Conference, and what a great week it was. Quality companies,
interesting and informed speakers, engaged attendees, and fantastic
food and drink. Many thanks to Brien Lundin for inviting me to be a
part of it.
It was a good week to be slightly detached from the metals
markets. The Fed promised to really, truly think about raising rates in
December and that apparently was enough to justify continued strength
in US markets and the US dollar, while smacking gold back down.
Honestly, it’s enough to make you crazy. Why is bad news – that the US
economy is not strong enough to sustain a teensy little rate
increase – considered good? I personally don’t think the Fed will raise
rates any time soon because Yellen would rather be lambasted for not
doing what she promised (raise rates) than be blamed for a recession should
one follow a decision to tighten.
The way to avoid being driven batty by this endless rates-dollar-gold
dance is to ignore the day-to-day and focus on the fundamentals. I’m
preaching to the choir when I say that metals and mining are incredibly
undervalued and will cycle back up. More importantly, such statements
are useless unless accompanied by a plan for profits.
That is precisely what I discussed in New Orleans:
how to position your portfolio for profits in the short, medium, and
long terms. The best part is that each are possible.
Mining will remain a sideways market for some time. Sideways markets
are made up of some stocks gaining while others lose, and some periods
of markets rising versus other weeks of losses. In the short term, the
way to make money is to play those moves – and it is possible because
certain aspects of the mining market are predictable. By playing gold’s
seasonality and taking advantage of corporate news events and promotion
pushes, investors can lock in 20 or 30% gains fairly regularly. I know
that 30% upside isn’t really why we play this game, but when it is all
that’s available I say take it.
Making money in the medium terms is about investing
in the stocks that will move first and fastest as gold starts to
recover. I highlighted how mid-tier miners are outperforming majors and
I think that bifurcation will continue, making mid-tiers a mid-term
opportunity. Opportunity also exists in the strongest and most
de-risked development assets.
As for the long-term part of your portfolio, look to
cream of the crop explorers, low cost producers with growing
production, and management teams taking advantage of the downturn to
collect quality assets.
The list of undervalued exploration and mining companies is long. It is
so long, in fact, that it’s easy to get overwhelmed, to be unsure where
to focus and what to expect out of your investments. That’s why I like
thinking in terms of time: short-term trades, medium-term buys, and
The Maven portfolio includes all three kinds of
companies. To learn more, sign up for a free trial subscription HERE.
And now a snippet from The Maven Weekly, sent to
subscribers on Oct. 28th:
Nexgen Energy (TSXV:
NXE) put out yet another batch of stunner drill results.
Before I get into details, check out these intercepts:
80.5 metres grading 2.48% U3O8, including 15.5
metres of 10.01% U3O8, followed by 35.5 metres of 9.72% U3O8, including
3 metres of 72% U3O8
10.5 metres of 7.3% U3O8
5 metres of 7.23% U3O8
Arrow is a closely spaced set of shear zones
carrying phenomenal uranium grades within the basement rock on the
southern edge of the Athabasca Basin. The project is essentially
next-door to the PLS project, where Fission Uranium (TSX: FCU) has
defined over 100 million lbs. of high-grade indicated and inferred U3O8.
Nexgen has not calculated an initial resource – that
is due out in the first half of 2016 – but the mineralized zone now
stretches along 645 metres strike and across 235 metres width. It
starts 100 metres below surface and extends to 920 metres. And analysts
who have completed their own resource estimates generally figure it is
already bigger than PLS…perhaps twice the size.
The zone remains open in all directions and the
recent results demonstrate the success Nexgen has been having expanding
the zone. Getting into the details of zone shapes, sizes, and stepouts
would turn this short note into an essay, so for now I’ll just say that
Arrow seems to grow with every set of drill results, aided by Nexgen’s
90%-plus drilling success rate.
Shears A2, A3, and A4 will all contribute to the resource. A growing
high-grade zone within A2 will be significant: four recent holes into
that zone returned grades in excess of 10% U3O8 over wide
Nexgen has $20 million in the bank and drills continue to turn at
I am getting increasingly interested in Nexgen. My belief that uranium
will not start seriously moving for some time had put my interest in
the stock on hold – no reason to rush, so might as well wait till
things are further de-risked – but two aspects there are changing.
First, I think uranium’s ascent could start in 2016. Indeed, some argue
that it has already begun, given that the price seems to have
stabilized above US$36 per lb. U3O8. But that’s the spot market, which
is grounded in the contract price but moves on speculation. Before that
speculation starts, the contract side has to strengthen – and that is
From the way I see it, nuclear utilities will start signing new supply
contracts soon. End users usually secure supply two to three years
ahead but, after relying on spot purchases to fill gaps since Japan’s
nuclear shutdown added piles of supply to the market, a good number of
utilities are now 20% uncovered for 2018. Japan’s nuclear restarts mean
that pool of supply is shrinking, the spot price is threatening to
rise, and China’s incessant buildout of nuclear reactors is increasing
Utilities are looking ahead and see a need to secure
their needs. An active contract market makes for a stronger sector and
creates a foundation from which the spot price could jump off.
