Metal prices are again on the rise. Particular standouts
include: silver, lithium, zinc, gold, platinum and palladium. All of the
aforementioned metals have entered new technical bull markets in 2016 and
seem to be building momentum. It took four painful years, but this proves yet
again that low prices are the best cure for low prices. When the price of a
particular commodity drops precipitously, two phenomenons inevitably occur:
(i) higher cost suppliers of the commodity cut production and (ii) buyers of
the commodity purchase more in real terms. These twinning events may take a
while to play out, but they inevitably do.
M&A activity has picked up, particularly in Q2/16. This is great news
for quality development projects not yet owned by a major producer. The
recent bear market has a left a dearth of near-term production candidates and
those still remaining are that much more valuable to a potential acquirer.
Additionally, if this indeed becomes a multiyear bull market, then explorers
too will receive increased attention. Shareholders of well-managed prospect
generators are poised to do very well over the coming few years.
Here are a few companies that I believe are well positioned to ride the
bull.
Golden
Arrow Resources Corp. (GRG:TSX.V; GAC:FSE; GARWF:OTCPK) has been a strong
performer in 2016. The company, founded by the experienced Joe Grosso, has
been exploring and developing precious metal projects in Argentina for over
two decades. Golden Arrow's flagship asset, the Chinchillas project in Jujuy
Province, looks increasingly likely to reach production by the end of 2017
thanks to a joint venture with silver heavyweight Silver Standard Resources
Inc. (SSO:TSX; SSRI:NASDAQ). Once the Chinchillas joint venture begins
generating cash flow (or, conversely, is bought outright by Silver Standard),
the company will return to its roots as a prospect generator focused solely
on Argentina.
The market has rewarded Golden Arrow so far in 2016 for the following
reasons:
- Chinchillas offers near-term production potential with a
very affordable initial capex (thanks to synergies with JV partner
Silver Standard and its producing Pirquitas asset).
- Due to its massive size and relatively low grade,
Chinchillas is a classic "optionality play" with significant
leverage to the price of silver (which has been the best performing
commodity so far in 2016).
- Argentina's election of pro-business President Mauricio
Macri has opportunistic mining investors streaming into the country.
Golden Arrow's Chinchillas project is a textbook optionality play-a
relatively low-grade deposit that contains over 200 million silver-equivalent
ounces. One key takeaway is that this is a massive project, particularly when
you consider that at least 50% of the land package has yet to be explored. An
ultimate resource of 500 million silver-equivalent ounces is optimistic but
not impossible.
Golden Arrow is likely to "add another horse to the stable."
This acquisition would likely be similar in geology to Antofalla, and the
goal would be to discover another Chinchillas-like deposit. The company's
deep experience in Argentina will give it a leg up in any negotiations that may
take place.
Almadex
Minerals Inc. (AMX:TSX.V) is another company that has taken off, with a
500% year-to-date gain. The company was formed just 12 months ago, when
well-respected Almaden Minerals spun out its prospect generation business so
the company could focus on Ixtaca. We started buying in Q4/15, when Almadex's
market cap was equal to its working capital position. In hindsight, this was
a ludicrous proposition considering management's multidecade exploration
expertise in Mexico.
In the first half of 2016, the company was relatively quiet on the
prospect generation front. Instead, the company's share price was buoyed by
positive developments surrounding Almadex's royalty and equity holdings.
There were three major developments:
- The materialization of Gold Mountain Mining Corp.'s
(GUM:TSX.V) Elk Gold project into a legitimate British Columbia
development play, on which Almadex owns a 2% NSR royalty
- The revitalization of the Ixtaca project, on which
Almadex owns a 2% NSR royalty
- The sale of El Encuentroto to McEwen Mining Inc.
