We are still in the early stages of a four- or five-year resource bull market. Those who own hard assets will be heavily rewarded; those exposed to the general stock market (or, god forbid, government debt) are in for a rude awakening. What we are witnessing is reversion to the mean after a five-year period in which commodity prices slumped as financial assets inflated in price. The tide has shifted, and Trump instead Hillary in the Oval Office will have little effect on this reality.
For those who have missed this mining bull market thus far, NOW IS THE TIME TO GET AGGRESSIVE. Precious metals, base metals, ag minerals and energy metals should all do well. After a torrid start to the year, resource equities have been in a consolidation phase since mid-August. Smart investors are using this opportunity to build positions in high-quality names. Why wait until 2017 when hard assets start moving again when you can buy right now at cheaper prices?
Before I provide updates on a few of my favorite picks, I encourage all readers to check out a white paper produced by Jeremy Grantham and Lucas White from GMO. The paper, entitled "An Investment Only a Mother Can Love: The Case for Natural Resource Equities," provides a comprehensive look into the benefits afforded by long-term investments in natural resource equities. This is a must read for anyone actively investing in the space and can be accessed free of charge here.
The partnership maintains a concentrated portfolio of ~20 resource equities. Our biggest winner thus far in 2016 has been Almadex Minerals Ltd. (AMX:TSX.V), which I've discussed in previous Streetwise articles. When we started buying Almadex shares in Q4/15, the company's market capitalization was equal to the value of its working capital + marketable securities + gold bullion holdings. Remarkably Almadex shares are up over 800% since the beginning of the year, largely due to a new discovery made at the company's El Cobre Project in early August.
The success of this investment reminds us of two lessons:
(1) When companies with honest and experienced management teams are trading at/below working capital, BUY HAND OVER FIST. All surprises will be to the upside, and companies with small (or negative) enterprise values have historically proven to be low-risk investments.
(2) With a little luck, mineral exploration can generate tremendous value out of seemingly nowhere. Remember that Almadex had already drilled nine different holes at El Cobre before hitting significant mineralization in Hole EC-06-010. Since this discovery hole, the Almadex share price has tripled with additional gains quite possible.
An investment in Almadex is riskier now than when we first initiated our position. There is no question that the market has big expectations for El Cobre and, if the company fails to delineate a significant copper/gold deposit over the coming 12 months, the share price will be hit hard.
That said, Almadex will have excellent news flow over the coming months. Management still believes that the intrusive core of the porphyry system has yet to be discovered; the company will soon be drilling the "Deep IP Zone" and "Villa Rica Zone." Both of these are untested targets that lie south of the discovery hole. When analyzing upcoming drill results, investors should be looking for higher grades (at least 2 g/t gold equivalent) and equal widths (at least 150 meters) when compared to recent assay results. If the company is successful in finding the intrusive core, we would see another double or triple in share price in short order.
For investors with a shorter time horizon, Golden Arrow Resources Corp. (GRG:TSX.V; GAC:FSE; GARWF:OTCQB) is a buy below CA$1. As a quick refresher, Golden Arrow signed a JV deal with precious metals heavyweight Silver Standard Resources Inc. (SSO:TSX; SSRI:NASDAQ) in October 2015. Silver Standard's rationale for doing the deal was simple—its Pirquitas Mill runs out of feed in 2017 and it saw an opportunity to use Chinchillas, located only 30km from the mill, as a satellite pit to extend Pirquitas' production life by multiple decades. The agreement stipulated that Silver Standard would "spend a minimum of $4 million for pre-development activities. Expenditures may total up to $12.6 million based on the success of the pre-development activities," and that a decision needs to be made by March 31, 2017.
Silver Standard confirmed last week on its Q3 conference call that all technical work will be completed at Chinchillas by the March 3 deadline. Additionally the company has spent $10.5 million ($10.5M) at Chinchillas, including $3M in Q3/16 alone. This implies that the $12.6M in expenditures mentioned above will be reached before Christmas. Given the above points and the drastic improvement in precious metal prices since this deal was signed in October 2015, I am nearly certain that this deal will go ahead. What I don't know yet is the structure, and we could see any of the following occur: (a) outright takeover of Golden Arrow by Silver Standard, (b) Silver Standard buys the Chinchillas Project from GRG for shares/cash, (c) Silver Standard and Golden Arrow put Pirquitas Mill and Chinchillas into a separate vehicle, or (d) Silver Standard vends Pirquitas Mill into Golden Arrow in exchange for shares.
Regardless of the structure, I think Golden Arrow shareholders will be rewarded with a generous offer in short order. Between now and Christmas is a good time to accumulate Golden Arrow shares on the open market, though I would wait until November 29 when the share lock up from Golden Arrow's most recent placement ends.
I'll conclude with a few ideas for the deep value junkies out there: Golden Valley Mines Ltd. (GZZ:TSX.V), Solitario Exploration & Royalty Corp. (SLR:TSX; XPL:NYSE.MKT); Globex Mining Enterprises Inc. (GMX:TSX; GLBXF:OTCPK), Southern Arc Minerals Inc. (SA:TSX.V; SOACF:OTC ) and Minco Silver Corp. (MSV:TSX).
The above companies share the following characteristics: (1) market cap near/below value of working capital + marketable securities, (2) no debt, and (3) no need to dilute share structure for multiple years, if ever. I view each of these as low-risk investments for the above reasons, but the beauty is that all five stories have plenty of upside exposure to this nascent bull market.
Golden Valley Mines, for instance, owns 49% of Abitibi Royalties Inc. (RZZ:TSX.V)—and Abitibi, in turn, may prove to be 50% undervalued. Solitario has exposure to the Bongara zinc project in Peru (more than US$50M has already been spent on the project) through a JV with the world's fifth largest zinc producer. Globex Mining has 11 active JVs and near-term royalties, including a deal with Canadian Malartic Partnership at the Pandora Wood gold project. Southern Arc Minerals holds shares of Japan Gold Corp. (JG:TSX.V) and Osisko Mining Inc. (OSK:TSX); both of these companies have excellent management and bright futures. Minco Silver owns a late stage gold/silver project in China, which might reach production in this current bull cycle.
Admittedly the above companies aren't nearly as exciting as Almadex or Golden Arrow, but to each his own. Our investments are currently a mix of deep value and (hopefully) rational speculations. As long as you are willing to wait two to three years, now is an excellent time to deploy capital into mining equities—regardless of your investment style. I'd recommend putting money to work before the end of the year to take advantage of this consolidation period. It may not last much longer.
Matt Geiger is the general partner at MJG Capital, a limited partnership focused on long-term capital appreciation through investments in natural resources.
