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KMW Blog Jun 1, 2018: MIF May 26, 2018 - Can a Bull in a China Shop Vanquish the Bear?

Posted: Jun 1, 2018JK: KMW Blog May 26, 2018: MIF Presentation: Can a Bull in a China Shop Vanquish the Bear?
Published: May 26, 2018MIF: KMW Blog May 26, 2018: MIF Presentation: Can a Bull in a China Shop Vanquish the Bear?

On May 26, 2018 I gave a presentation at the Metals Investor Forum in Vancouver in which I concede that the junior resource sector has fallen back into the bear market that began in 2011. Interest rates are rising, inflation is creeping higher, and the policies of Donald Trump are pushing for the collapse of globalized trade and the encouragement of military conflict. It is an attempt to convert America's soft power into hard power, a strategy that will isolate the United States as the rest of the world learns to do without the United States such as is happening with climate change policies and the TPP. The disruption of trade and the uncertainty created by the Trump policies will lead to a global economic downturn which will not be positive for metal prices except perhaps "locally" where the United States gets its supply cut off due to geopooitical conflicts. The market fears this outcome and thus is reluctant to embrace the resource juniors this late in a business cycle whose end is perceived as being hastened rather than delayed. At the same time there is a sense that this is all just a dream from which the world will awaken, possibly after the November mid-term elections. The only big picture theme that hedges most outcomes is that of Back to America, the notion that there will be an exploration boom in the United States not just for metals needed to keep everything going, but gold for the day when the USD is just another competing currency. The exception is the unlikely scenario where the world accepts American hard power and bows down to its will. The desire for raw material self-sufficiency will be ideologically neutral. Even the free trade globalists realize that they cannot compete against the China super-corporation unless the United States becomes just like China. American exploration and development plays, backed by the 43-101 reporting system, will become a target for American risk capital. The alternative stance is to ignore the big picture and focus on stories that can flourish on their own fundamentals, which means discovery exploration and metals such as cobalt whose strong prices are tied into trends already baked into place such as the electric vehicle which China needs to wean itself off oil import dependency. The Kaiser picks in this session are all of this nature. MIF has turned its conference program guide into a magazine that includes an article from each speaker. My article, Can a Bull in China Shop Vanquish the Bear, argues that Trump's strategy for containing China will wreck the china shop. It is repreinted below the company links which include the comments I wrote for MIF as to why these juniors could flourish even if we remain stuck in a general resource sector bear market for a long time.

