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KRO Summary: March 1-31, 2020

KRO Summary: March 1-31, 2020
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Covid-19 Suppression Strategy launches Gold Uptrend
The economic fallout from the suppression strategy deployed in March 2020 to slow community spread of the Covid-19 coronavirus will have far reaching economic consequences. The shelter in place orders for any activity not classified as "essential" collapsed the consumption backbone of the western economy. In a competitive economy ongoing revenues are critical to paying business operating costs of which labor and rent are the most important ones. The first casualties were small businesses who had to let their employees go and in many cases simply did not pay the rent on April 1. Unemployment claims in the United States have soared into the tens of million, with only a fraction showing up in the Employment Situation report published on April 3. The charts in the KRO's US Jobs Situation Center will look very ugly after the next DOL report on May 8.
The Federal Reserve and the US government have mobilized trillions of dollars in the form of stop-gap stimulus measures which will be useless unless the suppression strategy is definitively lifted. Until a mass deployable vaccine or a treatment that reduces the fatality risk is available, a virus like covid-19 will lurk in the shadows, waiting for the right transmission conditions to emerge, something that will most certainly re-appear in Q4 of 2020 when the normal flu season in the northern hemisphere resumes. The regular flu season runs from October through April and is tracked by the CDC Weekly US Influenza Surveillance Report. As of April 4, 2020 the CDC estimates that there have been 39 million flu illnesses, 410,000 hospitalizations and 24,000 deaths. In contrast the global tally for Covid-19 is just under 2 million of which 584,073 have been confirmed in the United States. Only 123,348 deaths worldwide have been tabulated, though the actual number is likely much higher since it isn't really the coronavirus that kills infected people, but rather complications arising from underlying health issues. So far Covid-19 is different from the Spanish flu which killed 670,00 Americans in 1918-1919 and a staggering estimated 50-100 million worldwide. In the case of the Spanish flu it was young adults and especially pregnant women whose bodies mustered such a robust immune response to the lung damage caused by the respiratory virus that it prevented lung tissue self-repair after the virus had moved on. The Spanish flu faded away as a killer because its spread infected enough of the global population to create herd immunity.
The chance to nip Covid-19 in the Wuhan wet market bud was blown by China's authoritarian thug culture which wastes enormous energy suppressing anything that questions the credibility of the "do no wrong" Communist Party headed by Leader for Life Xi Jinping. America's chance to contain Covid-19 was arguably blown by a narcissist leader who listened too much to his anti-science handlers at Fox News who pushed the idea that the coronavirus was a conspiracy floated by the liberal media to tank the economy so as to harm his re-election chances in November. The president may be ignorant but not stupid; the government was fully aware of the pandemic risk to the country thanks to the Crimson Contagion simulation done by the Department of Health and Services from January-August 2019 whose dismal conclusions about limited response capacity landed on everybody's desk in October. A likelier explanation is an implicit decision to let herd immunity be the solution to a pandemic which the states rejected in favor of the suppression strategy. However, by shunting the runaway pandemic tram from the track populated by vulnerable Boomers this strategy is causing economic hardship for the Post Boomer generations. Bernie Sanders may not be on the November ballot, but America's inadequacies compared to other modern economies will dominate the national discourse as the Covid-19 struggle drags on. Hopes for a V-shaped recovery hinge on how fast normal economic activity can resume. However, in the absence of a vaccine, we will probably be living with a "suppress and lift strategy" which is similar to driving a windy mountainous road where you are constantly monitoring to apply the brakes or accelerate. Many businesses will be reluctant to resume activity, especially with a potentially even bigger Covid-19 infection surge when the 2020-2021 flu season ramps up.
