Newsletter writer also talks about the junior resource stocks he likes
SmallCapPower | September 22, 2016: SmallCapPower spoke recently with newsletter writer Eric Coffin, who discusses the junior resource bull market, gold, and some mining stocks he likes at this time.
SmallCapPower (SCP): Okay, so welcome back, Eric. Junior resource stocks have had a great 2016 so far. Do you see the momentum continuing for the remainder of 2016 and into 2017?
Eric Coffin: I do. My basic thesis all year has been that we’ve started a new bull market primarily at this stage at least in precious metals. With a couple of exceptions, I’m less sure about base metals because I’m not completely comfortable about the world economy these days. Right now, we’re having a bit of a pullback in the resource space. Not really that surprising, given how big a rally we had. It was inevitable that at some point there’d be some profit taking. The current reason for concern is belief that the Fed might raise interest rates at the September meeting and will almost certainly, at this point anyway, raise them in December. That’s caused a bit of weakness in gold, not a lot really. But it’s spooked some of the, I guess, what I would call the marginal players, some of the hedge funds and guys like that, because you see particularly heavy selling in the large companies and ETFs, interestingly enough, not the smaller resource stocks. I’m not terribly concerned about that. I do think there’s a higher chance than most gold bugs or the bond market is pricing in that the Fed raises rates this month. I think that would be a bad idea. I think once we get to and through the Fed meeting that happens in about a week that’ll probably be the end of the pullback, even if they do raise rates. I think once everybody’s past the initial “Oh my God, they did it” and some knee jerk selling a bottom would form. That said, I agree the most likely outcome is that they don’t do it. I’ve seen a lot of metrics out of the U.S. economy that don’t give me a lot of comfort lately. If I was on the Fed board, it would be very difficult for me to talk myself into doing a rate increase at this time. I think they should have done it two years ago. But they didn’t, unfortunately. And they’re painted into a corner now. If there’s no rate increase, we’ll get a stronger move. If there is one, we’ll get a move anyway, just a bit delayed. So far…it’s pretty much a classic bull market, an early stage bull market coming out of a very bad bear market. Historically, these bull markets in gold and gold equities tend to last for three to five years. You see bottom to top percentage gains in the 200% or 300% range for the sector as a whole. We’re nowhere near either of those yet.
SmallCapPower (SCP): Okay. So can you expound on that with your outlook specifically on the gold price and what other external factors that you think that’ll drive the value either higher or lower?
Eric Coffin: Well, my thesis really from the start of the turn late last year was that really what’s gonna really drive things…it’s a bit top down. I mean we’ve seen lots of money come into the juniors, which is good, because juniors, of course, are negative cash flow businesses. They have to raise money to be able to explore. But, really, the big money that’s come in and has pushed some of the industry players down into the smaller companies, is what I’ve been calling “outside money.” And I think that money and I’m talking big funds, generalist funds and hedge funds, they’re looking at essentially a negative interest rate environment. That’s the real driver for outside money in my opinion.
The recognition that commodities and precious metals in particular, flourish in negative real interest rate environments.
Historically, one of the most dependable positive indicators for a strong commodity market but particularly strong precious metals market is a negative real interest rate environment where central bank mandated rates are below the rate of inflation. The current environment obviously an artificial construct. The central banks created it purposefully to try to pump liquidity into various economies. It’s not just the Fed, of course. The ECB and the Bank of Japan are much more aggressive than the Fed is. That backdrop, assuming that backdrop doesn’t completely alter and shift us from negative real interest rates to positive real interest rates and I don’t see that happening quickly, we have a gold supportive environment. The Fed would have to lift rates at least a couple of percent to generate positive real rates. And I do not see that happening anytime soon. A move of that magnitude, even over a few months, would almost certainly generate recessionary conditions in the U.S. With the negative rate backdrop in mind, once everybody stops panicking about this next Fed meeting, I think the odds of a move through, say, $1,400 to $1,450 per ounce by year end are actually pretty good.
