I spent last week at the New Orleans Investment 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 long-term holds.
The Maven portfolio includes all three kinds of companies. To learn more, sign up for a free trial subscription HERE.
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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:
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 intervals.
Nexgen has $20 million in the bank and drills continue to turn at Arrow.
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 due.
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 demand pressures.
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 complicated mine.
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.
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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.
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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 US$257.
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 Hills.
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.