Goliath Gold project; Treasury Metals
All pictures are company material, unless stated otherwise.
The Critical Investor, an avid and critical mining stock investor and newsletter writer from Europe, looks for high quality companies, strong short-term catalysts and deep value. In this interview with Streetwise Reports, he takes a deep dive into the drivers behind gold’s appreciation, discusses several criteria he uses to evaluate mining juniors and developers, and profiles, using his numbers-based approach, 13 junior mining companies, of which most are featuring in his portfolio.
Streetwise Reports: Gold and silver have been trading more or less sideways for the last month or so. What do you see ahead for the precious metals?
The Critical Investor: The question is simple, but as precious metals and especially gold have no fundamentals but sentiment drivers, in my view, the answer isn’t as simple and straightforward. First and foremost I am no gold bug, nor any metal bug for that matter. The two drivers I consider most important for gold are negative real interest rates (interest rates below inflation levels) and the U.S. dollar itself, besides the general fear trade that gold usually is. For the foreseeable future I see a very dovish Federal Reserve on interest rates, possibly with the intention to leave rates this low for at least one year and potentially more, as inflation is running below their target. It’s uncertain if there will be another U.S. stimulus package before election day, but if there isn’t, it is my feeling that the second COVID-19 wave might invoke these packages anyway.
The first stimulus package, of unprecedented size, sent the dollar lower and gold higher, and this has reversed somewhat the last two months. Without another colossal stimulus package, the dollar is now considered by several experts as a potential safe haven against COVID and the elections, possibly keeping gold in the US$1850–1900/oz range, but as mentioned, I don’t see this as a real possibility as Europe and other parts of the world are already facing the consequences of the second COVID wave and are acting upon it, whereas I see the U.S. as problematic in this regard, which will almost certainly trigger a new package.
What will be the result of it? Usually there is a stronger first time effect on unprecedented events and measures, as people tend to get used to a new situation and are not as surprised in a good or bad way anymore when things happen for a second or third time. As the stock markets are already at or near all-time highs, with economic fundamentals lacking, meaning potential overvaluation, reinforced by, for example, share buybacks and the mutual funds of the Vanguards and Fidelities of this world, I don’t see these same markets gain much more beyond their all-time highs based on stimulus packages. But what it could invoke is the U.S. dollar going lower, creating another opportunity for gold, after the second COVID outbreak, which could scare people out of anything from gold to stocks, to go even higher than the US$2068/oz record set in August, especially with a solid framework of ongoing negative real rates.
As far as a second COVID correction goes, I do believe that at the time of the first outbreak everybody was panicking, with a vaccine nowhere in sight anytime soon, not knowing what to expect for support coming from the Fed and governments. We know now that these parties are very generous, work much more swiftly than during the 2008 financial crisis, and will do whatever it takes again. So my guess is that a second correction will by far not be as steep and deep as the first one; China manufacturing and consumption has recovered nicely, key indicators in this area keep coming in above expectations in the Western hemisphere, and as a vaccine seems near for Q1 2021, this could add confidence to the markets as well.
SWR: Precious metals and base metals don’t all move in lockstep with each other. What metals do you think will do better than others in the middle to longer term?
TCI: As discussed in my last answer, based on a few assumptions on sentiment drivers, I see gold doing well, followed by silver, which has less appeal to investors and is much more volatile. As silver seems to be decoupled from gold the last few years, has much less intrinsic value and is often a by-product of other metals, and is also much less used as a storage of value but used more in industrial manufacturing, investors tend to speculate much more in gold and gold stocks.
I don’t have an opinion on platinum group metals (PGMs), by the way. I remember four years ago, PGM mines were closing, car catalytic converter demand was increasing, so it was a no brainer to invest in platinum and platinum stocks, only to see everything go down after a quick short rise, and trading sideways for years. Palladium did well on the other hand, as supply/demand fundamentals were far more positive than for platinum, although it is used in much smaller volumes for more or less the same purpose. I don’t understand it, so I don’t have an opinion on this.
Base metals are also doing well these days, as China is recovering nicely from COVID, and production and consumption data are improving, and as a result imports of all sorts of base metals by China is increasing. Copper has made a remarkable recovery from its March lows of US$2.05/lb, hovering above US$3/lb now after a few volatile weeks. Also playing a part in this were supply issues in important copper producing jurisdictions like Chile and Peru, but as these are coming on-line again, the copper price sees some pressure lately. We were entering a deficit this summer, and it is expected by experts that this deficit will expand next year, so I expect the US$3/lb levels at least to hold if this comes true. Around US$3/lb, most copper projects are economic, this is an important base case threshold.
