Thursday 4 March 2021

Trying to Build a 10-Bagger

Evolve or Die

This blog started as an experiment when I was toying with the idea of starting a mining newsletter.  I figured that if I was researching junior mining stocks for my portfolio that I could potentially leverage/monetize that research by sharing it with others.  In addition, I wanted to use it as a forum to help junior mining investors navigate the pitfalls of the sector.  I got great feedback and enjoyed posting on the blog.

But circumstances changed and the newsletter idea and the blog were put on ice. Instead my focus shifted to running mining companies.  In March 2019 I became Interim CEO of AbraPlata Resource Corp. (TSXV: ABRA / OTCPK: ABBRF), which had run out of cash and was defaulting on property agreements.  I was tasked with cleaning it up 💩.  

I put my own money into ABRA because I recognized the potential of the silver-gold project that the company owned.  The good news for me and any of you that followed me into ABRA is that it is now a great, smoothly running company with a market cap of CAD$170 million. 🚀🚀🚀

Why were we so successful with AbraPlata?  Three key factors:

1. assembling a great team

2. having a project with multi-million ounce potential

3. luck - silver prices went from $15/oz to $26/oz.

Junior Mining Stocks - Investing or Gambling?

I think putting money in junior mining stocks is more akin to gambling than investing.  Poker is a good analogy because your luck will depend on the cards you're dealt (property geology and jurisdiction), your poker skills (due diligence and experience), and the other players at the table (company executives and promoters).  

Few other sectors have the potential for 10-baggers and that's what draws people in, much like a high stakes poker game.  Picking the right junior mining stock can be life changing.  But whether you win the game or not depends on luck, timing, and making good picks.  My goal is to skew the odds in my favor so that my fate is not left in the hands of lady luck.

Trying to Build My Next 10-Bagger

AbraPlata has been a 10-bagger for me and I continue to love the company and its potential, both as an investor and as Chairman.  It's like my first child.  But AbraPlata has a baby sister now.  

I'm CEO of Canstar Resources Inc. (TSXV: ROX/OTCPK: CSRNF) which is exploring for gold in Newfoundland.  My goal is to make Canstar a 10-bagger and this blog will serve as a journal detailing that journey.

I'll try to post periodically on this blog about the process of trying to build a 10-bagger company from the ground up.  I realize these posts won't appeal to everybody, but I think those of you outside the mining industry may find the insight useful for selecting mining stocks in order to improve your odds.  In return, if you like what I'm doing at Canstar I ask that you consider becoming an investor and going along for the ride.

Of course there is no guarantee that Canstar will ever be a 10-bagger.  Wouldn't that be nice - a guaranteed 10-bagger?  It will take luck and perseverance.

I'll also periodically post my thoughts on things like markets and metals prices.  "Experts" say you can't time the market, but I don't believe that.  Hint: I think we're near a bottom for gold and gold stocks.  At the very least, its a much better time to buy gold stocks now than it was at the peak seven months ago.

Tuesday 15 January 2019

2019 - Be a pig, but don't get slaughtered

It's cliche, but what a difference a year makes.  We started 2018 with a very bullish market for metals and mining stocks.  The euphoria, however, was short lived with the market starting to roll over in February with another leg down starting in July and a horrendous December.  In fact, the major US indices recorded their worst December since the Great Depression.  The Chinese Zodiac calendar had 2018 as the year of the Dog.  In hindsight, I'd say that was pretty apt.  RIP 2018!

Since we're on the topic of the Chinese Zodiac calendar, 2019 is the year of the Pig (starting Feb. 5).  I don't believe in zodiac signs or horoscopes but, interestingly, analyzing S&P 500 returns over the past 90 years indicates:

  • The average annual S&P 500 return from 1929 to 2018 was 11.2%
  • The average S&P 500 return in Years of the Pig was 20.8%
  • The average S&P 500 return in Years of the Dog was 10.9%
Lo and behold, the year of the Pig has the best stock market returns of all 12 zodiac animals (the worst is the Year of the Snake with an average 0.6% return, so make sure you're in cash for 2025).  Let us hope that the streak continues and that we can all be pigs this year.  Given the macro economic backdrop, just be careful that you don't get slaughtered.

In large part, the December drop was triggered by treasury yields and the Fed.  The global economy is clearly slowing and the US Fed is raising rates.  Jeez, that is not entirely shocking when we are 10 years into an economic expansion.  To me, the market drop was not warranted by the data.  Without boring you with a ton of detail and charts (check out the Fat Pitch blog for some great charts and analysis), the facts are that interest rates remain low by historical standards even though the labor market is tight.  We are not seeing massive wage inflation and an overheating economy that necessitates rapid rate hikes. Major economies continue to grow, albeit at a slower pace (3.5% in 2019 vs 4.0% in 2018).  Corporate balance sheets are generally quite healthy, earnings are continuing to grow, and valuations are reasonable.  Default rates remain low and high yield spreads have not blown out.  All things considered, that is a pretty Goldilocks scenario.

Source: JPMorgan and
In simple terms, we are NOT in a recession (yet).  While the probability of a US recession is trending up, the treasury spread is currently indicating only a 21% probability in the next 12 months.  But, if treasury spreads continue to widen, then seems to be just a matter of time before the US is in recession.  If consumers and investors become convinced that a recession is looming, it is effectively a self-fulfilling prophecy and a recession will happen.  The other important concept to remember is that stock markets are forward looking.  Values today reflect what the market is expecting to happen.  So, even if we are not in a recession today, valuations will be negatively impacted if investors collectively believe that is where we are headed.
The December market crash potentially set up an opportunity that we only see every couple of decades: a 20% market decline when the economy is not in a recession.  At the very least, it set up a tradeable rally that we have seen rapidly develop over the past two weeks.  I added significant equity exposure in December, but I'm now starting to fade the subsequent rally.
Source: JPMorgan and
With props to the Fat Pitch blog again for their great chart collection, the chart below shows how the S&P 500 behaved in the three prior instances when that index experienced three one standard deviation down days followed by a four standard deviation up day (which occurred on Dec. 26, 2018).  In each one of these rare instances, the market as between 12% and 21% a year later.  BUT, in each of those instances, the S&P 500 also retested the lows anywhere from one month to 5.5 months after the four standard deviation up day.  If history is a guide, then December's drop was a buying opportunity, either as a buy and hold event or by waiting and buying if the market retests the December bottom.  For those who want to be pigs, you could view the bounce off the December lows a tradeable rally, then sell the rally and buy again on a double bottom.  That, of course, is assuming that history repeats itself.

