The Gold Report: The U.S. stock market has been in a bull
run for a number of years. What are your thoughts on the market and what it
means for precious metals?
James Kwantes: Since Donald Trump was elected president, but also
for years before that, large-cap U.S. stocks have been a "can't
miss" for investors, who have been rewarded for chasing returns. It
seems very toppy to me, but that doesn't mean it couldn't go on for a while
still. In 2000, in the big tech boom, the market caps of the two or three
largest technology companies equaled the market cap of something like every
mining company in the world. We're at that level again. We're starting to see
weakness in the U.S. dollar, and that's positive for gold. These things are
cyclical. Gold looks like it's ready for the next longer-term breakout and
we're heading into a period of seasonal strength. We're starting to see signs
of strength in the junior market as well.
TGR: Would you talk about a couple of companies that you like in
the precious metals area?
JK: Let's start with the Yukon, where I recently did some site
visits. When you fly into the Yukon, you see placer mining operations, where
miners pull gold out of the rivers and the gravels. They look like big gravel
pits from the air, and some of the operations are very large. Placer mining
is a big industry in the Yukon—about 20 million ounces (20 Moz) of placer
gold has been pulled out since the Klondike Gold Rush days in the late
1890s—but the Yukon has never really had a large bedrock gold mine. So the
hard-rock source for all that gold is a kind of holy grail in the Klondike.
Last year, Goldcorp Inc. (G:TSX; GG:NYSE) bought Kaminak Gold Corp. and
its Coffee project for $520 million. That sparked another gold rush, an
exploration rush, that is seeing many of the world's largest gold mining
companies do joint venture deals with companies that have Yukon projects.
TGR: What are some of the companies you are excited about in the
Yukon?
JK: There's an interesting company called Klondike Gold
Corp. (KG:TSX.V). It owns a large land position around Dawson, the
epicenter of the Klondike Gold Rush, that includes some of the most
productive placer mining creeks where a lot of gold is still being pulled
out. Klondike Gold owns the claims above many of the best creeks.
Klondike is systematically exploring an area called Lone Star, which was
the site of one of the only historical bedrock gold mines that produced
high-grade gold. Klondike has hit about 2 kilometers (2 km) of gold
mineralization along a structure that CEO Peter Tallman thinks may continue
for as long as 7 km.
I like Klondike for several reasons. It's very close to Dawson City, so
its costs of drilling are very low. And in the Yukon that's important. A lot
of these companies require helicopters to get in and out, which is expensive.
Klondike has great backing. Frank Giustra, the co-founder of Goldcorp and
founder of Lionsgate Films, is a major shareholder. So is Francesco Aquilini,
another Vancouver-based billionaire whose family owns the Vancouver Canucks
hockey team. So Klondike has some deep-pocketed shareholders and a plan to
home in on an area with lots of gold mineralization. I really like its
prospects for this year.
TGR: What's another company in the Yukon that you like?
JK: Arcus Development Group Inc. (ADG:TSX.V), a small company
that is under the radar. The CEO, Ian Talbot, is a geologist and a lawyer, and
was BHP Billiton Ltd.'s (BHP:NYSE; BHPLF:OTCPK) lawyer out of its Vancouver
office. Arcus owns a land position directly north of Goldcorp's Coffee
deposit. The Coffee project covers a vast land position, but a lot of the
gold mineralization is on the northern portion, very close to where Arcus's
Dan Man project is. Last year, Goldcorp bought 19.9% of Arcus. So even though
it's not on the radar of investors, it's on Goldcorp's radar. Arcus is
drilling the project this year. I'd be surprised if Goldcorp didn't buy it
out at some point.
TGR: Did any other companies in the Yukon catch your attention?
JK: One company that I like in the Yukon is Strategic
Metals Ltd. (SMD:TSX.V). It is a project generator with the largest
claims position in the Yukon. It has projects all over the Yukon, so it's
really well poised to capitalize on this money that's flowing into Yukon
exploration companies.
Strategic is almost like a mutual fund focused on the Yukon. It owns 40%
of Rockhaven Resources Ltd. (RK:TSX.V), which has a high-grade gold,
polymetallic Yukon deposit of more than 1 Moz of gold in the Inferred
category. Strategic owns 7% of the shares of ATAC Resources Ltd. (ATC:TSX.V).
