Mining’s old guard needs strong medicine
A new report details subpar investor returns in the mining industry over the last decade, particularly big cap diversified companies which have not adapted to new realities.
Orex Hits High Grade
Everyone loves to ask: What is it going to take to bring the junior resource sector back to life? I always have the same answer: investors need to make some money.
I think there is good potential for that this year. Select stocks will advance. Certain discoveries will make waves. And we saw one example this week.
Orex Minerals’ (TSXV: REX) share price nearly doubled on news it drilled into 61 metres grading 359 g/t silver, essentially from surface, at a new target on its Sandra Escobar project in Mexico. Orex is optioning the property from Canasil Resources (TSXV: CLZ), which saw its share price triple.
Orex has sampled the target, work that outlined a zone 150 metres wide and some 750 metres long. It was narrow, high-grade veinlets that drew the team to the area, but it’s hard to cobble together a viable deposit from scattered sets of narrow veins.
Deposits take volume, which means either lots of veins or mineralized host rock.
So Orex tested the host rock. Expectations were low as it did not look great, but samples returned significant silver, in the 100 to 200 g/t range.
So they drilled. Results are only out on the first hole of the 12-hole program.
Those are some nice grades. It was also nice to see Orex release meter-by-meter assays for the entire intercept, which shows consistent mineralization, most of it better than 100 g/t silver. Orex figures the true thickness is more like 43 metres.
The structure here is a rhyolite volcanic dome, a load of altered rock that hosts silver minerals and stockwork veinlets. At this point Orex believes a rhyolite unit acted as an impermeable cap, focusing fluids within the dome.
There is much yet to figure out, starting with the next 11 holes. The property is in Durango, near some of the world’s largest silver mines. Orex is earning a 55% stake by spending $2 million on exploration over three years and paying Canasil $500,000. Orex could then boost its stake to 65% through another $2 million of exploration and another $500,000 payment.
A week after the news, Canasil and Orex have held on to their gains. Anyone new to the story is up nicely now – triples are not exactly common these days. It will be very interesting to see how this story plays out. If the discovery is real and grows with each drill hole, we will be looking at a prototypical example of what this beaten down sector can generate. When a stock worth just pennies makes a discovery, multi-baggers are the name of the game.
Ivanhoe Amazes
Then again…Ivanhoe Mines (TSX: IVN) can announce a fantastic new discovery at one project and a ridiculously high-grade resource at another, and still see its share price slide.
The discovery was at its Kamoa property in the Democratic Republic of Congo. The discovery – a high grade, flat-lying stratiform body of copper mineralization 5 km southwest of the defined resource – returned some of the best intercepts ever from the property. And Kamoa is the highest-grade undeveloped copper project in the world, so that’s saying something.
The best hole into the new zone, hole 996, cut 24.2 metres grading 3.48% copper, while hole 997 returned 18.8 metres of 4.64% copper.
Ivanhoe already knew this area, called Kakula, hosted high-grade copper. A wide-spaced drill program in 2014 returned significant copper in six of 21 holes, including 13.5 metres grading 4.15% copper. That work outlined three areas of interest, with Kakula Discovery sitting in the middle. That is where the new holes are located, though they sit a significant 400 metres north and east of the earlier intercept.
Now Ivanhoe is testing the zone with a 10,000-metre grid drill program, while also testing the other two areas of interest with 9,000 metres of drilling.
Kamoa is already a very impressive project. Smack in the middle of the Central African Copperbelt, Kamoa is home to 739 million indicated tonnes grading 2.67% copper and 227 million inferred tonnes at 1.96% copper. Mineralization sits in flat-lying bodies that are 2.5 to 18 metres thick.
Ivanhoe owns 49.5% of 95% of the project, after having sold an equal stake to Zijin mining for US$412 million. The DRC government owns 5% of the asset, a stake that will increase as Ivanhoe and Zijin negotiate project development.
