Three undervalued companies in the junior exploration arena
The brutal bear market in junior mining stocks over the past (going on) nine years is near an end—that’s my firm belief.
I’ve been watching this sector since my late teens. I’ve witnessed and participated in several bull cycles in gold and base metals, and when the turn comes, it’s often dramatic.
Timing can be tricky, but those positioned ahead of the reversal often find themselves in an enviable position when the trend turns positive. And these junior mining stocks can run hard—10-baggers are not uncommon during the course of a bull run. I’ve even witnessed 100-baggers.
Companies with significant resources in the ground trading at severely depressed levels are my current focus.
I believe this next bull cycle in gold and silver is going to be particularly powerful, and I suspect we’re right on the cusp of liftoff. I see a similar scenario developing for base metals, battery metals, and Rare Earth Elements (REEs).
A potent potential catalyst for a powerful bull run in junior mining stocks
There are a host of fundamental reasons why gold should claim significantly higher ground in the months and years to come. The backdrop for the metal couldn’t be more favorable: plummeting bond yields, negative interest rates, debt levels taking on a life of their own, pervasive geopolitical risk, equity valuations stretched way beyond reason.
It’s difficult to imagine a scenario where gold won’t push significantly higher in the months and years to come.
We’ll explore some of those factors in future reports, but the one that has my complete attention right now is the distinct possibility that we’ve reached the peak.
There’s a very good chance that we’ve reached a peak in production and discovery. The theory—Peak Gold—is gaining acceptance and experts in the industry have been talking about it openly for several years now.
Peak Gold is the belief that most, if not all, of the low hanging fruit is gone. Most of the easy gold—the large, near-surface, high-grade deposits—have already been discovered. From here on, production levels and the rate of new discoveries will decline.
Ian Telfer, gold industry magnate in a Financial Post article declared last year:
“Are we not looking for it? Are we bad at finding it? Or have we found it all? My answer is we found it all.”
In my role as Senior resource writer over at Chris Parry’s Equity Guru, I often point to the situation in South Africa as validation of the Peak Gold theory.
South Africa used to be the world’s largest producer by a wide margin. Today it ranks number eight, and according to African Statistics Day, this once-dominant gold producing nation will completely exhaust its reserves in less than 40 years.
That’s an unsettling prediction.
If this theory holds water, the junior exploration companies I follow closely—those developing significant mineral assets—could scream significantly higher when the next bull phase kicks in.
I believe that’s about to happen.
Lean project pipelines
Fact: every day a Gold Producer digs ore out of the ground—every day they’re in business—their precious metal inventory shrinks.
With Peak Gold looming large as a potential new reality, these ounces will not be easy to replace.
Further exacerbating the situation, the brutal bear market of the past nine years forced many of these companies to dramatically scale back exploration spending. They didn’t even go looking for it.
Senior Producers—those highest up on the food chain—require a steady pipeline of Tier-1 (5,000,000-plus ounce) gold deposits in order to maintain current production levels.
Whether it’s a Senior, a Mid-tier, or a Small Producer, the key to long-term survival is a robust pipeline of new discoveries.
If a company is unable to grow this project pipeline organically, through exploration, it needs to change tactics. It needs to take on the role of acquirer, predator.
It needs to hunt.
Targeting junior exploration companies that are onto a new discovery, or are in the process of developing an existing resource, is a strategy that has worked for me in the past.
Virginia Gold, a stock I purchased in the $1.00 range during the last gold bull cycle, was taken out by Goldcorp for roughly $15.00 a year and a bit later.
Frenzied merger and acquisition activity
The junior exploration companies I’m highlighting below could do a Virginia and scream significantly higher, even without any help from their underlying metal prices.
The merger and acquisition activity we’ve witnessed over the past year demonstrates a growing appetite by larger entities (predators).
Barrick Gold has been at the center of much of the activity in the sector. Earlier this year the mining behemoth completed its $6.1 billion all-stock takeover of African mining giant, Randgold.
Next in the Senior arena, Newmont announced a friendly takeover of Goldcorp in a transaction valued at $10 Billion. But before the deal was closed, Barrick went after Newmont with a hostile bid worth $18 billion. Barrick eventually withdrew their bid and Newmont is now called “Newmont-Goldcorp”.
That was some pretty wild behavior—some might call it desperate—on Barrick’s part. In my mind, it adds tremendous validity to the theory that most of the low hanging fruit is gone.
Moving down the food chain, China’s Zijin took out Nevsun, Pan American Silver took out Tahoe, Kirkland Lake is attempting to bag Detour Gold, and Endeavour is taking aim at Centamin. This is by no means a complete list among the Mid’s.