ATAC is one of the exploration companies that had a major come in: Barrick
Gold Corp. (ABX:TSX; ABX:NYSE), the world's largest gold mining company, did
a joint venture deal on one portion of ATAC's large land holdings. Both
Rockhaven and ATAC have very large drill programs. Strategic also recently
spun out to shareholders a new Yukon-focused exploreco called Trifecta Gold
(TG:TSX.V) that is drilling at two projects.
Before Goldcorp bought Kaminak, it wasn't easy to raise exploration money
for the Yukon. Now there's money flowing and quite large drill programs
underway. It will be interesting once the results start flowing in to see if
the Yukon can sustain the interest and capital flow.
TGR: Are there other companies that you'd like to talk about?
JK: Since we're talking about gold and high-grade gold, another
company that I follow in Resource Opportunities is Sabina Gold
& Silver Corp. (SBB:TSX; RXC:FSE; SGSVF:OTCPK). It used to be called
Sabina Silver, with a silver polymetallic project that it sold for quite a
large amount of money back in 2010-2011. Sabina has been well financed through
this terrible bear market that we've come through. I picked up coverage of
Sabina during the bear market at $0.39. A new CEO had just come in, Bruce
McLeod, whom I was familiar with and respected.
Sabina has the very high-grade Back River gold project up in Nunavut,
again a northern project. What's interesting about Sabina is a lot of the
gold is in open pits. Sabina has in all categories more than 7 Moz of gold,
and the grades are 5–6 grams/ton (5–6 g/t) gold with some zones that are much
higher grade that the company is drilling. Back River is one of the last
large, high-grade gold deposits globally that's owned by a junior mining
company.
But Sabina has had some trouble with permitting. The company went through
a lengthy permitting process, with thousands of pages of material and
mitigation plans for tailings and caribou management and everything else. The
Nunavut Impact Review Board (NIRB) last year recommended to the federal
government that the project not go forward. That was obviously a big blow to
the company. The federal government went back to the regulator and said we
want you to have another, closer look at this project. Sabina went back to
the drawing board and altered its plan to address some of the concerns. NIRB
reversed itself earlier this summer.
Sabina stock is now at about $2.27 or so and the company has more than $36
million in the treasury. It is drilling some of the "treasure
boxes," high-grade gold areas that could be a real sweetener for any
mining company that takes over the project.
The Nunavut area is quite active. There's a company called TMAC Resources
Inc. (TMR:TSE) that's building a high-grade gold mine nearby. Agnico Eagle
Mines Ltd. (AEM:TSX; AEM:NYSE) has some of its best operations up in Nunavut
as well.
TGR: What is another company you would like to talk about?
JK: If we're talking high-grade gold, we can't leave out Pretium
Resources Inc. (PVG:TSX; PVG:NYSE) and its Brucejack project up in the
Golden Triangle in British Columbia. Before I took over the Resource
Opportunities newsletter, I was an editor and reporter at the Vancouver
Sun newspaper. Working as the newspaper's mining writer was good
preparation for the newsletter. Vancouver has so many mining and exploration
companies, so I really had to be selective and focus only on the best
projects and people. One of the people I interviewed was Bob Quartermain,
Pretium's CEO, when the company had its IPO. He was raving about the
high-grade gold up on the Brucejack property.
Fast forward a few years, and Pretium recently announced commercial
production at Brucejack. The mine is high grade, but also has size. There
have been gold mines in the Golden Triangle, which used to be quite an active
mining area, with higher grades, but none of them was nearly as large as
Brucejack.
It will be interesting to see how that one plays out. Of course, there was
some controversy over the resource and whether the grades hold up. Now
Pretium is feeding ore into the mill. So that'll be a good one to watch for
the coming years.
Also up in the Golden Triangle is a little exploration company called GT Gold Corp.
(GTT:TSX.V). In its first pass at drilling, GT Gold is hitting some
really nice near-surface intercepts, including 13.03 g/t over 10.67 meters.
The stock has gone on quite a run. That company has a market cap of about
$100 million. Companies that have properties bordering on GTT's ground are
starting to see their stock prices come up.
I do like to compare companies because in this market things can get out
of whack. All the excitement goes to certain names and other ones get
neglected. That can create opportunities. For example, there's a company
called IDM
Mining Ltd. (IDM:TSX.V) that is building a small underground gold mine in
the Golden Triangle that is very high grade. It's taken over a project that
majors had put several million dollars' worth of work into, including about 2
km of underground workings, tunnels and so on. It just published a
feasibility study. IDM, an advanced-stage company that's now going through
permitting, has a market cap of about $50M.