More or less the same (China demand improving, Chile/Peru mines halting temporarily) goes for zinc, as both countries are important producers of this grey metal as well. However, the zinc market is a more complex one, as zinc smelters basically control prices, and are known to operate not very transparently, causing giants like BHP exiting the zinc market altogether. Zinc projects in general need a higher zinc price than the current US$1.05/lb, more like US$1.10–1.20/lb.
Nickel has also seen a great recovery on improving China figures, but it is believed that its future is tied to the demand of electric vehicles (EV), and more specifically, its batteries. Because this is a market with lofty forecasts, but also heavily dependent on government subsidies and necessary technical progress, the timeline of supply/demand in nickel isn’t clear for the moment. But as current production needs to be expanded meaningfully, and future new mines are far and few between, it is anticipated that somewhere in the future nickel prices should go up. At the current nickel price of US$6.65/lb, not a lot of projects are economic, if any; usually a nickel price of US$7.50–8/lb is needed. Something else is playing a role apparently in the EV universe, and this is Elon Musk of Tesla, calling for mining projects that will produce battery materials like lithium and nickel. According to a hilarious article in Mining.com, it seems he has no clue what he is talking about, but the effect is impressive nonetheless, sending most lithium and nickel stocks much higher.
SWR: Do you see certain types of mining companies as better investments than others? For instance, seniors vs. juniors vs. mid-tiers? Explorers vs. developers vs. miners?
TCI: This all depends on your risk profile, as any licensed portfolio manager can confirm to you. Personally I don’t trade miners, as I see them simply as leverage on the gold price if well run with good assets in good jurisdictions. I like more autonomous growth/catalyst potential in my stocks, as you can find in explorers and developers. But again, the earlier stage the more risky. Most explorers tend to double or triple in a bull market just on the narrative before drilling, and more often than not the drill results disappoint and the stock loses 50% or more in a day. But if successful it could run up 2 or 3 times in a day as well, often directly after the open, so it is hard to get in then. I have seen my fair share of disappointing explorers, so I tend to be more careful now and predominantly play the narrative after getting in early. For every 3–4 losers you need a solid winner, so it is a difficult game if you elect to hold everything during first drill results.
In my view, it is never a bad thing to invest in quality projects and management. On the other hand, these companies often see overvaluation as they attract a large following based on exactly those criteria. So it is key to get in early, accept a certain amount of early-stage risk and size position accordingly. Usually I focus on new companies with strong management and a project that already has a resource, or a historical resource, has a growth story and has no problem raising lots of cash.
SWR: You have a background in construction/project management. How does that affect the way you look at mining companies? Do you feel that you offer a different perspective than other industry commentators?
TCI: My background gives me a result driven, more analytical point of view as I am not only interested in narrative, management, jurisdiction and geology, as most commentators are, but also interested in hard facts and figures, and also focused on the future. Where could this resource or project go from here and why, without too much arm waving? I always like to compare a project with peer projects, model my own discounted cash flow analysis, see how it can develop regarding economics. But I also like to estimate resources based on drill results, which in my case without a geological background and geo software doesn’t go beyond the back of an envelope, but I haven’t been that far off in most instances, although there is a lot of luck involved, of course.
SWR: What criteria do you count as important in evaluating an investment in a mining company?
TCI: As I mentioned earlier, strong management with a history of success in juniors is important. But there can only be so many strong management teams with track records, so the opportunities in this regard are limited. Below them are the talented newcomers, but without much of a track record, so harder to detect. In that case, following the money is often quite useful. I found that talented newcomers have no problem raising cash and attracting well-known directors/advisors, so when I see a junior with a team unknown to me raising C$12–20 million out of nowhere, I’m surely interested to know more. I also have a network of people who know most in the industry, providing me with their opinions if asked. In some cases this also works for projects, as most interesting projects have seen earlier exploration. This is something an investor can ask the management of other companies that are working in the same area; often their geologists know many other projects. Beware of bias and pitching of their own project, but usually something useful comes out of it, which can be presented to management of the researched company itself.
