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Persistence pays. Uranium rises.

For metals and miners December is a long, quiet slog. Between the distraction of the approaching holidays and the negativity of tax loss selling, companies with news hold onto it until January.

Thankfully this year we have the Federal Reserve's decision on interest rates to keep us busy!

Yippee. I, like many others, think Yellen will raise rates on December 16. I, unlike many others, think that will soon result in a top for the US dollar.

I also think a rate raise will be good for gold. Yes, the conventional argument is that higher rates increase returns on bonds and dividends and cash, thus increasing the 'opportunity cost' of gold and that should mean gold declines when rates rise. But that just isn't what has happened.

As this chart shows, there is little correlation between interest rates and gold. Through the 1970s gold gained with rates, mostly. Then gold moved mostly sideways for two decades while rates kept stepping down. In 2001 gold started its 11-year run, at first alongside rising rates and then in opposition to them.

Were we to zoom in closer, gold prices generally fall in the month leading up to a rate hike and then rise, though often after a lag, once the hike happens. The reason: investors upload gold in expectation of tightening, a negative pressure that eases after the event and thus creates upside momentum.

This pattern has repeated following the first rate hike of the last four tightening cycles: gold rallies after a short lag.

As an aside, I don't fundamentally agree with a rate hike. I look at the United States and see increasing odds of a recession in 2016. Nevertheless, the 'data driven' Fed will raise in December to save face and create room to ease (though 25 basis points ain't much room).

Time for this week's Maven Letter snippet (and apologies it's a day late - computer issues). I started with a look at mining news that caught my eye, then moved on to uranium. I am more bullish about uranium than any other mainstream mined commodity for 2016 and an opportunity arose to enter my favorite early-stage uranium story. That recommendation followed the macro look at uranium. If you're interested, sign up for a trial subscription.


In The News…

We’re all slogging through this market. It’s been no fun for investors to watch as value evaporates and opportunities shrink. But it’s been equally hard for companies – harder, actually.

Juniors don’t have a choice: a gold explorer is a gold explorer. Sure, the company can change gears completely and start growing marijuana, for example, but that disregards the inherent value. A good junior is a group of skilled and experienced operators, advancing an asset or portfolio that they believe in based on their past technical and financial successes.

Those skills and experiences won’t help much growing weed. Moreover most of these people have been through several sector cycles; they know the upturn makes up for the bad years, if they can just survive until then.

So it becomes a question of survival. That can take two forms: doing nothing until the environment improves or finding ways to raise money and advance assets, downturn be damned.

The best juniors of course fall into the second category. Two bits of news recently show what can be achieved with ingenuity and perseverance, two traits necessary for success in these markets.

The first came from Precipitate Gold (TSXV: PRG). Precipitate is advancing the Juan de Herrera gold project in the Dominican Republic. The team has already made one discovery there, when the first set of drills to test a target called Ginger Ridge returned 18 metres of 4.54 grams per tonne gold, along with several lower-grade intercepts.

A follow-up IP survey made those results even more intriguing. IP is a reliable tool in that part of the world, having led neighbour Goldquest Mining (TSXV: GQC) to its 2-million oz. Romero discovery. Precipitate’s discovery hole at Ginger Ridge was at the northern edge of its IP survey. When they extended the survey to the north, the anomaly grew in size and strength.

It means the area north of the discovery hole is begging for additional drilling. But drilling costs and it has been very tough to raise cash to drill early-stage gold targets.

Precipitate took a moment to think. Ginger Ridge looks great, but it’s only one target. If they drilled and hit, great. If the drill missed…the market would probably discount the whole story, even though there are other interesting areas on the project.

So Jeff Wilson and his small team spent the summer figuring out how to grow the Juan de Herrera story without spending much money (since they had very little). Some desktop work and a mag survey got that process started, but it was an ingenious deal with Goldquest that ramped things up.

One interesting part of working in the Dominican is that companies are limited to 30,000 hectares of ground. Goldquest has its 30,000 hectares, and on it a very good gold deposit. But pre-development projects aren’t getting a lot more love than early-stage exploration, so despite a strong PEA and some stellar drill results Goldquest too is having a hard time.

Both companies believe the Tireo mineral belt holds huge potential. If others saw the same potential, both companies would benefit. And there was a way to help that along.

