2018 Outlook from Exploration Insights' Brent Cook and Joe Mazumdar
Vancouver, British Columbia / January 2, 2018 / JMN Wire / Neils Christensen asks Exploration Insights' Brent Cook and Joe Mazumdar how they would invest $100k into the mining sector and also gets their take on what 2018 has in store for investors.
1) How would you invest $100k in the mining sector in 2018?
We will continue to invest in junior mining companies whose upside potential is underpinned by exploration success. Given the dearth of quality, high margin projects held by major and mid-tier producers, our focus will be on early-stage exploration projects seeking these projects. This is especially true in the gold sector where the gold price is range bound with a strong resistance level at US$1,300 per ounce and marginal resources are the norm. Given the poor financing environment for non-cash flowing junior explorers, we will have a certain portion of our portfolio invested in active prospect generators that are signing deals with major producers who are ‘running to stand still’ with respect to their reserve and production growth opportunities.
Our commodity focus will be on precious metals such as gold and silver, base metals such as copper and zinc, and battery metals such as lithium. We are avoiding uranium as we are concerned about getting in too early given the global inventory overhang. Assets in mining friendly jurisdictions, with progressive tax and royalty structures that allow companies to generate a return that is commensurate with the risks they absorb, will also be an important investment criterion.
2) What will affect gold most in 2018?
Given the current global geopolitical environment, the number of potential scenarios for 2018 is almost infinite. In our view, the extended bull market run is long in the tooth and we suspect that the underlying risks pose the potential for several black swan events that could very well come to the forefront in 2018. Higher interest rates are coming; however, the number of rate hikes is the question and some are already baked into the current gold price, so any changes to the forecast are critical. The consensus forecast is for three rate hikes in the New Year but a new head of the Federal Reserve will be appointed, so we are not sure what impact this will have.
The reforms in the US tax code and low-interest rates have supported the US equity markets suggesting that greed eclipses fear at this stage. This is reflected in the low volatility rates (VIX<10) and high valuations of very risky speculations across the board. The lack of fear has curtailed the demand for safe-haven assets. In 2017, the surge in cryptocurrencies such as Bitcoin, which was up ~19x to a mid-December peak, has hived off some of the safe haven and ‘store of value’ demand from gold.
Gold prices have been supported predominantly by investment demand, specifically ETFs, over the past year hence any changes on this source of demand would have a significant near-term impact on it. Although inflows have slowed, they remained net positive in 2017. Any combination of additional interest rate hikes than forecast, strong equity markets, and a continued expansion of investor interest in cryptocurrencies would be negative for gold in 2018.
3) What are the top 3 companies for 2018? Why?
Our choices for top companies in 2018 are all involved in exploration or prospect generating and provide exposure to gold, silver, copper, zinc, and lithium.
Advantage Lithium (AAL.V) - An explorer in the ‘Lithium Triangle’ of northwest Argentina in a joint venture with Orocobre (ORL.T, ORE.ASX)—the only lithium producer in the Salar de Olaroz-Cauchari. AAL’s property package straddles a lithium development play operated by a joint venture between a major producer, Sociedad Quimica y Minera SA (SQM.NYSE), and Lithium Americas (LAC.T). We think that there is significant tension between Orocobre and SQM/Lithium Americas Corp. JV over control of the Salar de Olaroz-Cauchari and AAL is in the middle with the smallest market capitalization of all the players. The company has C$13 million in cash and a number of warrants (~13 million at a strike price of C$1.00) from its February 2017 financing that is currently being exercised. Therefore, we think it is well funded to deliver its next significant catalyst, an updated resource estimate in the first quarter of 2018.
Tinka Resources (TK.V) - The zinc explorer achieved its goal of expanding the Ayawilca resource through the discovery of South Ayawilca in 2017, and both the market (+265% year to date at Nov 11, 2017, peak) and the industry (Winner of the 2017 Mining Journal Explorer of the Year Award) has recognized its efforts. The company delineated a high-grade zinc resource containing 5.6 billion pounds grading 7.3% zinc equivalent at its wholly-owned Ayawilca project in a prolific belt of central Peru in November 2017 and continues to drill to infill and expand the resource outline and quantify the potential of its land package. We have owned Tinka since PDAC 2017 and continue to recommend the stock due to the paucity of high-quality zinc projects in mining friendly jurisdictions. Commodity analysts have forecast that 8 million tonnes of zinc will be required in 2030, 3 million of which are not accounted for by forecast production and the current probable project pipeline.
