Persistence Pays For These Gold Juniors and Why I’m Most Bullish on Uranium

Yippee. I, like many others, think Yellen will raise rates on December
16. I, unlike many others, think that will soon result in a top for the
U.S. dollar.

I also think a rate raise will be good for gold. Yes, the conventional
argument is that higher rates increase returns on bonds and dividends
and cash, thus increasing the ‘opportunity cost’ of gold and that
should mean gold declines when rates rise. But that just isn’t what has
happened.

As this chart shows, there is little correlation between interest rates and gold. Through the
1970s gold gained with rates, mostly. Then gold moved mostly sideways
for two decades while rates kept stepping down. In 2001 gold started
its 11-year run, at first alongside rising rates and then in opposition
to them.

Were
we to zoom in closer, gold prices generally fall in the month leading
up to a rate hike and then rise, though often after a lag, once the
hike happens. The reason: investors upload gold in expectation of
tightening, a negative pressure that eases after the event and thus
creates upside momentum.

This
pattern has repeated following the first rate hike of the last four
tightening cycles: gold rallies after a short lag.

As
an aside, I don’t fundamentally agree with a rate hike. I look at the
United States and see increasing odds of a recession in 2016.
Nevertheless, the ‘data driven’ Fed will raise in December to save face
and create room to ease (though 25 basis points ain’t much room).

Time
for this week’s Maven Letter snippet (and apologies it’s a day late –
computer issues). I started with a look at mining news that caught my
eye, then moved on to uranium. I am more bullish about uranium than any
other mainstream mined commodity for 2016 and an opportunity arose to
enter my favorite early-stage uranium story. That recommendation
followed the macro look at uranium. If you’re interested, sign up for a trial subscription.

The Metals Investor Forum approaches!

Juniors don’t have a choice: a gold explorer is a gold explorer. Sure,
the company can change gears completely and start growing marijuana,
for example, but that disregards the inherent value. A good junior is a
group of skilled and experienced operators, advancing an asset or
portfolio that they believe in based on their past technical and
financial successes.

Those skills and experiences
won’t help much growing weed. Moreover most of these people have been
through several sector cycles; they know the upturn makes up for the
bad years, if they can just survive until then.

So it becomes a question of survival. That can take two forms: doing
nothing until the environment improves or finding ways to raise money
and advance assets, downturn be damned.

The best juniors of course fall into the second category. Two bits of
news recently show what can be achieved with ingenuity and
perseverance, two traits necessary for success in these markets.

The first came from Precipitate
Gold (TSXV:
PRG). Precipitate is advancing the Juan de Herrera gold project in
the Dominican Republic. The team has already made one discovery there,
when the first set of drills to test a target called Ginger Ridge
returned 18 metres of 4.54 grams per tonne gold, along with several
lower-grade intercepts.

A follow-up IP survey made those results even more intriguing. IP is a
reliable tool in that part of the world, having led neighbour Goldquest Mining (TSXV:
GQC) to its 2-million oz. Romero discovery. Precipitate’s discovery
hole at Ginger Ridge was at the northern edge of its IP survey. When
they extended the survey to the north, the anomaly grew in size and
strength.

It means the area north of the discovery hole is begging for additional
drilling. But drilling costs and it has been very tough to raise cash
to drill early-stage gold targets.

Precipitate took a moment to think. Ginger Ridge looks great, but it’s
only one target. If they drilled and hit, great. If the drill
missed…the market would probably discount the whole story, even though
there are other interesting areas on the project.

So Jeff Wilson and his small team spent the summer figuring out how to
grow the Juan de Herrera story without spending much money (since they
had very little). Some desktop work and a mag survey got that process
started, but it was an ingenious deal with Goldquest that ramped things
up.

One interesting part of working
in the Dominican is that companies are limited to 30,000 hectares of
ground. Goldquest has its 30,000 hectares, and on it a very good gold
deposit. But pre-development projects aren’t getting a lot more love
than early-stage exploration, so despite a strong PEA and some stellar
drill results Goldquest too is having a hard time. 

