It’s been over a decade since major miners have looked down their project pipelines and found them bare. Sure, the blind focus on growing production (rather than making money…) meant the big boys were still making deals late in the last cycle, but in general those deals added big assets to portfolios already brimming with smaller opportunities.
Now, after selling almost everything to survive the bear market, majors need to start restocking the pipeline again.
Usually that process starts with new production and near-development stories, but there just aren’t very many such assets around. The bear market derailed so many projects that only a small number are ready to be built or are newly operational. Majors are circling these opportunities but, because they know competition will be stiff, they are also going straight to exploration-stage opportunities.
This theme was overwhelming at the show. Every junior – from project generators to single asset explorers, from companies focused on North America to those with assets in Eastern Europe or South America – every one spent more time meeting with majors than meeting with investors. The majors were there with big teams and those teams clearly had mandates to look high and low for opportunities.
This kind of major interest matters, but don’t expect a wave of M&A. Instead, I think we are going to see a wave of partnerships – joint ventures and equity investments that give the major a foot in the door with assets they like. And while such deals aren’t as exciting for the market as takeouts, they are important because they make it possible for juniors to advance their projects quickly and to focus on exploration instead of where and how to find capital.
Optionality Offers Leverage, But Little More
Optionality plays have done very well in gold’s run to date. Investors have piled into the idea of leveraging gold via a portfolio of projects with significant ounces in the ground.
That leverage will remain. And leverage to a rising price is win enough for many. However, if a win for you means a takeout or a construction decision, optionality isn’t the right game.
This time around, majors are not interested in size. They want value. Goldcorp did not buy Kaminak because a mine at Coffee would impact its production profile significantly; they bought it because Coffee will be an economically robust mine that will help Goldcorp’s bottom line.
Value accretive assets are the name of today’s game. That means things like infrastructure, metallurgy, social license, design complexity, and costs really matter. Large deposits with challenges in these areas are not of interest. They may yet come back into vogue, but if they do it will not be for a while. Majors destroyed so much capital buying for size without focusing on practical value in the last cycle that the focus on value accretive assets will stick around for quite a while.
Juniors are Gaining Confidence
This one I knew before Beaver Creek, but it was reinforced while there. Juniors are gaining confidence that capital is available. It has taken time for that confidence to establish, which is why so many juniors initially planned only small drill programs this year – they were still in full capital conservation mode.
Now they see oversubscribed financings left and right, backing everything from advanced assets to grassroots exploration and from the revival of old projects to new discoveries. The confidence means drill programs are being expanded, new targets are being tested, and new partnerships or acquisitions are being inked. Most moves are still small relative to the exploration programs or deals we see when things are hot, but they are a heck of a lot bigger than they were six months ago, let alone a year ago.
Those Active Now Will Win Later
The bear market was tough. Lots of companies went into complete hibernation; lots of people left the sector. It takes time for companies to get going again from standstill and for people to insert themselves back into the sector.
That’s ok; it’s part of the process. But the companies and people who stayed alive through it are leading the pack today.
Companies that stayed alive are reaping the rewards of their bear market efforts. The efforts were often directed at tasks that could be accomplished, like advancing engineering or metallurgy or permitting or social license. Not sexy stuff – but when the market is so turned off that stocks fall on hot drill results, it makes sense to focus on the boring.
And now, with that ‘boring’ stuff well in hand, the companies that persevered have options.
Strategic Metals (TSXV: SMD) is one good example. This Yukon-focused project generator did what it could in terms of exploration during the downturn, but one of its prime accomplishments? Permitting half a million meters of drilling on its various projects.
Chatting with president and CEO Doug Eaton, he pointed out that it’s tough to know which projects will run into permitting problems until you try. And so try they did. Drill permits for one project were denied, which is great in that Strategic knows not to put any more money into that ground.
But permits for dozens more were approved. That means:
- Applying for permits forced Strategic to develop an exploration plan for each prospect – it gave purpose to dedicating time to assessing geology and options, whether actual exploration was around the corner or not. Those plans are now valuable as majors hunt for projects of interest.
- Projects with drill permits are way more appealing to potential partners than those without. Permits mean a shorter timeline to active exploration and lend confidence that the area is workable. Appealing projects are precisely what a project generator is supposed to have on offer!
There are lots of similar examples. Constantine Metals (TSXV: CEM) earned a permit to build a road to its deposit, which will make exploration more efficient and less costly.
Precipitate Gold (TSXV: PRG) inked a data sharing deal with Goldquest Mining (TSXV: GQC), their project neighbor, that turned the requirement to relinquish ground in the Dominican Republic into an advantage for both companies.
Oceanus Resources (TSXV: OCN) was able to buy the El Tigre asset on fantastic terms because the vendor was broke and didn’t realize OCN’s team had a new geologic idea that is reviving the historic asset.
Atlantic Gold (TSXV: AGB) was able to buy a series of proximal gold deposits in Nova Scotia, redefine the resources, permit an open pit operation, and start construction because the team had the right combination of expertise and backing to make it happen despite the bear; they will pour first gold in a year.
Luna Gold (TSX: LGC) renegotiated a royalty, turning a crippling cost into a manageable expense and reviving the Aurizona gold project in Brazil as a result.
The benefits of staying active extend beyond obvious corporate achievements. A constant topic of conversation today is who is working with whom to buy what – and who else is trying to buy the same asset. Competition to buy ounces in Nevada, for example, is very stiff, but I’ve also heard of groups getting beat to assets in Nova Scotia, Romania, Mexico, and Ghana, among other places.
The competition is not limited to assets either – groups with cash to deploy are competing for equity stakes in good juniors. Eric Sprott put $20 million into Ascot Resources (TSXV: AOT), just beating out Osisko who also wanted to invest.
Such stories abound right now. My conclusion: the companies and people active today offer the best odds of success as this bull gets going. Place your bets!
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28 year investor. This is by far the best description I have ever seen of what's happening and what's going to happen in the uranium space. You are amazing.