Source: NDR and
At the market lows, valuations did indeed look very compelling with the S&P 500 at a forward P/E of 14.4.  Canadian valuations were even more compelling at roughly 13x, about 1.6 standard deviations below the long-term average.  Assuming a recession isn't right around the corner, that suggested 10% upside simply based on mean reversion.  But, as can be seen from the chart below, P/E valuations tend to trend and the recent uptrend in valuation is broken.  While 14.4 is inexpensive, you will still lose money in the near term if we are on our way to a P/E ratio of, say, 10 like we did in the last downturn.  My view is that the current situation may be similar to the situation in 2006.  The economy is not yet in a recession, but growth is slowing and valuations have likely peaked for now.  Simply buying the market dips, a very lucrative strategy for the US market for the past 10 years, is likely not to bear fruit any more.  Now, sector and stock selection are likely to have a greater influence on returns.

Knowing what part of the market cycle we are in is tremendously important for market positioning and gains if you are not a passive investor.  I came across the chart below a few years ago and I set it as my computer wallpaper.  Market cycles play out over many years, so this graphic reminds me to periodically assess where we are in the cycle.  In a nutshell, my goal is to take risks during Accumulation and Markup, but then preserve capital when we get into or close to the Decline phase.

The challenge with the Market Structure graphic is that the patterns are obvious in hindsight but not in the moment.  Given recent market activity, it seems to me like we are currently in the Late Markup stage or the Early Distribution stage.  December may have marked the transition period from Markup to Distribution.  But what if that is not the case and we are still in the Mid Markup stage?  Getting defensive too early can mean missing out on big gains that typically take place during the Late Markup stage.  This is why we look to data and trends, as well as historical behavior, for clues and to be nimble so that you can react.

My assessment is that we have entered the Distribution stage.  While that suggests the market top is in, it would not surprise me to see the S&P 500 test the top end of the range.  I added significant equity exposure in the December drop, but I tried to do so in a way whereby I was positioned for compelling upside while not exposing myself to massive downside.  With my involvement with junior mining companies, I have plenty of exposure to high risk, high reward stocks.  I also wanted to diversify more beyond mining, especially given that I had previously positioned myself for a bounce in copper stocks.  Ooops!

One of the purchases I made in December was Vermillion Energy (TSX: VET) and I like this trade.  Vermillion is a diversified energy company with low Canadian exposure, so hasn't been as hard hit as Canadian oil & gas producers from the political pipeline debacle in Canada.  On top of that, it pays a healthy dividend (currently 8.7% and 9.7% at my cost) that looks sustainable.  Vermillion was the baby being thrown out with the bath water in December and I bought some at an average price of $28.37.  I'm up 13% on the trade so far, but I just sold April 2019 covered calls at $34 for $1.50.  If the market recovery continues, my shares will get called away by April and my return will be 25% plus monthly dividends.  Not a bad pass for four months!  On the flip side, if the market takes a turn for the worse, I now won't lose money on the trade unless it goes below $26.87 due to the premiums I received for selling the covered calls.  This is what I like - good return potential with moderate downside risk.

I also bought some preferred shares that are up nicely because pref investors seem to periodically do stupid things with instruments that are fairly illiquid.

Going back to my bad copper trade, I sold my Turquoise Hill (TSX: TRQ) for a tax loss in December.  One thing that diminished my view on TRQ is that I heard Rio Tinto really screwed up building Shaft 2.  The shaft screw up might be worse than announced, which would be an expensive mistake that will cost TRQ and may delay a strategic move by Rio Tinto to acquire 100% of the massive Oyu Tolgoi project.  I still like the low valuation on TRQ and will consider putting a position back on in the future.

For now, I took the proceeds from TRQ and bought First Quantum (TSX: FM), as its Cobre Panama build seems to be going well and the stock has much better liquidity than TRQ.  I still like copper fundamentals, but there are major short-term headwinds due to concerns over China slowing.  Consequently, this stock has barely bounced since last month's market bottom and it is reminding me how long-term fundamentals are often not synonymous with short-term gains when it comes to stocks.  However, it is hard to give up on the trade as a resolution in the China-US trade war, more China stimulus, or further weakening could all benefit copper.  I also find the First Quantum chart interesting from a technical perspective.  Will support at $10 hold, leading to a bullish breakout?  The descending triangle pattern suggests we will know soon.  If support breaks, whether due to company-specific factors or macro factors, FM could easily drop to $8 or lower.  On the flip side, if the situation becomes more bullish FM could easily move back up to $16 or $18.  Conceptually, I like the upside potential versus the downside risk, but this failed copper trade is testing my patience. 

2019 is off to an interesting start and I suspect it will be an interesting year.  I think my mantra for the year is be a pig, but don't get slaughtered.

Disclaimer: This is a free blog with my thoughts and opinions.  Do not construe it as investment advice.  Consult your broker and do your own due diligence.

