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KMW Blog Sept 28, 2018: MIF Presentation: Adapting to a New Reality for Resource Juniors


Posted: Nov 16, 2018JK: KMW Blog Sept 28, 2018: MIF Presentation: Adapting to a New Reality for Resource Juniors
Published: Nov 16, 2018MIF: KMW Blog Sept 28, 2018: MIF Presentation: Adapting to a New Reality for Resource Juniors

On September 28, 2018 I gave a presentation Adapting to a New Reality for Resource Juniors at the Metals Investor Forum in Vancouver which discussed how the cannabis bubble is sucking the risk capital oxygen out of the junior resource sector and warned that it is not likely to fizzle after Canada legalizes recreational marijuana on October 17. Conventional thinking would argue that once cannabis is legal, investor attention will shift to the bottom-line: how profitable is a "commodity" business after it has been decriminalized? However, while it is reasonable to expect cannabis stock prices to sag after October 17, the respite for the resource juniors will be short-lived because the cannabis bubble story will shift to speculation about legalization of recreational marijuana in the United States where, although some states like California and Colorado have legalized it, cannabis remains illegal at the federal level. This prevents the legal cannabis products business from flourishing because proceeds cannot enter the US banking system. Although Donald Trump himself is not opposed to the legalization of cannabis, Republicans in the House and Senate are unlikely to support such a move during the current term. The earliest political opportunity for cannabis legalization in the United States would be after the 2020 election, which further assumes that whoever ends up as president and in control of Congress is not beholden to the evangelical base. The United States with a 10 times bigger population than Canada represents a 10 times bigger market, and should it legalize cannabis, it by extension influences much of the rest of the world. This allows the Canadian cannabis sector to argue that all losses booked over the next couple years should be treated as market development costs geared toward the future opening of the US market. It is similar logic to that which drove the dot-com bubble. At the same time Canada becomes a case study as to what happens to a society when you legalize a mind-altering drug like cannabis. Will it be any worse than alcohol which has been legal in the United States since the end of Prohibition? Probably not, and the Canadian example will be used to argue that the opposition's fears are over-blown. So the cannabis bubble will recover from any post-legalization slump as it focuses on America beyond 2020. The exception would be in the event of a general equity market meltdown or global recession, but that would only make the current plight of the resource juniors worse. So a key message of my talk is: don't expect the cannabis bubble to go away. The junior resource sector has to slug it out on its own.

The talk then goes on to explore what sorts of bubbles the resource juniors are capable of. There are two types: 1) higher trending metal prices driven by macroeconomic growth or security of supply factors, with gold as a special category where uncertainty is the primary driver of higher real prices, and, 2) world class discoveries with replication potential. Resource juniors cannot compete with juniors plugged into conceptual bubbles like dot-com or cannabis which are characterized by "winner-take-all" and "the sky is the limit for the size of the market" beliefs. An orebody is finite thanks to its physical nature. Its value limit will be a function of tonnage, grade, metal price and extraction costs, all of which are unveiled during the exploration-development cycle. Furthermore, it makes no sense to talk about a resource company being the winner who takes all of a metal market except in the unusual case such as the Araxa niobium deposit in Brazil which, when recognized in the sixties, had a grade and tonnage ten times better than every previously known niobium deposit. The closest the resource sector comes to a conceptual bubble is when the market has no idea how high a metal price could rise before stalling. But that "ignorance" is always temporary as we saw with the rare earth bubble because at some point a raw material encounters demand decline through thrifting and substitution which brings the price back to earth. The one exception would be gold because gold is not really used for anything in the real world such as is the case with silver. Gold's usage is abstract, as a hedge against uncertainty. It costs energy to turn gold in the ground into gold in the vault. Gold is stored energy which distinguishes it from money which is an information system that keeps track of debits and credits among multiple entities over space and time. It is also different from a crypto-currency such as Bitcoin where the ability to exchange ownership for goods and services hinges on somebody expending energy to affect the exchange. The current value of all the above ground gold stock is about $7 trillion, a tiny fraction of the rest of the world's wealth in the form of real estate, bonds, equities, cash and private businesses. In contrast to metal price trend fueled bubbles, discoveries create small bubbles in the form of S-Curve market action limited to the junior because until a deposit has been delineated, nobody can definitively put a limit on its grade and tonnage.

