The Maven Letter: September 5, 2018 On The Macro: Golden Gains Ahead? Nevsun’s Big Deal; Why It Pays to Pay Attention to Free Trade Dates & You Can’t Make This Up. Portfolio Updates: Allegiant, Ashanti, GT Gold, Prize Mining, Velocity Minerals.
Last week’s Maven Letter was a lengthy one, hopefully providing enough reading to carry you through the last week of summer, which was particularly quiet in terms of mining sector news. As a result, we only have Portfolio Updates from a few companies this week: Allegiant, Ashanti, GT, Prize, and Velocity. That said, following a holiday Monday the markets reopened on Tuesday…and we got a big announcement from Nevsun: a friendly all-cash takeover by Zijin Mining for $1.9 billion. It’s a good deal and one I expect will close. Always nice to start the fall trading season with a takeout in the portfolio! After commenting on that deal, I comment on why the fall might work well for gold. I then explain why it pays to pay attention to free trade dates, which is a slightly nuanced topic but one that matters in the world of small exploration companies. And the final article of the letter looks at two examples from the last week of people going to the ends of the earth – and beyond! – for gold. You can’t make this stuff up
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Golden Gains Ahead? There has been lots of talk this summer about why gold hasn’t been acting as a safe haven. Rather than answer that, I have another (perhaps surprising) question: what would it be acting as a safe haven against? Sure, trade wars have people worried. And Trump is a wild card. But US stocks remain buoyant, the US dollar is strong, and consumer and investor confidence surveys keep returning robust results. So rather than ask why it isn’t attracting safe haven buying, perhaps we need to think about what needs to change for investors to start wanting safe havens. The two easiest answers are stock market weakness and significant political turmoil… and both might be right around the corner. Stock market weakness is quite likely over the next month or perhaps two. September is historically the weakest month for US stocks; October is not much better. This September things are especially set up for weakness, as through August the S&P and the NASDAQ hit new highs, consumer confidence rose to an 18-year high, and investor risk measures like VIX fell. Markets never rise non stop, especially against seasonal patterns. And seasonality isn’t the only force working against the markets. Trump seems set to announce further tariffs against China. Estimates suggest that an additional 25% tariff on another $200 billion worth of Chinese goods will knock a full 1% off of Chinese real GDP growth, which is something to fear. At the same time, it seems there are serious hurdles ahead for the new bilateral US-Mexico version of NAFTA, hurdles enough that it could well fall apart. Together, these make it seem that trade war fears may well peak in September. Trade wars make investors nervous about growth, which could well erode confidence measures. If confidence starts to crack, markets that are already well up will turn down, with all of the uncertainty that US midterm elections will bring only adding to the downward pressure. I’m not suggesting the bull market as a whole is over – not by a long shot. I am suggesting that markets may well step back in September and October, pushed down by trade war anxieties, seasonality, simple moderation from recent gains, and uncertainties related to US midterm elections. Speaking of the midterms, I think they could play a role in how these trade wars play out. Trump has suggested that he will (eventually) discuss trade with China and ultimately the guy wants to do a deal. But with November drawing ever closer, I wouldn’t be at all surprised to see Trump play hard ball on Chinese tariffs through September to rile up support before announcing a trip to China in October, all as a way of demonstrating his negotiating skills. If broad markets do weaken to start the fall and that puts some wind in gold’s sails, there’s reason to believe everyone – from explorers to producers – will do well. Why? Producers always do well when gold gains. Profits rise rapidly when gold gains against costs are that largely fixed, which is exactly why gold miners offer reliable low risk leverage when gold gains. As for explorers, I have been heartened to see a list of drill discoveries in recent weeks trade remarkably well. I use the term ‘discovery’ lightly – I am not convinced they will all turn into anything of merit, but each produced at least one or two drill intercepts that got the market excited. When I say ‘excited’, I really mean it. Sokoman Iron (TSXV: SIC) reported 12 metres of 45 g/t gold from its Moosehead project in Newfoundland and its share price soared 500%, though two-thirds of those gains eroded over the following month. Golden Ridge Resources (TSXV: GLDN) reported 327 metres of 0.31% copper, 0.35 g/t gold, and 1.9 g/t silver and its shares surged 200%. As we here at Maven know, Aben Resources (TSXV: ABN) reported 10 metres of 39 g/t gold and its shares shot up more than 100%. And Triumph Gold (TSXV: TIG) reported a new porphyry discovery that returned 125 metres grading 1.24 g/t gold, 0.31% copper, and 7 g/t silver and investors almost doubled its share price. Yes, these companies generally started with pretty low share prices, which makes it easier to earn large percentage gains. But they all actually attracted pretty good trading volumes too, which is just as heartening because it means people are actually paying attention! Also, volume plus share prices that gain and then maintain their gains for a time means investors can harvest some profits. That matters because harvested gains are available to deploy into new investments – and with the summer having been so difficult such profits have been limited, which has further limited a tight supply of investment dollars.
