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Yukon Tripping, M&A Assessed, High Expectations, and Portfolio Planning

Jul 25, 2016

Happy Monday all! A busy week ahead: the Sprott Natural Resource Symposium is in Vancouver this week, so I will spend a fair bit of time down there catching up with companies and listening to talks. Subscribers will also get a new recommendation this week; I’m just finishing the writeup. And I am busy assessing my portfolio with the goal of arriving at summer’s end prepared to take advantage of the opportunities I think will surface through the fall.

That was the focus of last week’s editorial: going through the Maven portfolio to be aware of financing free trade dates and to assess relative appreciation potential. That potential is key – we are still in the early stages of a mining bull market, which means new opportunities with very significant upside are still emerging. It is important to go through your holdings and determine what upside you see each stock offering and over what timeframe. Compare that to new opportunities and make sure you act accordingly, even if that means selling stocks you still quite like.

With that, on to this week’s Maven Letter snippet. I start with a quick look at one of the projects I visited while in the Yukon and then dig into news from a BC gold explorer that disappointed the market. After that I’ve included part of the editorial article.

As always, if you enjoy these snippets try signing up for a free trial subscription by clicking here.

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It was fantastic to be back up in the Yukon. It was my fifth trip to see mineral projects in the territory, which means I have seen most of the hard rock exploration projects in Yukon…more than once (the established ones at least).

I’ll take you through what I saw up north over the next few letters, starting with Western Copper & Gold’s (TSX: WRN) Casino asset. This is a massive deposit: resources total 18 million oz. gold and 11 billion lbs. copper, hosted in a porphyry that has a gold oxide cap, a supergene copper blanket, and a hypogene sulphide body.

About half the resources are defined to reserve levels, which back a feasibility study outlining a mine churning through 124,000 tonnes of ore a day to produce 171 million lbs. copper and 266,000 oz. gold annually for 22 years.

If those numbers seem big – they are. This is a huge mine, which is why building it would cost US$2.4 billion. Almost US$1 billion of that is just to build the mill; it simply costs a lot to build a facility of that size. The mine would also need a liquefied natural gas power plant – the mine would need as much power as the entire Yukon currently uses – and an access road, plus a gold heap leach facility and a significant tailings facility.

The project is halfway through permitting right now. What WRN expected would be a 2-year process has become a 5-year endeavor, due at least in part to the Mt Polley tailings facility failure in BC that has regulators demanding higher and different standards to permit tailings ponds. Fair enough.

Casino is an interesting project. The largesses of the last bull market make me wonder who would be willing to commit to such a big, expensive build and when they might be ready to do so, but I do not doubt that entity and time will come at some point in the cycle. It would be a very significant mine for either a gold miner or a copper producer, with the other pulling costs down into negative territory, and despite its sizeable construction cost its economic are good.

We have gotten so focused on grade that it is easy to overlook huge, lower-grade porphyry deposits like Casino – but to do so is to ignore the deposits that produce most of the world’s copper, and much of its gold. And not just in Chile – British Columbia has a list of copper-gold porphyry mines with similar, if note lower, grades than Casino.

Seeing the project has certainly put WRN back on my radar. I don’t know yet what that means, but I am interested.

M&A Action Assessed

While up in the Yukon last week I participated in an At The Bar session, which is usually a conversation between Brent Cook and Mickey Fulp. They often pull in someone else; this time it was me, while Brent’s colleague Joe Mazdumar subbed in for Mr Cook. (Click HERE if you’d like to listen.)

I mention the conversation because Mickey argued we are not in a true bull market for gold until we see cash deals and bidding wars in the M&A world. I thought it a good point: the majority of deals to date have been all shares and there hasn’t been a bidding war for anything.

The latest big M&A deal continues that trend – and if anything highlights the idea that today’s deals still represent better-positioned companies taking advantage of bear market opportunities. The deal saw Centerra Gold (TSX: CG) buy out Thompson Creek Metals (TSX: TCM). The deal carries a value of US$1.1 billion and represents a 32% premium for TCM shareholders, but it is an all-share agreement…and it’s important to look behind those nice numbers.

Thompson Creek has been actively seeking a buyer for 18 months because it is staring down US$800 million of bonds maturing in the next two years, of which US$300 million are due by the end of 2017. It is a lot of debt, enough I’m sure to have scared away many others interested in TCM’s key asset, the Mount Milligan mine. The deal stipulates that Centerra will redeem all those notes, plus another set due in 2019, and finance them via a new US$325-million debt facility, a $170-million financing, and some cash on hand.

And yes, the premium is nice and TCM shares have gained 350% since January…but scanning out to a 10-year timeframe puts things in a different perspective.

This is a stock that was worth $25 in 2007 and as much as $16.50 in 2011, and it just got taken out in an all-share deal valued at $0.79 per share by a company that has barely benefitted from gold’s gains because the market is so anxious about Centerra’s political risk. Centerra’s key asset is its Kumtor mine in Kyrgyzstan, which has been an ongoing source of political risk since it Centerra commissioned the mine in 1997 but which escalated to crisis level this year when Centerra launched an arbitration case and had its offices raided by Kyrgyzistani authorities.

It all paints a pretty uncertain picture for investors, which is why Centerra trades at only about 0.7 times net asset value (NAV). Its peers, according to production metrics, trade at almost twice the NAV multiple, on average.