Geologically speaking, I would like to see as many available good drill results as possible, and before any recent drilling has been accomplished, a relatively high acquisition price of an exploration asset at least points towards an implied higher chance of success. An existing (historical) resource is a nice thing to have and something of a potential backstop to me, when all (sometimes “blue sky,” “district scale”) stepout exploration plans fail unfortunately. On the other hand, I have had some nasty “we have a great historical resource and all we have to do is just a bit of infill drilling to satisfy the regulators and get it to 43-101 compliant” experiences as well, so it is not that easy.
Regarding an existing 43-101 compliant resource, I tend to estimate ASAP if it is or could become economic, by estimating assumptions based on comparable economic studies. If I have my doubts, I contact management with my findings and let them counter these if possible, until I’m satisfied.
Other important subjects are jurisdictions, often further specified to the area the project is located, as, for example, a country can have completely different state/province mining regimes. Every country or jurisdiction has its own very specific fields of attention. For example in Nevada, generally considered as one of the best mining jurisdictions worldwide, the coveted water rights are something that can cause lots of trouble when not acquired and permitted well before construction. In Peru, mining companies have to deal with local populations and governments for permits, but often also with regions that are pro or against mining, so it is important to know beforehand which claims you are going to stake, and for that you have to know the area very well. Another issue with lots of countries is that you need a team on location that is assembled almost completely out of local people, in order to get things done. This involves a lot of training, local presence, support of local communities, etc.
In general, basic things like share structure, debt, loans, roll backs in the past, name changes, management changes, management compensations, G&A, etc. all need to be checked in the news releases, financial statements and the MD&A documents on SEDAR.
SWR: Would you like to discuss several companies that you think present investment opportunities?
TCI: Sure, there are a number of companies I am following, being sponsored by and/or a shareholder of, that each represent different opportunities on their own. I’ll describe them in a nutshell in no particular order, so readers can decide where to go from there with due diligence:
The following companies are more of a speculative nature, their projects being more early stage:
SWR: Any parting thoughts for our readers?
TCI: These are extraordinary times for everybody, and represent challenges, threats and opportunities for everybody. As COVID-19 is staging a vicious comeback, and the U.S. is following Europe with a small delay, as I expect, that could result in very interesting presidential election circumstances with lockdowns, facial masks and special voting procedures having the potential to create unexpected outcomes.
National debt is already at such lofty levels that raising interest rates to more normal levels (2-3%) has become almost impossible, and will probably guarantee low rates to be a reality for many years to come. As long as inflation remains higher than interest rates, this could create the ideal environment for things like gold and gold related investments. Things are chaotic nowadays with COVID-19, but when a vaccine is developed, which is anticipated in H1 2021, I see the real world economy gradually (or maybe even pretty quickly) returning to former activity levels. This in turn could fuel a real wave of enthusiasm on the markets, including the TSX and TSXV, also lifting base metal sentiment and corresponding stocks.
SWR: Thanks for your insights.
I hope you will find this interview interesting and useful, and will have further interest in my upcoming articles on mining. To never miss a thing, please subscribe to my free newsletter on my website www.criticalinvestor.eu, in order to get an email notice of my new articles soon after they are published.
The author is not a registered investment advisor, and currently has a long position in all stocks mentioned, except Kenorland Minerals and Riley Gold. Treasury Metals, Golden Arrow Resources and Avrupa Minerals are sponsoring companies. All facts are to be checked by the reader. For more information go to the website of the companies and read company profiles and official documents on www.sedar.com, also for important risk disclosures. This article is provided for information purposes only, and is not intended to be investment advice of any kind, and all readers are encouraged to do their own due diligence, and talk to their own licensed investment advisors prior to making any investment decisions.
Alvalade Project, Closed Lousal Mine; Avrupa Minerals
More than 38% of eligible UEX securities have already been tender... READ MORE
Infinitum Copper Corp. (TSX-V: INFI) (OTCQB: INUMF) is pleased ... READ MORE
Energy Fuels Inc. (NYSE: UUUU) (TSX: EFR) reported its financial ... READ MORE
Libero Copper & Gold Corporation (TSX-V: LBC) (OTCQB: LBCMF) ... READ MORE
Fosterville South Exploration Ltd. (TSX-V: FSX) (OTCQX: FSXLF) (G... READ MORE
We acknowledge the [financial] support of the Government of Canada.