Post PDAC

The most common question that arises around big mining conferences is the mood. And I understand why it gets asked: the mood does change year to year.

The scientist in me struggles a bit to answer, though, because mood is not quantifiable!

My struggles aside, the mood was good. Last year I would have described it as timid optimism. This year it is active optimism, and very active at that.

Exploration companies are figuring out how to speed up progress. There is widespread agreement that we are in a bull market and that the best way to capitalize on that is to get busy. Capital is still limited (more on that in a moment) but one clear marker of the new bull market is that significant capital has arrived for some.

Those some are the companies that attracted interest from private equity (for example, Appian Capital investing $25 million in small Ontario explorer Harte Gold), active sector investors (from the Eric Sprotts to the whole crew of less famous but very active high net worth individuals who like this sector), resource-focused funds (Van Eck and Sprott and the like), brokers and bankers who collectively get behind a raise, or some combination of these.

When that happens, when capital arrives, plans that have been envisioned but postponed for years are put into action. Bonterra Resources is one example – the $6-million raise they announced quickly grew to $15 million, with participation from several notable investors very familiar with the gold exploration space. That matters because these players have reasonably long-term perspectives and are backed by astute technical teams who see merit in the assets. Funds like Van Eck, investment groups like Sprott, and private equity investors like Appian or Adrian Day do not generally participate in financings to sell 4 months later for a 20% gain. They see bigger potential and know that it will take a bit of time for that to manifest. (In fact, the scale and composition of the financing has put Bonterra near the top of my list in terms of a value buy today.)

Stepping up the ladder, development companies are trying to prove up value as quickly as possible in case a bid arrives. Integra is a good example here. It’s not that Integra has sped up operations because of the market; it’s that Integra’s entire outlook, ever since actively deciding to drive Lamaque ahead in the bear market, has been to prove up value as quickly as possible because there would be a dearth of good, development-ready gold assets when the gold bull market arrived. The thesis was correct and Lamaque remains a standout asset for exactly that reason.

Project generators are emptying their portfolios as companies partner projects. Deals are happening with companies from small to large and for a variety of reasons. Some are small deals that really just give a new company a listing asset, a project that may or may not be their focus going forward but that enables them to raise money and get started. More common and exciting are deals with mid to large-scale companies, for assets where the major sees enough potential to spend some money even though greenfield exploration budgets for majors are still tight. Eurasian’s latest deal, optioning the Copper Springs project to Anglo, is one such example. And so many partners have optioned Eurasian projects of late that EMX is now actively refilling its portfolio. It’s not a problem – these geologists always have lists of opportunities they are watching – and the action bodes well for EMX’s potential as we advance through this bull cycle.

The other area of intense activity is new companies. At PDAC I have a few goals: to meet subscribers, to get some face time with management from non-Vancouver-based companies that I know, and to uncover new opportunities. In terms of that third goal (arguably the most important), last year it was all about figuring out what companies were still alive after the bear market and, of them, which offered the best near-term upside.

This year it was all about talking to groups putting together new deals: whether a new listing or an established company getting re-born, there is a huge amount of new activity.

I learned about a group buying an old Nevada gold mine, where the recoveries were fantastic and the exploration upside remains very intact for historic corporate reasons. I learned about another experienced team who just raised $6 million to debut a new company with an interesting gold project in Guinea. I learned that a third high-power Vancouver group is buying a land package in Nevada surrounding a market darling exploration deal, suggesting the potential to get in early on a new version of that multi-bagger.

It’s a lot of activity, being carried out by people who capitalized on mining cycles before. That in itself I find notable.

At PDAC I also solidified my opinion on a zinc deal that you’ll hear about in the next section. As I said a few weeks ago, for those seeking exposure to zinc today the key is finding opportunities that have not already taken off. Most zinc stocks are doubles if not triples in the last year. Such stocks still offer upside in the form of leverage to zinc; the zinc talk I attended not only confirmed my expectation that the price of zinc has another 20% to gain this year but gave me confidence that the zinc bull will extend longer and higher than that.

Against that backdrop, leverage to zinc is nothing to scoff at. That said, leverage to zinc plus the upside from an under-rated stock means more potential upside, albeit at a greater risk level. That is what I believe I have found in this week’s recommendation.

A few more comments from PDAC. The first concerns all these new deals. That hard part, to me, is pegging fair valuations. Take the two Nevada deals I mentioned. One is for a land package with a mine that operated recently enough that permits are very much still valid, where the metallurgy is proven simple, and where sustained involvement from long-time mine managers and exploration geologists lends confidence in the exploration potential. The other is a prospective land package surrounding a property where exploration efforts in the last few years have outlined some very good gold potential, but where there is much left to determine in terms of scale let alone mine-ability.

Which property deal do you think costs more? Obviously I’m saying all this because it’s the opposite of what you’d expect: the ‘unproven’ land package is being dealt for three times the price of the historic mine.

Which price is right? Can they both be valid? How should one price the value of an area play or the discount for a property that missed the last exploration cycle? Add in the ever-difficult question of how to value the people involved and it’s nearly impossible to know.

That said, what matters is the potential once the dust settles. What will the share count be? Who are the major shareholders? How much cheap stock was issued in the shell and to whom? How much cash will the company have to advance the asset? Who will be driving the bus, both in terms of geology and promotion? The right answers to these questions reduce the importance of the deal price. And if good people are investing early, they clearly think the deal works and that matters.

The other comment is about what kinds of stories work today. That is probably the third most common question at PDAC, after “What do you think of the mood?” and “Find any deals that you like?” And I don’t think there is a simple answer.

This editorial continued in The Maven Letter, with a look at exploration spending, kinds of companies, and commodities set to shine in 2017. To read more, subscribe at www.resourcemaven.ca/subscribe