The Gold Report: Appropriately for this time of year—Halloween and the Day of the Dead—gold's hold above $1,700/ounce (oz) seems to be reviving some junior mining stock prices that had been left for dead. What are some names with a heartbeat?
Bob Moriarty: NOVAGOLD (NG:TSX; NG:NYSE.MKT) has come back from the dead a couple of times. In 2001 or 2002, NOVAGOLD was the number one gaining stock on the Toronto Stock Exchange. It reached $20/share at one point. In 2008, it hit a low of $0.46/share; 18 months later it had bounced back to $17/share.
TGR: And today it trades at $5/share.
BM: The lesson here is to buy when stocks are cheap and sell when they get expensive. Too many investors in the junior mining space marry the damn stocks. They fail to sell and take their profit when they have the chance. If investors aren't willing to sell at a profit, the only alternative is that they sell at a loss.
When I write about a stock, I think I can predict what it will do over the next few months to a year, but it is really hard to predict what the fools running these companies will do two or three years out. You have to take a profit when you can.
TGR: Well, NOVAGOLD has revitalized itself and is moving Donlin Creek in Alaska forward. Can you tell us another zombie story?
BM: Canaco Resources Inc. (CAN:TSX.V) has a big property in northern Tanzania. I visited about six years ago and looked at some of the gold through a loupe. From that look, I could tell the gold had been formed right there. But the other geologists on the tour begged to differ and the company drilled another project to the south. That was a total bust and the stock fell through the floor. As a last-gasp effort, Canaco sold half of the company to the Chinese at $0.05 a share in early 2009.
The company returned to northern Tanzania, where it drilled and promoted the project like crazy. The stock ran from $0.06/share in 2008 to $6.40/share in 2011. The company got to a market cap of $700–800 million (M). Then, with the market expecting a resource of 5 million ounces (Moz) or so, Canaco announced just 1 Moz. The market killed the stock.
TGR: On May 15, 2012, it was trading at $0.87/share and two days later it was down to $0.36/share.
BM: This is a perfect example of a stock being smacked by the market because management over-promoted the project and it blew up in its face. The company now has $0.54/share in cash and is selling for $0.41/share. That is crazy.
TGR: You believe Canaco is an interesting investment, then?
BM: Anytime you can buy $1 bills for $0.80, it is a good deal. Canaco has 1 Moz of mineable gold. Its mistake was over-promotion. I hope management had a "come to Jesus meeting" and is figuring out how to use that $100M to turn the project into a mine. If you cannot make a mine with 1 Moz in Tanzania, you cannot do it anywhere.
TGR: Looking for another zombie stock, how about CBM Asia Development Corp. (TCF:TSX.V; CBMDF:OTCBB)?
BM: I would like to grab management by their necks and shake them until their brains fall out. The company has raised $40–50M over the last four years and has a $25M market cap. Its coal-bed methane project in Indonesia has more potential than any I have ever seen or heard of.
I have a lot of shares in this bugger. I was in placements at $0.40 in 2008 and am now buying stock at $0.14/share. This is a situation where 100% of the investors have lost money; that has to be a management problem.
TGR: What does management need to do to move forward?
BM: Management needs to put money in something so investors can see the benefit. Management spends $1M here or $5M there to pick up a new project with 10 trillion cubic feet (Tcf) potential; but until you drill it out, you cannot put a hard number on it. It's worth a lot but investors don't see it. Management has to do something visible.
The company did put out a probable resource last year. Its share was 1 Tcf of gas and the market price in Indonesia is $10–12/thousand cubic feet. CBM Asia has an asset that should be worth $200–300M and its stock is selling for a tenth of that amount.
Management needs to drill to come up with a resource. It needs to sell something and show investors that the company can make money.
TGR: It looks as if CBM Asia has had a couple of resurrections. Initially, it had a nice run up in share price, got decimated and had another nice run up. With a $0.14 share price and a $25M market cap, it seems to be on life support.
BM: But it is not on life support, and that is the terrible thing. The company has $9M in the bank, a $25M market cap and 169M shares total. Its 1 Tcf resource should be worth $200–300M. Its enterprise value is $15M, when it should be $300M.