Enter a data sharing deal. Goldquest has been working in the Tireo gold belt for almost 10 years. In that time they have walked, sampled, surveyed, and assessed far more than the 30,000 hectares they now hold, but data on ground they no longer hold has been gathering dust. The deal gives Precipitate access to that data. A fair bit of it covers PRG’s ground; the rest of it is nearby. Precipitate is working through this trove of information with the goal of identifying new drill targets.

Should PRG make a new discovery, Goldquest would benefit from the area play advantage, and because Goldquest got 300,000 PRG shares in exchange for the information.

And it gets better. Precipitate went to Strategic Metals (TSXV: SMD), the Yukon-focused project generator that owns 12.5% of Precipitate by virtue of having vended some Yukon projects to PRG in 2012, to tell Strategic about the data deal. It was a standard meeting – Precipitate updates Strategic regularly and has offered Strategic the chance to participate in its financings over the last few years.

Strategic has always declined. But on hearing about the combination of the new IP anomalies and the data sharing deal with Goldquest, Strategic president Doug Eaton got interested. Significant data for shares? And enough layers of data that drill-ready targets could result?

By the time Jeff Wilson left the meeting, the stage was set for Strategic to fill an $800,000 financing. The funds will enable Precipitate to churn through the GQC data. Should good targets present, Strategic could exercise its warrants, which would put another $1.2 million in Precipitate’s account – enough for a drill program.

The ability to negotiate a data sharing deal has turned everything around for Precipitate. Instead of a bleak 2016, the company has new data to assess, new money to do so, and a path to drilling.

The second deal that served to remind me about the power of persistence came out of Pure Gold (TSXV: PGM) this morning. Pure Gold is also an early-stage gold explorer, focused on the Madsen project in Red Lake, Ontario. This is a perfect example of the value inherent in a good junior explorer: the Pure Gold team has decades of experience exploring and mining in Red Lake and they chose Madsen because a perfect storm of circumstances meant these grounds had not seen modern systematic exploration.

These guys should absolutely be exploring for gold in Red Lake, not growing weed. But they need money.

PGM still has $2.9 million in the bank, thanks to a $5.7-million raise in February. But given exploration work that’s already been done at Madsen, the only real way to develop momentum is to hit with the drill and drilling can eat through a few million pretty quickly.

So Pure Gold inked a deal to sell about 10% of its property to Premier Gold Mines (TSX: PG). The claims in question are on the northeast edge of Madsen, adjacent to Premier’s Hasaga property. They do not include any of Pure Gold’s primary exploration targets; in fact the claims do not even host the mafic-ultramafic contact along which Pure Gold has been finding high-grade gold.

The deal comprises $2.5 million in cash and $2.5 million worth of Premier shares, plus a 1% net smelter royalty on the claims.

With this injection of cash Pure Gold can confidently prepare for its 6,000-metre winter drill program.


Lydian International (TSX: LYD) just demonstrated that money is available, for the right projects on the right terms.

Lydian announced a US$325-million construction financing package for its Amulsar gold project in Armenia. Orion Mine Finance and Resource Capital Funds are backing the deal, which is not exactly straightforward.

The financing comprises:

  • US$60-million gold and silver stream covering 2.1 million oz. gold and 700,000 oz. silver.
  • US$80-million private placement
  • US$160-million term loan facility
  • US$25-million cost overrun facility

To access these funds Lydian has to raise US$25 million on the markets. Lydian is also working to cement a US$70-million equipment lease facility. All these components together should fund Amulsar’s US$395-million capital cost.

It’s a complicated financing deal, for sure. And while Lydian says it “greatly reduces dilution compared to traditional project finance structures”, the fact is Lydian’s current 185 million share count will grow by probably 400 million shares as the company raises US$25 million in the markets and US$80 million from its backers, given that its shares are trading at $0.275 today.

Nevertheless, congrats to Lydian on getting it done. It has not been easy getting Amulsar to this stage: a series of government dictates made it difficult to permit the heap leach facility, social support was limited in an area un-used to mining, and metal prices are way below where they were when I visited the project in 2010.

I was talking to the CEO of a different development-stage copper-gold company earlier this week. His approach is to de-risk the asset but spend as little money as possible until the markets improve, at which point his group will push through the final bits of feasibility work and start looking for development capital.

“I’ve seem projects get pushed ahead in bad markets and it’s the death of the asset,” he said. “That is what we don’t want. That being said, I’ve also seem teams push through and then get the timing just perfect, with their mine going into production just as the bull market gets going again, and those guys look like geniuses. But it’s hard. Timing is hard.”

