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KRO Summary: September 1-30, 2020


KRO Summary: September 1-30, 2020
Kaiser Research Online is an information portal featuring all resource companies listed on the ASX, TSX, TSXV and CSE. Membership is available as an Individual Annual KRO Membership at USD $450 and as Multi-User Corporate Annual KRO Membership at USD $1,000. For those who want to catch the awakening of the junior resource sector bull market during the rest of 2020 we have a Special which gives full access to the end of 2020 for USD $200. Use your Email to retrieve your login credentials if you have previously registered. See Membership Details for an overview of KRO.
The KRO Summary lists all Trackers and Blogs published during the designated weekly or monthly period so that so readers can easily catch up on what they may have missed. We no longer notify KRO members by email about new material except in special circumstances. When a Tracker is posted at KRO we notify members through the KaiserResearchOnline Slack Workspace. If you are an active KRO member and not registered on Slack, please let us know and we will send the invite. We will Tweet the link so that Twitter followers can catch up at their leisure. The title links to the Tracker or Blog, the charts in the Discovery Watch Blog link to the YouTube audio segment for that company, and the Tracker charts link to the free Corporate Profile. Blog content is unrestricted but Trackers are always restricted to KRO members unless one has been tagged to become unrestricted. Check the General Release Schedule to see which Trackers are already unrestricted or scheduled for general viewing.
Flu Season Pandemic a Bigger Problem for Resource Juniors than Election Uncertainty
A September rally never got underway for the resource juniors following the reversal of the uptrend in early August which tracked gold's retreat back below $2,000 where it has since hovered between $1,850-$2,000. Gold peaked at $2,067.15 per oz (LMBA) on August 5, up 35.7% for the year, with the KRO 2020 Gold Producer Index peaking a day earlier on August 5, up 56.4% for the year. The KRO 2020 Favorites Index peaked a week later on August 17, up 102.2% for the year.
Gold's failure to establish $2,000 as the new base was caused by a surge in central bank selling and diminished demand for physical gold by Indians. Most central bank gold buying is done by rivals of the United States such as China, Russia and Iran. It is not yet known if China stopped buying gold in the open market, though it likely continued to absorb its domestic gold production which is the highest in the world. Russia, which has managed to secure fourth place in number of covid-19 infections, has suffered from the sharp fall in oil revenues triggered by its foolish effort to undermine the American shale oil fracking industry and now sustained by the pandemic induced demand slump for oil. In Russia's case its currency has not recovered from the March panic decline against the US Dollar as most currencies have. Russian central bank selling of gold is thus a rational response to record high gold prices and a weak ruble.
India, which has three times the population of the United States, has recorded over 7.5 million covid-19 infections, in second place behind the United States with over 8.1 million infections, though recorded deaths are only half those of the United States which tally 219,775 as of October 19, 2020. Unlike China, which used the fist of autocracy to crush its pandemic once Beijing realized the seriousness of the novel coronavirus, India is a democracy, though with a considerably weaker social safety net than the United States which itself ranks below that of most advanced western democracies. Weddings are a major driver of Indian demand for physical gold, but restrictions on large gatherings and travel have postponed wedding activity for a better time for celebrations. In addition, Indians, concerned about economic hardship due to lockdown responses, have been selling gold jewelry to store up cash to cope with a pandemic that shows no signs of having peaked.
The regular flu season which runs from October through April in the northern hemisphere has now begun. Covid-19 infections began to accelerate around the world during the last two months of the 2019-2020 flu season and did not burn away in the spring sunshine as predicted by somebody who privately knew better and sought to prevent panic while his colleagues blew out their stock portfolios. Although Europe managed to flatten the covid-19 infection curve considerably deeper than the United States, covid-19 is making a roaring comeback in Europe as the flu season gets underway. While great progress has been made developing various vaccines for covid-19, the haphazard, often anti-science messaging from the White House has instilled widespread fear about the safety and reliability of vaccines rushed toward approval for political reasons. The reality is that no western pharmaceutical company will embark on large scale manufacturing of a vaccine unless it has been approved under conventional protocols.
Large scale deployment of a "trusted" vaccine is unlikely before H2 of 2021; meanwhile the northern hemisphere, where some people think covid-19 is a hoax and have made rejection of face masks and social distancing an expression of their political views, will get to witness how covid-19 behaves during the full regular flu season. Although covid-19 can cause death or long term health damage to anybody, the risk of a severe covid-19 infection is highest for people with existing health issues (ie obesity) and the various ailments that afflict older people, in particular the Boomer Generation of whom Trump is the oldest member. Most vulnerable are those aged 75 and older, the Depression-War era survivors. If covid-19 penetrates a nursing home the outcome is the same as Prospero's castle in Edgar Allen Poe's "The Mask of the Red Death".