Both companies believe the Tireo mineral belt holds huge potential. If
others saw the same potential, both companies would benefit. And there
was a way to help that along.    

Enter
a data sharing deal. Goldquest has been working in the Tireo gold belt
for almost 10 years. In that time they have walked, sampled, surveyed,
and assessed far more than the 30,000 hectares they now hold, but data
on ground they no longer hold has been gathering dust. The deal gives
Precipitate access to that data. A fair bit of it covers PRG’s ground;
the rest of it is nearby. Precipitate is working through this trove of
information with the goal of identifying new drill targets.    

Should
PRG make a new discovery, Goldquest would benefit from the area play
advantage, and because Goldquest got 300,000 PRG shares in exchange for
the information.

And it gets better. Precipitate went to Strategic Metals (TSXV:
SMD), the Yukon-focused project generator that owns 12.5% of
Precipitate by virtue of having vended some Yukon projects to PRG in
2012, to tell Strategic about the data deal. It was a standard meeting
– Precipitate updates Strategic regularly and has offered Strategic the
chance to participate in its financings over the last few years.

Strategic has always declined. But on hearing about the combination of
the new IP anomalies and the data sharing deal with Goldquest,
Strategic president Doug Eaton got interested. Significant data for
shares? And enough layers of data that drill-ready targets could
result?

By the time Jeff Wilson left the meeting, the stage was set for
Strategic to fill an $800,000 financing. The funds will enable
Precipitate to churn through the GQC data. Should good targets present,
Strategic could exercise its warrants, which would put another $1.2
million in Precipitate’s account – enough for a drill program.

The ability to negotiate a data sharing deal has turned everything
around for Precipitate. Instead of a bleak 2016, the company has new
data to assess, new money to do so, and a path to drilling.

The
second deal that served to remind me about the power of persistence
came out of Pure Gold (TSXV:
PGM) this morning. Pure Gold is also an early-stage gold
explorer, focused on the Madsen project in Red Lake, Ontario. This is a
perfect example of the value inherent in a good junior explorer: the
Pure Gold team has decades of experience exploring and mining in Red
Lake and they chose Madsen because a perfect storm of circumstances
meant these grounds had not seen modern systematic exploration.

These guys should absolutely be exploring for gold in Red Lake, not
growing weed. But they need money.

PGM still has $2.9 million in the bank, thanks to a $5.7-million
raise in February. But given exploration work that’s already been done
at Madsen, the only real way to develop momentum is to hit with the
drill and drilling can eat through a few million pretty quickly.

So Pure Gold inked a deal to sell about 10% of its property to Premier Gold Mines (TSX:
PG). The claims in question are on the northeast edge of
Madsen, adjacent to Premier’s Hasaga property. They do not include any
of Pure Gold’s primary exploration targets; in fact the claims do not
even host the mafic-ultramafic contact along which Pure Gold has been
finding high-grade gold.

The deal comprises $2.5 million in cash and $2.5 million worth of
Premier shares, plus a 1% net smelter royalty on the claims.

With this injection of cash Pure Gold can confidently prepare for its
6,000-metre winter drill program. 

————————————-

Lydian International (TSX:
LYD) just demonstrated that money is available, for the right
projects on the right terms.

Lydian announced a US$325-million construction financing package
for its Amulsar gold project in Armenia. Orion Mine Finance and
Resource Capital Funds are backing the deal, which is not exactly
straightforward.

The financing comprises:

• US$60-million
  gold and silver stream covering 2.1 million oz. gold and 700,000 oz.
  silver.
• US$80-million
  private placement
• US$160-million
  term loan facility
• US$25-million
  cost overrun facility

To
access these funds Lydian has to raise US$25 million on the markets.
Lydian is also working to cement a US$70-million equipment lease
facility. All these components together should fund Amulsar’s
US$395-million capital cost.

