Movers and Shakers
A classic example of a CEO who understands the cyclical opportunities in the resource
markets, according to Moriarty, was Rob McEwen at Goldcorp
Inc. (G:TSX; GG:NYSE) circa 2000. "He issued
the Goldcorp challenge to find the next 5 million ounces of gold at Red Lake.
It wasn't anything but a promotional gesture, but it made everybody in the
business view Rob McEwen as a leader moving the industry forward. In that
situation, illusion became the reality," Moriarty says.
Day points to Goldcorp as a producing company that is
still advancing new projects during this downturn. "It takes a long time
to develop a major mine, decide to go ahead, and then bring it into
production. Despite that, this company has three new mines ramping up this
year, hopefully just in time for a recovery in the market. But even without
that, these are operating mines making money at today's prices. That is an
example of a company continuing to advance and position for upside," he
says.
Another company that Moriarty thinks gets the "buy
low, sell high" idea is NOVAGOLD
(NG:TSX; NG:NYSE.MKT). "This was a $0.09
stock in the summer of 2001. The company did a joint venture deal in Alaska
with Placer Dome that required it to spend $6 million ($6M) in eight years.
NOVAGOLD did all the work in 18 months and ended with a $20 stock. That's
exactly the kind of aggressive company you want to look for right now,"
Moriarty says.
Moriarty recently visited California Gold Mining Inc. (CGM:TSX.V), which is in the midst of a major drill program in California on
the mine that made John Fremont rich in 1850. "The company had to
issue a lot of shares to raise the money, but the drill costs were half of
what it was two years ago. That is a smart move," he says.
Almaden
Minerals Ltd. (AMM:TSX; AAU:NYSE) would be an absolutely perfect example
of this value-added thinking, Moriarty says. "I happen to like the
father/son management team of Duane and Morgan Poliquin. I have been to the
project and love it. The company is moving toward production on the Tuligtic
project in Puebla, Mexico. It spun the other assets off as Almadex
Minerals Inc. (AMX:TSX.V) in a 2-for-1 special for shareholders.
"That's a perfect example of what you need to do in a market bottom.
Investors tend to forget that commodities move up and down and you can't kill
a project because today's price is too low. You have to weather through it.
Is Almaden going to be able to produce silver and gold at a profit at a
5-year/10-year trading average? My belief is absolutely yes, so I don't care
what the price is today. I want to see it move forward. The cost of diesel is
cheap. The cost of iron is cheap. The cost of labor is cheap. It's a
tremendous opportunity to take advantage of that.
"If you go down to your local Corvette dealer and a brand new
Corvette was quoted to you six months ago at $70M, but today the same red
sports car is on special for $6M, that sounds like a hell of a deal to
me." Almaden applied that logic to its recent purchase of the barely
used 7,000 ton-per-day capacity Rock Creek mill, a move that could reduce the
initial capital cost estimate of ramp-up for Ixtaca by $70M. "It was an
absolutely brilliant move on Almaden's part," Moriarty says.
Day also sees Almaden's purchase of the discounted mill as a plus,
particularly because of the structure of the sale as an option to purchase
with payments spread out over three years. "For less than $1M, it has
locked up this key piece of infrastructure. That is a wonderful example of
taking advantage of a downturn," he says.
Among juniors, Day sees a lot of companies doing good work in this market.
"Pretium
Resources Inc. (PVG:TSX; PVG:NYSE) is advancing the Valley of the Kings
project. The company had to raise new equity, but if a company has a good
asset and is demonstrating that it's advancing the project without being
wasteful, the market should give it credit for adding value."
Day calls out Lara Exploration Ltd. (LRA:TSX.V) as a company taking
advantage of the downturn by entering into agreements with other companies at
very low cost. "It is optioning properties out to other people, in many
cases receiving payments sufficient to enable it to continue operating
without raising equity, which I think is a smart way to continue to
work."
Another one Day sees as an example of a company using property options or
earn-in partnerships to conserve cash is Riverside
Resources Inc. (RRI:TSX.V). "Riverside acts as the operator, and the
partner pays a small management fee. The company has also been able to
generate some key strategic alliances that call for the partner paying for
the generative work. That is a great deal. Someone else pays it to go out and
look for properties. Obviously, the partner has the right to earn in to the
property if it likes it, but if it declines for whatever reason, then
Riverside has generated a project at someone else's cost. This company is
active largely on someone else's dime and earning a little bit of money for
it. Lots of companies are doing this kind of thing without having to raise
additional equity. It's mostly small stuff, but it keeps the company active
without raising money."
Day's final example of a junior taking advantage of unique opportunities
right now is Midland
Exploration Inc. (MD:TSX.V), which has been active in the wake of a $15M
equity raise, largely through the Quebec pension funds. "That is a lot
of money and it puts the company in an exceptionally strong position if it
sees something that it wants to buy. This company had zero projects dropped
in the last 12 months, and it has added at least four new partnerships in
that time. Midland was very active even before the equity deal, but now it
can both do more work on projects and shop its projects to bigger companies
and get better deals. It's an outstanding arrangement," Day says.
Streaming Deals
Day sees a down market as a golden opportunity for royalty companies. Last
year, Franco-Nevada
Corp. (FNV:TSX; FNV:NYSE) added a billion dollars' worth of new
royalties, both major streams with big-cap companies and some small
royalties. "A lot of those were distressed companies, so they were able
to take advantage of other companies' distress and get large, attractive,
long-life royalties. This year, it's probably on its way to almost another
billion in bargain shopping," he says.
"Osisko
Gold Royalties Ltd. (OR:TSX) acquired Virginia Mines Inc. (VGQ:TSX) and
an attractive royalty on the Éléonore project. More recently, it acquired a
package of royalties from Teck Resources Ltd. (TCK:TSX; TCK:NYSE), another
distressed company," Day reports.
"Royal
Gold Inc. (RGLD:NASDAQ; RGL:TSX) and Silver Wheaton
Corp. (SLW:TSX; SLW:NYSE), on the silver side, are also making smart
deals right now. The royalty and streaming companies are generally taking
advantage of other companies' distress because typically they have better
balance sheets," Day says.
The Contrarian Conclusion
"The companies aggressively moving projects forward right now are going
to be the leaders tomorrow," Moriarty concludes.
Moriarty's parting words are for the investors. "The people who make money
in investments are contrarians. What you need to understand is popular
psychology. When everybody wants to buy something, sell it to them. When
everybody wants to sell something, buy it from them. It is that simple. There
are no gurus. There's nothing magic about the market. When everybody's
screaming, buy page 1; when everyone is happy, you want to be selling page 1
and buying page 23."