Tuesday 18 December 2018

It is wise to listen to billionaires - Part I

When a person in the mining sector has built multiple successful companies and made over a billion dollars doing so, listening to their advice is a no brainer.  Ross Beaty is such a guy, having built Pan American Silver when he saw an opportunity in silver and Lumina Copper when he later saw an opportunity in copper.

Rick Rule recently did a great interview with billionaire Ross Beaty.  The interview is worth a read given Ross' success in the mining sector.  Here are the key statements I want to highlight for investors and managers in the mining sector:
  1. "This business is all about high risk and high reward...In public markets, given the fact of outsized risk, you want to be looking for things with outsized returns like 100% or 1000%."
  2. "If you’re going to be building a public company, go for size. Don’t waste your time on little things."
  3. "You can have a deposit that has 100 million ounces like Pebble (Northern Dynasty). It’s almost a goose egg of value if you can’t permit it and if you can’t make it work....I’d rather have 1 million ounces of high-grade gold than 100 million ounces of really, really low grade that you can’t make money on because that’s worth nothing."
  4. "This is a cyclical business. I know it’s going to change. How could I be even more exposed to the turn? How could I build value that’s going to come when the markets turn, when the bear market turns into a bull market? I don’t know when it’s going to happen but I know it’s going to happen."
Pretty simple, really.  Don't waste your time with small projects and don't waste your time with bad jurisdictions.  If you're going to take the risk, the big reward better be there.  The junior mining market is littered with mediocre projects that aren't going anywhere, yet management teams continue to spend money on them to justify their own existence.

Also, buy good projects with massive leverage when prices are low - timely advice given the market carnage we are currently experiencing (more on this in a future post).  Timing is important, as is patience.  This is why I keep reiterating my favourable outlook on copper (although I just took a tax loss on my Turquoise Hill position and moved it into First Quantum).  Valuations in the sector are attractive at the moment and the underlying fundamentals are very supportive.  This limits downside while positioning me for a potential bull market run.  Sure, there is risk that China demand for these metals will slow due to trade tariffs, but that is why prices are low.  I think the US and China can work through the trade issues.  Even if they don't, China has a multitude of tools available to keep economic growth strong, and one of those is ramping up infrastructure spending.

One last point made by Ross Beaty also caught my attention: "We had joint ventures with every company under the sun because if I could use someone else’s money on properties that we had exposure to, I felt that was like a zero-cost option on discovery. That worked because out of all those dozens of projects, we really only made one major discovery" (emphasis mine).  Mineral exploration is tough and requires a lot of capital.  The odds of finding a large discovery are small.  This is why I shake my head when investors trip over each other bidding up explorecos with a few good drill holes.  In the end, most of them won't amount to anything.  But, the rare one will be worth billions.  That is why I call exploration stocks lottery tickets.  Trade them on the discovery hype and then hold a reasonable size investment to see if you hit the jackpot.  Similar to the lottery or any game of chance, the dumbest thing you can do is go all in with a big investment.  This is in keeping with the words of another billionaire, Warren Buffet, who said "Do not test the depth of the river with both feet."

Thursday 15 November 2018

M&A could be an enema for crappy sector performance

Yesterday saw another significant M&A transaction being announced in the mining sector, with Pan American Silver acquiring Tahoe Resources.  This deal comes less than two months after the merger announcement between Barrick and Randgold, which was well received by the market.

Drain the Swamp!
I'd like to see a lot more of these deals announced because hopefully they will help clean up the mining sector and provide investors with some long overdue returns.  While the broader market has seen a tremendous bull market over the past decade, the mining sector has been stuck in a quagmire.  Not because of metal prices and not because of demand factors, but because the sector has done an extremely poor job of creating value.  In large part, this is because some companies or management teams have been exceptionally good at destroying value.  Public companies are supposed to make investors money and the mining sector has been atrocious in this regard.

Investors Chase Performance - No Love for Mining
Take a look at the 10-year charts below for Barrick, Randgold, Pan American, and Tahoe (all in USD).  Given the timing, going back ten years puts us at a pretty low starting point given the big market crash that took place in October 2008.  Yet, only Randgold and Pan American have seen their share prices increase.  Pan American is up, but holding that stock for the past ten years would have only generated you a measly 3.6% annualized return.  That is good relative performance, but weak absolute performance.  Only Randgold generated a good annualized return (12.3%) over that decade period, which is why investors are applauding the Barrick deal.

The mining sector is highly cyclical, so returns for investors need to be higher than the market to compensate for that risk.  Clearly, the opposite has been true.  If you had simply invested in the S&P 500 ten years ago (green line on the chart below) you would have had superior returns with a hell of a lot less volatility. 

Looking at these charts it is pretty evident why most investors these days don't care to invest in the mining sector.  Volatility is high and historical returns have been poor.

Mining Investment has Changed - Mining Brokers and Mining Funds are Disappearing
The poor sector performance also explains why the availability of capital has changed.  Retail brokers and portfolio managers are supposed to make money for their clients.  Most mining-centric brokers have blown up their books or have been shut down by their compliance departments.  On the institutional side, investors have pulled money out of mining funds to invest elsewhere and that has resulted in fewer mining funds with much less capital to invest.  Just look at the recent change in the $2.3 billion dollar Vanguard Precious Metals and Mining Fund, which is now called the Global Capital Cycles Fund.  Effectively, the change in strategy for this fund alone withdrew about $1 billion of capital from the mining sector.  Why?  Lower risk and volatility plus more consistent long-term performance.

I know I'm painting a gloomy picture here, especially for somebody who is supposed to be espousing the virtues of mining investment.  The reality is that buy-and-hold investment is a terrible approach in mining.  Vanguard is right that risk/volatility are high and long-term performance is poor or inconsistent.  The sector as a whole is poor at value creation, in part due to structural issues that result in the hyper cyclical nature of the mining industry.

