PDAC_2019_air_canada

Mining A Few Stocks At The PDAC

 

The week’s news has been dominated by Brexit. The Brexit process could see yet more twists and turn this week following another defeat of Prime Minister Theresa May’s withdrawal deal. U.K. lawmakers rejected the deal again on Tuesday evening by 149 votes, despite some latch-minute assurances from the EU. The Brexit situation remains a mess, but risk assets (other than GBP) remain unaffected by European political uncertainty. Not much progress on the China trade deal. With equity markets rallying this week, apparently no news is good news. We believe that with U.S. indexes having regained last November’s highs in pretty much a straight line since the December lows, that some form of extended consolidation at these levels is the most probable shortterm outlook for U.S. equities.

Macro data this week did not set off any alarm bells this week and inflation data remained benign.

  • A month after the biggest decline in 10 years, sales at U.S. retailers rebounded +0.2% in January (+0.15 forecast). Sales had tumbled a revised -1.6% in December, the largest drop since late 2009. If auto and gasoline are omitted, retail sales in January rose a much headier +1.2%.
  • The National Federation of Independent Business said its small-business optimism index inched higher in February after hitting in January the worst levels since the 2016 presidential election. The optimism index rose 0.5 point to 101.7, with 5 out of the 10 components increasing, led by a 5-point gain in those who expect the economy to improve. It nonetheless was the second-worst reading since Dec. 2016. The government shutdown was a primary cause of pessimism earlier this year.
  • The consumer price index climbed +0.2% in February following three straight months of no change. Core inflation that strips out food and energy rose +0.1% last month, the smallest advance since last August.

  • The producer price index edged up +0.1% last month. The first upturn in gasoline prices in several months accounted for most of the increase in wholesale inflation in February. Home-heating oil was also more expensive.

  • Orders for long-lasting durable goods rose in January for the third month in a row and business investment posted the biggest increase since last summer. Orders rose +0.4% in January (economists surveyed had forecast a 0.1% decline). Core orders rose +0.8% in January to mark the biggest increase since last July. The originally reported 1.2% increase in durable-goods orders in December was revised up a tick to 1.3%.

PDAC Take-Aways From Bill Cara

A favorite time of the year for almost 30,000 people from more than 130 countries is their visit to Toronto for four days in early March to attend the world’s greatest mining convention.

The 2019 Prospectors & Developers Association of Canada (PDAC) welcomed Prime Minister Justin Trudeau along with the usual crowd, the prospectors, investment analysts, media, students, Indigenous peoples, investors and executives of about 500 mineral exploration and mining companies and another 500 industry related services companies and government presentations from every part of the world.

In my case I have attended almost every year since 1981. This March 3 to 6 was just another one. But it never gets old.

Most investors know that these mining companies have increasingly elaborate online corporate presentations that contain the latest publicly-disclosed information, so why do we spend the time and money to attend? Well, government people go sell the benefits of mining in their jurisdictions and the suppliers go to sell their equipment and services to the mining companies. The mining companies go to raise capital or to acquire properties. Indigenous peoples are wanting partnerships to explore and hopefully mine the potential minerals in their lands. Stock exchanges seek listings. Students are seeking jobs. Over 400 from television and electronic and print media seeking stories. Everybody is there to meet people.

Big deals were getting done too. This year, for example, Australia’s Newcrest Mining (world’s third largest market cap among Goldminers) spent US$806.5 million in cash to acquire the promising Red Chris property in British Columbia from Imperial Metals.

We investors are there to scout out the companies with under-recognized potential. Obvious to everybody is that none of these so-called experts and wannabees knows which small company is going to be the next Barrick, Goldcorp or Teck or where the prices of metals will be a month from now. But if you are an investor and you want to talk to knowledgeable people about some of the not very well-known exploration companies that have great prospects, then this is the place to be. You listen to their stories and then you do the research later. I like to think of it as we are there to mine a few stocks.

This year I did uncover a few names I had known very little about, like Marathon Gold, Prophecy Development (Vanadium), and Scandium International Mining. To me, all of them seem good for the long haul. As usual, I dropped by the booths of a few old friends, like Rob McEwen of McEwen Mining, Rui Feng of Silvercorp, John McCluskey of Alamos Gold and Doug MacQuarrie of Asante Gold among others. At other booths, I met some new people in Sherry Dunsworth of Marathon Gold, Carolina Ordonez and Gordon Neal of New Pacific Metals, Andy Hay and Bill Morton of Lorraine Copper, Danniel Oosterman of Prophecy and Michael Michaud of Wesdome Gold, among many others.

In fact, I met people from so many countries or who had been working in virtually every part of the world that I could not begin to list them all. I even sat in on the so-called fireside chat with PM Justin Trudeau although that was a waste of valuable time.

What did I learn from three solid days of walking and talking? Well, whatever I write here (i) is a fraction of what I learned, and (ii) is done without remuneration from any source. You should know that I hold investment or trading positions in three stocks I have mentioned today: Wesdome Gold, Alamos Gold and McEwen Mining. At the appropriate time I will be buying shares in some of the others. In every case I recommend you spend your own time, as I will, to investigate further.