2 Several takeovers are also helping that situation. Today’s bid for Nevsun, for instance, will put gains in investment accounts, as will some of the early summer deals that have now closed (such as the $1.3-billion takeover of Arizona Mining). Are people positioning for a better fall already? After hitting a two-year low in mid-August the TSX Venture Exchange actually gained 9% over two weeks, which is encouraging.
TSX Venture Composite Index
We shall see in the next week or two whether I’m at all correct!
Nickel Follow Up As a short follow up to my comments last week on nickel, the London Metal Exchange is now exploring the possibility of launching a nickel sulphate premium contract next year. Remember: nickel sulphate is more expensive to produce and thus output has been falling, but it is the only kind of nickel that can be used in batteries. And the growth outlook for this ‘battery grade’ nickel is fairly steep, something along the lines of 20% compound annual growth over the next ten years. Nickel traders report that nickel sulphate is currently commanding a premium of US$2,000 to $4,000 over the LME nickel price, which is US$12,450 per tonne today. A nickel sulphate premium contract on the LME would allow traders to bet on that premium, adding to the LME’s offering of ways to bet on battery metals. The exchange is planning to launch lithium and cobalt contracts next year as well and is considering contracts for graphite and manganese. I mention it because I noted at the end of last week’s nickel article that there aren not many good ways to invest in nickel. Should this battery nickel premium contract come to be, it would help fill that gap.
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Nevsun’s Big Deal A heartfelt congratulations to Nevsun Resources’ (TSX: NSU) management and board for the deal announced today, which is a takeout by Chinese miner Zijin in an all-cash deal valued at US$1.4 billion. Zijin will pay $6 for each Nevsun share, which represents a 57% premium over NSU’s share price on May 7, the day before Lundin Mining’s first public attempt to take the company over. It is also 26% higher than Lundin’s all-cash offer from a month ago. And it puts the Maven gain at 37%, which isn’t immense but sure ain’t bad!
3 Nevsun Resources (TSX: NSU)
Nevsun’s board of directors is unanimously recommending that shareholders tender to the offer. I am sure they feel torn, as this team really wanted to build Timok and use it as the cornerstone asset in building a new mid-tier Canadian mining company. However, a good offer is a good offer and this gives shareholders a clear win rather than riding the uncertainties of building a mine, so they have to accept. I would also note that while Zijin doesn’t have any assets in Eritrea, Eritrea has welcomed Chinese investment in many projects over the last decade and the countries seem to have developed a functional relationship. That makes Zijin a far better owner for the Bisha mine than Lundin ever was. It’s a good deal and the market clearly thinks so, as NSU is trading almost at the deal price, which means people think it will go through as offered. There’s always a chance that another operator will make a bid, but I think the odds of that are pretty low. If you own Nevsun shares you can either sell now or wait for the payout, with little difference. My only frustration at the deal is its timing – I had written a prediction for today’s letter that Zijin would make a bid for Nevsun, but the deal happened and stole my chance to appear prescient! I made my prediction after news broke that Zijin was the successful bidder to become a strategic partner in the RTB Bor copper complex. The state had sought a partner for the complex, which includes mines and a smelter, and Zijin won the process with an offer of $1.3 billion for a 63% stake. The deal not only brought Zijin to Serbia but put the Chinese company in charge of a smelter in need of additional concentrate essentially next door to Nevsun’s Timok project. Timok is a clear fit for Bor’s smelter and now Zijin seems to have locked that all up. Congrats to the team at Nevsun and to all NSU investors.