MIF Company Presentation and Interview Video Links
Verde Agritech Plc (NPK-T)PresentationInterview
MIF Conference Guide: Verde Agritech Inc has spent the past decade trying to demonstrate that the key to Brazil's potassium fertilizer future lies within the billions of tonnes of glauconite it controls in the state of Minas Gerais. Glauconite is a potassium silicate formed in a marine environment that is very different sylvinite, a potassium salt that formed as evaporite beds which are mined deep underground in Canada, Russia, Belarus, China and Germany. Sylvinite is easily converted into potassium chloride, the dominant form of potash applied to crops. Brazil, an agricultural powerhouse with the largest share of undeveloped arable land in the world, relies more than 90% on potash imports. There are potash evaporite beds in the Amazon Basin, but environmental risks make it unlikely these will ever be developed. The Brazilian glauconite is unusual in that it runs 9%-11% K2O compared to 6% or less for similar deposits elsewhere in the world which have also been called "greensand". The problem with a silicate is that unlike a salt such as KCl it is not very soluble in water. A process was developed decades ago which calcines the glauconite in rotary kilns to produce "ThermoPotash" which can be applied to fields as a "slow release" supplement for conventional potash applications. Brazilian use of potash is very inefficient because of the torrential rainfall and acidic soils which washes away a good portion of the potassium before plant uptake is possible. Verde Agritech also developed a process for converting glauconite into conventional KCl, but it requires a potash price of $400/t or higher. With potash stuck at $200/t this is a non-starter. After Verde Agritech gave up on the KCl conversion process it focused on getting a smaller scale ThermoPotash facility permitted. But while waiting for permits the company noticed an unusual outcome within the agronomic studies it was conducting with various crops. Glauconite that was ground up but not heat treated was having the same positive effect on crops as was the ThermoPotash. Closer investigation revealed that a complex interaction between root secretions and microbe populations naturally in the soil was liberating the potassium from its silicate prison. Verde Agritech has since switched its game plan to a simple strategy of quarrying the glauconite, grinding it and selling it as "Super Greensand" at a price competitive with imported potash for direct application onto Brazilian farms. Starting with a 50,000 tpa permit Verde Agritech has embarked on a market development strategy whereby it plans to use internal cash flow to gradually build up production to 25 million tonnes of Super Greensand annually. The story thus is about building a market for a virtually unlimited resource by persuading Brazilian farmers to substitute a domestic source of potassium for their imported version.
Eagle Plains Resources Ltd (EPL-V)PresentationInterview
MIF Conference Guide: Eagle Plains Resources Ltd is a prospect generator focused on western Canada which has survived without a rollback since 1999. Its strategy is to option projects to a variety of parties that range from capital pools completing their qualifying transaction to producers such as SSR Mining which optioned 80% of the Fisher project in Saskatchewan after acquiring the high grade Seabee Mine. Eagle Plains has had successes spinning out projects with a serious partner so that the partner can eventually consolidated 100% ownership. The most notable example was Copper Canyon which Novagold acquired in 2011. The latest spinout is CSE-listed Taiga Gold Corp in which Eagle Plains retains a 19.9% interest. Taiga holds the Fisher project and four other properties to the south of the Seabee Mine. SSR has started an 18,000 m drill program to test a 7 km structure. Taiga's goal in 2018 is to raise capital for exploration on its 100% owned Orchid project. Eagle Plains, in turn, plans to start a 3 hole drill program in June to test an IP anomaly in the Talon zone area of the Iron Range project in British Columbia which has been billed as having both SEDEX and IOCG potential. The Talon target, however, appears to be a structurally controlled system with high gold and silver values.
Mineral Mountain Res Ltd (MMV-V)PresentationInterview
MIF Conference Guide: Mineral Mountain Resources Ltd is conducting a 12 hole drill program on the 100% owned Rochford project located 50 km south of the former 40 million ounce Homestake gold deposit. The junior has assembled for the first time ever most of the Rochford district where past exploration has been hampered by fragmented claim ownership. The focus of the drilling is the down-plunge extension of the iron formation syncline that hosts the former Standby Mine which was operated more than a century ago. Combining a recent geophysical survey with a digital compilation of historical work Mineral Mountain has outlined what it describes as the "keel of a plunging canoe" consisting of altered and mineralized iron formation that has yielded gold intercepts as deep as 1,800 m down plunge. The trick is to find Homestake "ledge" style zones of gold running 8 g/t plus over 6-10 metre widths that can be turned into multi-million ounce underground mineable deposits. The first three holes drilled in 2018 have revealed a trend of increasing arsenopyrite which has a good correlation with ore in the Homestake deposit. Drilling will resume in mid May targeting the "canoe" 100 metres down-plunge from the third hole, ultimately chasing the system down plunge 800 metres. In the past exploration drilling has consisted of single sniper "kill shots", some of which knicked the target, but none of which were followed up. Mineral Mountain plans to use a vectoring strategy of using the drill to home in on an enriched gold zone if such exists.
Lorraine Copper Corp (LLC-V)PresentationInterview
MIF Conference Guide: Lorraine Copper Corp was supposed to become the copper optionality vehicle for the toiling geologists behind the Eastfield group, Bill Morton and Glen Garratt, but when they came upon the opportunity to acquire the polymetallic Stardust project in British Columbia north of Serengeti's copper-gold Kwanika project, they could not resist. Stardust is a carbonate replacement system with high copper, gold and silver values on which the previous owner spent $10 million over a decade to outline a resource that stands at only about 3 million tonnes. Lorraine Copper brought a fresh perspective to the data, and before long the project had attracted the attention of a rampaging geologist called Mark O'Dea who struck a deal whereby Sun Metals Corp would acquire Stardust in a deal which would see Lorraine Copper end up with 30% of Sun Metal's stock. After raising over $6 million for a major exploration program on Stardust in 2018 Sun Metal began trading on May 8. Stardust is an exploration play of the kind where an existing mineralized system that has frustrated past explorers is undergoing a systemic rethink. Lorraine is also a 49% partner with Teck on the Lorraine project where past exploration by Teck has outlined a modest copper-gold resource. Lorraine is seen as having potential for multiple porphyry deposits similar to Mt Polley operated by Imperial Metals. If Stardust delivers a discovery it would put Lorraine Copper in a strong position to negotiate a majority stake in the Lorraine project or nudge Teck to resume aggressive exploration with Lorraine funding its 49% share.
Namibia Critical Metals Inc (NMI-V)PresentationInterview
MIF Conference Guide: Namibia Critical Metals Inc, formerly Namibia Rare Earths Inc, has expanded its critical metals focus in Namibia through the acquisition of the exploration portfolio of Namibia Gecko which has become the junior's largest shareholder at 42.4%. The immediate focus is the Kunene project in northern Namibia where ASX-listed Celsius has outlined an open-pittable sulphide resource of 107 million tonnes grading 0.11% cobalt and 0.42% copper at its Opuwo project for which it is preparing a scoping study. The Opuwo resource, hosted by a regionally extensive bed, represents only a fraction of the potential resource. Namibia Rare Earths' license to the west has a cobalt-copper soil anomaly covering not just projected strike extensions of the Opuwo beds but what may also be the hydrothermal center for this district scale cobalt system. Following a recent $4 million financing the company is starting a major exploration program seeking Opuwo style bedded mineralization in the northern part and higher grade lithology cross-cutting cobalt zones in the southern part. The company also owns the Lofdal Area 4 heavy rare earth deposit for which it has completed a PEA and is awaiting mining lease title. Lofdal is one of two advanced rare earth deposits outside China containing more than 90% heavy rare earths. It is sub-economic at current rare earth prices, but that could change if China and the United States engage in a global trade war or, worse, allow the Korean Peninsula to deteriorate into a military conflict. While the cobalt play assumes that the lithium ion battery will dominate the growth of the electric vehicles, the industry's holy grail which avoids lithium the fire hazard and cobalt the geopolitical Congo supply risk is an effective magnesium ion battery. A potential death star for the lithium ion battery is a new magnesium ion battery with a solid state electrolyte still 5-10 years from commercialization. Its critical input is yttrium, the most abundant of the heavy rare earths and one that has become ultra-cheap due to changes in lighting technology that no longer rely on it. Lofdal is thus not just a hedge on supply disruption of dysprosium and terbium from China to keep those super magnets working in electric vehicles, but a bet that yttrium will undergo a tenfold price increase if it becomes the key to displacing the lithium ion battery.
John Kaiser owns Eagle Plains, Lorraine Copper, Namibia Critical Metals, Verde Agritech; Eagle Plain and Verde Agritech are are SVH picks; Lorraine Copper, Namibia Critical Metals and Mineral Mtn are bottom-fish picks