Development would not be cheap. The first part of a two-phase plan would produce 100,000 tonnes of copper per year in concentrate; developing that operation would cost US$1.4 billion. Phase two would triple production and include a smelter to produce blister copper.
Those plans come from the 2013 preliminary economic assessment. A prefeasibility study is due out shortly.
Two days after it announced those drill results, Ivanhoe announced what is possibly the highest-grade zinc deposit ever. The deposit is part of Kipushi, an old copper-zinc mine in the DRC in which Ivanhoe bought a 68% stake in 2011.
The resource is insane.
Mineralization is divided between Big Zinc, the zinc-rich zone, and three areas that carry high copper grades: Fault Zone, Fault Zone Splay, and Serie Recurrente.
Big Zinc is home to 10.2 million measured and indicated tonnes grading 34.9% zinc, 0.65% copper, 19 g/t silver, and 51 g/t germanium. If that seems a crazy zinc grade, it is. It is more than twice the grade of the world’s next richest zinc development project.
The copper-rich zones offer 1.63 million measured and indicated tonnes grading 4% copper, 2.87% zinc, and 22 g/t silver, plus 1.6 million inferred tonnes at similar grades.
The market was expecting the grades. What the market was not expecting was the size. In its few years of drilling Ivanhoe has doubled Big Zinc and its news release made clear that the zone remains very open for expansion, with high-grade intercepts outside of the defined resource.
Kipushi operated as a mine between 1924 and 1993. In early 2011 the lower levels of the underground mine flooded because the DRC mining company that owned the asset failed to maintain pumps sufficiently. Ivanhoe bought into the asset in late 2011 and has been working to dewater since. Water is now below the 1,210-meter level.
To complete the story, Ivanhoe’s other key asset is Platreef, the massive platinum-palladium project in South Africa. This would be an underground mine tapping into reefs of mineralization, but a pre-feasibility study pegged development costs at US$1.2 billion.
Three of the highest-grade projects in the world, but Ivanhoe’s share price is struggling.
The two biggest problems are that its assets are in the DRC and South Africa, jurisdictions investors are wary of, and all demand huge capital costs. On its side is its leader: Robert Friedland, one of the best mine financiers and developers in the world.
Friedland’s prowess was clear when he announced the Kamoa deal. Selling half an asset to the Chinese for cash at a 196% premium compared to market cap – that counts as a coup. And the deal means Ivanhoe has cash. At the end of 2015 it received the initial Kamoa payment from Zijin, of $206 million, and for the next 18 months it will get US$41 million every 3.5 months.
Part of the share price problem has been a series of escrowed shares. Every quarter since the company listed in 2012, 30 million shares have been released from escrow. It has been a major overhang; the share price has been hammered every time a new batch of shares came free trading. The last set came out on January 23, just before the Kamoa discovery and Kipushi resource were announced.
Later in the week IVN managed to work its way up to $0.68 from $0.54. With the escrow curse cleared and three astounding – if challenging – assets, the stock has a chance.
Sierra Metals Finds Better Stuff at Yauricocha
Exploration drills working underground at the operating Yauricocha mine in Peru have tagged into a strong new zone, according to owner Sierra Metals (TSX: SMT).
Yauricocha taps into resources bearing average grades of 0.76 g/t gold, 55 g/t silver, 0.83% copper, 1.73% zinc, and 0.85% lead. The new zone, situated about 400 metres north of current operations, looks to offer notably better grades. The best results look like this:
For now the zone is about 240 metres long, but it remains open in most directions, in particular to the north and at depth. It is also thicker than the zones normally mined at Yaurcocha.
It all adds up to an area Sierra wants to get at asap. The company is working to access the new zone by the third quarter of the year. If that happens, the mine’s economics should get a nice lift because of higher head grades.
The market liked the news, lifting SMT 19% in a day. That being said, SMC shares are a volatile lot, so such moves are not uncommon.
