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."

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.

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.

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.

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.

http://www.visualcapitalist.com/chinas-staggering-demand-commodities/

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

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 Alberta...no, Manitoba...no, Colombia...no, 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!

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.

Source: visualcapitalist.com

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.

Source: barchart.com

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!

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:

The Assay - Indicators Point to a Silver Rally

Silver Seek - New Silver Bull Coming

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!!!

Tin - no longer a boring metal!?!

Tin is a boring metal.  It is used predominantly for solder (yawn!), and for applying a thin, corrosion resistant layer on metal (a.k.a. tin-plating) (double yawn!).  Or, so at least I thought.

Recently, Rio Tinto Ventures hired MIT to study which metals would be most impacted by new technologies such as autonomous and electric vehicles, renewable energy, energy storage, and advanced computing and IT.  Never in my wildest dreams would I have expected tin to come out at the top of that list, edging out lithium and cobalt.

We've all heard lots of hype about lithium, cobalt, nickel, and even vanadium being the hot metals associated with electric vehicles and batteries.  Lithium has lost some of its luster due to Tesla's struggles as well as potential that SQM could flood the lithium market.  I still like cobalt due to the supply concentration from the DRC, a hellhole of a country that, ironically, has amazing mineral endowment.  But, this is the first time I've seen or heard anything about tin possibly becoming a hot metal.

How does one play tin?  I don't think there are many tin companies.  One TSXV-listed company I found is Alphamin Resources Corp. (TSXV:AFM).  Alphamin is in the process of building a tin mine with some spectacular grades and expects to be producing tin in Q1 2019.  But, guess what?  It is located in the DRC!  So, between its undesirable geopolitical risk and being in the undesirable phase of building a mine, I personally will pass on Alphamin.  However, if you are OK with the DRC, then take a closer look because Alphamin is a real company with a $194M market cap and it looks destined to become a producer.

Another tin company on the TSXV is Eurotin, which has the ticker "TIN".  It has a $7M market cap, despite not even being able to sustain its website.  I'm sure that a tin rally might bring this back to life, but I don't have the time to go digging to see if this is a diamond in the rough.

Strongbow Exploration (TSXV:SBW) looks like another decent tin play.  Strongbow holds the fully permitted South Crofty tin mine in Cornwall, UK.  A 2016 PEA suggested pre-production capex of $118.7M with a 23.4% IRR and after-tax NPV(5%) of $130.5M at US$10/lb tin.  Those economics are not terribly compelling, but they could be if tin goes on a tear.  Strongbow appears to have solid management and backing from the Osisko group.

Strongbow was kind enough to provide a summary of tin projects in its corporate presentation.  The comparison suggests that their resource is quite small, but their presentation suggests growth potential of 17 to 21 million tonnes.  So, a cursory glance suggests that Strongbow is interesting tin company in a good jurisdiction...not the DRC!

Part of the reason I was so excited to see MIT flag tin's potential is because one of my clients (and major holdings), Tinka Resources (TSXV:TK), has a significant tin resource.  The Ayawilca Tin Zone has an Inferred Mineral Resource of 10.5 million tonnes at 0.70 % Tin Equivalent (0.63 % tin, 0.23 % copper, 12 g/t silver) containing 145 million pounds of tin (66,000 tonnes), 53 million pounds of copper, and 4 million ounces of silver.  Relative to the table above, that puts it in the middle of the pack in terms of size and grade.  Considering that the market is not giving Tinka minimal, if any, value for the tin resource, that adds a compelling angle to Tinka.  The bullish outlook for tin by MIT will cause Tinka to emphasize the tin resource some more.  Given the beating Tinka's share price has taken this year, culminating in a financing at a disappointing price this month, some positive news to get retail investors excited again is very welcome.  Go TINka!

What did I learn at PDAC?

The annual Prospectors & Developers Association of Canada, or PDAC, convention in Toronto has ended.  I was there, as were 25,000 other people.  While I actually didn't attend the convention much, here are a few things I learned and observed at this PDAC:

1. Some people can never have enough free pens or squishy toys.  I'd like to see a concerted effort by the mining industry to eliminate all the free junk that is given away at conferences like PDAC.  When you feed a pigeon, you'll get more and more pigeons that suddenly show up.  Ask yourself if you really want to attract pigeons pen collectors.  People who covet free trinkets are not who we want to attract to an investment conference.  On a side note, thanks to Lundin Mining (LUN.TO) for providing small chocolate bars that I gave to my kids so they would still love me after PDAC.
   