Collapsing the revenue side of the business equation through proclamation is different from economic activity collapsing as a result of a financial crisis as happened in 2008 which arose from a credit risk illusion created by an innovation called mortgage securitization. The abrupt cessation of business activity has prompted widespread withholding of rent payments both for commercial and residential real estate. Landlords themselves likely have debts they need to service with part of their rent income. Debt defaults will be cascading through the economy at all levels from a local business to entire nation states. Only the United States as the printer of the global reserve currency is immune from the threat of "foreclosure". Fear that Covid-19 is only temporarily gone will haunt both the economy and the market. A recession worse than that caused by the 2008 crash is almost guaranteed, with a downturn rivaling the Great Depression of the thirties conceivable. In an attempt to compare the current situation with that of the 1920's and track how the future unfolds I created a Crash Comparison graphic for the Dow Jones Industrial Average. I wanted to create a correlated timeline so I picked the peaks of the DJIA ahead of its crashes in 1929 and 2020 and carried it back to December 31, 1919, the eve of the roaring twenties, which was 3,534 days earlier. The equivalent today would be June 10, 2010. To account for the fact that the market was open on Saturdays back then I included all days of the week in the two timelines, carrying over the prior day's close for non-trading days. I rebased to 100 the DJIA levels of 107.23 on Dec 31, 1919 and 10,173.53 on June 10, 2010. The result is the chart above. People tend to think that in 1929 the market crashed and then faded away as an austerity and protectionist response pushed by conservative scolds created an economic depression. But before that the Dow Jones experienced a V-shaped recovery that lasted six months before a relentless downturn emerged that did not bottom until mid 1932. So far the new round of quantitative easing unleashed by the Federal Reserve has stopped the market free-fall and created a reversal that even managed to qualify as a "new bull market". If the Dow mirrors the 1929 experience, the V-shaped recovery will end when the 2020-2021 flu season begins, the mostly likely time for a major resurgence of Covid-19 and a month from the US presidential election. The Crash Comparison graphic is updated daily and is located at the top of KRO's US Jobs Situation Center.
During April the IMF will publish its semi-annual World Economic Outlook and is no doubt scrambling to revise economic growth projections for the world. The collapse in economic demand is already evident in the prices of of raw materials for which I provide long term charts of oil and copper to represent the energy and metals sectors. Putin and MBS clearly do not read international newspapers or they subscribe to the Trump claptrap that it is all "fake news" unless pumped out by Fox News. Why else would Russia and Saudi Arabia pick mid March to launch a price war explicitly described as an attempt to destroy America's shale oil based self-sufficiency that has made the United States the world's biggest oil producer? Shale oil fracking requires $50 oil or better to be profitable. Not only has Putin made it really difficult for President Trump to gush about the Russian autocrat, but Saudi Arabia and Russia have managed to cut their own financial throats which Trump had to bandage by bullying Opec+ into supply cutbacks at the expense of his rural gas guzzler driving base. All they had to do was stand back and let Trump's bungled response to the pandemic threat take the blame for the collapse of US oil production. Canada, of course, has suffered badly, with its exchange rate at one point soaring to 1.44 before retreating below 1.40 but still well above the 1.30-1.32 range where it was stable.
One might expect the lower oil price to slow enthusiasm for expanding the electric vehicle fleet, especially if the cheap electricity made possible by the overly abundant natural gas by-product of shale oil fracking comes to an end. But that is to forget that cheap oil benefits mainly China which is flexing its muscles in the Great Power game that the Covid-19 pandemic is accelerating. When the United States finally realized that Covid-19 was not a liberal conspiracy and scrambled to secure the medical equipment needed to fight the virus, it did not exactly endear itself with the rest of the world when it deployed America First and Only thuggery to intercept and divert orders multinationals had manufactured outside the United States and contracted to ship to other countries. The failure of the United States to demonstrate global leadership with regard to Covid-19, which will likely have a devastating impact on developing nations (670,000 Americans dead from Spanish flu compared to 50 million plus elsewhere), makes it difficult for the United States to project soft power around the world to secure its needs. If Covid-19 rolls through oil producing nations it has the potential to unleash civil disorder with possible disruptions of oil supply. It is too easy to see cheap oil as a temporary phenomenon for it to serve as a reason to abandon climate change mitigation strategies such as the adoption of electric vehicles. Copper is not down because future demand for this "energy metal" is evaporating. It is down because China underwent a massive lockdown during Q1 of 2020 which suppressed demand, and now that China appears ready to roll again, its ability to export goods is being crushed by the demand collapse created by the lockdowns in the rest of the world that won't ease until Q3 of 2020. Copper is weak right now because the surplus of supply created during Q1 of 2020 has not yet intersected with the curtailment of supply in Q2 of 2020 caused by the decision of many Latin American countries to declare mining as non-essential during their lockdowns. It is interesting to note that more copper now sits in the Shanghai warehouse than ever before.