What did I find pleasing? I am happy that Alamos Gold received their required permits from Turkey and the stock is reflecting that. Everything seems on track there, but guidance is down unfortunately. I’m happy too that McEwen Mining made its first Gold pour from its Gold Bar operation in Nevada and I got to hold the bar (it’s heavy) with a photo taken. That stock too has lifted despite the operational issues encountered at a few of their sites and where they postponed their dividend as a result. But production is down, and guidance has been lowered.

Prophecy Development has recently encountered some outstanding drill results at their Nevada Gibellini Vanadium Project but still needs a final feasibility before seeking the capital to put this property into production. The PEA reported an after-tax cumulative cash flow of $601.5 million, an internal rate of return (IRR) of 50.8%, a net present value of $338.3 million at a 7% discount rate and a 1.72 years payback on investment from start-up assuming an average vanadium pentoxide price (V2O5) of $12.73 per pound. As of March 12, 2019, the price of vanadium pentoxide is $17.10/lb. The price in 4Q2018 however was mostly in the $29-33/lb range. Soon after the closing of PDAC, the Company announced “the appointment of Michael Doolin as COO and interim CEO. Mr. Doolin will manage Prophecy’s worldwide operations. Doolin with over 30 years of operational and management experience in Nevada was Chief Operating Officer at Klondex Mines from 2012 to 2018”.

Lorraine Copper will hold a special shareholder meeting on April 5 where shareholders will likely vote to approve a merger with Sun Metals. Their polymetallic (Cu/Mo, Cu, Zn, Pb) Stardust Project containing extremely high-grade copper is in northcentral British Columbia. This spring and summer the property will be well drilled (an additional 100,000 metres), following on the 393 holes (80,000 meters) previously drilled. Management is hoping to build a copper resource of at least 10 million tons, which would facilitate a major copper mine. What twigged my interest in Lorraine was the Nov. 14, 2018 news release that reported that diamond drill hole DDH18-SD-421 was “completely assayed and has returned a total 100-metre intersection grading 2.51% copper, 3.03 grams per tonne (g/t) gold, and 52.5 g/t silver for a 4.99% copper equivalent (CuEq)”. At current metal prices, that single hole represents a gross value greater than US$300 per metric tonne, which is simply outstanding.

Scandium International owns the richest deposit of scandium in the western world. This is the Nyngan Project in New South Wales, Australia. Along with Aluminum, Scandium is a metal that is used in an AL-SC alloy that is stronger than the aluminium presently used to manufacture aircraft and mountain bikes. Management is on track to be in mining production in 2020 with a capex of between US$80-100 million. Project net present value (NPV) is $338.3 million and IRR is 33%. Insiders own 46% of the stock. At C$0.17 presently, the market cap is under US$40 mil. I’m told that scandium may present some difficult metallurgy issues, however. All in all, this is a fairly solid bet.

If I were younger, I could envision my next boat being of AL-SC construction and powered by solar/lithium.

Asante Gold in Ghana represents a tiny cap that needs capital to go ahead, but my friend Doug MacQuarrie, who controls the majority of the stock, is selective as to how he will do any financing because he strongly believes that his Kubi Gold property will produce one of West Africa’s major gold mines at some point. Presently he seeks a joint venture or $20 million debt financing for the project. Doug is an expert who founded and managed the 5+ million oz Obotan Gold Project of PMI Gold in Ghana that in 2014 was bought by Asanko Gold.

Wesdome Gold produced 71,625 oz Gold in 2018 with free cash flow of $30 million at their Eagle River Operations and now company-wide has had five straight quarters of generating a positive free cash flow. Gold production guidance for 2019 is 72,000-80,000 oz. The story going forward will be based on the price of Gold as their All-In Sustaining Cost (AISC) is a relatively high US$985. Better known and much bigger Goldminers with a significantly lower AISC would be all the following companies that presented at PDAC: Kirkland Lake, Centerra, Barrick, Yamana, Newcrest, B2Gold, Agnico-Eagle and Goldcorp (soon to merge with Newmont to become world’s largest Goldminer). But Wesdome does have the Kiena Val d’Or property in Quebec that was decommissioned in 2013, but which has the fully permitted mine and mill infrastructure on standby. With higher Gold prices and drilling in hopes of expanding resources, there is the hope for an early return to mining production at Kiena. Wesdome is probably the #1 take-over possibility among juniors. The stock is my largest Goldminer position.

Marathon Gold’s 100%-owned Valentine Lake Project is one of the two big Gold plays in Atlantic Canada today with 2.69 million oz (measure and indicated) Gold and a further 1.53 mil oz inferred. The cost of putting a mine into operation there will be over $250 million, but this is doable because the Net Present Value (NPV) is calculated at US$493 million. Projected AISC is a very low US$666 and the project IRR is about 30%, which is high. Very telling that Marathon is in it for the long haul is the fact Franco-Nevada purchased a royalty interest in what may in 4 or 5 years become a mine.