Aston Bay Attracts BHP
Amidst a slug of releases about majors dropping joint venture deals (Kinross walked away from Revelo Resources’ Las Pampas project and First Quantum abandoned Millrock Resources’ Alaska Peninsula project, among others), Aston Bay Holdings (TSXV: BAY) managed to attract BHP Billiton into a joint venture on its Storm copper project.
Storm is on Somerset Island in Nunavut, northern Canada. Its stratabound copper showings have attracted major attention before: Teck drilled some 97 holes on the property in the late 1990s and outlined four areas of mineralization.
The work produced some great results, including 110 metres grading 2.45% copper from surface and 56 metres of 3.07% copper from 12 metres depth. However, thousands of metres of core were never sampled and a list of target areas were never tested.
Now BHP wants to see what some of those targets offer. The major signed a letter of intent to earn a 75% stake in Storm by spending $40 million on the property within nine years. The earn-in requires that BHP spend at least $2.5 million in the next two years, an important requirement for the junior partner Aston Bay that will want to see its asset advanced. Aston also gets a $325,000 payment once the definitive deal is signed.
Kudos to Aston Bay for attracting BHP, a feat that required Aston to take over 100% of Storm from Commander Resources, from whom Aston Bay had been earning into the asset. It’s impossible to attract a major to a project when ownership is fragmented, so BAY’s mid-December announcement of a deal gaining 100% of Storm from Commander was pivotal.——————————————————
On The Macro
This week’s macro essay is a departure from the norm. After six intense days of conferencing, I sat down to write and found myself creating a short bit about this thought and another little take on that idea.
Usually I try to knit my thoughts into a big picture concept, but this time I realized: this is what we get out of conferences. So that’s what I should convey.
I spent the week catching up on projects, hearing new exploration news, trading ideas with mining friends, comparing commodity thoughts, and dissecting the current situation. At the end of it all, what I’m left with are a series of interesting ideas.
So here they are: my thoughts following six days of shop talk!
Interested Investors Versus Mainstream Malaise
When gold bars grace the covers of mainstream business magazines, the top is in and it’s time to sell. So when the Wall Street Journal titles one of its top stories For Mining Chiefs, Doomsday Scenarios Could Become Reality – does that mean the bottom is in?
The article says nothing new. It highlights how prices considered doomsday or impossible just a few months ago, like US$30-a-tonne iron ore or US$4,000-per-tonne copper, are now in sight. It goes through the China quandary – how uncertainty over Chinese growth and demand overhangs the commodity sector like a black cloud. It touches on output cutbacks to stem oversupply in copper.
It ends with a quote on copper: “I don’t think the market is going to let this rest until it sees blood.”
We have seen blood, thank you very much. The mainstream might have missed it, happily distracted by a six-year US bull market, but those of us in the sector have bled.
And if mainstream attention creates the final ‘leg down’ that we have all been awaiting – sounds good to me.
Given what I experienced at this week’s three conferences, I think that is precisely what is happening.
Our conference, the Metals Investor Forum (MIF), was packed. Attendees were truly shopping – until now, investors have seemed interested but not ready to engage, wary of further downside. Now, according to the conversations I had, they are positioning.
The same feeling pervaded Cambridge House’s annual Vancouver Resource Investment Conference (VRIC). On Sunday in particular the show was buzzing and companies were pleasantly surprised by the number of active investors stopping to talk shop.
(I will note that VRIC felt quiet on Monday. I take that as a side effect of the loss of so many of Vancouver’s brokerage houses. As a workday, Monday historically saw a flood of brokers, bankers, and analysts arrive to wander the floor once markets closed for the day. Now there just aren’t very many of those left in Vancouver.)
Maybe the broad market downturn is having the effect we want. The media is looking for culprits, hence the focus on commodities. Investors are looking for safety, hence gold’s 9% gain. Contrarian resource investors are finally seeing a reason for hope, hence the buzz at MIF and VRIC.