Buy When They Cry, Sell When They Yell 
The beauty of the mining sector's cyclicality is that there are self-correcting forces at play, but it takes time for them to play out.  When capital is plentiful, mining companies will overbuild.  That causes prices to fall, resulting in mediocre financial performance and plummeting share prices.  Over time, inefficient mines will be shutdown and the sector will consolidate (like Pan American acquiring Tahoe).  Capital will be scarce, so few new projects will be built and that will eventually result in metal deficits.  And, voila, prices once again rise and the cycle starts all over again.

Due to the cyclical nature of mining, one investment strategy that can work well is a buy low, sell high strategy.  It's a simple concept; the challenge is in effective execution.  The best time to buy mining stocks is when the sector is deeply out of favour and the masses are selling.  You're not going to pick the bottom and initially you'll probably face steep losses if you buy too soon, but as long as you buy quality producers and quality assets the odds are high that you'll make attractive returns when the sector comes back into favour.  Just make sure you get out when the sector becomes hot and generalist money piles in, as that will be the time when mining management will once again overpay for mediocre assets and start destroying value.  Again, timing the top is tricky but as long as your timing is decent the potential for large returns is good. 

As a general rule, selling due to fear means the bottom will be lower than you'd rationally expect and buying due to greed (and ignorance) will mean that the top is likely going to be much higher than you'd rationally expect.  Buying mining stocks in late 2015 or early 2016 would have been very lucrative.  However, we still haven't seen a bull market in mining stocks, so selling positions in 2016 or 2017 would have been more profitable than continuing to hold them until now.

Nearing Bottom?
My sense at the moment is that we are close to an interim bottom in the mining sector.  Sentiment towards the sector is apathetic due to a combination of poor historical returns, the trade war between the US and China, and headwinds from the strong US dollar.  Valuations are becoming compelling and the economic outlook looks good for at least another year, driven by a very strong US economy.

As discussed above, I'm probably premature in my sense that the mining sector is at or near a bottom.  Often the true bottom is marked by a sharp down leg caused by capitulation selling.  Other times, the bottoming process is more gradual.  All I know for now is that it feels like we may be close to a bottom, so I have started buying large cap stocks in the mining sector.  As you will see below, I'm using historical data and my experience as a guide for what I'm buying.  (As always, this blog is for information purposes only.  Seek the advice of a broker and do your own due diligence.)

My Investment Narrative
First of all, I am heavily favoring base metal producers over precious metals producers.  Secondly, in the precious sector, I am favoring royalty companies and smaller producers over the senior producers in the precious metals.  Across the board, I'm trying to limit country risk and buying quality companies.  Buying quality doesn't help returns, as often marginal producers perform better on the upside, but it does protect my downside because these companies are less likely to implode if things take a turn for the worse.  Even if you lose the battle, live to fight another day!

Value in the Base Metals
Historical charts help explain my current investment rationale.  As can be seen below, the 10-year performance of base metal stocks is much better than for precious metals stocks.  A couple of the base metal miners, Lundin and Teck, have even outperformed the S&P 500 over the past decade. 

I've been buying shares of First Quantum and Lundin because I think copper prices will turn.  Fundamentals for copper are attractive at the moment, but that is not reflected by the price of copper.  Base metal prices have been depressed since the middle of the year due to the US trade war on China.  However, there are indications that China and the US may soon have productive trade discussions.  A resolution to the trade war would be very positive for copper, as well as other base metals like zinc.  But, even if copper prices remain stagnant, these companies offer compelling value at the current share prices.  First Quantum and Lundin are trading at about 0.7 times their NAV10% and Lundin is trading at a piddly EV/EBITDA of about 3.0.  There are risks around both companies (Panama and Zambia for First Quantum, acquisition risk for Lundin), but my sense is that those risks are fully baked in at the current price.  Teck also looks interesting, but I have a hard time buying that stock because of the heavy exposure to coal.

Side Note on Turquoise Hill
I've also taken a decent size position in Turquoise Hill because it just got too cheap to ignore, despite the hefty country risk that comes with Mongolia.  I have a suspicion that Rio Tinto will renegotiate the Oyu Tolgoi ("OT") deal with Mongolia in the next few months. 

The government of Mongolia owns 34% of the OT project, but it has been having a hard time funding its portion of capex and that results in interest bearing loans from Rio or its lenders.  The recent announcement that the $5 billion underground expansion of OT won't start until later than expected in 2020 likely means that the Mongolian government will have to pony up more cash or increase its loans.  I think it would make sense for all parties to replace Mongolia's 34% interest in the OT project with a higher royalty (currently 5%), which apparently has been discussed in the past (source).  As part of the renegotiation, Rio Tinto could clean up issues surrounding power sources for the mine, resolve a tax dispute, and replace the original agreement, which some believe involved some payola.  Most importantly, if Rio Tinto can pull this off it would also be an ideal time to take out the 49% of Turquoise Hill that it doesn't already own.  Even with a hefty premium, it would be paying an opportunistic price.  The last time Rio bought shares of Turquoise Hill, it paid around $20 per share!  It would be a blockbuster deal and bring luster to a crown jewel in Rio's portfolio.

Senior Golds - Meh!
The chart for precious metals stocks is just plain embarrassing.  Other than Newmont, which has performed in line with gold prices, gold miners have destroyed massive amounts of value.  Kinross takes the cake, with the shares down 79% over the past decade (remember that horrendous $7B acquisition of Red Back Mining???).

Given the terrible track record of most of the large gold producers, why would I want to pay over 1x NAV and over 6x EV/EBITDA when I can buy the better performing base metal producers for less?  No thanks!  I've never understood the cachet associated with gold miners.  In my opinion, they don't deserve to trade at premium valuations to base metals miners, who generally have been better corporate stewards, and they shouldn't be valued using a 5% discount rate (or, worse, 0% in some cases).