The way the Federal Reserve works, they only have four meetings a year where they do the full press conference afterwards, dot plots, all that kind of stuff. Unless something really strange happened, I don’t see the Fed making a move in the first few rate increases except at one of those quarterly meetings. The next meeting happens to be one. After that, you’re getting close to the U.S. election. If they don’t make a move this month, I don’t see them doing it until December. And that sort of gives traders three months of open season, which is why I think if we get through the next meeting, odds are you see a leg up in gold that could run for a couple of months. And it could easily get through $1,400.
SmallCapPower (SCP): Interesting. So what commodities do you think will outperform during the next year or two?
Eric Coffin: Of the base metals, the one I like the most, I mean in terms of overall usability and dependability, is copper. But there is a lot of copper coming on stream. There are some quite large mines that are just getting up to commercial production scale now. I wouldn’t say I’m really negative on copper but I’m a bit leery of the near-term price action. Failing an acceleration in the world’s economy that we haven’t seen yet, I don’t really expect to see copper prices move up much. And I wouldn’t really be shocked if they dropped below two bucks. Probably, the base metal with, to my mind, the best supply demand characteristics is zinc. Zinc’s really the only other metal that I’ve talked about much this year. It’s the opposite situation to copper where three or four very large operations have actually ended their production life in the last year or so.
There is very little coming on in the next year or two. The big question mark with zinc is always China.
China does have a large number of small zinc producers. There’s a couple of big ones. But a lot of their production is sort of mom and pop small mining operations. Beijing has been cracking down on the sector over there quite a bit for environmental reasons, because a lot of these small mines are frankly environmental disasters in China. I don’t really think that’s gonna change. My sense is that they’re quite serious. They’re not kidding about this environmental stuff.
Chinese production really is a black box. But China has some of the world’s biggest smelters too. One of the few reliable data points you can get out of China is the fees that smelters charge miners for treatment and refining of ores, so called TC/RC charges. Those are levied on a per tonne basis. The level of those charges tells you a lot about how badly smelters need ore, since you can’t run a smelter profitably unless you’re operating near capacity. TC/RC charges for zinc concentrates have been falling for the past year and are currently at historically low levels. If Chinese smelters could get abundant concentrate feed those charges would not be that low, which implies we’re not seeing a zinc production surge over there.
While I know there are concerns that you might see this big whoosh of production out of China, I don’t think it’s gonna happen mainly for regulatory reasons. And as long as that’s the case, I think you can make a case over the next year for zinc seeing $1.20 to $1.50 a pound. At some point it’s just gonna go up. London metal exchange inventories…all the warehouse inventories have been dropping for a year and a half now. At some point, they’ll get to a level that’s considered critical, and then the speculative buyers will step in and you’ll just see it go up.
SmallCapPower (SCP): As a seasoned investor and expert on SmallCapPower, what factors do you consider before buying a resource stock? Can you give us any insights into that?
Eric Coffin: When the things were starting to turn late last year, I was mainly looking at and adding companies that were, what I would call development level. And by that, I mean companies that have established resources already. I was focusing mainly on companies that had oxide heap leachable resources. The very simple reason for that is that those tend to require less capital cost to get going. Even though I believe things have turned and we’re in a bull market, we’re only getting to the point now where it’s getting easier for companies to raise the kind of money you need to build a mine. Mines aren’t cheap to build.