The prospect for macroeconomic growth as a metal price driver is bleak in light of the global trade war Trump has launched as part of his America First strategy. The slump in metal and resource producer equity prices since June signals market concern that the global economy is heading into a downturn in 2019. I offered the argument that it does not matter how the mid-term elections turn out because neither party is keen about encouraging a recession. If the Democrats gain control of the House, they will but a brake on Trump's crazier policies, and if the Republicans retain control of Congress they will put the brakes on Trump to prevent a Republican extinction event in the 2020 elections. As it turns out, we now have the first situation, though I am concerned about the apparent Democrat strategy of turning the tables on Trump by embracing protectionism, a theme that has historically been at odds with the Republican agenda of free market globalization. Trump's demand that China stand down from its ambition of becoming a rival power to the United States by 2025 will be ignored by China, but China's policy of forced technology transfer or theft and an unfair domestic playing field for foreign companies has unanimous disapproval from the rest of the world. The inherent unfairness does give China room to negotiate without losing face domestically. So there is hope that the resource sector canaries in the coal mine will start singing again in 2019. As far as gold is concerned, it remains hampered by fear that America's War on Everybody will make everybody worse off, except that the United States will be the least worse off. In such a deflationary situation you want to own US dollars, not gold.

Smaller bubbles can engulf individual metals for two basic reasons. One is that supply on which the world relies is disrupted by some local calamity, usually of a geopolitical nature. The rare earth price bubble of 2010-2011 was of this nature. The other is that demand from a new usage emerges which is insensitive to higher prices than what the world is accustomed to. Lithium and cobalt, key inputs for the lithium ion battery, have been the main beneficiaries of the electric vehicle mania. While American and European efforts to develop electric cars get all the media attention, the real story is China's goal to achieve complete electrification of its car fleet by 2025. This goal is not driven by concern over climate change caused by combustion of gasoline or diesel; China's electric cars will be to a large degree charged by electricity from coal fired power plants. The goal is of a strategic nature in that China's greatest vulnerability is its oil import dependency. If push came to shove, America could in a heartbeat shutdown the seaborne oil supply pipelines to China. The lithium supply problem is well on its way to being solved, but the cobalt future supply problem, which Congo could singlehandedly fix from its copper-cobalt mines, remains a problem precisely because Congo has such an overwhelming supply advantage. It is akin to China's domination of rare earth supply and Brazil's domination of niobium supply. The other metal benefiting from new demand is vanadium, whose main usage has been as a steel alloying agent. It is dominantly supplied by China, Russia and South Africa. New demand for vanadium is coming from new large scale storage battery technology used for renewable power sources such as wind and solar whose cost has now dropped below that of coal. Nobody has a supply monopoloy on wind and sun, so if a vanadium based battery is the best solution to the wind and solar intermittancy problem, battery related demand for vanadium will eventually eclipse the steel alloy related demand.

My focus since the resource sector slump began in 2011 has been on discovery exploration where the goal is to find a deposit that works gloriously at the metal prices we have. The problem with discovery exploration is that the excitement generated when one junior makes a discovery does not easily wash into other exploration juniors. The idea of an area play seems to be dead, in part because map-staking in many jurisdictions allows a junior to quickly tie up most of the geologically relevant land before they disclose their new discovery. But what if a new discovery has scale implications far beyond what one junior can secure for itself? Last year I saw Novo's conglomerate gold discovery in the Pilbara as the beginning of a global discovery focused boom, but the Pilbara conglomerate gold play has stalled because Novo has been unable to overcome the grade measurement challenge using sampling scales as big as 5-10 tonnes. Novo's conclusion is that it needs to engage in "trial mining" of 10,000 plus tonne samples to demonstrate the economic viability of the Pilbara's conglomerate gold. The problem Novo now faces is that this scale of sampling requires conversion of an exploration license to a mining license for which a JORC resource estimate is required (the Australian equivalent of the Canadian NI 43-101). This is a "catch 22" situation because to obtain a mining license in Australia you need to demonstrate the presence of economic mineralization, for which you need a JORC compliant resource estimate. Novo's task ahead is to convince the regulators that the work done so far constitutes evidence of economic mineralization, and that either the rule be changed, or an exception be made for conglomerate gold hosted deposits. That could take a long time, which means the Pilbara is no longer a near term potential driver of a discovery exploration bubble.