I'm not hot on gold at the moment because I don't see it performing well until the FOMC changes its stance on rate hikes in the US.  On sector sell offs, I'd buy royalty companies like Franco Nevada and Wheaton Precious before I buy a senior producer.  Royalty company valuations are considerably higher than producer valuations, but these stocks have performed well and are trading towards the low end of their historical valuation ranges.  I'd also consider buying smaller gold producers that get beaten down, as the senior golds will likely do more acquisitions as the sector turns.  No positions yet, but I'd put some on if valuations go lower.

Friday 28 September 2018

Loose lips at Aurion Resources

I was at the Precious Summit last week, so I wasn't keeping a close eye on the market.  I saw the news that Aurion Resources (TSXV: AU) finally found the potential source of the gold boulders in Finland.  Hole AM18042 drilled intercepted 0.65 metres grading 3,510 g/t gold (or, if you like your results smeared a bit, then it was 2.90 metres grading 789 g/t gold of which 2.25 metres was only 3.0 g/t gold).  That is a whopper of a gold intercept, although it seems like they are looking for needles in haystacks.

I was happy for Aurion and its shareholders, even though I'm not a shareholder, because discoveries and gains are good for the entire junior mining sector.  At least I was happy until today when I pulled up the Aurion stock chart and noticed some peculiar trading action.  Aurion started drilling on June 21 and the stock got a bit of a pop on the news, which is normal.  But then, the volume and price suddenly jumped on August 15.  Then the price really jumped on September 13 and IIROC halted the stock.  One week later, the news of the gold intercept finally hits the market.

The Sep. 19 news release states "A total of approximately 5,239 metres (m) in 35 drillholes have been completed since early July."  5,239 m with two drills over about 2.5 months means that they are drilling roughly 70 m per day or 35 m per day per rig and the average depth is 150 m.  There are four target areas being drilled.  For the sake of argument, let's say one drill has been focused on the Main Target.  That means by August 13 that rig would have been drilling for around 40 days and completed an estimated 1,400 metres.  At 150 m per hole, that would be around 9 holes.  Holy shit, what a coincidence!  Hole AM18042 was the 10th hole on the Main Target.  Now, how long do you figure assays take to turn around in Finland?  Maybe one month.  Again, holy shit, what a major coincidence!  That's right around the time the stock popped again, before IIROC wisely halted it.

Obviously I'm being facetious here.  Somebody involved with Aurion must be tipping off investors on results, as it seems highly unlikely that the stock moves on August 13 and September 15 were coincidence.  When I see action like this, I run the other way because I'm at an information disadvantage.  It's action like this that gives the mining sector a bad name.

Wednesday 26 September 2018

Meet Garibaldi's baby Voisey

Garibaldi (TSXV: GGI) created lots of hype last year by making insinuations that they had discovered a new nickel deposit that could rival Voisey's Bay.  Eric Sprott was a believer and validated the story, so lots of investors bought into GGI, resulting in a market cap north of $300 million.  An impressive feat given the recent state of the mining sector!

Based on the latest drilling, I congratulate Garibaldi on the birth of baby Voisey.  Aww, it's so small and cute!  Dr. Peter Lightfoot must be a proud papa.

What this baby is still lacking is some size.  The market seems to have clued in on this, when in reality it shouldn't have come as a surprise because this is how exploration typically plays out.  Geology is tricky and involves a lot of luck.  I've met Dr. Lightfoot and I think he is a very knowledgeable and enthusiastic gentleman.  Maybe Nickel Mountain does grow into something big, but it will take lots of time and drilling...and some luck, which factored in large with the discovery of Voisey's Bay.

I took issue with Garibaldi last year for poor disclosure (e.g., disclosure of massive sulphide intervals without assays, core pics on the website) and excessive promotion that suggested this could be another Voisey's Bay.  The playbook was different this year and the company was ominously quiet.  But, drinkers of the Garibaldi Kool-aid hung in there.  Some investors with rose coloured glasses even convinced themselves that the company was sitting on spectacular results and waiting for the right time to announce them.  Come on people, this is mining!  Good news travels by jet and bad news travels by boat.  Also, while Garibaldi is hardly a shining star when it comes to good disclosure, not releasing material information in a timely manner is a big regulatory no no.

I'm not technically proficient enough to take a stab at the current resource size of Nickel Mountain.  But, fortunately we have the insight of the Angry Geologist.  While I add pictures of babies to maps, he/she puts the drill data in Leapfrog and comes up with resource estimates.  If you're interested at all in GGI, definitely go check out the Angry Geologist blog post.  The Angry Geologist currently estimates 304,535 tonnes grading over 2% nickel or 760,174 tonnes grading over 1% nickel (or about 0.5% of the Voisey's Bay resource).  That means a lot more needs to be found before this is a viable deposit that could turn into a mine.
The Angry Geologist
The lesson here is that junior mining investors often get ahead of reality, especially when spurned on with aggressive promotion.  To their credit, Garibaldi did pull in capital at high prices to drill the deposit and most investors are now aware of the story.  To me, there is still not enough evidence to suggest that this baby deposit will grow into a monster, like Voisey's Bay.  But, it is a cute baby deposit with really nice grades in a market devoid of good nickel sulphide deposits.

Diamond Fields, the legendary company behind Voisey's Bay, offers some insight.  It took a couple of years for drill results and new discoveries to demonstrate the size potential and there were pullbacks in the share price along the way.
Diamond Fields chart - Visual Capitalist

Garibaldi's market cap is now about $200 million and they have about $20 million in cash.  The two small, high grade nickel zones are not compelling enough on their own to get me to buy at the current valuation, but there is certainly potential for additional zones.  Given the current market backdrop, I still believe there are more compelling investments in the junior mining sector with more attractive risk-reward profiles.  However, I might be a buyer of GGI if the share price gets closer to $1.25 to $1.50 or would pay more if the company hits another zone of massive sulphides that proves their hypothesis of multiple lenses.