The consequences of the Covid-19 pandemic will hurt resource juniors with advanced non-gold projects, particularly ones dominated by metals such as copper and zinc which is supplied by many parts of the world. During March when I realized that many jurisdictions were shutting down exploration activity and even mining as "non-essential", killing market interest in exploration juniors forbidden from making discoveries, I spent a week reviving my metal supply databases, the partly completed fruit of which is available through the Metal Supply Center. The interactive copper supply heat map above lets you see how much copper was produced during 2015 by different countries (unlike for other metals the USGS has not updated its annual report for copper since 2015). As the world destabilizes in response to the fallout from the Covid-19 suppression strategy the question, "where does your metal come from?" is going to become increasingly important. Copper is among the least worrisome metals because it has tremendous geographical diversity of supply. But if the world fragments into hostile trading zones, the supply of some metals will become problematic. Globalized trade will remain under siege, with self-sufficiency also known as "autarchy" becoming a priority for many nations, especially the United States which has at least a 50% chance of Trump remaining in power beyond 2020 either through re-election this November or the suspension of democracy in the name of national security. Security of supply stories involving most metals will become very topical in 2021, but the action during the rest of 2020 will be gold focused.
The KRO 2020 Favorites suffered badly during March as senior equity markets crashed, trading down 24.5% as a group compared to being up 22.4% in mid February, but managing to rebound so as to be down only 1.3% as of April 13. The TSXV Index, which consist of 391 listings, less than 25% of all listings, plunged 41.3% from the start of 2020 and is still down 24.3%. Only about 58% of the TSXV Index consists of resource listings, with energy making up just under 7% and the rest a wide range of non-resource listings. The graphic below which compares the traded value of 1,134 TSXV resource sector listings with the rest shows that overall traded value has declined since the start of March, with resource listings gaining the upper hand during the first full week of April, not just in relative terms but also gaining in total traded value terms.
We are not yet back to the levels of January and February when it appeared that an end to the ten year resource junior bear market had arrived. But unlike the end of February and mid March value traded spikes for resource listings which were due to panic selling while the general market sagged, the recent rise is due to buyers at the offer. Leading the rebound are resource juniors with a gold focus.
March was a rocky period for the price of gold because gold did not function as a safe haven while equities were crashing. In so far as it was owned as portfolio insurance the sharp drop in equity prices caused gold to be liquidated to solve all sorts of problems experienced by fund managers, such as redemption runs and structured products that became illiquid. As in 2008 gold went down because it has an intrinsic value that ensures at some price there will be a buyer. That is not the case for equities nor debt instruments except for US treasuries which can become worthless if revenues vanish. The Federal Reserve stabilized the general market collapse by making available trillions of dollars to buy assets on an even greater scale than in 2008-2009. The worst day was March 20 when the SPDR GLD lost 451,568 oz at the end of a 9 day losing streak during which GLD lost 1,787,774 ounces. Except for one day with a minor loss the GLD since then has gained 3,263,657 ounces as of April 13. Gold has climbed above $1,700 and now is on track to challenge $2,000 not just as a hedge on the uncertainty created by America's new relationship with the rest of the world, but with the fiat currency debasement narrative beloved by conventional gold bugs visibly back in vogue. There is not yet a big inflow of risk capital seeking exposure to resource juniors with a gold focus, but we are witnessing a valuation snapback that will drive prices into new territory once the lockdown restrictions that inhibit getting exploration and feasibility demonstration work done are relaxed.