My biggest hope for a regional exploration boom lies in Nevada where traditional post staking is still the only way to acquire land. Nevada is very accessible to Canadian resource juniors, and even some Australian juniors have taken a fancy to Nevada. Exploration permitting is a pain, especially where the Forest Service holds sway, somewhat less so in BLM jurisdictions. The stigma associated with Nevada, even though 300 million ounces have been found in the last 50 years, is that Barrick and Newmont control most of the ground in the key "trends". But half of northern Nevada is buried under gravel cover thanks to the basin and range topography created by a rifting event long after the Carlin-type deposits formed. The current theory explaining how Carlin-type deposits formed makes a case that all of northern Nevada is prospective; all you need is deep structures and favorable host rocks to soak up the gold and associated pathfinder elements. The big question is whether the known "trends" represent all such available structures? A major discovery by a junior outside these trends by drilling through gravel or younger rock cover would shatter the stigma that Newmont and Barrick have it all. It would also glove well with my belief that the market, especially for American investors, is ripe for a "Back to America" exploration boom. Best of all, most of northern Nevada is open for staking so that if we do overcome the "got it all" stigma, a modern day gold rush driven by juniors would ensue.

The talk goes on to focus on scandium and why it represents an exception to the conceptual bubble limits of resource juniors. In the case of scandium the global market is tiny, not because there is no usage for the metal, but rather because primary, scalable supply at a stable price whose cost matches the functional value created by using scandium as an aluminum alloying agent has historically not existed. Scandium, which has a crustal abundance greater than lead, is a dispersoid, which means that in rock forming processes scandium atoms "repel" each other. Although lead is less abundant, it forms sulphide minerals like galena where the lead content can be 50% of an orebody whereas scandium, which is 21 ppm in your backyard dirt, rarely concentrated above 100 ppm (0.01%). It is scandium's dispersoid nature, coupled with a higher melt temperature, which, when added to molten aluminum, strengthens the aluminum. Thanks to discoveries made in Australia's New South Wales during the past 15 years where the grade in near-surface, open-pittable laterite deposits is 3-6 times higher than what was mined by the Soviets during the sixties (130 ppm) to outfit their fighter jets with aluminum-scandium alloy, scandium is on the cusp of a market size explosion from 20-30 tonnes annually to 1,000 plus tonnes over the next decade. The latent demand has always been there, but primary, scalable supply has not. A junior with one of these new higher grade scandium deposits needs neither a discovery nor a higher metal price. It simply needs offtake agreements which enable it to supply the scandium. Once one of these juniors cracks the chicken and egg offtake problem, a scandium supply development bubble will evolve. During the initial stages there will be a "winner-takes-all" phase of mergers and acquisitions that will eventually stall as other juniors, recognizing that scandium is headed towards a $2 billion plus market, start exploring for deposits with similar grade. But by then investors in the earlybird scandium juniors will have made a lot of money because the market is currently pricing the scandium story as a failure.

In the final part of the talk I introduce my new Google Earth map based system at Kaiser Research Online which allows individuals to find interesting projects more easily. To demonstrate the concept I created a KRO Conference Focus web page dedicated to all the companies which presented at the September 2018 Metals Investor Forum. MIF also published a MIF September 2018 Magazine which includes general comments by the speakers and brief company writeups by the speakers. The company comments below are slightly longer versions of what was published in the magazine.