Friday 14 September 2018

Everybody loves copper - Rio Tinto should buy Turquoise Hill stake

Markets don't like uncertainty because uncertainty equals risk.  For this reason and US dollar strength, we've seen metal prices plummet over the past few months.  This uncertainty stems from the escalating trade war situation between the US and China, the big fat pig with an insatiable appetite when it comes to metals consumption.

Ironically, despite the recent metal price weakness, large mining companies have never been so eager to acquire large new copper assets.  Lundin (TSX: LUN) is still looking to acquire copper assets, after it lost Nevsun (TSX: NSU) to Zijin.  BHP (ASX: BHP) just acquired a 6.1% equity stake in SolGold (LSE: SOLG), which is advancing a big copper porphyry discovery in Ecuador.

South32 (ASX: S32) is also looking for copper exposure.  South32 already has a $150M JV deal with Trilogy Metals (TSX: TMQ), the base metals spin out from NOVAGOLD (TSX: NG) that has two large copper assets in Alaska that are infrastructure-challenged.  The challenge in finding large copper projects to acquire may also have factored into South32's recent US$1.6B takeover of Arizona Mining.

Big copper projects are hard to find.  Almost two-thirds of the copper discovered in the past decade is contained in the four largest deposits.  Large new deposits are required to replace depleted mines and meet the ever growing demand for copper.  The rise of electric vehicles("EVs") is one of the bullish arguments for copper demand, with an estimated 15% of copper growth coming from the EV sector.  One of the things I like about copper, compared to energy metals like cobalt and lithium, is that copper will benefit no matter what battery or energy storage medium becomes dominant.  If it is electric, it is going to need copper.

In my mind, a big question is what is Rio Tinto (LSE: RIO) going to buy?  Rio has lots of cash and in June 2018 it point blank stated that it would be willing to pay a big premium to secure a prime copper asset.  Most of Rio's current cash flow comes from iron ore, but it covets more exposure to copper.  This is reflected in its exploration spending, with 53% of its exploration budget going to copper.
Source: Rio Tinto
Rio Tinto could make a big splash going after a big copper producer like First Quantum (TSX: FM).  It seems like takeover rumors about BHP or Rio Tinto going after First Quantum pop up every three years or so and one of these times the rumors will probably come true.  I think Rio would need to pay a 50% premium to get a deal done, which it certainly is capable of doing.  I'm not currently long First Quantum, but I do trade the stock periodically and may pick some up for copper exposure and the possibility of a takeover bid.

One copper stock I have been buying recently is Turquoise Hill Resources (TSX: TRQ).  Turqouise Hill (which used to be Ivanhoe Mines) owns 66% of the massive Oyu Tolgoi copper deposit in Mongolia.  The Mongolian government owns the other 34%.  I won't go on a rant here about how bad Mongolia is - it takes time to come out of the dark ages.  The important points are that Rio Tinto already owns about 51% of Turquoise Hill and Oyu Tolgoi is a monster of a copper deposit.  Production is still ramping up and will be 340% higher by 2025.

Source: Turquoise Hill Resources

It seems like a no brainer for Rio Tinto to acquire the other 49% of Turquoise Hill.  And now would be a good time, judging from the relative share price performance. As illustrated in the 5-year chart below, the spread between the two stocks is widening.  This would be a low risk acquisition for Rio Tinto and a seemingly good use of its cash.  Therefore, I am long Turquoise Hill shares.  It gives me exposure to rising copper prices and, with a little luck, a takeover bid from Rio Tinto.  The risk in the position is that there are no other bidders for Turquoise Hill, but with the stock near its 15-year lows it seems like a decent entry point here.

What about in the small cap space?  Copper projects need to be big.  Big projects need infrastructure.  And big projects near infrastructure get developed.  So, by definition, juniors only make the big time if they have new discoveries.  I'm watching juniors like Regulus Resources (TSXV: REG) and Chakana Copper (TSXV: PERU) because I like their teams and I like Peru, but they will only succeed if they can find big deposits with enough high grade to make the economics work.  The rule of thumb seems to be that you need at least a billion tonne resource with 200 or 300 million tonnes of that ideally being around 1% copper, depending on gold credits.  SolGold's Cascabel project seems to be getting to that size, so I think it is also an emerging acquisition target. 
Source: SolGold

The SolGold CEO seems "eccentric", shall we say, but the dynamics are getting pretty interesting between Newmont Mining and BHP.  A small cap Canadian vehicle with exposure to SolGold is Cornerstone Resources (TSXV: CGP).  Cornerstone has a 15% stake in the Cascabel project and it owns about 10% of SolGold's shares.  The team at Red Cloud calculate that the Cascabel stake and SolGold stake are worth about CAD$0.29 per Cornerstone share.  I'm trying to pick Cornerstone shares up below CAD$0.20 as a way to play SolGold.

Source: The Chippewa Herald

Friday 31 August 2018

A little dump with the pump in the oil & gas sector - Perrison Petroleum

Notice that there haven't been any egregious scams like West High Yield ("WHY") in the junior mining sector this year?  The reason for that is probably that the junior mining sector has been performing terribly in 2018.  The lack of investor enthusiasm in the sector and the absence of new dumb money attracted to hot sectors makes it tough to run a good scam.  Consequently, the junior mining sector still has its share of BS, over promotion, and low level scams, but the real egregious stuff is taking place where the suckers are.  Crypto/Blockchain and marijuana.