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Why It Pays to Pay Attention to Free Trade Dates Raising money is an essential part of the junior resource game. Companies can’t explore without cash. The market usually pays attention and knows when a company is running out of cash – and the result is usually a weaker share price, because financings aren’t often good news. There are exceptions – news that a major miner like Goldcorp or South32 is investing in a junior is positive, but the financing still means dilution for current shareholders. And most financings don’t involve a strategic partner or a prominent fund; instead, they mean diluting the share count and usually at a slight discount to market. 4 That’s the more obvious, business end of financings: that the need to raise money hurts share prices because financings are dilutive and often discounted. It’s worth noting that share prices often recover most of their lost ground once the financing is done, assuming it went well. But there’s another end to this business that deserves attention, because it generates similarly reliable – and even more predictable – pressures on share prices. That’s the free trade date. Shares bought in a financing are restricted for four months. That means those who participated in the financing can’t sell their shares until those four months are past. If the stock is up or down 10%, 60%, or 200% from the financing price – no matter, the financing shares are under lock and key. Hold periods certainly help stabilize stocks after financings, but the challenge is that four months later a whack of investors – who all have the same cost base – are suddenly allowed to trade. If the stock is way up, selling is guaranteed. That’s the first lesson of free trade dates: pay attention to them. If a stock is up, it will fall heading into the free trade date – perhaps all the way back down to the financing price, because that’s the common cost base. The stock starts to fall heading into the free trade dates because sophisticated investors will start short selling a stock that’s up two weeks ahead of the free trade date, to lock in their gains before everyone else tries to do the same. Whether a stock will come all the way back down to the financing price depends on a few things. First, was there a warrant? If the financing included a warrant (or a half warrant), investors are less concerned about locking in a gain from their shares. Many are in fact willing to take a pretty tiny gain – perhaps just a few percent – to get their cash back off the table, because the warrant means they retain the opportunity to win. Warrants give investors the right to buy a stock at a set price for a set period. A financing might sell units for $0.40, with each unit comprising a share and half a warrant. Each full warrant might allow the holder to buy a share at $0.60 for two years. So if the company in question does well and shares trade up to $1.30 the next year, warrant holders can then buy stock at $0.60 and, if they want, immediately sell again for $1.30. If the financing did not include a warrant, investors are less inclined to sell for small gains. They may of course still do so – perhaps they think the environment for gold or zinc has changed for the worse or maybe they found exploration results during the four-month hold disappointing and no longer want to be invested in the story. But if they still like the story and shares are only 10 or 20% above the financing price, they will be inclined to hold and retain their exposure. So warrants matter. It also matters who bought the financing. Companies try to place financing shares with strong hands, but it’s not always possible. Some portion of the financing will always end up with folks looking for quick small gains and their selling will drag the share price down at the free trade date. Conversely, if a company attracted a big fund or a major miner into the financing, those shares will not come available for sale and so selling pressure will be lessened. Then there’s the more nebulous question: what happened in those four months? If an explorer raised money to drill, have drill results come out? If so, were they good, amazing, or terrible? And what did they do to the project’s potential? There are no guarantees here – while amazing drill results might really increase a project’s potential, they likely also lift the company’s share price…which encourages at least some profit taking. Of course terrible drill results likely mean the price is down below the financing level – and even then, financing investors might sell and drag the price even lower. The take away is this: if you are invested in a company and they raise money, mark your calendar and make sure to watch the share price 3 to 3.5 months from when the raise closes. If the stock is 5 well up, consider taking profits – because the financing investors are about to do so and pull the price down. On the flip side, if you like a company but feel the price got away from you a bit, a free trade date could well provide a better entry point. Financings are an essential cog in the junior exploration machine. Understanding how they impact share prices just gives you a bit of an advantage.
