Junior Mining Capital is Flowing Back: IMIC Conference Experts

Our IMIC junior mining experts discussed gold prices, the case for base metals, as well as the biggest competition for risk capital

Angela Harmantas | June 8, 2018 | SmallCapPower: Capital is flowing back into the junior mining space, says a panel of expert investors at the recent International Mining Investor Conference (IMIC) in Vancouver, British Columbia.

The panel, moderated by Chris Thompson, Head of Research at Ubika Research, was comprised of leading investors in the junior mining space: Ralph Aldis, Senior Analyst at US Global Investors; Brett Heath, CEO of Metalla Royalty & Streaming Ltd.; and Matt Zabloski, Founder and Lead Portfolio Manager at Delbrook Capital. All of the panelists had very different investment theses and commodity preferences.

Even though investment opportunities may seem plentiful, it can still be difficult to spot the winners in the mining market. At IMIC, the three experts talked gold prices, the case for base metals, the biggest competition for risk capital, and their investment criteria.

Gold has room to grow

Gold still has a lot of room to break out, according to two experts on the panel. Ralph Aldis of US Global Investors thought it was interesting that inflation is mentioned as a main topic rather than a peripheral one. “When inflation starts to become common knowledge and people start accepting it then you start getting more buy-in [in the space],” he said.

Mr. Aldis also cautioned investors not to focus too heavily on nominal rates and the Federal Reserve’s rate hikes. “People see the 10-year (nominal rate) go above 3% and they think it’s bad for gold, but four out of the last five times that they’ve raised rates gold has gone up.”

Another metric to watch is the gold-silver ratio, said Brett Heath, CEO of Metalla Royalty & Streaming Ltd. He pointed out that in the last 20 years the ratio has been over 80 about four times, and every single time it was followed by a big price move. “When you see extreme ratios of over 80:1 then that really indicates from a micro perspective, prices are actually really cheap right now,” he said. “We think there’s a good probability that you will see a run here in the future.”

Case for base metals

Matt Zabloski, Delbrook Capital’s founder and lead portfolio manager, is bullish on copper and nickel. Mr. Zabloski and his team like the outlook for nickel prices in the short term and are focused on finding nickel sulfide assets, specifically that of the Class 1 variety that is used in the production of batteries suitable for electric vehicles. Copper is a longer term play for Delbrook, but Mr. Zabloski felt that there are enough copper companies out there who could catch the cycle in time for a break out. Although there is little interest in early-stage copper exploration plays, he liked late-stage exploration and early-stage development companies as potential M&A targets. Of the companies already in production, he felt that senior producers could get good leverage from a rising copper price. “A 10-cent move in the copper price is about $300 million in EBITDA when it comes to the company,” he said. Delbrook has a large position in copper giant Freeport-McMoran.

Copper fundamentals are largely buoyed by the electrification of vehicles that is set to become a reality over the next few years. “The electrification thesis is there, and we believe it’s real,” Mr. Zabloski said. But Delbrook’s founder isn’t bullish on every metal and mineral used in battery production. “I think the largest commodity short that we have at the moment is in the lithium space,” he pointed out.

Zinc is another story – Delbrook is forecasting a balanced zinc market in 2019 but back into deficit by 2020. “I think the easy money on that trade has been made and we’ll need to see a move back up in the spot price to get the market more interested in the underlying equities,” said Matt Zabloski.

Biggest competition for risk capital

If recent media reports are to be believed, the two hottest industries competing with miners for risk capital is cannabis and blockchain. But Ralph Aldis believes that the real competition for capital is from something else entirely – the two major gold ETFs, which Mr. Aldis said are bigger than some of the gold funds. He referred to the capital going into the GDX and GDXJ as “dumb money” that is only playing the beta of the gold stock to the gold price. “They’re not really getting the performance (fund managers) want because there are so many bad companies in there who have large market caps,” he said.

Investment criteria

The panellists had very different criteria for making an investment into a mining company. Mr. Zabloski felt that the biggest issue in marketing companies onshore and offshore is the equity volatility in small caps. Delbrook avoids the equity volatility of making a direct equity investment, and instead does something on the convertible debt side resulting in equity-like exposure on the upside. “The company has to be cash flowing in our mind or we have to be very comfortable with the asset,” Matt Zabloski said. “Trying to be innovative on the financing side helps us when marketing to LPs and provides more stability.”

The Metalla team takes a different approach, considering investments on a return basis. Brett Heath highlighted two recent Metalla investments, a development asset on an Osisko property and an exploration royalty on an early-stage Agnico Eagle project. “What we’ve seen is that the royalty/streaming sector as a whole has been reaching for cash flow and I think it’s hurting them,” Mr. Heath said. “You can only buy so many assets that are premium to the NAV before you start to pay for it.”

Metalla looks at possible investments on a per-share basis, Mr. Heath continued. “If we can get something on a development asset with a good counterparty at a much more attractive price, then we’re ok to wait.”

Top picks

The panellists shared their top picks with the audience to round off the discussion. Ralph Aldis liked Chicana Copper, which is a 4% holding for him. Matt Zabloski liked mid-cap Tahoe Resources Inc. (TSX:THO) on as a longer investment, while as a shorter investment, he mentioned Kirkland Lake Gold Ltd (TSX:KL). And Brett Heath’s pick? You guessed it – Metalla Royalty & Streaming Ltd (TSXV:MTA).

Disclosure: Neither the author nor her family own shares in any of the companies mentioned above.

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