Today, however, I saw a news release for an oil & gas company that reminded me of WHY.  Perisson Petroleum Corporation (TSXV:POG) claims that they have an MOU with Lan Cheng Limited, a private investment fund comprise of "a network of wealthy individuals, associated institutions and private equity groups which invest in large diverse projects on a project-by-project basis."  Under the MOU, Lan Chen will invest US$50M to acquire 4.9% of Perisson's shares at a price of USD$1.0946 per share.

Hahahahaha, sure!!!  Unless Lan Cheng consists of a network of bleeping morons looking to part with their money or they confused USD with CNY in the MOU, this is preposterous.  The shares were trading at $0.07 when this supposed financing was announced.  Why would any investor pay 20 times the market price?  As we saw with WHY, they don't.

Why fabricate such ridiculous news?  Take a look at the chart below.  Volume on POG suddenly spiked on August 10 with 1.9 million shares traded.  Another 1.9M share spike took place on August 20.  Rather suspicious trading activity given that the news release about this miraculous financing came out on August 21!  Sure looks like a good old pump and dump job to me.

This deal would imply that Perisson is worth US$1.02 billion.  Sure.  This is a company that deliberately reduced its share price to pennies earlier this year by doing a 10 for 1 stock split that increased the shares outstanding to 888 million.  The same company that couldn't file audited 2017 financials on time "due to an unexpected and critical business trip overseas involving management of the Corporation that has extended far longer than expected (for the arrangement of arranging critical financing and conducting due diligence on the Corporation’s previously announced Kazakhstan oil field acquisition." 

Perisson has a fancy website that quotes Confuscious and waxes poetic.  Who needs information on mundane things like management and directors, strategy, and news releases on a website when you have cool messages like this one...
It is tough to figure out what Perisson even is or wants to be.  Oil in gas in,,, Kazakhstan.  If all those fail (which, it appears, they have), why not strive for a global integrated oil & gas company?

In June 2018, Perisson announced a non-binding MOU to acquire a controlling interest in a Chinese refinery named Hebei Xinquan Petrochemical Co.  The transaction was expected to close in July (oops, almost September now).  Hopefully that closes soon, as it sounds important.  Per the June 4, 2018, news release on the deal, "the Xinquan Refinery will represent a key step in Perisson’s long term plan to become an integrated global oil and gas company."

Going through the news releases on SEDAR, it becomes very clear that Perisson's past is littered with bogus claims about transformative deals and large financings.  A $20M convertible debenture financing with a 12% coupon was mentioned in February 2018 only to come in at $3M with a credit-card like 18% coupon in April 2018 (and this looks like it was subsequently made convertible at $0.05/share).  Back on December 7, 2016, Perisson stated that it was "approaching closing of its previously announced private placement in the amount of CDN$10 million in secured convertible debentures and has increased the maximum amount of the financing from CDN $10 million to CDN$50 million."  The $50M was never raised, nor was the $10M that sounded like it was firm. 

Sadly, there doesn't seem to be any accountability for "fake news" in the junior stock world.  POG shares were halted a week after the obviously bogus financing news was released and the halt was only because the stock shot up to $0.29.  Trading resumed after a clarifying news release, which didn't clarify much.  Let the dumping resume!

Wednesday 11 July 2018

Trade tariffs create risks and opportunities in base metal stocks

If you're not familiar with the Visual Capitalist, I highly recommend that you check out the website and signing up for the daily email.  Content is always visually stunning and covers a broad range of topics.  Yesterday's post - The Base Metal Boom: The Start of a New Bull Market? - by Nicholas LePan is an excellent one, although the timing was unfortunate.  Base metal prices took it on the chin overnight as The Donald announced that the US will potentially slap tariffs on another $200 billion of goods from China after August 31.

While I agree with the Visual Capitalist article that the electric vehicle boom and electrification of everything will drive the next metals boom, the immediate reality is that base metal consumption growth is totally driven by China.  This growth isn't from the Chinese making lots of EVs and installing solar panels everywhere; for the time being, it is still primarily from infrastructure growth and economic expansion.  The chart below, extracted from the Visual Capitalist piece, shows China's dominance in metal consumption.

Therefore, when the U.S. announces tariffs on $200 billion of goods, it makes sense that base metals fall.  Those tariffs will potentially reduce China's exports, which in turn will slow China's growth and its consumption of base metals.  That is why copper prices dropped 3.6% overnight, bringing the one month decline to 16%.

It used to be said that copper has a PhD in economics.  Perhaps that was true in the past, but that is no longer the case .  Now it would be more apt to say that copper has a PhD in China economics and the chart below of copper prices (area chart, right axis) compared to the iShares MSCI China Index Fund (blue line, left axis) shows the strong correlation.  The fate of us mining investors is solidly in the hands of the China economy and, consequently, U.S. policies aimed at China.

What are the investment ramifications of all these tariffs?  China certainly doesn't look like it is going to back down, so expect retaliatory measures.  That could lead to additional tariffs from Trump, since China exported about $500B of goods to the US last year. China only imported $130B of US goods, but it has other non-tariff ways of retaliating as outlined by Bloomberg. In other words, expect ongoing tariff noise in the markets for at least the next couple of months.

I won't get started on my views on politics or global trade.  My views won't change anything and I don't get upset by things that I cannot change.  Instead, I try to identify ways to make money (or avoid losing money) from the changes made by bonehead politicians.  In this case, I think we will see short-term investment opportunities created from the ongoing US-China trade war.

Short-term Ideas
In the short-term, I think the trade war sets up trade opportunities in equities.  The trade war creates uncertainty and uncertainty equals risk to investors.  As a result, we are seeing a selloff of base metals stocks.  Panic selling is likely to be overdone, so I think there will be trading opportunities in stocks like First Quantum (TSX:FM).  As always, this post should not be construed as investment advice, consult your own broker, do your own due diligence, etc. etc.  This is a high risk approach that is not for the faint of heart or those who can't afford to lose money - equities trading is a lot like gambling.  I'm just blogging here to tell you how I approach these situations and to help me crystallize my own thoughts into actionable ideas, not to provide advice.

