The Gold Report: VSA Capital recently published a research
report that reads, "One of the key parts of exploration funding and the
acceptance of risk versus monetary reward was the considerable correlation
between share price appreciation and the reduction of geological risk."
However, this no longer seems to be the case. What's broken?
Paul Renken: What has transpired for the last couple of years, particularly in the
junior and very small-cap exploration space, is that the money to find
deposits and advance them along the risk profile to a bankable state has
largely disappeared. The dollars required to define a resource have been
viewed by the market as an opportunity to sell shares to take advantage of
any short-term price strength. From the long-term shareholders' point of
view, the money was wasted. Companies should have sat on the cash and not
bothered with any exploration.
The directors of these
companies need to realize that at the early stages of a project, they have to
consider the probability of finding a significant deposit and how much it's
going to cost to define it. Investors, and
institutional investors in particular, are looking for very low costs of
discovery.
TGR: Has that become part of your
investment thesis for junior resource equities?
PR: Yes, we're looking to bottom-fish
particularly good stories with good deposits that have languished for some
time but that are now showing good economics. There are many firms out there
seeking capital but there just isn't much capital to finance all of them, or
even the majority. If you're going to commit capital to bring some of these
stories to production, why not cherry-pick the best stories and the best
deposits at the most economical cost? The smaller you get in the resource
space, the good deposits or good corporate stories are available at very low
valuations simply because the sector has been so out of favor for so long.
TGR: When is risk capital going to
return to the sector?
PR: The exploration side of the
business, a subsector of the mining space, needs to show that it has the same
or greater potential for a return on investor capital versus other sectors.
It is a competition for the available dollars among all the different
companies in all the different sectors�as well as debt capital and
currency markets�not just other mining companies.
We seem to be at the
bottom or bouncing along the bottom in the small-cap mining space. I'm
looking forward to seeing some signs, likely in a matter of weeks, that we
have seen the bottom of the market.
TGR: Where in the bulk commodity space
should investors look for performing equities?
PR: Companies that have a strong
component of their earnings in industrial metals�lead, zinc, nickel, etc.�should do better than those in the iron ore
space. As a large-cap company, Glencore International Plc (GLEN:LSE) is likely best positioned among large mining firms listed in London. Glencore is pretty well situated in metallurgical coal
and base metals concentrates, particularly lead-zinc concentrates. It is also
getting involved in vanadium. It has its finger on the pulse of a variety of
different bulk commodities that are traded on the London Metal Exchange, as
well as on the mining side.
TGR: You cover a number of industrial
commodities, including tungsten. Tungsten has the highest melting point of
any metal, but at $370/metric ton unit ($370/mtu),
it's not exciting many investors. What's the investment case for tungsten?
PR: Tungsten's primary use is in
carbide cutting tools, essentially a proxy for manufacturing activity. If the
banks and governments across the world are going to get the economy moving
faster, they have to increase manufacturing activity. Manufacturing activity
means being able to create, cut and sell metal�everything from fabricated products to metallic tools to sheet metal,
including auto body panels.
Auto manufacturing is
increasing in both China and the United States. And because China wants to
maintain its manufacturing dominance, it is no longer exporting tungsten as
it did in the 1980s, when it essentially swamped the worldwide tungsten
market. These days, some sources say as much as three-quarters of the arable
land in China is contaminated. The Chinese must address this issue and that
means no longer accepting quick and dirty methods of metals production. We
expect Chinese tungsten exports to continue to tighten, and therefore
tungsten should have fairly robust demand going forward.
TGR: What are some tungsten equities
that you follow?
PR: We cover a few names that are
already producing, but primarily we cover companies in the exploration and
development stages, like Northcliff Resources Ltd. (NCF:TSX.V). It has the Sisson tungsten
project in eastern Canada. The feasibility study is complete and the company
is working on permitting and financing.
TGR: Northcliff is part of the Hunter Dickinson
group of companies, which is based in Vancouver. How much of an advantage is
that?
