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Thoughts After 6 Conference-Full Days

Interested Investors Versus Mainstream Malaise

When gold bars grace the covers of mainstream business magazines, the top is in and it’s time to sell. So when the Wall Street Journal titles one of its top stories For Mining Chiefs, Doomsday Scenarios Could Become Reality – does that mean the bottom is in?

The article says nothing new. It highlights how prices considered doomsday or impossible just a few months ago, like US$30-a-tonne iron ore or US$4,000-per-tonne copper, are now in sight. It goes through the China quandary – how uncertainty over Chinese growth and demand overhangs the commodity sector like a black cloud. It touches on output cutbacks to stem oversupply in copper.

It ends with a quote on copper: “I don’t think the market is going to let this rest until it sees blood.”

We have seen blood, thank you very much. The mainstream might have missed it, happily distracted by a six-year US bull market, but those of us in the sector have bled.

And if mainstream attention creates the final ‘leg down’ that we have all been awaiting – sounds good to me.

Given what I experienced at this week’s three conferences, I think that is precisely what is happening.

Our conference, the Metals Investor Forum (MIF), was packed. Attendees were truly shopping – until now, investors have seemed interested but not ready to engage, wary of further downside. Now, according to the conversations I had, they are positioning.

The same feeling pervaded Cambridge House’s annual Vancouver Resource Investment Conference (VRIC). On Sunday in particular the show was buzzing and companies were pleasantly surprised by the number of active investors stopping to talk shop.

(I will note that VRIC felt quiet on Monday. I take that as a side effect of the loss of so many of Vancouver’s brokerage houses. As a workday, Monday historically saw a flood of brokers, bankers, and analysts arrive to wander the floor once markets closed for the day. Now there just aren’t very many of those left in Vancouver.)

Maybe the broad market downturn is having the effect we want. The media is looking for culprits, hence the focus on commodities. Investors are looking for safety, hence gold’s 9% gain. Contrarian resource investors are finally seeing a reason for hope, hence the buzz at MIF and VRIC.

Feel is a hard marker to gauge accurately, yet it is so important. If you wait until the turn is apparent, you’ve missed some serious upside. Relying on expert forecasts is dangerous – analysts hate to be overoptimistic, as that means their targets are too high, so as a result most metal price forecasts conservatively extend out flat from current levels. When there are structural reasons to expect price variance, forecasts end up so widely divergent as to be useless! I attended the technical session on copper at Roundup and the speaker showed how copper forecasts regularly range by 40 to 60%.

You have to make up your own mind. The feel of shows like MIF, VRIC, and Roundup are part of that. And it felt fairly good.

The Build Versus Wait Question

It is one of the big conundrums of our sector today: if you have an advanced asset, should you push to get it into production to catch higher prices as they happen or should you wait until higher prices make money easier to access and build then?

Different teams have different answers.

For example, the team at Pilot Gold (TSXV: PLG) has officially put its Turkish assets on the backburner because it is too hard to capture value or advance assets in this market. As interim president and CEO Rob Pease put it during a Roundup presentation, the near-development Halilaga assets gives Pilot a very strong foundation, one that will matter when the market improves. Right now, however, the asset ironically adds little to Pilot’s value, so it is difficult to justify putting money into it.

Many others have the same outlook. Exeter Resource (TSX: XRC), for example, has the large copper-gold Caspiche porphyry project in Chile. Exeter could produce a feasibility study on Caspiche in about nine months, but the next step would be financing and the Exeter team does not think they could secure a financing package today that would work. So they are sitting tight, spending as little as possible while they improve the project where they can and await better markets.

Others, of course, are building through the downturn. Pretium Resources (TSX: PVG) secured its project financing in September, through a combination loan-stream-equity deal. Opinions on the deal are mixed and we will really only know whether the money was worth the costs once Brucejack is in operation.

Another example comes from Lydian Resources (TSX: LYD), which secured financing to develop its Amulsar gold project in Armenia in December. That deal is even more complicated, combining a gold and silver stream, an equity financing, a loan, and a cost overrun facility, all of which is contingent on Lydian raising $25 million on its own. Provided they can, the project will be a go…but Lydian will have something like 600 million shares outstanding.

The point is that financing is possible today, but the terms are hard.

The spend-versus-sit-tight debate is being fought at every level of the sector. Take, for example, the companies out there buying up good properties while they are cheap. Some such groups pointedly plan to NOT advance their assets at all. First Mining Finance (TSXV: FF) is among this group: that team is banking properties but thinks any money put into the ground right now is wasted, because they can buy gold in the ground for US$10 an ounce. Discovering an ounce costs more than that, often many times more.

Others are taking a completely different approach. Lundin Mining (TSX: LUN) brought Fruta del Norte, an incredible gold deposit that Kinross could not unstick from its permitting quandary, and is pushing towards production. Lithium X (TSXV: LIX) is working to establish a portfolio of high quality lithium assets, but it plans to advance each asset it acquires. Every project generator I know is out scouring the world for assets to acquire and advance while opportunities abound and people are available.

There’s no single answer to which approach is better. It depends on the asset, the commodity, the team, the jurisdiction, the permitting, and the plan.

But in five years it will be very interesting to look back and see whether pushing ahead despite the bear market or waiting patiently until things improve was the better plan.

Some Stocks Will Work

I had numerous conversations about how the year would unfold and there were a few points of agreement across those conversations.