Evrim Resources (EVM.V) - This Americas focused prospect generator has recently signed significant project earn-ins for different projects, including a copper porphyry in eastern British Columbia (Axe project) with a major copper producer, Antofagasta Minerals (ANTO.LSE). EVM is taking full advantage of the lack of grassroots exploration projects generated by major precious and base metal producers and has planned a grand total of 24,000 to 34,000 meters of drilling for 2018; therefore, plenty of news flow to come. It also has five active joint ventures and a regional exploration alliance in its assets. The company has ~C$3.6 million in working capital and anticipates spending about C$1.0 million in 2018 while its various partners contribute C$7-8 million to their respective projects.
4) What 3 investments would you avoid in 2018? Why?
We will most likely avoid adding uranium producers, leveraged gold plays, and primary cobalt explorers to our portfolio in 2018. We think that the uranium inventory overhang on the market is significant and will require a few years before it becomes manageable. In the interim producers are looking at spot prices of US$20-25 per pound of U3O8 with no significant long-term contracts being signed at higher levels. More curtailments by major uranium producers will help, along with a faster rise in global demand.
As gold producers have been writing off millions of ounces of reserves due to the challenging economics of high-cost gold production at reserve prices levels closer to current spot levels, we don’t think that marginal gold assets will catch a bid in 2018 with respect to M&A.
Primary cobalt producers will be on the high end of the cost curve as the vast majority of production is as a by-product from copper and nickel production. Also, we are concerned that evolving battery technology may require less cobalt. We prefer to gain exposure to the growth in electric vehicles’ production via the sector’s demand for lithium and copper.
5) If you could describe 2017 in one word, what would it be?
“Twilight-Zone” - We had anticipated a ‘Twilight-Zone’ scenario for 2017 and we think the description remains appropriate. On the global front an emotionally unstable narcissist became the most powerful man in the world, a mentally unstable man gained nuclear capabilities, Brexit lumbered forward, facts became illusory, the Mid-east splintered even more and stock markets and speculative assets surged.
Within the mining sector, the flow of funds dwindled as institutional money dried up, yet a very few exploration stories headed to the moon (at least temporarily). We witnessed individual junior exploration companies stocks gaining 100’s to 1,000’s of percent based on visual descriptions of the core, geophysical anomalies, and big concept ideas, but minimal hard data. We think this is another indication that reality, facts, and science took a back seat to hype, ignorance, and greed in 2017. This can’t continue indefinitely and we expect (hope) that hard data and reality will gain credence in 2018.
6) What are your thoughts on bitcoin in 2018?
Although we recognize the value of blockchain technology, in our opinion cryptocurrencies are the poster child of the “twilight-zone” speculative world of 2017. These are complex algorithms requiring massive amounts of energy to produce something with a cost of mining that is unpredictable and, that only exists on your hard-drive and in the minds of those who own them. The majority of mining is done in massive warehouses in Mongolia and China where coal power currently provides the cheap energy required to run the calculations and cool the mining racks. Therefore, the cost of mining and the public’s confidence in the cryptocurrencies is, to a large extent, dependent on unpredictable energy costs and one’s faith in a very volatile market. No thanks!
Exploration Insights intends to stick with what we know best--mining and exploration with the confidence that quality mineral deposits will always be valuable.
7) Any additional comments
We think 2018 will be a volatile year for nearly all investment classes with uncertainty and greed being the driving force. This means that in the mining and exploration sector one will not be able to rely on a “greater fool” buying your mistakes. Due diligence with regard to geological, resource, social and political aspects of any metal project will be critical to winning or losing on investments in this sector.
About Exploration Insights
The Exploration Insights (EI) Newsletter is a synergistic collaboration between veteran economic geologists and equity analysts Joe Mazumdar and Brent Cook offering the sophisticated speculator a strictly independent, unbiased, and technical analysis of the junior mining and exploration sector. Our sole purpose is helping our subscribers profit from their investments. Turning Rocks into Money™ is our motto. For more information visit www.explorationinsights.com.
See original publication at www.kitco.com.