MIF Company Presentation and Interview Video Links
Renaissance Gold Inc (REN-V)PresentationInterview
MIF Conference Guide: Nevada is by far the biggest gold producing region in the United States and northern Nevada where the Carlin-type deposits are located also boasts the highest gold resource density among world class gold districts. But Nevada is also the most heavily explored gold region in the United States and the days of easy outcrop focused discoveries are long gone. A strong, Nevada based technical team and adequate funding are essential for success. Renaissance Gold Inc is led by the team that discovered Long Canyon which Newmont bought for $2.3 billion and has developed into a 150,000 oz per year open pit gold mine. In 2017 RenGold brought Long Canyon alumnus Bob Felder into the fold through the acquisition of privately held Kinetic Gold Inc and appointed Felder as the new CEO. While RenGold's focus had been largely on epithermal systems in the Walker Lane of western Nevada, Kinetic owned a number of prospects in northern Nevada with "under cover" Carlin-type potential. Although Nevada has been heavily explored, that description applies only to the ranges and the adjacent gravel covered pediments onto which structures and mineralization in the hills can be projected. The 20 million ounce Twin Creeks deposit operated by Newmont is such an example. The ideal Carlin-type target sits within Lower Plate "dirty" carbonates underneath tighter Upper Plate siltstones in close proximity to structures that allowed fluid flow. The Carlin-type deposits were formed 42-25 million years ago during the rollback of the Farallon subduction slab, long after thrusting pushed the siltstones over the carbonates. While Carlin type deposits can form in Upper Plate rocks, the richest ones like Pipeline, Carlin, Goldstrike, Cortez Hills, Twin Creeks and Goldrush are in Lower Plate rocks. So obstacle one consists of barren Upper Plate rocks obscuring the more prospective Lower Plate rocks beneath. A further complication is the rifting event about 15 million years ago which gave shape to Nevada's basin and range topography. Half of the Upper-Lower Plate assemblage is buried under basin gravels. Yet a further complication are younger volcanics which accompanied the rifting and in some places added an additional layer of barren rocks. Modern Nevada 2.0 exploration strategy seeking Carlin-type elephant deposits must "see" through this cover. Efforts by RenGold to identify "under cover" targets have attracted ASX-listed S2 Resources Ltd as a farm-in partner. One of these projects is Ecru just north of the Pipeline deposit operated by Barrick. In October farm-in partner S2 will begin drilling a couple deep holes testing the Upper/Lower Plate contact which in the vicinity of Ecru can be as deep as 1,000 m. RenGold has several other northern Nevada prospects farmed out to bigger companies, but it is not limiting its generative work to Carlin-type settings. It continues to investigate the Walker Lane at the southern end of which RenGold had generated the Silicon project near the Bullfrog-Sterling mines. AngloGold will end up with 100% of Silicon after paying another USD $2.7 million to RenGold by mid 2020, but RenGold does retain a 1% royalty. Silicon hosts the upper part of a low sulphidation epithermal system with no notable gold values at surface. But drilling during 2018 has led AngloGold to plan a 17,000 m follow up drill program. There are no Comstock Lodes left in the Walker Lane for prospectors to stumble upon (8 million oz gold 200 million oz silver), but when the prize consists of high grade underground mineable vein systems, high level systems hiding deeper riches are the new "under cover" game in the Walker Lane. RenGold adheres to the prospect-generator farmout model, and is sufficiently funded to operate for another two years, longer if AngloGold makes a discovery at Silicon.
Scandium Intl Mining Corp (SCY-T)PresentationInterview
MIF Conference Guide: If you wish to invest in a resource junior but are pessimistic about metal prices and sceptical about big new discoveries, Scandium International Mining Corp is the ideal junior. The company owns 100% of the Nyngan scandium deposit in New South Wales of Australia for which it delivered a positive definitive feasibility study in late 2016 and received a mining lease in mid-2017. The discovery of laterites in Australia with grades three times higher than what the Soviets mined in the Ukraine was made more than a decade ago. Scandium is the lightweighting holy grail for the transportation sector. The addition of scandium to aluminum as an alloy input as low as 0.1% increases aluminum's strength, makes it corrosion resistant and allows weld joints as strong as the rest of the material. Scandium could do for aluminum what niobium has done for iron, a market worth $2-$3 billion today. But the scandium oxide market is only 10-15 tonnes per year worth $20-$30 million at the $2,000/kg price SCY plans to sell it for. The Nyngan DFS proposes to produce 35-40 tpa of scandium oxide, 2-3 times more than currently consumed. The resource is large enough to expand output as high as 120 tpa. But if annual consumption is only 15 tonnes, who will SCY sell its scandium to? The reason the scandium market is so small is not due to lack of demand, but because its supply is in the form of a by-product from nickel and rare earth mines, uranium in situ leaching, and titanium dioxide waste streams. The scandium grade from these sources is very low and the supply cannot be scaled up in response to higher demand. So the latent demand is perpetually frustrated. But the scandium grade of the New South Wales laterites is high enough to support a primary, scalable scandium mine. Nyngan is the most advanced of several similarly enriched scandium deposits. The project has an NPV of $220 million at 8% with a 33% IRR and a CapEx of USD $87 million. But how do you finance CapEx without an offtake agreement in place that guarantees the output will be bought at $2,000/kg? And what end-user will commit as an offtaker and tool up to use aluminum-scandium alloy when primary scandium has never been produced at the mining plan scale? SCY has embraced a guerilla market development strategy whereby it has positioned itself as a master aluminum-scandium alloy producer which is cultivating offtake agreements with dozens of potential offtakers. Rather than secure one or two large offtake deals SCY is seeking multiple small agreements, each of which can translate into substantially larger commitments once Nyngan has demonstrated it can supply as predicted by the DFS. This in turn sets the stage for future capacity expansion at Nyngan funded by internal cash flow. This market development strategy, which involves supplying potential end users with sample material to test in their products, has been underway for a year now. SCY does not need a discovery or a higher metal price; what it needs is CapEx funding on terms that reflect the fundamentals of the DFS and the expansion growth potential. The key is an initial offtake deal that triggers many similar deals that sell out Nyngan's initial output capacity. The low market valuation suggests this will never happen and therein lies the speculative upside value.
Wolfden Resources Corp (WLF-V)PresentationInterview
MIF Conference Guide: Wolfden Resources Inc is a first mover in the state of Maine which has been off-limits to exploration since 2013 when the state decided to reform its mining code. The result in late 2017 was a streamlined permitting process which bans all open-pit mining. In reality Maine has seen little exploration since the eighties when the high grade Pickett Mountain zinc-lead-copper-silver gold VMS deposit was brought to a prefeasibility stage before being abandoned. The mineral rights were owned by a lumber company which sold the entire land package in late 2017 to Wolfden for USD $8.5 million which was partly funded by Altius Minerals through a royalty purchase and equity financing. The Pickett Mountain deposit sits within the Appalachian belt that hosts the rich Buchans deposit in Newfoundland and the Bathurst camp in New Brunswick. The West Lens has been traced as deep as 800 m while the East Lens has been tested to a depth just over 400 m and remains open. During the summer of 2018 Wolfden conducted a 10,000 m drill program that targeted the 400-800 m portion of the West Lens which has sparse drilling. Initial results are confirming historical grades and filling in the holes in the deposit. A second 10,000 m drill program will be undertaken during the fall of 2018 to test targets parallel to and on strike with the known mineralization generated by recent geophysical surveys. The minimal goal is to demonstrate the viability of underground mining a 5-6 million tonne resource with a 15% zinc equivalent grade whose ore can be direct shipped to processing facilities such as the Empire Mine operated by Titan Mining in northern New York. The broader goal is to discover additional lens which support development of a standalone mining operation. In that regard the second round of exploratory drilling on new targets in the vicinity of the known zones opens the potential for Pickett Mountain to become a discovery delineation play on top of being a feasibility demonstration play.
Serengeti Resources Inc (SIR-V)PresentationInterview
MIF Conference Guide: Serengeti Resources Inc is on track to delivering a prefeasibility study for its Kwanika copper-gold project in central British Columbia by mid 2019. The project is a 65:35 joint venture with Posco Daewoo, the South Korean conglomerate which sees Kwanika as a future copper ore processing hub. Posco has provided $8.2 million for the PFS which during 2018 included infill and geotechnical drilling to support new geological domain models and engineering for a mine that will be partly open pit but mostly underground. The PFS work could lead to a boost for copper and gold resource grades following the realization in 2016 that the direction of historical drill holes did not optimally capture the orientation of this porphyry system's structural fabric. Due to the uncertain outlook for copper and gold prices the Kwanika project is best treated as an optionality play with room for improvement from the PEA fundamentals which delivered an after-tax NPV of CAD $191 million at 7% and an IRR of 16.6% at base case prices of $2.90/lb copper and $1,290/oz gold. The summer 2018 drilling did not test the deep unresolved IP anomaly to the north of the Central Zone but did deepen the hole stopped in mineralization in 2016. Should metal prices and the PFS support moving on to the feasibility and permitting stage, Serengeti may spin out Kwanika as a separate company whose 65% stake could be acquired by a producer eager to jointly develop Kwanika with Posco. The reason for doing so is that Serengeti is a traditional exploration junior. During 2018 Serengeti has advanced two 100% controlled projects to the drill ready stage when the exploration season resumes in June next year. The first is the Atty project which adjoins the Kemess copper-gold mine now operated by Centerra. The target at Atty is the possible fault offset extension of the Kemess East deposit. The second drill ready project is Croy Bloom, another copper-gold prospect which had not seen any work during the past decade. Finally, Serengeti has completed summer field work on 8 "covered" prospects identified and staked after the release of a government airborne radiometric geophysical survey in early 2018. These prospects are covered in terms of overburden or heavy forestation at valley edges where prior exploration work will have been minimal. Serengeti is particularly well-suited for investors who believe metal prices will turn around in 2019 and risk capital will return to the junior resource sector.
John Kaiser owns Scandium Intl; Scandium Intl and Serengeti are SVH picks; Renaissance Gold and Wolfden are bottom-fish picks

 
 

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