The clipping above is instructive in showing how predictable and unpredictable a covid-19 infection can be. I only noticed it because it was at the bottom of a page in the NYT Business section, and, given that obituaries do not yet interest me, I am baffled how the double presence of the "Felice" surname managed to catch my eye. It really bothered me that somebody my age who cared for her stricken mother and predictably caught the same coronavirus but, despite no apparent health issues, unpredictably died as a result of covid-19. The lockdown response in March 2020 disproportionately hurt the Gen Z and Millennial generations as well as people at the lower end of the socio-economic spectrum. It has also economically harmed and in many cases destroyed numerous small businesses. What will be the response when the 2020 winter flu season gets rolling? Is the United States medically prepared to handle the stricken if a Swedish style "herd immunity" approach is adopted to avoid a new round of economic hardship? That seems to be the favored approach of the current White House if it survives the November 3 election. But what if the opposite approach is adopted, which is plausible given that a vaccine may be ready for large scale deployment after the 2020-2021 winter flu season has run its course? Will the younger, less vulnerable generations graciously accept another 6 months of economic hardship and general deprivation, or will they rage against the Boomers? There are lots of moving parts in the current situation.
The stalled gold uptrend is one reason a September rally never materialized for the resource juniors, even though in real price terms gold is up 50% from $400 gold in 1980 inflation adjusted by the US CPI to the present, which would put gold at $1,266 per oz (in so far that gold is supposed to function as an inflation hedge). The stalled gold uptrend is not a sufficient explanation for the slowed activity in both gold producers and resource juniors. One small junior which launched a financing attempt in late August announced on October 2, 2020 that "the completion of the financing is being deferred until further notice due to weakness in gold markets over the past number of weeks". The real problem is that investors are worried that general equity markets will crash again during Q4 of 2020, dragging gold with it, and vaporizing the bids of resource juniors. The two most dreaded scenarios potentially triggering a general market crash are a disputed election outcome or a new covid-19 infection surge that is worse than the one which overwhelmed the world in Q2 of 2020.
Resource junior investors, however, are also concerned by the potential fallout from the best resource junior financing binge since Q1 of 2011 when the gold uptrend linked post 2008 crash rally that began in mid 2009 peaked, ushering in a decade long bear market during which all the cash raised pretty much "vanished". From May through September 2020 TSXV listed resource juniors raised $2.1 billion through 694 private placements, all of which have a 4 month hold. The May batch ($169 million) comes free trading in October with the September batch ($476 million) coming free in January 2021. Most of these financings included a half or full warrant. The standard Canadian investor practice is to dump the long position as soon as it is free trading and clip the warrant as a free ride on the stock's upside during the next couple years. Of these private placements 76% (529) are currently in the money based on the closing price on October 16, 2020. This paper raised $1.6 billion and has a current value of $2.9 million, meaning that the placees are sitting on $1.3 billion of profits. The other 165 (24%) private placements showing no profits or paper losses raised $434 million and have a current value of $354 million representing a paper loss of $80.4 million. The investors of the private placements still in the money are collectively sitting on an 82% profit. If their goal is to capture those profits, which also recovers their initial investment, $2.9 billion in new after market capital must come into these stocks between now and the end of January 2021.
What will attract new capital into the markets of these TSXV resource juniors? Much of the capital raised was earmarked for discovery exploration, some for brand new conceptual targets, but most of it for a rethink of existing systems that without a change in their deposit fundamentals are not in the money even at $1,900 gold. These juniors need to deliver positive results to demonstrate that fundamental value has been created through exploration success. Couple that with a future breakout by gold into the $2,000-$3,000 range and these juniors will deserve higher valuations. But assay lab turnaround time has been severely impacted by covid-protocols. For example, the pulverizing of core samples requires physical stations spaced at a minimum social distance to prevent workplace infection. There is only so much physical space in an assay lab for such stations, which has turned sample preparation into a major bottleneck. In addition, not only has the junior resource sector undergone a tremendous surge in exploration drilling thanks to the $2.1 billion financing surge (and this doesn't include money raised by TSX listed companies), most of that money has gone into North American projects, overwhelming the capacity of existing assay labs which have had to cut back capacity in response to the worst resource junior bear market in 50 years. Many of these projects such as those in British Columbia's Golden Triangle have a seasonal nature, which has created a problem in that companies cannot rely on timely assays to guide drilling strategies before winter shuts down exploration until late Q2 of 2021. This makes it difficult to drive an expanding value discovery story that encourages existing shareholders to stick it out and attracts newcomers. The private placement time bomb has the potential to wreck stock prices as the 4 month holds end with results still trickling in as the work season shuts down. November through May is a dead zone for juniors with projects in remote Arctic regions or ones like northern British Columbia which sustain heavy snowfall. Ontario and Quebec do not suffer this winter seasonality because in many places January through April is the best time for exploration because swampy areas are frozen solid. The big question for juniors with projects in eastern Canada is whether or not exploration will be shut down in Q1 2021 because the regular flu season has sent covid-19 infections through the roof. A herd immunity approach will not work in Canada because First Nations communities, which are often used to stage exploration, cannot risk covid-19 infections and will block exploration activity. Much will depend on the extent that covid protocols have been refined since the March 2020 panic and how badly covid-19 hits Canada during the winter.