There does, however, remain a serious problem that has worsened, namely the ability to raise capital. The market meltdown has no doubt shrunk Canada's pool of accredited investors who are unwilling to lie about passing the means test Canada's regulators impose as a condition for participating in a private placement, the primary means by which resource juniors raise capital. Those that truly do qualify as "accredited investors", namely having a net worth in excess of $1 million excluding equity in primary residential real estate, or consistently making $200,000 plus annual income (something nobody should be confident about going forward), will not be overly inclined to invest in resource juniors. The bank controlled brokerage firms will limit their funding efforts to the bigger gold juniors with advanced gold projects, while there remain only a handful of boutique brokerage firms willing to bankroll the smaller resource juniors, and they can only service a tiny fraction of the thousand plus resource listings. In addition regulators keep trying to force juniors to include disclosure forms in their private placements which require astonishingly detailed disclosures about not just the accredited investor but also his or her spouse. This document is supposed to be faxed or emailed to a resource junior where who knows who will have access to it. Are the regulators engaged in a conspiracy to foster identity theft? No truly accredited investor fills out that form, which hinders a junior from raising capital through non-brokered private placements unless they tell the placee to ignore the privacy invasion form. It is as if the regulators have a anti-competition deal with the financial sector to channel all millionaire capital through the brokerage sector gateway where they extort a toll.
The regulators did invent the "existing security holder" exemption a few years back which does not require a means or market sophistication test for a person to be eligible to buy up to $15,000 worth of stock per company per 12 month period through a private placement. This was an important step which allows investors to give their money directly to a junior for stock, often with warrants included, just like the millionaire class of supposedly "sophisticated investors" which includes trust fund babies dumber than a bag of hammers. But the insistence that the investor already own at least one share in the company when it announces a private placement open to this exemption serves no legitimate purpose unless it is to declare that Canada's regulatory disclosure system is neither sufficient to allow an individual to arrive at an investment decision nor adequately enforced to be a reliable source of information about Canada's publicly listed companies.
I happen to think Canada's 43-101 based reporting and disclosure system is very effective but there are always exceptions to the rule such as a horrible little junior called Frontline Gold Corp whose CEO Walter Henry helped Bay Street destroy Eric Owens' Alexandria Minerals Corp. For the past two years every unaudited quarterly filing on SEDAR has had "expressed in thousands of Canadian dollars" as a headline above the balance sheet which my financials inputters never fail to overlook and correctly input as current liabilities at $2,392,573,000. I do happen to know this is not correct because the header is absent from the audited annual financials. But it always shows up in subsequent unaudited quarterlies. It comes to my attention when I see the total debt of the 1,134 TSXV resource sector listings double to over $4 billion and I investigate to see how that happened. Frontline Gold and the sloppiness of Walter Henry should not be the reason investors must already own shares in a junior in order to participate in a private placement. This is an anomaly easily fixed by a regulator calling up CEO Henry and yanking his necktie. Furthermore, there is no mechanism by which a company can verify that an individual does already own its stock, nor is it clear what happens if an investor simply lies. But it is an obstacle for companies who want to do things properly, and it is a ridiculous reason for investors who do not wish to lie to be excluded from participating in a private placement.