First Quantum stock is volatile and liquid, making it a great trading stock.  As I write this, FM's share price is down 7.5%.  Don't worry about whether that is too much, too little, or just right.  In the short-term, fundamentals don't matter.  It's more about investor psychology.  The way I approach these situations is that I don't typically buy the sell-offs on the first day.  Typically it takes three or four days for a sell-off to run its course.  The other tool I find very useful for picking entry points is Bollinger Bands.  Take a look at the First Quantum chart below with Bollinger Bands showing two standard deviations from the 20-day moving average.  There have been three instances in the past year where rapid sell-offs have taken the stock significantly below the lower band and in each case the stock has bounced back quickly.  That's the trading set up I'm looking for and I did actually buy FM two weeks ago at $17.72.

Based on the current lower band, as well as technical support levels, I'd buy FM if it dropped to $16.50 to $16.75 in the next few days.  Bollinger bands are dynamic, driven by moving averages, so the entry point will change on a daily basis and intuition does come into play.  I try to wait until I see signs that the stock is stabilizing before buying, rather than just catching a falling knife.

Once I'm in, the tougher question is when to sell the stock.  If this is a short-term trade as opposed to an investment, then sometimes I sell intraday so as to not carry risk overnight.  That's what I did the last time I bought FM because it was just before a long weekend.  If I hold the position, I always consider a stop loss or selling at a loss if the stock doesn't bounce to preserve my capital.  If the stock bounces, which happens more often than not, then consider putting on a trailing stop loss (something I only do virtually rather than in actual practice) or selling when stochastics exceed 80, indicating that the stock is getting overbought.

Long-term Ideas
Since I don't think the trade war noise is likely to go away any time soon, I am reticent to have much long-term exposure to mining stocks, especially juniors, at the moment.  I'll hold my Tinka Resources (TSXV:TK) stock because I work for the company and believe that the near term exploration potential and longer-term takeover potential outweigh the prevailing bearish zinc sentiment.  On other junior and senior mining stocks, I believe that we will see better entry points in the coming months.

I am still a believer that mining stocks will do well, just as they typically do in the latter part of the economic cycle.  Likewise, regardless of whether a US trade war with China is real or rhetoric, China will continue to grow, electric vehicles will become more dominant, and electrification and battery storage will increase metals demand.  If you liked Cobalt before, all of the reasons to like it are more or less still intact but now you can buy Cobalt 27 (TSXV:KBLT) for under $8 rather than paying $12 or $13.  That stock is looking very interesting at these prices.

First Quantum still seems expensive to me as a long-term buy, perhaps because Rio Tinto recently came out and said they would pay a big premium for good copper assets.  I'm sure Rio Tinto doesn't read my blog, but if they did I would recommend not talking up copper asset values when you're looking to buy them.

In addition to Cobalt 27, I think Trevali (TSX:TV) looks quite interesting at the moment.  That stock is at a 2-year low, which seems very overdone relative to zinc fundamentals.  I have lots of zinc exposure through Tinka, otherwise I'd be taking a serious look at Trevali both as a short-term trade (Q2 production will be announced July 18) or maybe as a long-term buy.  Sure zinc prices have declined over the last six months, but that helps ensure that there is no demand destruction or excess new supply.  In other words, the zinc market looks like it may remain balanced and that's a good thing.

Happy trading!

Thursday 19 April 2018

Silver outperforms gold for a change

There seems to have been increased talk about silver over the past few weeks.  Rather than rehashing the reasons why, here are a couple of good articles about how it may be silver's turn to shine:
I'd also previously indicated on this blog that a gold-silver ratio of 80 has historically marked the bottoms for silver.

Interestingly, silver moved up 2.5% yesterday while gold was only up 0.2%.  Could this be the start of a mean-reversion trend that sees silver move back towards its more typical range of 1-to-65 versus gold?  That would imply that silver should be trading at $20.75/oz, based on the a gold price of $1,349.  I hope so, given the significant silver exposure in my portfolio.  However, I have a hard time believing that silver can have a significant rally without gold's participation.  If gold can break out of its range and trade above $1,370, then I think silver will do very well.

While on the topic of relative performance, Scotia Mining Sales had an interesting graphic yesterday showing the performance of over 50 gold and silver mining stocks.  I thought the variability of performance was quite interesting, especially given that gold, silver, the GDX and GDXJ were all huddled right around the 0 mark.  Picking the right stock in the past year certainly made a big difference on returns.  

Red = Gold
Blue = Silver
Yellow = Streaming/RoyaltyCo
Black = Index / Commodity
Source: USD-Adjusted Price date from Bloomberg, Chart and Colour Scheme from Scotia Mining Sales

I don't own any of these stocks at the moment, but have done well in the past with Franco-Nevada, a relatively safe way to play gold.  B2Gold (one of the favorites of the IKN Blog) looks interesting.  On the flip side, while I've traded Pretium in the past before it started mining, I wouldn't touch it now with a 10 foot pole because there is way too much risk that lower than expected gold grades are going to persist.  If gold and silver do break out, a good way to play it is to buy producers with relatively high cash costs because that provides exponential margin growth when precious metals prices move.  While I'm not a huge fan of Kinross because of the baggage it carries from bad acquisitions, that stock does typically have high leverage to gold prices and can soar in a positive gold environment.  In the silver space, Endeavour Silver has fairly high cash costs and greatly benefits from higher silver prices.

No meme in this post, but I do have a joke.  What do you say when you drop a gold bar on your toes?  Au!!!

Trying to Build a 10-Bagger

Evolve or Die This blog started as an experiment when I was toying with the idea of starting a mining newsletter.  I figured that if I was r...