I have gotten a lot of grief from people who bought shares on my recommendation. But I am still buying; I have an open order. I do not think I am an idiot; I think management has done a poor job. I think CBM Asia has the goods and will resurrect when it shows the shareholders some value.
TGR: OK, we have gone from Alaska to Africa to Indonesia. What location and company provide your next zombie stock?
Bob Moriarty: This one— Philippine Metals Inc. (PHI:TSX.V; PHIXF:OTCQX)—is a very funny stock.
TGR: A Goldman Sachs analyst out of Sydney recently told me the Philippines is a mining district on the cusp of breaking out. What makes Philippine Metals a zombie?
BM: I met Philippine Metals' management several years ago in Vancouver. The company had three major projects in the Philippines and I saw some of the rock—it was some of the highest grade copper I had ever seen. I invested when the shares were $0.45/share. It dropped to $0.25/share in mid-2010 when some drill results did not work out.
The Philippines has some of the richest gold and copper deposits in the world. It also has one of the most corrupt governments in the world. You can have two companies working there, one can be very successful, the other a total failure. It all has to do with their understanding of the local politics.
Philippine Metals now has $0.04/share in cash. I bought shares this week at $0.02/share. You cannot go wrong buying $1 bills for $0.50.
TGR: Is the company moving forward at all?
BM: I'm told yes. But if it disappears into Junior Stock Heaven, I lose $0.02; if lightning strikes and it hits something, maybe I make some money.
TGR: Would you consider Comstock Mining Inc. (LODE:NYSE.MKT) a zombie stock? It was beaten down and now seems to be coming back.
BM: When the Comstock Lode was active in the 19th century, it produced 8 Moz gold and 299 Moz silver. Because of the ratio of silver to gold, it was considered a silver district originally. Based on today's ratio of silver to gold it would be considered a gold district.
This stock has had some pretty high ranges. In 2010 it was $2.20/share, went up to $4.40/share and by May 2012 had drifted down to $1.60/share.
The company has seven miles of the Comstock Lode—a lot of gold and silver. Its success will depend on how good management is and how fast it can increase production. I was there for its first gold/silver pour not long ago. The company estimates production of 20,000 oz gold this year, which is not a lot, but Comstock will be producing a lot more in the future.
There is some local opposition to the mine, which seems crazy to me. The only decent paying jobs in Nevada are mining. Comstock will be increasing production, 99% of its drill holes are hitting ore-grade material and someday the fools in Nevada will start realizing that riches don't come from a government unemployment check.
TGR: What about Tembo Gold Corp. (TEM:TSX.V; TBGPF:OTCQX) or Argentex Mining Corporation (ATX:TSX.V; AGXMF:OTCBB)?
BM: Tembo and Argentex are both really good examples of zombie stocks.
When I visited Argentex in Argentina three months ago, its stock has been beaten down to $0.25/share. I wrote about the company and its share price rose to $0.40/share. A delayed NI 43-101 report hurt the stock price for a while. If you like silver, you have to like Argentex. The company has some great silver projects. When I was there, it was developing ounces for $0.06/oz. The stock is cheap now, but not for long.
Tembo has excellent management. The company raised a lot of money and put it into the ground. It was getting great intercepts on its projects in Tanzania. Then, what happened to Canaco dragged Tembo down.
Tembo should be a $3–4/share stock right now, but it is $0.47/share. This has nothing to do with management or the market. It is suffering from what happened to Canaco.
TGR: It seems that when something happens anywhere in Africa, all of the African stocks get smacked. That makes no more sense than smacking down a stock in Ontario when something happens in Mexico.
BM: That is absolutely true. Some of the most profitable African mines are in Tanzania. If you cannot make a mine out of a great resource there, management should be run out of town on a rail after being tarred and feathered.
TGR: I think it's time to leave the zombies to their unholy slumber and talk about some other companies that pass your litmus test.
BM: The companies I like the best are those that take care of their shareholders, companies where 100% of the shareholders make money.
