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

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...