I tended to shy away from the really super massive low-grade things where you’re looking at one, two, three-billion-dollar CapEx. I was kind of focused on things like SilverCrest, like GoldRock, like Kaminak, all of which have been taken over, I might add, in the last few months. I’ve added a few more development names to replace them. I’m frankly finding it harder to find those names, at least ones that I like. One of the reasons that I see continued upside is that that space has really shrunk when it comes to what I would consider potential viable takeover targets. There really aren’t that many of them. So I focus on some of those. More recently I’ve started adding more exploration plays to the HRA list. That’s kind of my first love anyway. When looking at exploration plays there’s two or three important things to focus on. And one obviously is management. You wanna find management that knows how to run an exploration company, preferably one that has experience making discoveries, one that you know has done it before. That both gives you some comfort that they know what they’re doing at a technical level, but it also makes it a lot easier for them to raise money, which is the lifeblood of the business. I’m looking for situations where I see something either very cheap where I think the company can generate a lot of new targets or a new target where I see a lot of scale potential. It’s not a done deal yet. They’ve got to drill it. They’ve got to prove it up. But if they hit, there’s potential for very large gains, because you’re looking at something that has an ultimate potential value that’s extremely large if they hit.
And what I’ve really focused on lately was exploration companies that I thought could get the market’s attention because of the potential for those kind of results. I’ve tried to get my readers in well in advance of the drill program, because in this stage of a bull market, if you can find companies where you’re one of the early guys in and they capture the market’s attention, there’s room for fairly significant gains before the drill program even starts. I’ve been fortunate to have a number of companies on that list in that situation where the stocks are up 200% or 300%, and they haven’t even drilled yet.
In those cases, I tell readers over and over and over again “you’ve got to play the odds. You know, be realistic here. Yes, I’m hoping these guys hit. Yes, I’m hoping it’s the greatest thing in the world. Yes, I’m hoping the stock goes to the moon. But this is exploration.
Most projects do not become mines. It doesn’t work most of the time. So if you’re up 200% or 300% percent, you have your marching orders, when the drill results start coming in, if this stock owes you anything, do not email me, do not phone me, do not complain to me, because I will not be sympathetic. I’ve given you a situation where you should be able to zero your costs out or better and have a free ride on an exploration program.” I’ve been trying to build a list of those within the HRA list of companies that I follow.
SmallCapPower (SCP): Okay. Well, speaking of that, the companies you follow, can you mention any of the stocks that you like at this time, and why you like them?
Eric Coffin: Yeah, I’ll talk about two or three different ones. Some of them are ones that I’m not necessarily saying you should buy right now, because they’ve moved a lot, but they are examples of what I’m talking about. One very good example of what I’m talking about is a company called SilverCrest Metals (CVE:SIL). I followed the predecessor company, SilverCrest Mines. I’ve known management for a long time, great guys, very successful, very focused group, knows how to find deposits. These aren’t guys looking to do science projects. They want economic mineralization.
The original SilverCrest was taken over about a year ago by First Majestic, because First Majestic wanted their Santa Elena mine, which they discovered and developed and built.
They spun out a new company called SilverCrest Metals. They were very adamant when they negotiated the merger that the Las Chispas property had to be spun out into this new deal, or they weren’t going to agree to the merger. That told me that Eric Fier, who runs the company, obviously thinks extremely highly of this property. That was good enough for me. I was pounding the table pretty much with readers. It was my “no brainer” from about September to March. They have indeed hit some very high grade stuff. It’s got a very loyal shareholder base, because a lot of their shareholders are, well, insiders, but also people that owned the original SilverCrest. They’re very happy to just go along for the ride with Eric. Because of that, the stock’s trading at three bucks now. I don’t know that I’d be telling people to start buying it at three bucks. But this was a good example of one where I was basically pounding the table at 15 and 20 and 25 cents. And I’ve told readers, you know, again, to use a phrase I used a few minutes ago, if this stock owes you anything now, you’re not paying attention. Like, this is a perfect example, people. You should have all your money off the table. You should have 100% gain and be able to ride it and see how things go. That’s an example of what I’ve been trying to do. I’ll talk about a few earlier stage ones now.
One company that’s drilling right now… And this is an example of a project that still has to be proven. It’s got the first drill program ever going on it right now. It’s an example of a new idea, new area, that if it does work out I think will get a huge amount of market attention very quickly. It’s a company called Northern Shield Resources (CVE:NRN). This is a group that has specialized since the company was formed in looking for nickel-copper-PGE deposits in layered intrusions. It’s kind of an esoteric area. But Ian Bliss and Christine Vaillancourt that run the company, this has always been their focus. They’re very good at it. They have a lot of respect from the majors. In the past, they’ve been able to do good joint venture deals on early-stage properties because they get a lot of technical respect.