There's interest and money flowing into the Golden Triangle, which is very
remote and has a winter climate. But more roads have been built in the last
few years and also the British Columbia government has built a
high-transmission power line that goes right through the heart of the area.
There's another mine called Red Chris, a copper-gold mine that Imperial
Metals Corp. (III:TSX) has opened. So there's a lot going on up there as
well.
TGR: Any other gold companies you want to touch on?
JK: Columbus Gold Corp. (CGT:TSX; CBGDF:OTCQX) is an
interesting story. It has some recent news, too. Columbus owns a 45% stake in
the Montagne d'Or project in French Guiana. Nordgold SE, a big Russia-based
gold mining company, funded a feasibility study at Montagne d'Or, so it now
owns 55%. Columbus will probably either sell its 45% stake to Nordgold, or
it'll sell it to another gold mining company. Montagne d'Or is a very large
deposit, 5 Moz, with good grades, considerably higher than average gold
grades being mined now globally.
Columbus also has a Nevada angle. It recently announced plans to spin out
the Nevada properties into a new company called Allegiant Gold. Columbus is
shifting focus to its very large land package in Nevada. The exploration team
it works with is Cordex, a legendary Nevada exploration team that's now run
by Andy Wallace. Cordex was founded by John Livermore, who was the key person
who discovered the Carlin Trend in Nevada, one of the world's largest stores
of gold. Columbus has a very powerful exploration partner there. Columbus is
narrowing in on the zones it's going to drill. It's another one to watch,
especially if the spinout of the Nevada properties goes through as planned.
TGR: In Resource Opportunities, you also cover uranium.
What's your take on the market?
JK: I love finding things that are hated or neglected, that people
don't care about because they have been low for so long that they're not even
on the radar. And uranium fits that bill. Ever since the Fukushima disaster
in 2011, it's just been lower lows, more or less continually.
But uranium is a funny market because it's very cyclical. In the late
2000s, there was an incredible uranium boom that took the spot price up to
about $100/lb. And as the uranium price goes down, of course, it becomes less
and less economic to mine. Some of the world's largest producers are cutting
production and at a certain point, that will affect the price, which will
come up.
I think uranium is a really good opportunity right now, especially for
companies that can go into production in the 2020 decade. And because it's
such a small market, there are not many companies that produce uranium, so
when the move happens, it can happen quickly, and it can be fairly violent as
well.
TGR: What uranium companies fit that bill?
JK: NexGen Energy Ltd. (NXE:TSX; NXE:NYSE.MKT) has a
spectacular—I'll call it a discovery—but it's actually a very large, growing
high-grade deposit in the Athabasca Basin in northwestern Saskatchewan. In
2014, Resource Opportunities picked up coverage on NexGen Energy
during that terrible bear market. It was a little junior with a land position
in the Athabasca Basin, and the stock was at $0.30. For a long time nobody
else covered it.
But it started hitting these spectacular, high-grade intercepts, and it's
been quite a success story. The stock is now at $2.73. NexGen just came out
with a preliminary economic assessment (PEA) on the Arrow deposit showing
very strong economics, including an after-tax internal rate of return of 57%
(at an 8% discount rate).
For some perspective, Cameco Corp. (CCO:TSX; CCJ:NYSE), the Canadian
uranium company, is one of the world's largest producers, producing something
like 15% of annual global supply. The PEA that NexGen just came out with
shows that in the first five years of Arrow's mine life, NexGen would produce
more uranium annually than Cameco does now.
NexGen is really positioned to take a dominant place in the world's
uranium sector. The world's largest mining companies are all keeping a close
eye on it. The stock price has performed in a terrible market for uranium,
and I think there's upside from these levels. If NexGen gets taken over, the
company that owns and develops Arrow will have a dominant position in the
global uranium market. So it is quite a large prize.
TGR: Recently, NexGen announced that it had a $110 million
financing with CEF Holdings Ltd. Does that give it the financial security
that it needs to get to production if it decides to take the mine into
production itself?
JK: One of the things that makes junior mining companies vulnerable
to hostile takeovers of course is being in a weak financial position. CEF
Holdings is a joint venture between CIBC, one of the big Canadian banks, and
Li Ka-shing, Asia's richest person. He's a multibillionaire and very
successful across different sectors, including mining and energy. It's a real
validation. He first took a position last year, and has now doubled down.