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You Can’t Make This Up Two stories this week are a great – and ridiculous – reminder that some people will go to the end of the earth and beyond to get their hands-on precious metals. The first story concerns a group of miners planning to mine asteroids. In the second, a pack of thieves tried to absorb gold from leach solution at Tahoe Mining’s La Arena mine in Peru. The asteroid miners got a boost recently, when the Luxembourg’s parliament passed a law that makes it the first European Union country to offer legal certainty that asteroid mining companies get to keep what they find in space. Yes, apparently Luxembourg’s parliament has nothing better to do than pass space mining laws… Luxembourg’s Law – Article 1 – states that “space resources are capable of being appropriated.” It updates the existing international space law standard, the Outer Space Treaty of 1967, which doesn’t make clear if private companies can own the resources they stumble on in outer space. The United States Congress also passed a space mining law, The US Commercial Space Launch Competiveness Act, in 2015 that made private ownership by US corporations explicit. The difference between the US space mining law and the Luxembourg space mining law is that in the US law a majority of a company’s stakeholders must be in the US, while the Luxembourg law places no restrictions on stakeholder locations. Why Luxembourg you ask? Well the country has been pretty active in space mining the past couple of years. Last year the Luxembourg Government through “Société Nationale de Crédit et d’Investissement” (SNCI) signed a cooperation agreement with US-based space technology company Planetary Resources within the framework of Luxembourg’s SpaceResources.lu initiative which aims at the exploration and the commercial utilization of resources from Near Earth Objects such as asteroids. In a news release, Peter Marquez, Acting General Manager of Planetary Resources Luxembourg, said, “Luxembourg’s new space resources law provides Planetary Resources with a strong basis for stability and predictability for our current and future asteroid mining operations. We are appreciative that Luxembourg has taken this critical step towards the long-term sustainability of asteroid mining.” But for those of us who can’t lasso an asteroid to mine gold, some enterprising thieves in Peru thought they had the prefect ploy. That was until it all went wrong. Last week, the would-be thieves cut five holes into Tahoe Resources’ leach solution pipe and placed bags of carbon in the holes to absorb the gold from the solution. It was an almost-fool proof plan…except one of the bags blocked the pipeline and the solution started spraying all over the place, dumping almost 600 m3 of leach solution into a collection pond for clean water that was then discharged into Sayapampa Creek.
6 There’s no telling if the thieves had made way any gold before their scheme was foiled. Tahoe is cleaning up the mess and have called in the local authorities to track down the culprits. Like I said, it seems people will go to any extreme to get their hands on precious metals. Now, if gold investors could only get this creative we’d see gold prices back up in the bull market range in no time!
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Portfolio Updates
Allegiant Gold (TSXV: AUAU) – HOLD; High Risk ($0.46) Allegiant announced the results from the final 13 holes drilled in a Phase 1 program on its Eastside project in Nevada. The goal of the program was to extend the deposit-hosting Original zone. The latest assays point to success in that effort, with mineralization from the Original zone extended by 300 metres to the west and 400 metres to the south. All holes were drilled outside the pit- constrained area for the deposit in an area cordoned off for waste. Highlights from this latest batch include Hole 147 (42.7 metres of 2.5 g/t gold, including 9.1 metres of 9.0 g/t gold), Hole 151 (79.2 metres of 1.0 g/t gold) and Hole 161 (74.7 metres of 0.9 g/t gold). Those are the kind of intersections that can make a difference in the next resource estimate for Eastside, which will aim to double the in-pit resource at Original and reduce its strip ratio. Interestingly, seven of the 13 holes were abandoned due to poor drilling conditions, but many of them ended in mineralization.
7 Eastside project (Nevada) – Allegiant Gold Ltd.
Phase 2 will wait until Allegiant has completed the 10-12 month discovery drill program it has just embarked on in Nevada. Drilling is ongoing at the Red Hills project and will eventually find its way to the Adularia Hill target, which is located within Eastside’s district-scale property boundary. Adularia Hill sits north of the Castle, Berg and Black Rock zones at Eastside. Those zones collectively host a historical resource of 272,153 ounces. The drilling news from Eastside is a reminder that Allegiant has a flagship project in its portfolio, even as its discovery drill program kicks into high gear. I like the company’s odds of significantly expanding the Original zone deposit via drilling, as it remains open in several directions. For now, though, we’ll turn out attention to the results from that discovery program.
Ashanti Gold (TSXV: AGZ) – HOLD; High Risk ($0.085) Continuing to push out news on its Kossanto East project in Mali, Ashanti Gold released some preliminary metallurgical results for the project’s two main zones. Recoveries on the whole were quite good, with material from the Gourbassi East and Gourbassi West targets averaging between 85.5% and 95.4% gold recoveries. The one exception was a low-grade sample from Gourbassi West. Overall, Gourbassi West recoveries averaged 95.5%, the Gourbassi West Oxide target averaged 93.6% and Gourbassi East averaged 87.6%. As is typical with these sorts of early met results, Ashanti will incorporate this data into the PEA the company has planned for Kossanto East. That study will also include the steady diet of drilling assays Ashanti has supplied the market with over the past several months. 8 So, they continue to grind it out, with each successive piece of news flow making a small addition to a story that has a chance to surprise the market to the upside when the company releases that PEA and accompanying resource update.