On the lower end of the food chain, SEMAFO took out African ExplorerCo Savary, St Barbara took out maritime miner Atlantic Gold, China’s Zijin announced an all-cash takeover of Continental Gold, Titan Minerals has its sights set on Core Gold, and the list goes on.
Once again, the key to a Producer’s long-term survival is taking on the role of an apex predator. My focus is on the potential prey as these takeover (TO) offers are often accompanied with fat premiums. And if a bull market in mining stocks kicks in with a vengeance, as I suspect it will shortly, these TO premiums will grow increasingly fat.
Yes, large economic mineral deposits, particularly those close to the surface, are becoming increasingly rare. But there are a few choice junior exploration companies sitting on significant resources—companies that are likely being eyed closely by resource-hungry predators.
If you believe that you’re positioned in a company destined to get taken out by a resource-hungry Producer, and in light of the fact that takeover offers almost always come with fat premiums, you can sit back, relax, and allow the acquiring company to set your exit price.
Deciding when to sell a stock is a difficult decision, especially if it’s trending strong. During the spring and summer of 2005, after Virginia Gold tagged its Eleonore’ discovery and the stocks began stair-stepping higher, friends I met online began messaging me, insisting that I take profits and look elsewhere for better value.
Eleonore’ was different. With each successive news release building on the last, I sensed an endgame in the making. There were rumors of an imminent takeover, and the rumors made sense. Rather than selling into strength, I actually averaged up several times, increasing my position whenever funds allowed. I also focused on one of the Eleonore’ area players—Azimut Exploration—which went on a spellbinding tear.
I believed I had an endgame in Virginia Gold. Rather than attempting to guess my exit point, I let Goldcorp set it.
The price Goldcorp offered Virginia shareholders in early December of 2005 represented an all-time high and a 24% premium over the previous sessions close.
Be right. Sit tight. If you’re convinced you have an endgame in the making, let the resource-hungry predator(s) set your exit price.
I suspect we’ll see a large uptick in merger and acquisition activity in 2020.
Narrowing down my top three for 2020
This wasn’t an easy task as I have my eye on dozens of companies in the junior exploration arena. Those that are in the pre-discovery phase of development are obviously the highest risk. Those that boast significant discoveries, but are located in politically challenging regions, must also be classified as ‘higher-risk’.
Reducing risk in this arena is key.
One of the ways to mitigate risk in this sector is to target only those companies with the right geology in mining-friendly jurisdictions. The opinions of objective, experienced geologists can help narrow down the field. Brent Cook and Joe Mazumdar are two names that come to mind in that regard.
If you don’t have a geological background, you can gain a rudimentary understanding by googling a few key concepts. YouTube is a good source for learning the basics.
You can further minimize risk, and increase your odds of success, by shortlisting companies helmed by mining men and women with established track records of creating shareholder value.
Further still, if management has skin in the game—if they are regular buyers of their own stock—it’s safe to assume that their values are aligned right alongside yours, and will likely be fiercely protective of the capital structure of the company.
Despite what you may have heard, or been led to believe, there are men and women in the junior exploration arena whose greatest passion in life is creating shareholder value—discovering, developing, and monetizing assets (or putting said asset into production).
It’s not all Wild West out there.
My three top picks
I have two gold companies and one rare earth element (REE) company.
The stocks featured below represent, in my view, excellent value at or near current prices.
All three of these picks have endgame potential.
We’ll start with my REE pick.
Defense Metals (DEFN.V)
- 39.47 million shares outstanding.
- $5.72M market cap based on its recent $0.145 close.
Defense is developing its 1,708 hectare Wicheeda Rare Earth Element (REE) Project in the Prince George region of British Columbia.
REEs, often referred to as the ‘Vitamins of Chemistry’, are everywhere in this modern world.
Exhibiting an extraordinary range of electronic, optical and magnetic properties, they are used in everything from medical imaging technology, to flat-screen TVs, to nuclear power generation, to electric vehicle (EVs) batteries and motors.
If we look at EVs alone, the pace at which they are rolling of the assembly line will soon kick into a whole near gear as nations around the world demand a greater reliance on clean, renewable, and zero-emission energy sources.
But there is a problem with this increasing demand. China controls roughly 85% of the world’s REE supply.
The West is scrambling to secure alternative sources.
Very recently, Reuters reported that the U.S. Army plans to fund construction of a number of REE processing facilities, part of Washington’s urgent push to secure domestic supply.
All of the above puts Defense Metals in an enviable position.
What Defense has is what the Western world needs
Defense’s Wicheeda project currently has an Inferred resource of some 11,370,000 tonnes averaging 1.96% Light Rare Earth Oxides (LREOs).