I like Novo Resources Corp. (NVO:CNSX; NSRPF:OTCQX), which is run by Quinton Hennigh. I visited Australia with Quinton and saw the best deposit I have ever seen. It has taken the company three years to assemble the project, but it has come together. Shares were $0.40 three months ago; now the share price is $0.88.
TGR: I thought Quinton Hennigh was working with Brent Cook. Is Novo his side gig?
BM: Quinton has half a dozen gigs. He is the brains behind Evolving Gold Corp. (EVG:TSX; EVOGF:OTCQX; EV7:FSE) and Gold Canyon Resources Inc. (GCU:TSX.V). He helped out Prosperity Goldfields Corp. (PPG:TSX.V). He has done a lot for EurOmax Resources Ltd. (EOX:TSX.V) in Serbia and Bulgaria.
But Novo Resources is his baby. He wanted to keep it quiet until it was done. He did the deal with Mark Creasy in August; I wrote about it and shares more than doubled. Virtually all of the shareholders have made money. Quinton is proving up 3 oz gold per square meter. Now, 1 square kilometer is 1M square meters; that would be 3 Moz. This is an extraordinary deposit with unlimited potential. Plus, the stock is very cheap and nobody knows about it.
The project is in the Pilbara region of northwestern Australia, a region known for its iron deposits. Those iron deposits precipitated out of salt water 3 billion years ago when oxygen started being formed by algae. The funny thing is that same sort of precipitation is the source for gold deposits worldwide, yet it's not understood.
Gold did not all come from deep in the earth, it came from salt water and fresh water that was a lot more acidic than it is now. Way back then, water contained thousands of times more gold than it does today. As the chemistry of the water changed, its ability to contain gold changed and the gold precipitated out.
According to this precipitation theory, there probably is a lot more gold around than we think. However, you need to approach it the way you would a coal-bed methane, potash or coal deposit. You need to think about a sedimentary basin with gold being in conglomerates. That is what Quinton has come up with: multigram gold in 10-, 20- and 30-meter intercepts. He is adding lots of ounces in a hurry.
TGR: We are close to the end of a year during which the gold price has held steady. What do you see for the rest of the year?
BM: The prices of gold and silver have held up very well. We have come out of a minor correction with real nice prices for the juniors. I think this is the buying opportunity of a lifetime. The government's announcement of more quantitative easing (QE) from QE3 into infinity can only be inflationary over the long term.
TGR: If it is the buying opportunity of a lifetime, why are larger investors like the hedge funds and the institutions not piling into the space?
BM: Because they do not pile in at bottoms. They pile in at tops.
TGR: But we are not seeing a bottom right now. Gold and silver prices are ascending. Are we in the middle of a long-term bull market for both silver and gold, with a ways to go yet?
BM: Yes, absolutely. Big investors are skeptical; they will leap in only after we have had a major rise. One of the first pieces I wrote for our website in 2001 was "Hey Guys, This Is a Bottom." Gold stocks were up 50% in six months and nobody noticed.
TGR: Any final Halloween treats for our readers. Bob?
BM: I cannot say it often enough: This is the opportunity of a lifetime. You can be in a closed room, wearing a blindfold and throwing darts and you are sure to hit something very valuable. Stocks are so cheap that you are almost hard pressed to make a bad decision.
TGR: Thanks, Bob.
DISCLOSURE:
1) Sally Lowder of The Gold Report conducted this interview. She personally and/or her family own shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Gold Report: NOVAGOLD, Comstock Mining Inc., Tembo Gold Corp., Argentex Mining Corp., Evolving Gold Corp., Gold Canyon Resources Inc. and Prosperity Goldfields Corp. Streetwise Reports does not accept stock in exchange for services. Interviews are edited for clarity.
3) Bob Moriarty: I personally and/or my family own shares of the following companies mentioned in this interview: Tembo Gold Corp., Novo Resources Corp., Evolving Gold Corp., Gold Canyon Resources Inc., Prosperity Goldfields Corp., CBM Asia Development Corp. and Philippine Metals Inc. I personally and/or my family am paid by the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this interview.