Can a Bull in a China Shop Vanquish the Bear

After a brief interruption during the first half of 2016 the junior resource sector has descended back into the bear market that began in 2011. Traded value of the 1,200 resource listings on the TSXV has dropped below $20 million daily, less than 25% of total traded value which is dominated by juniors involved with cannabis or blockchain. This a troubling development because we appear to be late in a business cycle that began with the recovery after the 2008 financial crisis. It is a time when risk appetite traditionally rises and shifts its attention to the resource juniors, often helped out by rising metal prices caused by the mining industry's aversion to the commodity boom-bust cycle. It does not seem to be happening. Is it because we are too late, the downturn too obvious? Or are we jumping the gun in assuming the downturn is imminent? While economic activity is always cyclical, the duration and amplitude of each new cycle is difficult to predict.

An example was the upturn in metal prices in 2003 after languishing from 1998-2002 while the dot com bubble raged. A mining industry leery of the bust that always follows a metals boom did not acknowledge the emerging China super cycle until 2006, a hesitation reinforced by persistent backwardation in the metals futures market. The bust always happens because of the lag between the decision to mobilize new mine supply and its delivery. Such decisions are usually made collectively in response to persistently high metal prices for which some sort of explanation as to why this time is different emerges. Either by the time the new supply gets delivered the business cycle has turned down, reducing demand, or the supply is so large that it gluts the market. In either case the mining industry gets severely scolded for not getting it right, while those who got it right by missing the boat as it headed out to sea got fired long before they were proven right.