A recently concluded drilling campaign at the project tagged high-grade LREOs in every hole drilled (13 holes in total). And we’re not just talking about narrow intervals. We’re talking about long intercepts of high-grade material.
- Drill hole WI19-30 intersected a broad zone of mineralization returning 2.59% LREOs (cerium, lanthanum, neodymium, praseodymium, and samarium oxides) over a core length of 130.8 meters (including 4.43% LREO over 27 meters).
- Drill hole WI19-32 tagged an impressive 4.01% LREO over a length of 58 meters within a broader zone of mineralization assaying 3.63% LREO over 75 meters.
A grade of 1% LREOs is the value equivalent of roughly 2.5 g/t gold (or USD $100.00 per tonne). Using that simple comparison, the 4.01% grade over 58 meters encountered in drill hole WI10-32 is equal to a gold hit of 10 g/t gold over the same length. So why didn’t the stock blast off and not look back?
The market doesn’t understand REEs. Yet.
Hole WI19-32 is a colossal hit, but it’s not a one-hole wonder. Check out the grades and widths across all 13 holes drilled this past summer in the table below.
The following graphic beautifully illustrates the positioning of each hole. Note how the deposit is expanding to the north, southwest, and east.
The Wicheeda resource will almost certainly grow.
Obviously, the market doesn’t understand what Defense Metals has. If it did, the share price would be tracking significantly higher.
I see this is an opportunity to capitalize on an undervalued asset before the rest of the market catches on.
It’s also important to know that Wicheeda is being pushed aggressively along the development curve.
There are a number of catalysts in the offing that could drive shareholder value in the short to medium term. Chief among these:
- A resource update factoring in all 13 holes highlighted above is scheduled for Q1 of 2020.
- News from bench-scale tests and the construction of a pilot plant should come within the next few months (the company reported extremely positive metallurgical test results earlier this year—results that position Wicheeda among the very best REE deposits on the planet).
- A spring/summer drilling campaign designed to expand the Wicheeda resource and test other areas along the 1,708-hectare property will be announced later in the spring.
I’m expecting the market to gain a greater appreciation of Wicheeda’s subsurface mineralization and the strategic significance of this LREO deposit in mining-friendly B.C.
I urge you to take a closer look at this one. You can also access my coverage of the company, and the REE market, over at Equity Guru via the following link.
Cartier Resources (ECR.V)
- 191.63 million shares outstanding
- $28.74M market cap based on its recent $0.15 close
Cartier management is on a mission to build shareholder value. Recent developments suggest they are succeeding admirably, though you wouldn’t know it by the market’s reaction.
The company’s underlying fundamentals and recent success with the drill bit make its current share price a joke (authors humble opinion).
Here’s my thinking…
Cartier management has acquired and assembled a robust pipeline of brownfield projects for pennies on the dollar. The goal is to de-risk and drive development with the drill bit, option or monetize the asset, and then move on down the line to the next best development project in their pipeline.
The company’s 100% owned flagship project—The Chimo Mine Project—is a past producer having giving up 379K ounces of gold from 14 zones between 1964 to 1997.
Agnico Eagle owns 17% of the Cartier’s stock. In previous financings over the past three years, Agnico Eagle has participated and maintained its pro-rata position in the company—a real vote of confidence by one of the best and smartest mine builders in the business.
Note the proximity of Agnico Eagle’s La Pa Mine on the map below.
Now consider that Agnico recently shut La Pa down.
With La Pa’s gold reserves exhausted, and all that infrastructure sitting idle, it doesn’t take a rocket scientist to understand why Agnico has a foothold in Cartier—it needs new ounces to feed its mill.
Cartier’s strategy with Chimo is to drill, and keep drilling.
Since July 2017, the company has drilled 109 diamond holes for a total of 49,251 meters.
Last month the company tabled its first resource for Chimo:
- 3,263,300 tonnes at an average grade of 4.40 g/t Au for a total of 461,280 ounces of gold in the indicated resource category;
- 3,681,600 tonnes at an average grade of 3.53 g/t Au for a total of 417,250 ounces of gold in the Inferred resource category.
This is a very decent first pass resource estimate, but it’s only the beginning.
This maiden resource is outlined in red (above map).
A resource estimate for the company’s North Gold Corridor and South Gold Corridor, outlined in green and yellow, is due in Q1 of 2020.
This resource newsflow likely marks only the beginning of a sustained growth curve for the Chimo Mine Project.
Phase III drilling
The company recently launched a Phase III, 11,000-meter drilling program designed to expand the dimensions of multiple prioritized zones (11K meters of drilling should generate considerable assay related newsflow in the coming weeks and months).