Feel is a hard marker to gauge accurately, yet it is so important. If you wait until the turn is apparent, you’ve missed some serious upside. Relying on expert forecasts is dangerous – analysts hate to be overoptimistic, as that means their targets are too high, so as a result most metal price forecasts conservatively extend out flat from current levels. When there are structural reasons to expect price variance, forecasts end up so widely divergent as to be useless! I attended the technical session on copper at Roundup and the speaker showed how copper forecasts regularly range by 40 to 60%.
You have to make up your own mind. The feel of shows like MIF, VRIC, and Roundup are part of that. And it felt fairly good.
The Build Versus Wait Question
It is one of the big conundrums of our sector today: if you have an advanced asset, should you push to get it into production to catch higher prices as they happen or should you wait until higher prices make money easier to access and build then?
Different teams have different answers.
For example, the team at Pilot Gold (TSXV: PLG) has officially put its Turkish assets on the backburner because it is too hard to capture value or advance assets in this market. As interim president and CEO Rob Pease put it during a Roundup presentation, the near-development Halilaga assets gives Pilot a very strong foundation, one that will matter when the market improves. Right now, however, the asset ironically adds little to Pilot’s value, so it is difficult to justify putting money into it.
Many others have the same outlook. Exeter Resource (TSX: XRC), for example, has the large copper-gold Caspiche porphyry project in Chile. Exeter could produce a feasibility study on Caspiche in about nine months, but the next step would be financing and the Exeter team does not think they could secure a financing package today that would work. So they are sitting tight, spending as little as possible while they improve the project where they can and await better markets.
Others, of course, are building through the downturn. Pretium Resources (TSX: PVG) secured its project financing in September, through a combination loan-stream-equity deal. Opinions on the deal are mixed and we will really only know whether the money was worth the costs once Brucejack is in operation.
Another example comes from Lydian Resources (TSX: LYD), which secured financing to develop its Amulsar gold project in Armenia in December. That deal is even more complicated, combining a gold and silver stream, an equity financing, a loan, and a cost overrun facility, all of which is contingent on Lydian raising $25 million on its own. Provided they can, the project will be a go…but Lydian will have something like 600 million shares outstanding.
The point is that financing is possible today, but the terms are hard.
The spend-versus-sit-tight debate is being fought at every level of the sector. Take, for example, the companies out there buying up good properties while they are cheap. Some such groups pointedly plan to NOT advance their assets at all. First Mining Finance (TSXV: FF) is among this group: that team is banking properties but thinks any money put into the ground right now is wasted, because they can buy gold in the ground for US$10 an ounce. Discovering an ounce costs more than that, often many times more.
Others are taking a completely different approach. Lundin Mining (TSX: LUN) brought Fruta del Norte, an incredible gold deposit that Kinross could not unstick from its permitting quandary, and is pushing towards production. Lithium X (TSXV: LIX) is working to establish a portfolio of high quality lithium assets, but it plans to advance each asset it acquires. Every project generator I know is out scouring the world for assets to acquire and advance while opportunities abound and people are available.
There’s no single answer to which approach is better. It depends on the asset, the commodity, the team, the jurisdiction, the permitting, and the plan.
But in five years it will be very interesting to look back and see whether pushing ahead despite the bear market or waiting patiently until things improve was the better plan.
Some Stocks Will Work
I had numerous conversations about how the year would unfold and there were a few points of agreement across those conversations.
One: no one expects significant market improvement. The bull market is not about to roar; the Venture exchange, weighed down by legions of inactive companies, will do little.
Two: regardless of the overall market, good mining equities will outperform.
It happened last year. Look at Claude Resources, Sabina Gold & Silver, NexGen Energy, Roxgold, and a few others – they enjoyed individual bull markets.
If select stocks can pull that off again this year, if a few acquisitions close, if gold strengthens, if uranium starts to move, if a lithium bubble grows – each of those aspects alone wouldn’t have enough impact to generate overall momentum, but together they could mark the beginning of the bull.
Speaking of select equities outperforming – there’s a twist to that fact that I hadn’t thought about much until this week, but I think it’s rather significant.