GT Gold (TSXV: GTT) – HOLD; High Risk ($0.52) We got more assays from Saddle South this week, with holes that included high-grade intercepts on the east, west and south sides of the deposit area, as well at depth. Hole 79 provided the highlight intersection, cutting 9.6 g/t gold over 40.9 metres beginning at 534 metres’ depth. That intercept itself will probably be useful in building a resource, as long as the company does enough drilling in that area to track the structure to that depth. And they will be incentivized to do so because they need to include these high-grade hits in the resource…because a lot of the near surface stuff has not been very exciting so far. The zone is developing good continuity – 1 kilometre of strike and 350 metres width is pretty great for a zone that is only halfway through is second season of exploration. And sampling suggests both width and strike will continue to grow. The challenge is that the market loved Saddle South for its initial splashy grades…and those are now seeming to occur reliably only at pretty significant depths, while the near surface stuff is very moderate. That can work: if the near surface zone is consistent enough, and they can do enough drilling to have confidence that the deeper structures are continuous as well, one can imagine a situation of open pit mining the low grade to start and then driving underground to get the real goods. While that could work, it isn’t what the market is looking for from this discovery. Indeed, judging from the market’s reaction so far today, investors aren’t overly thrilled with this batch of assays. GTT is trading around $0.10 down as of this writing. Of course, Saddle North is the other question. Is it a nice porphyry? The market has swooned over some of those recently (see Golden Ridge Resources), so if that develops and straight up adds to the story, this project could yet have legs. At the moment, it does not appear the market is particularly excited about Saddle South…but I suspect it would be willing to get excited again if results started to sparkle more.
Prize Mining (TSXV: PRZ) – HOLD; Medium Risk ($0.16) With money in hand from its recently closed private placement, Prize has wasted no time getting drilling going on Manto Negro. The copper project in Coahuila State, Mexico is the main reason I added Prize to our portfolio earlier this year. The project hosts the same type of “red-bed” mineralization that has provided central Africa and Poland with some the world’s most productive copper deposits. The 3,000-metre, Phase 1 program will focus on the Granizo showing and the Pilar Grande area. Prize will ply each target initially with 15 holes. Drilling at Granizo will test its entire 550-metre strike length and will also test to up to 100 metres down-dip. Pilar Grande hosts a historic underground mine, and work there will test the 200-metre-by-50-metre area that contains the mine’s underground workings. Sample grades from Manto Negro have averaged between 1.5% to over 5% copper, with higher grade areas of 6% to 8%. Combine those tantalizing grades with the 18,000-hectare project’s district scale, and you have the makings of a potentially lucrative copper deposit here. The project has all 9 needed infrastructure available close by and mineable grades that Prize projects to be in the 1%-2% range. PRZ has traded on the low-end of its 52-week range of late, a victim of lack of news flow from Manto Negro and a broader market worried about trade wars. I continue to believe in copper for the long term and believe Prize’s share price will begin turning around, assuming the assays from this current drilling program at Manto Negro are positive.
Velocity Minerals (TSXV: VLC) – HOLD; High Risk ($0.165) Last week, Velocity Minerals kicked off what will likely be a busy few weeks of news with met results on its Rozino gold project in Bulgaria. Rozino, as you’ll remember, is the most advanced of the handful of projects Velocity has a right to earn up to a 70% interest in from private-owner Gorubso. The key to that relationship is that Gorubso is a domestic company with an active mining operation at its Chala mine and a central processing plant available for any ore from Velocity’s earn-in projects. Bulgaria can be a challenging jurisdiction to break into, and the fact that Velocity has an “in” through Gorubso is a major feather in the company’s cap. Equally important is that central processing plant, as it gives the company the chance to operationalize the deposit at Rozino with a relatively low capex. As to the met results themselves, they demonstrate that Rozino can produce 91% recoveries for a 30 g/t gold concentrate using standard flotation. That low-volume, high-grade concentrate could be trucked to Gorubso’s central processing facility. Velocity does not expect those transportation costs to be material to the project. As I said, these results a just the beginning of what will be a busy few weeks for Velocity. It should have results from drilling on the Chala Mine shortly and, by the middle of the month, will have incorporated the met results into a PEA on Rozino that will allow the company to take a 70% interest in the project. With a little luck, a combination of high-grade results from Chana and a PEA that surprises to the upside will provide a lift to Velocity’s share price.
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