While at PDAC I spent the most time talking to the New Pacific Metals people who are developing a highgrade silver prospect in Bolivia that has incredible possibilities. Some of the true width drill intersections are as impressive as anything in the Silver world today. Over the years I have written in the blog and invested in this company as well as in Silvercorp, their major shareholder.

As you may know, CEO and Chairman Rui Feng has been a friend for many years. I have written extensively about him and his Silvercorp, particularly a few years ago when hit by a professional short-seller’s report that almost doomed his company. He recovered from that ugly experience because the truth was on his side. His company is in fact now China’s largest silver producer and has produced 61 million oz Silver plus 901 million lbs Lead and Zinc over the past 12 years. The AISC of Silver is just $6.63/oz, which is the lowest of their peers and their return on equity is the highest. To date, Silvercorp has bought back $56 mil in shares and paid $99 mil in dividends. They also invested $23 million for a 30% equity interest in New Pacific Metals and together with the 7.5% holding of Rui Feng and more from his friends, Silvercorp has solid control and deep pockets to stay in control.

So, while I like Marathon Gold, Lorraine Copper and Prophecy Development, I must say that New Pacific is the most intriguing story I discovered at PDAC. This is a billion-dollar mining company in the making.

Here are some highlights about the company and about mining investment in admittedly high-risk Bolivia:

Recent accomplishments of New Pacific:

  • Sept 2017: Acquired 100% of Silver Sand Project (Minera Alcira SA) for US$40 million.
  • Nov 2017-Sept 2018: Expended US$10.11 million as part of 55,000 metre drilling program at Silver Sand Project.
  • July 2018: Acquired 100% interest of two additional concessions north of the Silver Sand Project.
  • uly 2018: Signed MOU with COMIBOL to negotiate and complete a Mining Production Contract (“MPC”) to expand land package for the Silver Sand Project.
  • Sept 2018: Established an exploration team of 40+ members.
  • Jan 2019: Signed MPC with COMIBOL, the first of its kind for a foreign investor in Bolivia, to expand land package covering an area of approximately 57 sq. km.
  • Feb 2019: Reported near-surface drill results that intercepted silver mineralization in 190 out of total 195 holes, including a huge 99.91 meters grading 244 g/t Ag.

For many mining companies and investors, the problem for New Pacific is Bolivia, which like Venezuela has in the past caused grief for many foreign owned mines and resource investment projects. Other than the results of their ongoing work to prove up the massive potential of Silver Sands, why is New Pacific excited to be investing in Bolivia? The points they made to me:

  • Stable Government under Evo Morales, first Indigenous president of the country, who is now 12 years in office and likely to win the upcoming election.
  • New mining laws in 2014 and 2016 aimed at increasing foreign investment and an updated law (law #516) for foreign investment protection that is presently under revision.
  • Under-explored but rich in mineral endowment with a long history of mining – Cerro Rico in continuous operation since 1550.
  • Foreign mining investments in the country from Pan American Silver, Sumitomo, Argentum, Glencore, Orvana, and New Pacific Metals.
  • The fastest growing economy in South America in 2018.

Remember: you can’t take the rewards unless you accept the risk. In my opinion, these companies are all worthy of your time to study the risks before investing. As we say, “Let the rock do the talk.”

If you do invest, try to be patient.

I look forward to seeing you at the PDAC 2020 Convention, March 1 to 4, 2020. Mark your calendar.

For further information on these companies, go to:

https://newpacificmetals.com/presentation

https://www.prophecydev.com/investors/investor_presentation/

https://www.marathon-gold.com/site/assets/files/4295/2019-02-04-cp_moz.pdf

https://www.lorrainecopper.com/presentation/

https://sunmetals.ca/project/

http://www.scandiummining.com/investors/corporate-presentations/

http://www.asantegold.com/investors/presentations

https://wesdome.com/investors/presentations/

http://silvercorpmetals.com/investors/corporate_presentation/

https://www.alamosgold.com/investors/Presentations/default.aspx

https://www.mcewenmining.com/investor-relations/presentations-and-fact-sheet/default.aspx

http://www.newcrest.com.au/investors/presentations

Graphs of each stock mentioned above

New Pacific Metals (NUAG)

Prophecy Development Corp (PCY.TO and PRPCF)

Marathon Gold Corp (MOZ.TO and MGDPF)

Lorraine Copper Corp (LLC.V)

Sun Metals Corp (SUNM.V)

Scandium International (SCY.TO)

Asante Gold Corp (ASE.CSE)

Wesdome Gold (WDO.TO and WDOFF)

Silver Metals Corp (SVM.TO and SVM)

Alamos Gold (AGI.TO and AGI)

McEwen Mining (MUX.TO and MUX)

Newcrest Mining (NCMGY)

 

 


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