There really are a few stocks out there that are darlings: Kaminak, Integra, Pretium, etc. These guys have had no problem accessing cash during the downturn. That’s great – it’s allowed them to advance their assets considerably – but the flip side is that they are sopping up all of the limited investment interest out there. Brokers and bankers are talking these deals up because they’re in. Investors are attracted to the positive momentum and latch on (rightfully so).
It’s great for those few stories – but it sucks for the rest. Chatting with Bill Fisher, president of Goldquest Mining, the other night, he has come to realize that GCQ’s efforts to preserve its bank account has ended up a downside. Without the need to raise money in the last two years, Goldquest has fallen off the radar screen and has no momentum.
If only I’d spent more money and had to raise, he said, then I think our price would be higher! He may well be right, no matter how ironic.
Japan Goes Negative
I won’t dwell on Japan’s decision to adopt negative interest rates, as there is an abundance of analysis available out there. What I will say is this: loose monetary policy hasn’t worked yet, so I don’t know how or why the Bank of Japan thinks it will work now.
The Bank of Japan has been easing – printing money, holding low interest rates, and aggressively buying government bonds and risky assets – for years. Decades, even. One take on the decision to move into negative rates territory is that the Bank has run out of bonds and risky assets to buy.
Despite the long-lived effort, Japan remains stuck in a state of deflation and very low growth.
So they’re trying more of the same.
There is now a 0.1% fee charged on deposits left with the Bank of Japan, which is supposed to encourage commercial banks to lend their cash out to businesses rather than sitting on it. And the Bank said it “will cut the interest rate further into negative territory if judged as necessary.”
Japan’s stock market jumped on the news…briefly. Within an hour shares plunged back down again as traders realized the bigger issue: that negative interest rates are really a move to depress the value of the yen, a move that represents another shot in the world’s ongoing currency war.
The more the yen and the euro decline (to domestic advantage), the more pressure China will feel to further devalue the Yuan to keep its exporters competitive and its import market active. But a major Yuan devaluation would represent a major deflationary hit to the global economy. One of the world’s largest import markets would shrink, its weak currency reducing its purchasing power, and the world’s largest export market would make less and less off each sale.
Not what we want, broadly.
The Yuan has been a very closely managed currency and despite some recent relaxation it will remain so. I see China managing a slow devaluation of proportions sufficient to walk the line. It will be a hard line to walk – and negative Japanese interest rates don’t help.
Gold’s Near-Term Outlook
Gold has performed admirably over the last few weeks, notching almost 10% to hover near US$1,115 per oz.
Given the big picture, I think it will end 2016 higher than it is now.
However, a near-term pullback may be in order. Gold is climbing up to its 200-day moving average, which is a natural resistance level. While it could break through that line on first attempt if propelled by some outside force (nuclear threats from North Korea, weak US economic numbers pushing markets down, that kind of thing), in the absence of such an event the price will probably fail its first attempt to beat the 200-day moving average.
It is more likely to succeed once a choppy pullback at least allows the shorter-term averages (14-day and 50-day) to catch up.
Some gold companies have benefited from gold’s gains. Barrick Gold is now up 68% from its 52-week low, which it hit in September; half that gain happened in January. Gold Fields is up 63% since mid-December.
Others have not felt the love. Looking back a few months, Newmont is flat, Goldcorp is flat, Kinross is down, and several mid-tiers including Eldorado and B2Gold are notably down (more on B2 later in the letter).
It adds up to a GDX Gold Miners Index that is flat since gold started gaining in mid-December and a GDXJ Junior Gold Miners Index that is down some. Sigh.
A big part of the problem is the baby-with-the-bathwater attachment. Index selling means miners get sold alongside everything else in a downturn. Margin calls mean brokers sell what they can sell, not necessarily what they want to sell, and gold stocks are pretty liquid and therefore sellable.
The takeaway to me is: if you have short-term trades designed to leverage gold’s strong season and they are among the equities that have moved up, I would consider exiting the trade. Gold may well slide in the coming days, while market mayhem may well hurt miners. Take your gain and enjoy.
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