These prioritized zones lie to the east of the main resource along the Central Gold Corridor labeled “PRIORITY TARGET” (map below).
If this current phase of drilling is successful, we should see a resource update for the Central Gold Corridor later in 2020.
Not a one-trick pony
What I really like about this company—one of the reasons I elevated it to top-shelf status—is the number of high-quality development projects that are next in line for a probe with the drill bit.
Benoist, Wilson, and Fenton are on deck. Each project has a story. All three are worth investigating, but Benoist has piqued my interest.
This company’s shares are NOT receiving the credit they deserve, despite the positive newsflow.
But where the market lacks understanding is very often an opportunity.
Cartier has endgame written all over it.
Coral Gold (CLH.V)
- 46.5 million shares outstanding
- $20.46M market cap based on its recent $0.44 close
I’ve been following the Coral story for a good many years. The company’s flagship asset has a 30-year history and I believe current shareholders are about to be handsomely rewarded for their conviction and patience.
Coral holds an uncapped sliding scale 1% to 2.25% net smelter royalty (NSR) on over 2.7 million ounces at Barrick Gold’s Robertson Property located along the prolific Cortez Gold Trend of northern Nevada.
Robertson is a joint venture between Barrick (61.5%) and Newmont-Goldcorp (38.5%). This JV among mining behemoths is called Nevada Gold Mines, or NGM for short.
Examine the following map (note the scale) and know that Pipeline, Cortez Hills and Goldrush—all on-trend and in close proximity to Robertson—represent three of the largest Carlin-type gold deposits in the world. They make up NGM’s lowest-cost assets with over 50 million ounces of gold reserves & resources.
Installments from this robust NSR are to be divvied out quarterly—a hefty advance payment has already come into play (details below).
The following slide from the company’s i-deck lays out the details of Coral’s sliding scale royalty.
This is a compelling speculation. The company currently has roughly $14M in cash representing around $0.30 of its current share price. At $0.44, the market is valuing this potentially fat sliding scale Robertson NSR at a mere $0.14.
Why such a modest valuation? The market is waiting for NGM to deliver a Pre-Feasibility Study (PFS) expected sometime in 2020.
With the release of the PFS, Robertson’s economics will be fully understood, and if it’s as robust as expected, Coral shares could see a substantial re-rating.
The exact timeline is not known, but NGM is working diligently to produce this PFS.
The clock is ticking for NGM. If Robertson is not in production by Dec. 31, 2024, they’ll be forced to pay Coral $500k per year.
Skin in the game
Believing its shares are not being given the respect they deserve, the company recently announced a normal course issuer bid (NCIB) to purchase up to 10% of its current float. The company has already retired nearly 7,000,000 shares since it struck its deal with Barrick a few years back.
Coral management, a seasoned team with over 150 years of combined experience, obviously believes this PFS will demonstrate favorable economics—they collectively own 30% of Coral’s outstanding shares, ownership that demonstrates tremendous confidence in the project.
Here’s the thing: with the company continually shrinking its share float with these NCIBs, the impact of a robust PFS could trigger a much stronger pop to the upside when it’s finally tabled. It all depends on the numbers NGM delivers.
It’s important to understand that the current 2.7 million ounce count at Robertson may represent only the tip of the iceberg. There could be tremendous exploration upside at depth.
Finding a deep, rich “feeder” deposit—the source of Robertson’s surface gold—is high on NGM’s priority list.
NGM’s geologists have stated they’re seeking a “Meikle-style” discovery at depth (the Meikle deposit was discovered in September 1989 when a deep drill hole tagged 164.5 meters of 11.62 g/t Au from 397.5 meters to 562 meters).
The more ounces discovered at Robertson, the more Coral’s sliding scale NSR is worth. The more the company’s NSR is worth, the higher the stock will trade.
In the meantime, the company is beginning to explore the remaining three projects in its portfolio: JDN, Norma Sass, and Eagle.
I like this setup. The downside risk appears limited. And the upside potential—the incoming PFS, the exploration upside, and the possibility of a buoyant gold price—has to be considered very good.
There is endgame potential here too—there are a number of Sr. royalty companies scouring the earth, looking to acquire high-quality royalty assets. But this NSR won’t go cheap. Management’s stake in the company should thwart any low-ball hostile takeover.
Important to note: with management holding 30% of the common shares, and the already tight float shrinking via the NCIB, Coral is a thinly traded stock. Be careful how you place your buy orders. Do NOT chase this stock with market orders.
There you have it. Those are my three top picks going into 2020.
Make sure you subscribe to my weekly newsletter to receive regular updates on my three top picks, as well as timely commentary on additional opportunities as they present themselves.
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