PR: It essentially allows Northcliff to consolidate its general and administrative
costs and be able to call upon a group of experienced professionals from a
wide variety of disciplines�legal, engineering and capital
finance. It's a pretty sizable advantage because it doesn't have to pay the
full-cost rates that it would if it hired those people as a standalone
company. Also, Hunter Dickinson has been successful over the years in
monetizing corporate stories and assets to the benefit of investors. It's a
good brand name.
TGR: Are there other tungsten equities
that you're following?
PR: I will give you three others. The
first is Largo
Resources Ltd. (LGO:TSX.V). Its large Marac�s iron-vanadium project in Brazil is in the
commercial ramp-up stage, but it also has a tailings retreatment project for
tungsten in Brazil that has been put on care and maintenance because of a
lack of water. Largo also has another large, low-grade tungsten deposit in
Canada's Northwest Territories that has been sitting idle for a while.
TGR: So Largo is primarily a vanadium
story. How long will it take for the Marac�s iron-vanadium project to become economic?
PR: The ramp-up period will last a
good 12 months. The company is just in the process of roasting its first ore.
Full-scale commercial production will likely happen well into next year.
The next one is a little
firm on the London market called Thor Mining Plc (THR:LSE; THR:ASX). Thor is working on a definitive feasibility
study at its Molyhil molybdenum-tungsten project in
Australia and the company just acquired another early-stage tungsten property
in Nevada. That particular company is for investors who want a play in a very
small space with a pretty interesting story.
TGR: And the last tungsten story?
PR: The other firm is Blackheath Resources Inc. (BHR:TSX.V), an exploration-stage company. The Blackheath
management team is essentially the same one that was successful for investors
under Primary Metals Inc. Primary Metals owned the Panasqueira
tungsten mine in Portugal from 2003 until 2007, when the company sold it at a
profit. Now that management team has returned to Portugal under Blackheath and has picked up tungsten districts and mines
that were productive from World War II through to the 1960s. The company is
now re-exploring and attempting to redevelop those deposits, virtually none
of which were ever drilled. I can't imagine that the old miners, against all
odds, found all the economic tungsten mineralization. So far the results are
looking good.
TGR: You also follow the rare earth
elements (REE) subsector. It seems to be the most volatile, yet Reuters
reports that two of its biggest players, Lynas
Corp. (LYC:ASX) and Molycorp
Inc. (MCP:NYSE), may have finally overcome their many challenges to become
bona fide REE producers. Should investors believe the hype?
PR: Lynas and Molycorp
have disappointed investors simply because they are taking too long and using
too much money to reach their goals. Lynas has
become the poster child for social action as part of an effort to prevent its
concentration and treatment plant from operating in Malaysia, whereas Molycorp continues to have issues with bringing its mine
back to the level of commercial production that it had achieved decades
earlier. In both cases institutional investors are going to have to be very
patient to realize any return on capital.
TGR: What's your view on the REE space
in general?
PR: I'm positive on the REE space.
Further down the food chain there are a number of interesting REE stories
with simpler mineralogy that should require simpler plants and processes to
produce REE. That means their capital expenses should be a lot less, too. The
Chinese have controlled REE production for a number of years but China is
trying to seize greater control of the market inside its borders because
there has been so much illegal REE mining and smuggling.
The Chinese realize that
the volatility experienced in REE pricing just a few years ago caused many
end users to seek alternatives. The subsequent steep decline in REE prices
has been difficult for Chinese REE producers. By the same token, annual REE
demand growth is in the high single-digit range. That's expected to continue
for some time.
TGR: What are some REE equities you're
following?
PR: Among the rare earth explorers and
developers we watch is a company called Mkango Resources Ltd. (MKA:TSX.V). It has a REE project in Malawi in southeastern Africa. Mkango should soon announce its prefeasibility results.
Metallurgical testing done to date on the deposit's mineralization suggests
that it should be fairly easy to process with fairly high rates of recovery.
I'm looking forward to seeing the capital requirements it needs to put its
project into production.
TGR: Mkango recently appointed Derek Linfield
as chairman. He has some experience getting Canada-listed companies listed in
London. Is that one of the main reasons Mr. Linfield was brought on board?