They made a new discovery about a year ago called Huckleberry in the Labrador Trough. This is an area that, as far as they can tell, no one had ever staked here. No one’s ever worked here before. It’s brand new. No one’s ever been in the area before. What they discovered was a layered intrusion. There’s quite a bit of high-grade copper in grab samples at surface. They have flown this property and two adjoining properties. They’ve got very, very impressive-looking airborne anomalies. It’s a classic looking layered intrusion much like…the examples would be, say, Voisey’s Bay or Norilsk. That’s sort of the model they’re looking at. The Huckleberry project, they’ve done a JV agreement with South32. South32 is a spinoff company from BHP Billiton. It’s a fairly large company. They can earn up to 70% over 3 years by spending…I think it’s 5 million. They are drilling right now. That will be the first test. Management of Northern Shield actually likes the adjoining properties that are called Sequoi and Se2 better than Huckleberry. They think those are actually the big targets. They hung on to 100% of those. I’m expecting to see results from Huckleberry in, say, a month maybe. They’re going to try to drill Sequoi as soon as they finish at Huckleberry.
I have cautioned readers already that the weather gets ugly fast in this part of the world so not to be shocked if they don’t get much done at Sequoi.
The advantage of the very long Labrador winters is they can go back there in a month or a month and a half. If the weather turns ugly, just wait for winter. It would probably be easier to drill then. Colder, yes, but this sort of terrain has a lot of muskeg that you can set up a rig on once everything freezes. That’s one where you should see results come in the next month. Because of the scale of these targets, if they hit something, I think the market would get very excited very fast. I started talking about it at three cents. It’s about 20 now. But I think it would go a hell of a lot farther if they actually hit something. It’s really got very large potential. I’ll mention two others. One is a more advanced. It’s one of these development ones that I was talking about. It’s the most recent development level company I’ve added. It’s a company called GMV Minerals (CVE:GMV). They have a property called Mexican Hat in Arizona. This is an oxide heap leachable gold resource. It’s not large. It’s about 530,000 ounces I think right now. I was actually attracted to this because of the metallurgy. When you’re working on a heap leachable deposit, metallurgy’s critical. These are low-grade things. If you can’t leach most of the gold out and if you can’t do it in an efficient manner, they just don’t work.
This one, from early metallurgical testing looks like it might be what’s called run-up mine. What that means, in a nutshell, is you don’t have to do tons of crushing and grinding to get the gold out. You just dump it on the heap, put the solution on it, and you’re good to go. Those are obviously much cheaper and much lower Capex. They’re doing a large column leach test right now. They’ll be reporting on that probably in the next three or four weeks. If it’s run of mine, then I think even at its current size it’s probably a mineable deposit. But, as importantly for me, they should be starting a drill program in about three weeks that to me looks like it’s got the potential to add 100,000 or 200,000 ounces to it. But even more importantly for me perhaps, they’re gonna be the first guys to sort of go out in the flats away from this hill. The deposit is on Mexican Hat hill. Out in the flats, there’s no outcrop. But from the geophysics, it looks like several of the faults that run through Mexican Hat hill, run out through the flats. No one’s ever really worked out there. The deposit itself is clearly related to the structures. They’re gonna play around with this, trying out some different geochemical and geophysical methods and see if they can find a good way to target out in the flats and drill that. If they can find extensions or new zones in the flats the resource size potential for the project could be much larger. There are so few of these good heap leachable deposits around. If they can make this thing a bit bigger, bring the resource up from inferred to indicated, show that the metallurgy is as good as it appears to be right now, then someone will come along and take GMV out, I’m fairly comfortable about that.