Resource junior traded value activity remains elevated above levels from Q1 of 2020 but has declined from the strong levels of June and July while gold was trending up. The final quarter of 2020 is perceived to be a difficult time for the resource juniors because of the delayed results data flow, the need for new money to enter the market as private placement hold periods end which is hard to imagine if gold is not ramping through $2,000, seasonal winter constraints putting exploration stories in limbo, and anxiety about how bad the second covid-19 infection wave will be and how harmful the mitigation response will be to economic activity. Only fools and magical thinkers ever believed this problem would be gone by now, and so we will have to slug through it.
The other concern holding back resource junior investors is the risk that the V-shaped recovery in general equities undergoes a reversal just as it did 10 months after the initial 1929 market crash. The Federal Reserve's heavy purchase of treasuries and even corporate bonds has kept interest yields extremely low, which has helped prop up equity markets. The quarterly US Household balance sheet data shows that the value of holdings of bonds and T-Bills declined during H1 of 2020, and not because yields went through the roof and principal values collapsed as everybody has been predicting since 2009. Only one-percenters own bonds and treasuries, and it is unlikely that their cash has gone into bank deposits where only $250,000 is guaranteed. That money has gone into equities.
The biggest potential trigger for a new general equity market crash is Trump's threat to dismiss any election outcome other than his victory as a massive fraud. That idea is preposterous, but the unprecedented surge in mail ballot voting by citizens wishing to avoid long lines at polling stations where wearing a mask and maintaining social distance is deemed optional by many will result in delays for a full count. His request that unregulated militias "stand back and stand by" has been interpreted as a dog whistle for thugs to show up at the polling stations carrying bats in states like California where no open carry of any guns is allowed in public places, or with their guns in plain intimidating view where open carry is allowed. But that is a joke because all they will be observing is lines of individuals waiting to cast their secret ballot, all of whom will be taking smartphone videos of these militia thugs standing by. There simply isn't anything for these "guardians" to observe and act on. A bigger problem is during the subsequent days if election night counts indicate a Biden victory but mail-in ballots remain to be counted. Given the tricky nature of the Electoral College system in the United States which has shown itself to being especially vulnerable to big data based manipulation by Americans with a political agenda, there will emerge a window of uncertainty during which right and left wing thugs as well as just plain criminals may take it upon themselves to launch their own version of the Nazi Kristallnacht to create mayhem and looting opportunities that could spook the general market.
In the case of a Democrat sweep of all three US government branches the general equity market may suffer an exodus from the FANG type companies in anticipation of a crackdown on Big Data tech companies. Forget the Russian meddlers, they are bit players, but think instead of the Cambridge Analytica Great Hack bankrolled in 2016 by media tycoon Robert Mercer and his daughter Rebecca which won Wisconsin an arguably made Trump president, the Facebook and YouTube algorithms that channel users into ideological cul de sacs as now depicted by the Social Dilemma "movie", and the Pink Slime which has hijacked local online news outlets. A focused Big Data sell-off, deserved as it might be, is not going to create optics helpful to our resource juniors during the interim. That risk would suggest building up cash reserves for some serious bottom-fishing in December 2020, especially if the Democrats emerge victorious. Although the Democrats will try to restore the United States as the glue that holds the free world together against rising autocracies like China, which may reduce demand for gold as a hedge against global insecurity, they most certainly would embrace fiscal stimulus on a massive scale, first to ride out the covid-19 pandemic in 2021, and then to set the stage for a massive comeback in 2022 through infrastructure renewal, all of which will require further expansion of American debt. That will prompt traditional gold bugs to rediscover gold, and it will boost raw material demand whose supply development lagged during the past decade, and certainly did not accelerate during the 2020 Pandemic Year. A resource junior bull market awakened in 2020, and is set to flourish over the next couple years. We just have to navigate the US election uncertainty over the next three months and hope that covid-protocols keep the Canadian surge relatively subdued while still allowing exploration activity to be carried out. Where will the new capital for the resource juniors come from? It may very well come from the 99 percenters whose bank deposits have reached record highs thanks to the inability to spend their income on the usual pleasures. With another year of covid restrictions ahead of them, but this time with light at the end of the tunnel courtesy of a vaccine, the resource sector's dual narrative of future fiscal stimulus driven uptrends for most metals may resonate with them.
KRO Summary: September 1-30, 2020
Sep 1, 2020 - Blog - Kaiser Media Watch Blog - September 1, 2020 to September 30, 2020
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Sep 10, 2020 - Blog - KMW Blog September 10, 2020: Discovery Watch September 10, 2020 with Jim Goddard and John Kaiser
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Sep 17, 2020 - Tracker - Tracker: Spec Value Rating for Cons Woodjam Copper Corp
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Sep 17, 2020 - Tracker - Tracker: What's Next for Consolidated Woodjam Copper Corp?
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