PR: Mkango is interested in cultivating
institutional shareholder interest around London and in this hemisphere.
Being an Africa-focused REE developer, I think the board sees London as a
natural marketplace to raise capital for a REE mine.
TGR: Perhaps one more REE junior?
PR: Another one is Tasman Metals Ltd. (TSM:TSX.V; TAS:NYSE.MKT; TASXF:OTCPK; T61:FSE). Tasman has two REE deposits, but
the primary one is called Norra K�rr in Sweden. That particular deposit is
relatively low grade in total REE at below 1%, but geologically it is skewed
toward the heavy rare earths. It may also very well be quite profitable. The
other interesting thing is that it is the only rare earth deposit in the
development stage with a direct market into the European Union (EU). The EU
has declared REEs to be among a number of different metals and materials, including
tungsten, that are critical to its industrial future
as a trading block. I suspect that once the Norra K�rr feasibility study is complete, some
financing doors will open in short order.
TGR: In a February 2014 interview, you told us that
investors should be in precious metals, gemstones and uranium. While precious
metals' prices were up in the first half of this year and the diamond
equities you mentioned have performed, uranium continues to flounder. Is it
as simple as asking investors to have more patience?
PR: It certainly has been a
disappointment for uranium investors and for analysts who can see that it
should be performing much better. The issue is that Japan has not brought its
nuclear program back on-line. Japan has a surplus of uranium from long-term
contracts that it can't use because those reactors are not operating.
Japan is forced to resell
that material for whatever it can get. This is costing the Japanese economy
billions. How long will it continue to do this? It has already gone on longer
than any of us anticipated. The government intends to bring these reactors
back on-line at some point, when it is satisfied that it is safe to do so.
TGR: What should investors do?
PR: If they are still holding uranium
equities, they must decide whether it's worth holding that position. A few
uranium equities out there are definitely good bottom-fishing situations
because the grade or size of the deposit dictates that they will be put into
production as long as there is a global nuclear industry.
TGR: Please share some with us.
PR: A darling among uranium investors
over the past couple of years is Fission Uranium Corp. (FCU:TSX.V). It's run by CEO Ross McElroy and Chairman Dev Randhawa, who
successfully sold the Waterbury Lake discovery and several other assets to
Denison Mines Corp. (DML:TSX; DNN:NYSE.MKT). And then Fission hit very
high-grade uranium at the Patterson Lake South deposit.
It has really come up
trumps with that project. Continuity has been established between the
individual ore bodies, and Fission continues to add resource size through
drilling. The company has not yet declared a resource, but the suspicion
among analysts is that it's between 50�100 million pounds contained
uranium. It's going to be mined; it's a question of by whom and for how much.
TGR: Fission's success spawned a
staking rush in the area. Are there latecomers that have something to offer
investors?
PR: A couple of names that come to
mind are Lakeland
Resources Inc. (LK:TSX.V) and Azincourt Uranium Inc. (AAZ:TSX.V). Lakeland is headed up on the
exploration side by a former geologist working for Fission. It is working
projects in the Athabasca Basin looking for near-surface uranium
mineralization primarily on the northern and eastern edges of the basin. Azincourt and the Fission Uranium exploration assets
spinoff company Fission 3.0 Corp. (FUU:TSX.V) are in
joint venture on the property immediately north of Patterson Lake South.
Fission's chairman, Dev Randhawa, is on the board and the Azincourt
chairman, Ian Stalker, we know as well. Azincourt
also holds ground in the Macusani uranium district
in Peru, a project we were previously familiar with through Vena Resources
Inc. (VEM:TSX ; VEM:BVL; V1R:FSE).
TGR: Could you give us an overview on
the nickel space?
PR: The nickel space has been quite
interesting ever since the Indonesian export ban went into effect in January.
It's done wonders for the value of nickel. The price moved to the $9/pound
($9/lb) range from about $6.50/lb. We expect nickel
to stay in that range until Chinese pig iron producers are able to source
other nickel-laterite ore or cheap nickel concentrates. Until a source is
found, we think the price will remain strong.