The supply response to the China super cycle was massive, resulting in a price slump that began in 2011 and accelerated after 2013. Mining companies entered a period of rationalizing their operations, ditching the marginal ones and concentrating on the profitable ones that could weather the next downturn. Although metal prices have recovered from their 2015 lows as western economies, led by the United States, finally accelerate, the mining industry is reluctant to build new mines that require current or higher metal prices to stay at those levels. The attitude is one of, "gee, if a supply-demand imbalance does materialize, we will rake in a lot of cash flow for our shareholders". In doing so the mining industry is setting the stage for another metal price boom that should inject life into juniors with currently marginal deposits and unleash another scramble by the majors to refill their development pipelines. We are at such a juncture but it is not happening.

What is different this time around is a growing unease that the global economy is heading for a train wreck, not because of financial excesses such as the 2001-2008 real estate bubble created by mortgage securitization and credit default swaps blind to the fat tail risk that characterizes second-guessing social feedback systems. Globalization premised on free markets has flourished, but China has operated as a type of super-corporation that makes and enforces its own laws and prints its own currency. In doing so it has set a trap for the global economy into which ordinary corporations, driven by profit making mandates from their owners, were only too happy to fall. The stagnation of wages and the shift of western economies into services away from manufacturing gradually created a realization within the populations of developed countries that the prosperity dream was fading, that the promise that anybody who works hard enough, demonstrates merit, will succeed.

The ensuing rage of impotence has become the fountain that feeds the rise of a populism which seems perfectly ready to ditch democracy in favor of authoritarianism, as if all the lectures about the thug cultures that underpinned left and right wing dictatorships were just about long dead guys called Hitler, Stalin and Mao Zedong. It has an iconoclastic end-times air about it and it has embraced Donald Trump as its avatar. Under the guise of "America First" Trump has embraced a strategy of collapsing globalized trade in an effort to hobble the Chinese super-corporation, to cripple its ambition of eclipsing the United States as the biggest military and economic super-power. America, the mother of all submarines, is going to descend to the bottom of the sea where it can just barely withstand the pressures but everything attached to it, all those other economies, will implode.

This is such a disturbing vision that while it is implicit in the media discourse, nobody seems willing to take it seriously. It is a new variation of the apocalyptic gold bug vision where everything is going to collapse because we do not have a true libertarian order of tiny government and absolute free markets. China has no intention of abandoning control of its destiny to a bunch of transnational corporations pretending to duke it out in a free market they work hard to rig in their favor. The real problem is how does a country like the United States deal with the rise of China without becoming like China. The policies embraced by Trump and his "base" seem designed to force this question in a manner with all sorts of undesirable consequences. Most people who understand the potential consequences and reject them as unacceptable are treating the current situation as a surreal dream that will one day end, just as does the latest season of some NetFlix series.

I have to admit that I am binge watching the current affairs landscape unfold as though it is a NetFlix series season that will eventually come to an end forcing me to attend to regular business like fighting back the weeds in the garden. The cannabis and cryptocurrency fads do not interest me because I see them as symptoms of the underlying end-times gloom. Finding and mining resource deposits, even when it involves gold and diamonds which I'm not sure the world needs more of, requires an overall optimism about the future. Unless this growing wall of worry dissipates, a revival of the junior resource sector due to a spectacular new discovery or higher trending metal prices due to persistent global economic strength is unlikely. The alternative, that the worry proves well founded as a collapsing world order leads to a rising gold price and metal supply disruptions, could be so frightening that risk capital vanishes. Meanwhile it remains possible for individual resource juniors to do very well, even ahead of delivering the fundamentals, if their story has a hook that can catch the public's imagination.

When I research the field of resource juniors for stocks to recommend as bottom-fish or spec value hunter picks I look for an angle which not only makes a plausible case for success, but hook which is interesting enough that it will attract speculative market interest while the play is unfolding. The companies I invite to the Metals Investor Forum represent examples of the type of stories that have caught my attention.


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