The financial reality of its Kyrgyzstan baggage is precisely why Centerra bought Thompson Creek: to diversify its political risk by adding the Mount Milligan mine in British Columbia. Mount Milligan has two decades of reserves on the books, plus exploration upside, packaged in a large and politically safe operation.

It wants it badly enough to take on Thompson Creek’s debt, apparently. At least some in the market support the move: Centerra was able to close a $195.5-million private placement in two weeks, selling 26.6 million shares at $7.35 apiece. The price is in line with Centerra’s 52-week average.

To make the deal more palatable to a gold-focused market, Centerra also renegotiated the Mount Milligan streaming deal TCM had with Royal Gold. The old deal has Royal Gold getting 52.25% of the mine’s gold output, for US$435 per ounce. The new deal has Royal Gold getting 35% of the gold, at the same price, and 18.75% of the mine’s copper output for 15% of the copper spot price.

Royal Gold was willing to make the deal because Centerra stepping in greatly increases the odds that Mount Milligan will remain viable going forward, something that was not certain under Thompson Creek given its debt loads. Royal says the amendment is value neutral, though that actually depends on the relative price potential of gold versus copper. Centerra must see better odds with gold in the medium term and thus needed more gold exposure to make Mount Milligan desirable.

At the end of the day the deal matters little to me, in that I was not long TCM and I have no interest in buying CG. It is interesting, though, in what it says about M&A – which is that, despite all our excitement about gold and all the share prices that have multiplied many time, the deal market is still not that hot. There are still messes out there looking for a clean up crew (like TCM) and until we see a bidding war erupt we can assume mid-tiers and majors are still not in a rush to acquire.

That’s a good thing – it is a reminder that there is lots of life left is this gold market yet.

High Expectations

There’s telling a story. There’s promotion that works. And then there are those stories that just seem to catch the market in just the right way and send a stock soaring, based on expectations of exploration success.

It is possible, though very hard, to create that reaction. More often it happens on its own: a good exploration story lines up with a rising metal market and a hot area play to catch everyone’s attention.

That describes what has been happening with Colorado Resources (TSXV: CXO). The project, called KSP, is a very interesting one. The company has been getting out to tell its story. The area is the Golden Triangle, one of the hottest area plays around.

The result was a stock that soared 900% in five months.

You can see on the chart that the price fell back in recent days. Why? Because Colorado put out results from its first eight drill holes. And, while good, they weren’t as fantastic as the market expected.

The project hosts a crazy gold-in-soil anomaly – 1.5 sq. km carrying 1.2 g/t gold – that has seen 17,500 metres of historic drilling and 1,240 metres of underground development. Only a quarter of the drill core was ever analyzed and none of the holes went deeper than 75 metres, but the work still generated some impressive intercepts, including 423 g/t gold over 3.5 metres, 20.9 g/t gold over 7.4 metres, 41 g/t gold over 7.5 metres, 41 g/t gold over 1.1 metres, and 30.3 g/t gold over 4 metres.

That backdrop created high hopes CXO would hit it out of the park right off the bat. Instead, the first eight holes returned some good results, including 11 metres of 6.12 g/t gold and 5.6 metres of 6.27 g/t gold in the two most northerly holes. Holes 3 cut 2 metres of 18.7 g/t gold and 8 metres of 9.99 g/t gold whiel hole 4 returned two 1-metre hits grading 10.2 g/t gold and 15.7 g/t gold in hole 4, both of which were drilled roughly 300 metres south of holes 1 and 2.

Those are good results. Moreover all eight holes hit, which says Colorado seems to understand the structures at play. And these are only eight holes out of a very impressive 37 holes already drilled this season testing three parallel structures.

Nonetheless, the market wanted more. CXO’s share price lost 24% in two days, bringing it to $0.44 at close today.

I expect the market will get over its unreasonable expectations in short order and lift CXO again back up. More generally, I think this is a story with a lot more room to run. Colorado is not in the Maven portfolio, but it probably should be, especially at this price.

On The Macro

[I started this week’s Maven Letter editorial article assessing gold’s latest moves. Here is the constructive conclusion of that conversation…]

So, sticking to the hypothesis that gold will inch up through the summer (in fits and starts, obviously), it’s time to return to The Plan that I laid out last week. In short:

  • If a stock does well, because of news flow or promotion efforts or straight leverage to a run in gold, take money off the table. Sell Some of your holdings into strength to reduce your risk while retaining exposure.
  • If you want to own more of certain stocks in your portfolio or want to enter stocks that you feel you missed buying before they went on a run, watch for weakness. Down days provide opportunity, as do stock-specific events. If you believe in the story and in gold overall, you will appreciate in several months that you took advantage of buying opportunities this summer.
  • Free trading dates are important. Many companies raised money, starting in March and continuing through today. Stock issued in financings is subject to a four-month hold. A stock usually trades at its highest about a month before a free trade date and falls to its lowest in the two weeks following a free trade date, because financing participants sell to lock in gains (and to ride the warrant if warrants were issued).
  • Relative appreciation potential is key. Assess your portfolio. If you still believe in a story, consider its potential for gains relative to new opportunities. For stocks that are already up considerably, the odds of another 300% gain are less than they are for a new story just entering the fray or a laggard stock that has now dealt with its baggage. Keeping your money in a well-performing stock that might double over the next two years is ok, but selling that stock to lock in your gain to date and re-deploying into a new story that hasn’t moved much yet – that’s playing the Relative Appreciation Potential game.

[Then we assessed all our holdings, deciding to sell certain stocks to free up capital for new opportunities.]

Thanks for reading and see you next Monday!