The Canadian resource juniors have for ten years been stuck in a bear market that granted only a couple shortlived relief rallies. Of the 1,134 TSXV resource listings that I track, 529 of them or 47% have negative working capital totaling just over CAD $2 billion. The remaining 53% have about $2.5 billion in positive working capital. These figures do not include the Dec 31 year end filings which are not due until the end of April. Given how only $387 million has been raised by resource listings so far in 2020, with only $86 million and $87 million raised in February and March, and April not looking good with lockdowns likely in effect until May, the Canadian resource junior eco-system is heading toward an extinction threshold. It isn't enough that gold blasts through $2,000 and Bay Street channels capital into a small percentage of financially engineered juniors. Everybody knows that the vast majority of resource juniors fail to deliver a mine, but not everybody understands that it is the collective activity of a large and diverse pool of such juniors that is needed to deliver future mines. It is very important that all the legitimate resource juniors receive funding for their projects. There is a large audience of non-millionaires in Canada who should be entitled to invest directly in resource juniors. Much of that audience consists of Post Boomers, people born after 1964 who never followed their Boomer parents into resource sector speculation. The regulators could solve this funding problem with a stroke of a pen by eliminating the "existing security holder" requirement of the exemption. Company executives have been reluctant to push for this change, partly because they do not want to paint a retaliation bulls-eye on their foreheads, and partly because the private placement paperwork required by the regulators is insanely and unnecessarily complicated, and they don't really want to increase their workload tenfold to raise the same amount of money. So, in addition to making the non-millionaire private placement exemption available without conditions beyond the $15,000 per company per 12 month period constraint, the regulators should simplify the paperwork, reducing it to no more than 4 pages at the front to be filled out and signed, with all the legal boilerplate as one long appendix that the placee's signature affirms has been read just as is the case with all those online "terms of service" details affirmed by a mouse click. If nothing is done the Covid-19 crisis will be the death of the Canadian resource junior sector rather than the opportunity that attracts a younger audience to a sector whose traditional audience of Boomers and Old Timers is shrinking both literally and in terms of financial priorities.
KRO Summary: March 1-31, 2020
Mar 1, 2020 - Blog - Kaiser Media Watch Blog - March 1, 2020 to March 31, 2020
Mar 7, 2020 - Blog - This Week in Money: Jim Goddard interviews John Kaiser
Mar 13, 2020 - Blog - KMW Blog Mar 13, 2020: MIF Presentation Mar 1, 2020: Prophecy of Doom or Opportunity?
Mar 18, 2020 - Tracker - Tracker: New Spec Value Rating for VR Resources Ltd
VR Resources Ltd announced on March 17, 2020 that it has suspended drilling on its Ranoke IOCG prospect in northern Ontario after completing 2 holes. The reason given was that securing water for the helicopter supported program proved difficult and expensive due to very cold conditions that froze local resources. VR hopes to return during the summer, though with a revised model about the target it was chasing. The initial model was one of an IOCG breccia body or carbonatite intrusion cent...
Mar 18, 2020 - Tracker - Tracker: New Spec Value Rating for Azimut Exploration Inc
Azimut Exploration Inc announced on March 18, 2020 that is starting a 30 hole, 6,000 m drill program at its 100% owned Elmer project in the James Bay region of Quebec. The news release included the results of an IP survey completed in February over the Patwon prospect for which Azimut released results in January that signaled a potentially major new gold discovery for this part of Quebec. The "potentially" qualifier was required because the 7 short drill holes were focused on an outcropping area...
Mar 19, 2020 - Blog - KMW Blog March 19, 2020: Discovery Watch March 19, 2020 with Jim Goddard and John Kaiser
VR Resources Ltd (VRR-V) Azimut Exploration Inc (AZM-V) Midas Gold Corp (MAX-T)
Mar 27, 2020 - Blog - KMW Blog March 26, 2020: Discovery Watch March 26, 2020 with Jim Goddard and John Kaiser
Opus One Resources Inc (OOR-V) NioBay Metals Inc (NBY-V) Verde Agritech Plc (NPK-T)
Mar 31, 2020 - Blog - KMW Blog Mar 31, 2020: Collected Interviews for March 2020

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