TGR: What are some nickel equities with
leverage to the nickel price?
PR: One company that is particularly
levered to the nickel price is Royal Nickel Corp. (RNX:TSX), which has the Dumont nickel deposit in Qu�bec.
TGR: Do you want to discuss gemstones?
PR: The fundamentals for diamonds were
looking quite good at the end of 2013 and that has proven to be the case.
Most diamond equities, particularly the producing equities, are showing nice
gains this year. That's based on improvements in both cut and raw stone
prices on the auction tenders of these companies over the first seven months
of 2014. U.S. and Asian retail demand continues to improve and we're
comfortable projecting further gains.
Among the names are Gem Diamonds Ltd. (GEMD:LSE; GEMD:VIRTX; ZVW:FSE); Petra Diamonds (PDL:LSE;
PDMDF:OTCPK); and
Dominion Diamond Corp. (DDC:NYSE;
DDC:TSX),
formerly Harry Winston. Those are names that I follow closely.
TGR: In a report titled, "Emerging
Market Forex and the End of the Commodity Market Super-Cycle," Goldman
Sachs says that bulk commodities, like iron ore, copper and oil, will see
five years of price softness to the tune of $80/ton iron ore, $6,600/mtu copper and $100/barrel for Brent crude. Do you
concur?
PR: We'll probably see some volatility
in that very flat marketplace. Goldman Sachs is quoting prices that are 10�20% under the current prices, yet some of
these prices are moving in the opposite direction. For instance, geopolitical
risk is pushing up the price of Brent crude.
To reach $3/lb or lower for a sustained period, copper would require
a significant surplus over the next five-year period. The amount of copper
coming into the market has been consistently lower than analysts'
projections. Last year, there was a slight deficit. There may be as much as a
400,000-tonne surplus this year in my view, but that isn't significant enough
to sway prices. I would peg the five-year average copper price closer to
$3.20/lb.
As far as iron ore is
concerned, it may try to test $80/ton at some point, particularly if there's
a decline in steel output in China. I suspect that the overall average for
five years would be closer to $90�100/ton for 62% iron CFR (cost and
freight).
TGR: Parting thoughts?
PR: I'm hopeful that we are looking at
the bottom for mining equities. We may see another trading range for gold and
for silver. Silver is certainly playing out according to what we had
anticipated at the end of last year. Gold is a bit stronger than we had
expected, largely because of geopolitical risk and retail interest from Asian
investors. Platinum group metals prices are looking quite good and will
continue to because of labor risk in South Africa and geopolitical risk in
Russia. Overall, we see strength in a number of different commodities. It's
time for equities to catch up.
TGR: Thank you for talking with us,
Paul.
Paul Renken has a broad range of experience in various
aspects of the mining and minerals business. He began his career as a
geologist for Canadian junior resource companies in the western United
States. Owning a stake in a private consulting firm as vice president of
exploration, Renken searched for various base
metals, precious metals and industrial minerals. In the UK, he worked in the
equity market media outlets of Digitallook and Hemscott before joining VSA as mining analyst in 2006.
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DISCLOSURE:
1) Brian Sylvester conducted this interview for Streetwise Reports LLC,
publisher of The Gold Report, The Energy Report, The Life Sciences Report
and The Mining Report, and provides services to Streetwise Reports as
an independent contractor. He owns, or his family owns, shares of the
following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors: Largo
Resources Ltd., Azincourt Uranium Inc., Fission
Uranium Corp. and Mkango Resources Ltd. Lakeland
Resources Inc. is affiliated with Zimtu Capital
Corp. Streetwise Reports does not accept stock in exchange for its services
or as sponsorship payment.
3) Paul Renken: I own, or my family owns, shares of
the following companies mentioned in this interview: None. I personally am,
or my family is, paid by the following companies mentioned in this interview:
None. My company has a financial relationship with the following companies
mentioned in this interview: Thor Mining Plc, Northcliff
Resources Ltd., Blackheath Resources Inc. and Royal
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