And at the other end of the spectrum, very early stage, is a company I’ve followed for a long time and I’m quite good friends with the CEO, called San Marco Resources (CVE:SMN). San Marco is doing something pretty interesting. I consider it quite interesting technologically. They’ve done a partnership. It’s not really a joint venture, because the other company, GlobeTrotters, isn’t getting an interest in the properties. They basically got a couple of million shares of San Marcos’ stock in return for this deal. The partner is GlobeTrotters, a private company. It’s based in Vancouver. They’ve been working in Peru for several years now. GlobeTrotters itself will stay private. But their specialty is taking remote sensing data like Landsat, ASTER, that sort of stuff. They’ve got their own filtering techniques and their own algorithms that they use to modify this data. And what they’re doing is they’re looking for hydrothermal systems. Hydrothermal basically just means hot fluid. Hydrothermal systems are the ultimate source of pretty much all mineral deposits. They do leave traces. Usually, any hydrothermal system will have a much larger area that it affects because of the heat and the pressure of these fluids creating these alteration zones. And, really, what GlobeTrotters does is use this data to try to find these alteration zones at surface. I know they’ve been successful in Peru with this. Because they’re private, they don’t really talk about who they’ve done deals with. But I know some of the deals they’ve done. I know there’s at least one porphyry discovery that’s based on their work that a major is drilling right now. That discovery is not on top of a mountain. It’s not in the middle of nowhere. It’s actually right by the Pan American Highway. It’s just one of those things that nobody looked at until these guys showed up.
They’re taking that methodology, applying it to the entire state of Sonora in Mexico with San Marco. They’ve generated something in the order of 100 to 150 targets. San Marco’s side of the deal is they’re the ones with the boots on the ground. They’re gonna go out and ground-proof things. If it looks like they’ve got something that looks interesting, they’ll stake it right away. If it’s on ground that’s already staked and it looks interesting enough, they’ll talk to the owners and try to do a deal. They announced, I believe it was yesterday actually, that they’d staked the first three concessions. But there’s gonna be a lot more. The way this process will work is there’ll be 20, 40, 50 properties staked. Fifty or 75 or 80 percent of those properties will get dropped after cursory work, which is what you want. You don’t want to waste money on stuff that doesn’t look like it’s going anywhere. But I expect them to generate a lot of strong targets. And that is something that the sector desperately needs. Anyone that you talk to, you talk to me, you talk to Brent, you talk to John Kaiser, any of us will tell you there’s been a real dearth of new discoveries. For the last cycle really, say, 2009 to 2012, there really weren’t any large discoveries. Somebody’s got to go out and find some new targets. And that’s what these guys are doing and it’s a strong technical group. On top of that, they do have a couple more advanced, probably pretty much drill-ready projects. I think they will be drilling those in the next month or two. So if you’re interested in getting in really early stage, that’s probably a good place to start. That one’s SMN on the Toronto Venture exchange.
SmallCapPower (SCP): All right, so how can viewers learn more from you, Eric?
Eric Coffin: Well, they can go to my website which is hraadvisory.com. There are some reports up there. If they look in the upper right corner on my home page, there is a free report. And in fact, that report happens to be on GMV Minerals, the developer that I mentioned. If they just put in their email, that report will get sent to them. That’s also the best way to get the cheapest deal on an introductory offer. There’s a very cheap price for the first three months, which I don’t actually offer on the subscription page. You’ve got to go to that report to get it. But feel free to go to the subscription page and pay full price, if you want.
If you happen to be in Vancouver in early November and want to listen to some of my newsletter colleagues and I, and meet some of the companies we follow, come to the Metals Investor Forum on November 12th and 13th at the Rosewood Hotel Georgia. Joe Mazumdar, Gwen Preston, John Kaiser, Jay Taylor, Jordon Roy-Byrne and I will be speaking and there will be presentations by a select list of companies chosen by the newsletter editors. Companies are invite only, and so is the audience. Your readers can RSVP for the event using the following link Here >>