2. Copper exploration is hot.  There are a lot of big mining companies looking for large scale copper projects. Since there are not a lot of those for sale due to the lack of exploration in the past 5-10 years, producers are now funding juniors to go out and drill.  This is good for copper explorers, since there isn't much new institutional or retail money flowing into the mining sector right now.  We should all pool our money and hire the Angry Geologist to go out there and find the next behemoth copper deposit for us.
3. Cobalt remains one of the hottest metal plays, perhaps because the DRC seems destined for a civil war.  The DRC accounts for a whopping 58% of global cobalt production and child labor is abundant.  It seems wise to avoid the DRC and get some exposure to cobalt.  Clearly, investors are positioning that way, as Cobalt 27 Capital (KBLT.V) just closed a $200 million financing.
4. Most institutional investors and corporates remain very leary of Ecuador, despite its mineral potential.  I'd include myself in that camp and also avoid Bolivia.  On the other hand, I think Argentina is moving in the right direction (at least for now) and they have better wines.
5.  Solgold (SOLG.L) has a very large advertising budget..maybe because of point 4.  Investors couldn't miss Solgold, whether they were picking up luggage at the airport, driving downtown, or getting in a hotel elevator.  This week's share price chart suggests that the advertising splurge did little for the share price.
6. The market remains fascinated by battery metals and even nickel is getting a boost from it.  Perhaps that is in part due to nickel typically being associated with cobalt, but keep in mind that smelters typically only pay for 50% of the cobalt.  Unfortunately, there are not many good ways to play nickel.  After Inco, Falconbridge, and Breakwater were taken out in the last big nickel surge, the only producer left is Sherritt (S.TO).  Sherritt is still recovering from its epic mess at Ambatovy, but the worst of that mess is probably behind it now.  And, no, I still don't believe Garibaldi has a world class nickel discovery.
7.  A banker made one of the most sage comments of the week (shocking, I know).  He stated that the mining sector won't take off unless gold and/or copper lead the charge.  Those sectors are large enough to draw in generalist funds, which are severely underweight the materials sector. When the mining sector starts to turn, those generalist funds will be dragged into the sector, which they neither like nor understand.  However, they won't be able to avoid investing because the sector has a high beta and not participating means that the generalists will get blown away by their benchmarks.  So, whether you like zinc, nickel, or something obscure like vanadium, let's all cheer on gold and copper!
8. Silver is in the doldrums.  I think history teaches us a lot about investor psychology, so sometimes looking at long-term charts can provide good perspective for prevailing situations.  At the moment, gold is trading at 80 times the value of silver; the 30-year average is 66.  Interestingly, the turning points for silver over the past 30 years have been right around the 80x mark.  I generally don't care about silver and just stick with gold.  The last time I liked silver was around 2006 and it did very well that time.  Now, I would once again consider myself a silver bull.  If gold finally breaks out, I think silver will soar even more.  Now is a great time to be buying silver stocks, in my opinion, and I've been adding to my position in little-known AbraPlata Resource (ABRA.V), which has a resource that equates to almost two ounces of silver equivalent per share outstanding (and not in the way that Seabridge has a huge resource that can't economically be extracted).  I do work for the company, so reach out to me if you want to learn more.  Shameless self promotion, I know, but AbraPlata is so undervalued that I couldn't resist plugging it here.  I also continue to like Dolly Varden (DV.V) and Endeavour Silver (EDR.TO), whose high cash costs translate into huge leverage to rising silver prices (I have no relationship with those two companies).
   

Hammer time! Friday's bullish market reversal

Prior to being a junior mining IR consultant and blogger, I used to be in equities research and trading.  Back in those days, I studied the markets intensely looking for buying opportunities.  I used a variety of technical indicators, technical analysis, fundamentals, and intuition to guide my decisions.  As discussed in this post, I think there is a good chance that we saw a market reversal on Friday.  That sets up what could be a significant buying opportunity.

The equities market is constantly evolving and changing.  This bull market is quite different from the last, as there is a lot more computer-based trading, a lot more passive investing (i.e., investors buying ETFs instead of actively managed funds), and a remarkable lack of volatility.  Most investors have become accustomed to the low volatility, making the recent market pullback seem shocking when, in fact, it is quite normal (historical charts here). 

Source: Yardeni.com

My belief is that we are in the latter stages of a bull market and that the bull market is intact.  Valuations are expensive and interest rates are on the rise, but global growth trends are supportive.  Consequently, I expect equity markets to recover and trade higher.

In the short term, equity markets are not efficient and investors are not always rational.  Many decisions are driven by fear and greed.  During corrections, investors who may have been buying out of greed may suddenly panic and sell.  As the sell-off intensifies, selling pressure can escalate and buyers may think twice before acting.

I'm not a die hard believer of technical analysis, but I do believe it is a valuable tool.  The reasons for that are often rooted in psychology.  For example, an investor waiting to buy shares during a correction may wait until a stock or an index is at a support line or at a certain moving average before buying stock.  Similarly, investors often prefer to buy stocks at round numbers.  Just look at Apple shares on Friday, which found support at $150/share.  There is nothing special about $150 from a fundamental perspective; it is just a nice round number where more investors will place bids.