One: no one expects significant market improvement. The bull market is not about to roar; the Venture exchange, weighed down by legions of inactive companies, will do little.

Two: regardless of the overall market, good mining equities will outperform.

It happened last year. Look at Claude Resources, Sabina Gold & Silver, NexGen Energy, Roxgold, and a few others – they enjoyed individual bull markets.

If select stocks can pull that off again this year, if a few acquisitions close, if gold strengthens, if uranium starts to move, if a lithium bubble grows – each of those aspects alone wouldn’t have enough impact to generate overall momentum, but together they could mark the beginning of the bull.

Speaking of select equities outperforming – there’s a twist to that fact that I hadn’t thought about much until this week, but I think it’s rather significant.

There really are a few stocks out there that are darlings: Kaminak, Integra, Pretium, etc. These guys have had no problem accessing cash during the downturn. That’s great – it’s allowed them to advance their assets considerably – but the flip side is that they are sopping up all of the limited investment interest out there. Brokers and bankers are talking these deals up because they’re in. Investors are attracted to the positive momentum and latch on (rightfully so).

It’s great for those few stories – but it sucks for the rest. Chatting with Bill Fisher, president of Goldquest Mining, the other night, he has come to realize that GCQ’s efforts to preserve its bank account has ended up a downside. Without the need to raise money in the last two years, Goldquest has fallen off the radar screen and has no momentum.

If only I’d spent more money and had to raise, he said, then I think our price would be higher! He may well be right, no matter how ironic.

Japan Goes Negative

I won’t dwell on Japan’s decision to adopt negative interest rates, as there is an abundance of analysis available out there. What I will say is this: loose monetary policy hasn’t worked yet, so I don’t know how or why the Bank of Japan thinks it will work now.

The Bank of Japan has been easing – printing money, holding low interest rates, and aggressively buying government bonds and risky assets – for years. Decades, even. One take on the decision to move into negative rates territory is that the Bank has run out of bonds and risky assets to buy.

Despite the long-lived effort, Japan remains stuck in a state of deflation and very low growth.

So they’re trying more of the same.

There is now a 0.1% fee charged on deposits left with the Bank of Japan, which is supposed to encourage commercial banks to lend their cash out to businesses rather than sitting on it. And the Bank said it “will cut the interest rate further into negative territory if judged as necessary.”

Japan’s stock market jumped on the news…briefly. Within an hour shares plunged back down again as traders realized the bigger issue: that negative interest rates are really a move to depress the value of the yen, a move that represents another shot in the world’s ongoing currency war.

The more the yen and the euro decline (to domestic advantage), the more pressure China will feel to further devalue the Yuan to keep its exporters competitive and its import market active. But a major Yuan devaluation would represent a major deflationary hit to the global economy. One of the world’s largest import markets would shrink, its weak currency reducing its purchasing power, and the world’s largest export market would make less and less off each sale.

Not what we want, broadly.

The Yuan has been a very closely managed currency and despite some recent relaxation it will remain so. I see China managing a slow devaluation of proportions sufficient to walk the line. It will be a hard line to walk – and negative Japanese interest rates don’t help.

Gold’s Near-Term Outlook

Gold has performed admirably over the last few weeks, notching almost 10% to hover near US$1,115 per oz. Wohoo!

Given the big picture, I think it will end 2016 higher than it is now.

However, a near-term pullback may be in order. Gold is climbing up to its 200-day moving average, which is a natural resistance level. While it could break through that line on first attempt if propelled by some outside force (nuclear threats from North Korea, weak US economic numbers pushing markets down, that kind of thing), in the absence of such an event the price will probably fail its first attempt to beat the 200-day moving average.

It is more likely to succeed once a choppy pullback at least allows the shorter-term averages (14-day and 50-day) to catch up.

Some gold companies have benefited from gold’s gains. Barrick Gold is now up 68% from its 52-week low, which it hit in September; half that gain happened in January. Gold Fields is up 63% since mid-December.

Others have not felt the love. Looking back a few months, Newmont is flat, Goldcorp is flat, Kinross is down, and several mid-tiers including Eldorado and B2Gold are notably down (more on B2 later in the letter).

It adds up to a GDX Gold Miners Index that is flat since gold started gaining in mid-December and a GDXJ Junior Gold Miners Index that is down some. Sigh.

A big part of the problem is the baby-with-the-bathwater attachment. Index selling means miners get sold alongside everything else in a downturn. Margin calls mean brokers sell what they can sell, not necessarily what they want to sell, and gold stocks are pretty liquid and therefore sellable.

The takeaway to me is: if you have short-term trades designed to leverage gold’s strong season and they are among the equities that have moved up, I would consider exiting the trade. Gold may well slide in the coming days, while market mayhem may well hurt miners. Take your gain and enjoy.

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In her letter, Resource Maven explains what she is buying and selling, and why. Maven has bought into several of the markets best - performing stocks well ahead of the curve. She regularly identifies exciting new exploration opportunities and manages the inherent risk by selling some into speculative gains. And the mine builder and operator stocks that form the basis of the portfolio give strong, ongoing leverage to the rising prices of gold and silver. She has your precious metal bases covered.

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Hi Gwen,

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.

Best Regards,

CLB

-CLB (May 14, 2020)

BTW - I really enjoy reading your newsletter - very comprehensive and you do an excellent job of integrating a macro perspective into your analysis.

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