Second, Nexgen has derisked the project notably in
recent month. The asset is growing rapidly and showing its strength
against its nearest competitor, the PLS project. PLS is a shallow
unconformity-related deposit and the idea is to mine it via an open
pit. The challenge is that PLS is under a lake. I think the capital and
mining costs are going to be significantly higher than the PEA assumes;
more generally, it wll be a complicated mine to build and there just
aren’t many – if any – uranium miners around interested in building a
Nexgen’s Arrow, by contrast, would be mined by
conventional underground methods. In fact, it is remarkably similar to
Cameco’s Eagle Point mine, which is nearing the end of its lifespan.
That short news update got long! I will have more to
say about Nexgen shortly.
Arena Minerals (TSXV:
AN) is another company that has caught attention of late – and
deservedly so. Arena is a project generator with a twist. The company
is earning 80% of a large land package in the Antofogasta area of
northern Chile from an industrial miner that has owned and worked the
claims for over 100 years.
By industrial miner, I mean a company that produced
nitrate and iodine from near-surface layers. The land was never
explored for metals…despite sitting amidst several of the largest
copper deposits in the world.
Arena’s Atacama project is big: 92,000 hectares.
It’s a big enough land package that really it encompasses several
distinct projects – and Arena has now, as per its project generator
model, joint-ventured three of those properties to majors.
Japanese miner JOGMEC is earning into a 30,000-hectare
portion in the middle of the property. B2 Gold (TSX: BTO) is
earning into a similar-sized chunk at the southwest end. And just last
week Arena announced that Teck Resources (TSX: TCK.B) is now
earning into a 19,000-hectare block at the north end.
The Teck deal has the major earning 60% of Arena’s 80% stake by
spending US$19.5 million in two stages over six years. Teck also agreed
to invest into Arena, with a $1-million investment immediately and
another $500,000 before mid-2016, and to make a one-time payment of
US$450,000 plus annual payments of US$100,000.
The agreements with JOGMEC and B2Gold are similar. Both of those
partners are currently drilling. All three partners are looking for
something big. This is, after all, a region of giant copper porphyries.
Mineralization is obscured, however, by thick cover, so geophysics does
not work and outcrops don’t exist.
To test for a hidden giant, both JOGMEC and B2Gold are drilling on grid
patterns. They aren’t testing targets; they’re covering the ground with
a pattern of holes to see what lies beneath the cover.
The idea of a project generator with only one
property is interesting. That Arena has inked deals with three majors
in the last eight months is impressive. The fact that these majors are
grid drilling in search of a hidden giant is intriguing.
Arena is one to watch.
Teck reported a monster loss in the third quarter. The miner took $2.2
billion in impairment charges after lowering its coal price
expectations, leading to a $2.1-billion quarterly loss. Interestingly,
Teck shares gained 5% on the news.
Teck cut its long-term coal price assumption to US$130 per tonne, down
from US$185 per tonne previously. Last quarter the company actually got
just US$88 for each tonne of coal. In 2011, when coal prices peaked and
Teck spent big to increase its role in the space, a tonne was worth
Impairments aside, Teck actually had a good quarter. The company
earned adjusted profits of $29 million or $0.05 per share, partly
helped by the low Canadian dollar but also because Teck has slashed
costs. In April it cut its dividend by two-thirds; it also ordered
temporary shutdowns at some of its Canadian coal mines.
Net profits are good, but Teck needs more than $29 million to
strengthen its balance sheet. Three rating agencies have cut the
company’s credit rating to junk status. The miner has $9.7 billion in
debt and is spending $2.9 billion to fund its 20% stake of the
under-construction Fort Hills oil sands project, tying itself to
another commodity – bitumen – with an uncertain pricing future.
To raise cash, Teck has struck several streaming deals. In July it
banked US$162 million by selling a future stream of gold production
from a Chilean project to Royal Gold. A few weeks ago it sold a silver
stream from a Peruvian mine to Franco-Nevada for $610 million. The
moves mean Teck has $1.8 billion cash on hand, enough to complete Fort
Some see opportunity in the stock, though not in the
near term. Dundee Capital Markets, for example, acknowledged that
Teck’s move into the oil sands left shareholder divided and means the
company is no longer the “go-to” name in base metal. Nevertheless,
Dundee sees potential in TCK if zinc prices go on a run.
Zinc is one bright light in a fairly dim outlook for
Teck. But this is a company that has fought back from the brink before
(2009 anyone?), so I definitely wouldn’t count it out.
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