It’s a complicated financing deal, for sure. And while Lydian says it
“greatly reduces dilution compared to traditional project finance
structures”, the fact is Lydian’s current 185 million share count will
grow by probably 400 million shares as the company raises US$25 million
in the markets and US$80 million from its backers, given that its
shares are trading at $0.275 today.

Nevertheless, congrats to Lydian on getting it done. It has not been
easy getting Amulsar to this stage: a series of government dictates
made it difficult to permit the heap leach facility, social support was
limited in an area un-used to mining, and metal prices are way below
where they were when I visited the project in 2010.

I was talking to the CEO of a different development-stage copper-gold
company earlier this week. His approach is to de-risk the asset but
spend as little money as possible until the markets improve, at which
point his group will push through the final bits of feasibility work
and start looking for development capital.

“I’ve seem projects get pushed ahead in bad markets and it’s the death
of the asset,” he said. “That is what we don’t want. That being said,
I’ve also seem teams push through and then get the timing just perfect,
with their mine going into production just as the bull market gets
going again, and those guys look like geniuses. But it’s hard. Timing
is hard.” 

Here’s
hoping Lydian is timing it right. 

————————————-

As
one of the groups backing Lydian, Orion Mine Finance is also trying to
time things right. It was interesting that I read about the LYD deal
right after reading about what Orion CIO Oskar Lewnowski said in his
presentation to the Mines and Money conference currently underway in
London.

“We are going to see a pretty broad cross-commodity leg down,
where US$900-an-ounce gold is more than just a possibility,” he said.
“US$1.80 a pound for copper is likely. I don’t think we’re going to see
much relief until 2018.”

Lewnowski has experience. He co-founded metals merchant and hedge fund
Red Kite more than a decade ago. In 2013 he spun Orion out to focus on
mine financing.

Lewnowski wasn’t the only experienced mine financier or builder to step
out last week with bearish sentiment. Mark Bristow, CEO of Randgold
Resources (one of the best gold miners in the world from the
perspective of financial management) also spoke at Mines and Money and
also sees more downside ahead.

“We have quite a bit of pain to go through,” he said. “We’re still in
the denial phase…the longer we live in denial the longer the workout is
going to be.”

Bristow is a skilled, experienced mining man, but I would disagree that
we are still in the denial phase. In fact, looking back on 2015 I think
the biggest change of the year was a shift from “I can’t wait until the
market turns around” to “the market isn’t going to improve anytime soon,
so let’s figure out how we can we make things work today”. 

————————————-

 On
The Macro: Uranium Today

Uranium uranium uranium. Wherefore art thy price movement
uranium?

 Coming.

 Raymond James analyst
David Sadowksi does some of the most thorough uranium analysis out
there. His latest report maintains his overall view that the world will
run very short of uranium starting in 2020 if prices do not rise enough
to incentivize new mine builds.

Sadowski is not alone in this. Most, if not all, uranium analysts see
serious supply shortages looming if prices do not increase.

A strong new addition to Sadowski’s research is his Dynamic Uranium
Incentive Price model. His team evaluated almost 60 projects, from mine
expansions to new mines and mine restarts. They built discounted cash
flow models for each project in order to calculate what uranium price
it would take for each to produce a threshold rate of return. 

The result is below:

Each bar represents a project;
the width of the bar is the asset’s maximum annual output. The height
is the price needed to incentivize development.

The takeaway is that current prices support very little new production. In
fact, there is only one uranium mine under construction in the world
today (it’s in China). Higher prices are needed. Specifically, Sadowski
estimates that in order for enough new mines to be built by 2025 to
avoid what will otherwise be a 65-million lb. deficit, prices need to
reach US$70 per lb.

I don’t think prices are suddenly going to jump to that level simply
because the data say they should. However, uranium is a forward-looking
market. Utilities running nuclear reactors cannot flirt with running
out of fuel, which is why they generally cover their needs at least
three years out and as much as a decade out. That contract model means
a deficit looming in four years should start to influence prices soon.