NexGen's cash position is about $200 million, and the company's market
capitalization is less than $1 billion. So that treasury really does give
NexGen options.
And the Li Ka-shing connection is important because a lot of the demand
growth on the uranium side will come from China. Uranium supply is very
important for China, which is building lots of nuclear reactors due to its
growing population and energy needs. China is also going big into solar power
but the nuclear push is substantial.
TGR: Let's switch to diamonds, which your newsletter also covers.
Any companies you want to talk about there?
JK: As in uranium, I like to find things that people aren't
interested in or that are out of favor, and diamonds fits the bill.
I was at the annual Prospectors & Developers Association of Canada
meeting in Toronto back in March, and it was a big crowd, lots of good
energy. I went to a diamond presentation that had some pretty high-quality
companies presenting and the room was almost empty. I found that interesting,
especially because among the few people there were Chuck Fipke, a billionaire
who found Canada's first diamond mine, and Eira Thomas, who helped discover
Diavik, Canada's second diamond mine. She was also the CEO of Kaminak when it
was taken over by Goldcorp. Eira is a cofounder and director of Lucara Diamond
Corp. (LUC:TSX.V) and continues to have an interest in diamonds.
Some of the biggest mining companies in the world are quite interested in
diamonds because a profitable diamond mine is a very powerful cash machine.
For example, the new boss of Rio Tinto Plc (RIO:NYSE; RIO:ASX; RIO:LSE;
RTPPF:OTCPK), Jean-Sebastien Jacques, has talked about how he loves the
diamond business. And Rio Tinto just inked a joint venture deal with Shore
Gold (SGF:TSX), which is exploring for diamonds in Saskatchewan. And then of
course, De Beers for a long time had almost a monopoly on diamond production
and marketing. It is now majority owned by Anglo American (AAL:LON), and De
Beers has been a real profit generator for Anglo American.
Back in April, I did a site visit to Lucara's Karowe diamond mine in
Botswana. Lucara is a Vancouver-based Lundin Group company that is quite an
interesting story. It bought a De Beers exploration project that De Beers
gave up on, and started finding these very large diamonds. A couple of years
ago, Lucara found a 1,109-carat diamond, the second largest ever discovered.
Lucara tried selling the historic diamond at a live auction last year.
There were different factors, but it was unable to sell it last year. But
Lucara also found an 813-carat diamond that sold for $63 million, a record
for a rough stone.
Lucara's Karowe mine is small. It only produces about 0.03% of diamonds
globally each year, but it produces more than 60% of diamonds that are larger
than 10.8 carats (called "specials"). Lucara keeps finding very
large diamonds that command really high prices. The company has now paid out
more in dividends than it has raised in the capital markets, and the stock
yields more than 3.5% at these share price levels. Lucara has been weighed
down by this 1,109-carat diamond that remains in inventory, which it named
the Lesedi La Rona. I think the Lesedi will sell and for a lot of money. So
Lucara is a company that generates a lot of cash flow from Karowe and has
consistently increased the dividend.
On the exploration front, a company I follow is called North Arrow
Minerals Inc. (NAR:TSX.V). The chairman of North Arrow is Gren Thomas,
who is Eira Thomas's father. He was the CEO of Aber Resources, which
discovered the Diavik diamond mine up in Canada's Northwest Territories.
North Arrow has the Naujaat diamond project in eastern Nunavut, which has
a population of rare, valuable orangey-yellow diamonds. North Arrow recently
raised $5 million from investors, including Ross Beaty who invested $2
million. Similar to the large diamonds, colored diamonds are much rarer. And
North Arrow has actually cut and polished some of the orangey-yellow
diamonds, and they're quite beautiful stones. With the money raised, North
Arrow has taken a small bulk sample and is doing some drilling. The
orangey-yellow diamond population could put that project over the economic
hurdle to allow it to become an operating diamond mine.
North Arrow has other projects across Canada as well and a very strong
team, with quite an active program over the next nine months. It has
discovery potential at some of its other projects, including Mel and Loki.
TGR: Thanks so much for your insights, James.
James Kwantes is the editor of Resource
Opportunities, a subscriber supported junior mining investment
publication. Kwantes has two decades of journalism experience and was the
mining reporter at Vancouver Sun, the city's paper of record.