(MUX:TSX; MUX:NYSE) for CA$250,000 (Almadex retained a 2% NSR royalty on
the property)
However, just within the past two weeks, the company has demonstrated why
the prospect generation business can be so exciting. On Aug. 8, the company
announced an intersection of 163.5m at 0.68 g/t gold and 0.29% copper at its
fully owned El Cobre project. These results were only for the top half of the
hole and, sure enough, the company announced earlier this week that another
150.9m at 0.55 g/t gold and 0.22% copper was intersected below the initial
zone of mineralization. Assays ended at 540m, with the news release stating
that "Porphyry style alteration continues to the end of the hole,
currently at ~890 meters depth and advancing."
While the full results from hole EC-16-010 have yet to be received, this
already looks to be a legitimate discovery of a large copper-gold deposit.
Over the coming months, Almadex will bring additional drill rigs to the
property to both (a) conduct stepout drilling around hole EC-16-101 and (b)
test several anomalous areas on the property that have yet to be drilled.
These next six months hold the potential for immense value creation at El
Cobre.
Nevsun
Resources Ltd. (NSU:TSX; NSU:NYSE.MKT) remains my favorite mid-tier base
metal play. While Nevsun's share price has lagged many of its peers, the
company has had a sensational 2016 from a business perspective. The market
will soon catch on.
There have been multiple positive developments thus far this year, but
Nevsun's most significant was the acquisition of Reservoir Minerals and its
world-class Timok copper-gold project in Serbia. Timok has become one of the
most significant undeveloped base metal deposits in the world due to its high
grade, massive size and proximity to existing mining infrastructure.
An April 2016 PEA on Timok's Upper Zone outlines the project's exceptional
economics, including an initial capex of $213 million; a post-tax NPV of $1
billion (at 8% discount rate and spot metal prices); a post-tax IRR of 86%;
and a payback of less than one year.
For a project of this size, these economics are virtually unheard of. Additionally
they don't take into account Timok's Lower Zone, which may have a potential
production life of 15-20 years. We'll learn more about the Lower Zone over
the coming year as Nevsun has initiated an aggressive drilling program. In a
best case scenario, the Lower Zone could double or triple the overall value
of Timok.
Developments at the Bisha mine in Eritrea have been overshadowed by the
high-profile Timok deal. However, there have been several significant
developments this year worth noting, including Bisha's zinc expansion coming
in on time and underbudget and Q1/Q2 supergene copper ore production of 55.8
million pounds at a C1 cash cost of $1.04 per payable, which was above
guidance of 40-50 million pounds and under the cost guidance of $1.20 to $1.40
per payable pound of copper.
Additionally, Newsun announced that it had increased its total land
package of exploration licenses to 814 square kilometers in Eritrea's Bisha
VMS District. This represents a 1,891% increase from the 41 square kilometers
the company had before the deal. This acquisition solidifies my belief that
Nevsun will find enough ore to keep the Bisha mine producing for another
three decades. This may be a VMS district on the same scale as Manitoba's
Flin Flon district, which has seen 25 producing mines in the past century.
I'm thrilled to see what the company can discover elsewhere in the district
over the coming years.
Matt Geiger is the general partner at MJG Capital, a
limited partnership focused on long-term capital appreciation through
investments in natural resources.
Disclosure: 1) The following companies mentioned in this
article are sponsors of Streetwise Reports: Golden Arrow Resources Corp. The
companies mentioned in this article were not involved in any aspect of the
article preparation. Streetwise Reports does not accept stock in exchange for
its services. The information provided above is for informational purposes
only and is not a recommendation to buy or sell any security. 2) Matt Geiger:
I or my family own shares of the following companies mentioned in this
article: Golden Arrow Resources Corp., Almadex Minerals Inc. and Nevsun
Resources Ltd. I personally am or my family is paid by the following
companies mentioned in this article: None. My company has a financial
relationship with the following companies mentioned in this article: None.
Funds under my company's control hold the following companies mentioned in
this article: Golden Arrow Resources Corp., Almadex Minerals Inc. and Nevsun
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