Here’s hoping Lydian is timing it right.


As one of the groups backing Lydian, Orion Mine Finance is also trying to time things right. It was interesting that I read about the LYD deal right after reading about what Orion CIO Oskar Lewnowski said in his presentation to the Mines and Money conference currently underway in London.

“We are going to see a pretty broad cross-commodity leg down, where US$900-an-ounce gold is more than just a possibility,” he said. “US$1.80 a pound for copper is likely. I don’t think we’re going to see much relief until 2018.”

Lewnowski has experience. He co-founded metals merchant and hedge fund Red Kite more than a decade ago. In 2013 he spun Orion out to focus on mine financing.

Lewnowski wasn’t the only experienced mine financier or builder to step out last week with bearish sentiment. Mark Bristow, CEO of Randgold Resources (one of the best gold miners in the world from the perspective of financial management) also spoke at Mines and Money and also sees more downside ahead.

“We have quite a bit of pain to go through,” he said. “We’re still in the denial phase…the longer we live in denial the longer the workout is going to be.”

Bristow is a skilled, experienced mining man, but I would disagree that we are still in the denial phase. In fact, looking back on 2015 I think the biggest change of the year was a shift from “I can’t wait until the market turns around” to “the market isn’t going to improve anytime soon, so let’s figure out how we can we make things work today”.


On The Macro: Uranium Today

Uranium uranium uranium. Wherefore art thy price movement uranium?


Raymond James analyst David Sadowksi does some of the most thorough uranium analysis out there. His latest report maintains his overall view that the world will run very short of uranium starting in 2020 if prices do not rise enough to incentivize new mine builds.

Sadowski is not alone in this. Most, if not all, uranium analysts see serious supply shortages looming if prices do not increase.

A strong new addition to Sadowski’s research is his Dynamic Uranium Incentive Price model. His team evaluated almost 60 projects, from mine expansions to new mines and mine restarts. They built discounted cash flow models for each project in order to calculate what uranium price it would take for each to produce a threshold rate of return.

The result is this:

Each bar represents a project; the width of the bar is the asset’s maximum annual output. The height is the price needed to incentivize development.

The takeaway is that current prices support very little new production. In fact, there is only one uranium mine under construction in the world today (it’s in China). Higher prices are needed. Specifically, Sadowski estimates that in order for enough new mines to be built by 2025 to avoid what will otherwise be a 65-million lb. deficit, prices need to reach US$70 per lb.

I don’t think prices are suddenly going to jump to that level simply because the data say they should. However, uranium is a forward-looking market. Utilities running nuclear reactors cannot flirt with running out of fuel, which is why they generally cover their needs at least three years out and as much as a decade out. That contract model means a deficit looming in four years should start to influence prices soon.

There is evidence the influence is already at work. At a recent Cameco investor workshop, president and CEO Tim Gitzel said utilities are starting to look around for new long-term contracts. The backstory here is that many utilities freaked out when uranium prices shot up in 2007 and locked in long-term contracts, to protect themselves from further price appreciation. Of course the opposite happened: uranium started to weaken of its own accord and then Fukushima hammered it down.

Those 2007 contracts, though, were binding. As such many producers are selling uranium for 50% above spot or better, and those sales have kept producers alive.

But they were generally ten-year contracts, which means the time to ink new deals is nigh.

Add in that the spring is traditionally ‘mating time’ in the uranium sector – when buyers and sellers generally discuss long-term contracts – and we could be looking at a near-term price lift that starts a long, slow ascent.

The other reason to enter uranium today is slightly counter intuitive. The contrarian uranium argument is getting old. It has now been almost five years since the Fukushima disaster and uranium consumption is still below pre-accident levels, while stockpiles are higher. Arguments for a price rebound have been around for years but so far the upside has been minimal.

That means even contrarian investors are limited – the space is being ignored. Share price multiples for pounds in the ground keep sliding.

I realize the same can be said for other metals, but there’s a difference. With gold, there is no structural supply-demand argument. Same with copper and silver, platinum and palladium. Zinc is the only other metal facing a significant supply shortage.

Given all the uncertainty in mining, I like a story supported by fundamentals. Supply shortages for an essential commodity like nuclear fuel fit that bill.

[Thanks to David and Raymond James for permission to use their charts in this article.]

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