Candlestick patterns can also be useful, especially for spotting trend reversals.  One of the most reliable bullish candlestick patterns is a hammer, which is a candle with a long tail and a short body at the top.  This candlestick pattern forms when a security trades down significantly from the open, then rallies back to close just below or above the opening price.  What this signifies is capitulation selling (scared investors dumping) that triggers bullish investors to step in.  Sellers are cleaned up and buyers take control.

As can be seen on the chart below, the S&P 500 held support at the uptrend line on Friday and subsequent buying resulted in a nice reversal candlestick.  It is not a perfect hammer, but I think it conveys a similar message that we may have seen the bottom of this correction.

Other tools I use to aid in identifying overbought and oversold markets are sentiment indicators.  An easy indicator to use is the percentage of stocks trading above their 50-day moving average.  Generally speaking, markets are overbought when this number is high and oversold when this is low.  I've drawn lines at 20% and 80%.  This indicator is not very precise for picking market bottoms or tops, but can be useful for market timing.  As long as there is no trend change (i.e., bull market to bear market), buying when this indicator is at an extremely low level can be quite lucrative.

I would be remiss if I didn't throw out some caveats and words of caution.  The two most important things I learned on the trading desk were:
1. Gather as much information as possible (e.g., fundamental analysis, technical analysis) and try to be right more than you are wrong; and
2. Recognize when you are wrong and preserve your capital.
In the context of this blog post, that means that if you go on the assumption that Friday's market action was a reversal based on candlesticks, then you better watch trading closely on Monday to make sure that the reversal pattern is substantiated rather than negated and have an exit strategy.  For example, if you buy SPYs for exposure to the S&P 500, take your losses and get out if the uptrend line is broken.

The other important thing I've learned in the markets over the last two decades is that, at times like these, it is best to buy securities that are liquid and high quality.  Sure, you could use this pullback to buy more of your favorite junior mining stocks, but that adds a lot of risk.  The other mantra of this blog is to look for low risk, high reward opportunities.  In this case, to me that means buying things like call options, ETFs, and large cap stocks.  If you buy the S&P 500 at 2625 and it goes back to its highs, you achieve a gain of 10%.  On the other hand, if Friday's reversal fails and you exit the trade at 2500 you will have a 5% loss.  My gut instinct is that there is a higher probability that markets go higher from here rather than lower, so 10% upside potential with 5% risk seems attractive.  Of course every investor's circumstances are different, so do your own due diligence, consult an adviser, and keep in mind that this blog is free and should not be construed as investment advice.

What would I buy in the mining sector?  Quality names that are attractive takeover candidates.  The reason I like takeover targets is that the takeover potential tends to put a floor on the share price, since the likelihood of a takeover bid will increase if the share price drops.  I really like Atlantic Gold (TSXV: AGB), which has a fully diluted market cap of CAD$394 million (plus CAD$135M in debt for an Enterprise Value of approximately CAD$530M) and is one of the few gold companies that has successfully put a mine into production.  This is a notable feat - just ask Pretium, TMAC Resources, Klondex, Red Eagle, etc.

Atlantic Gold is now a low cost gold producer in Nova Scotia, Canada.  Production is currently about 80,000 ounces of gold per year, but that is expected to increase to 200,000 ounces per year.  It's costs are first quartile, meaning juicy margins and the ability to survive even if gold prices decline.  Atlantic is also a good size - not too big and not too small - as an acquisition target.  I believe there is a strong chance of a takeover bid in 2018.

Atlantic Gold is one of the few stocks that I've been keeping an eye on, as it has been putting out lots of positive news lately.  It hasn't pulled back much on the back of the recent market decline and gold's failure to break out, but it is 12% off its highs and is currently oversold (based on stochastics).  I think this is an attractive entry point.

The other stock that I've been patiently waiting on to pull back is NexGen Energy (TSX: NXE).  The uranium sector is out of favor (for good reasons), but NexGen truly has an amazing discovery in the Athabasca Basin that keeps getting larger.  NexGen is a stock to just buy and forget about.  At some point the uranium sector will turn around and a major mining company is going to covet NexGen.  I've missed the opportunity to buy NexGen at $2.50/share the last couple of times it traded down to that level, but this time I plan to pick some shares up.  Even in the absence of a takeover, NXE has been trading in a range between $2.50 and $3.50, which presents potential upside of 40%.

Finally, if you want to know what not to buy, do yourself a favor and go read the IKN blog.  Avoid companies run by promoters, liars, former Bre-X supporters, and gringos that piss off the locals.  Now is a good time to dump any crappy stocks you have and to buy quality.