There is evidence the influence is already at work. At a recent Cameco
investor workshop, president and CEO Tim Gitzel said utilities are
starting to look around for new long-term contracts. The backstory here
is that many utilities freaked out when uranium prices shot up in 2007
and locked in long-term contracts, to protect themselves from further
price appreciation. Of course the opposite happened: uranium started to
weaken of its own accord and then Fukushima hammered it down.

Those 2007 contracts, though, were binding. As such many producers are
selling uranium for 50% above spot or better, and those sales have kept
producers alive.

But they were generally 10-year contracts, which means the time to ink
new deals is nigh.

Add in that the spring is traditionally ‘mating time’ in the uranium
sector – when buyers and sellers generally discuss long-term contracts
– and we could be looking at a near-term price lift that starts a long,
slow ascent.

The other reason to enter uranium today is slightly counter intuitive.
The contrarian uranium argument is getting old. It has now been almost
five years since the Fukushima disaster and uranium consumption is still
below pre-accident levels, while stockpiles are higher. Arguments for a
price rebound have been around for years but so far the upside has been
minimal.

That means even contrarian investors are limited – the space is being
ignored. Share price multiples for pounds in the ground keep sliding.

I realize the same can be said for other metals, but there’s a
difference. With gold, there is no structural supply-demand argument.
Same with copper and silver, platinum and palladium. Zinc is the only
other metal facing a significant supply shortage. 

Given
all the uncertainty in mining, I like a story supported by
fundamentals. Supply shortages for an essential commodity like nuclear
fuel fit that bill.

[Thanks to David and Raymond James for permission to use their charts
in this article.]

Resource Maven finds and explains the news that matters in the world of
resource exploration and development.

Click HERE to
have Maven’s mining news emailed to you.

Or
follow Maven on Twitter: @miningmavengwen 

To learn how to turn resource
knowledge into investment success: subscribe
to Resource Maven.

EDITORIAL POLICY AND COPYRIGHT: Companies are selected based solely on
merit; fees are not paid. This document is protected by copyright laws
and may not be reproduced in any form for other than personal use
without prior written consent from the publisher.
DISCLAIMER: The information in this publication is not intended to be,
nor shall constitute, an offer to sell or solicit any offer to buy any
security. The information presented on this website is subject to
change without notice, and neither Resource Maven (Maven) nor its
affiliates assume any responsibility to update this information. Maven
is not registered as a securities broker-dealer or an investment adviser
in any jurisdiction. Additionally, it is not intended to be a complete
description of the securities, markets, or developments referred to in
the material. Maven cannot and does not assess, verify or guarantee the
adequacy, accuracy or completeness of any information, the suitability
or profitability of any particular investment, or the potential value
of any investment or informational source. Additionally, Maven in no
way warrants the solvency, financial condition, or investment
advisability of any of the securities mentioned. Furthermore, Maven
accepts no liability whatsoever for any direct or consequential loss
arising from any use of our product, website, or other content. The
reader bears responsibility for his/her own investment research and decisions
and should seek the advice of a qualified investment advisor and
investigate and fully understand any and all risks before investing.
Information and statistical data contained in this website were
obtained or derived from sources believed to be reliable. However,
Maven does not represent that any such information, opinion or
statistical data is accurate or complete and should not be relied upon
as such. This publication may provide addresses of, or contain
hyperlinks to, Internet websites. Maven has not reviewed the Internet
website of any third party and takes no responsibility for the contents
thereof. Each such address or hyperlink is provided solely for the
convenience and information of this website’s users, and the content of
linked third-party websites is not in any way incorporated into this
website. Those who choose to access such third-party websites or follow
such hyperlinks do so at their own risk. The publisher, owner, writer
or their affiliates may own securities of or may have participated in
the financings of some or all of the companies mentioned in this
publication.