Where Do We Go After “Crazy” Month for Gold and Silver? - Monthly Wrap Up

Man: You're listening to Sprott Money's "Monthly Wrap Up" with Craig Hemke.

Craig: Well, hello again, everyone, and welcome back to the Sprott Money News "Monthly Wrap Up" series. I'm your host, Craig Hemke. It is now the end of November 2021. And our guest this month is Joe Mazumdar, who is the publisher of "Exploration Insights." Always great to hear from Joe. And, of course, if you're in the mining sector, all the help you can get is always gonna be a good idea to see your way through what are good companies, maybe not so good companies. And again, any experienced hands you can have on deck to help you see your way through, that's a great idea. And Joe is certainly that. Joe, thank you so much for spending some time.

Joe: Thanks very much, Craig. I appreciate it.

Craig: Hey, before we get to "Exploration Insights," I want to remind everybody this content is sponsored by Sprott Money. So any time you're in the market for precious metals, if you're looking for some gift ideas for the kids, the grandkids, go to sprottmoney.com. Always keep that on your list of places to check when you're adding physical precious metal. And again, we always appreciate you listening and submitting your questions for these programs that Sprott Money produces.

If you enjoy today's monthly wrap up or any of our other segments, "Ask The Expert," "Precious Metals Projections" that we do with Chris Vermeulen, be sure to subscribe, like, maybe share that information on whichever channel you're listening to. It helps us get the word out, and cast a wider net and let people know about the value of precious metals. There's great value at "Exploration Insights." Joe, tell everybody a little bit about what you do there.

Joe: "Exploration Insights," it's a weekly newsletter about what I'm buying and selling in the mining sector, and also we pull out a few thematics that we see happening in the sector, whether it's M&A, or trends in commodities, or it's precious metals, it's industrial commodities. And then in stage, we do anything from exploration up to production, but the focus really is on preproduction.

Craig: And again, I always tell people at my site, you know, if you're going to invest in the mining shares, you need all the help you can get, because unless you're an expert like Eric Sprott, and you can read all these reports yourself, which I am not, it's always good to have experienced, wise, smart people on your side, and obviously Joe Mazumdar, "Exploration Insights," I can give that a big thumbs up, at least from my end.

Joe, we've been collecting questions for you for the last couple of weeks. So I've got some of those we'll get to eventually. But this is the monthly wrap up, so we want to talk about what has happened here in November. It's been a crazy month. Now, it started with the November FOMC meeting, when the FOMC announced they were gonna start tapering their QE programs. And about a week later, we had these massive inflation numbers in the U.S., and the precious metals has shot higher.

And then about a week ago, Powell was renominated to run the Fed another four years, and all of a sudden, everybody starts thinking that there's gonna be rate hikes instead next year and an accelerated taper, and everything just comes crashing back down. But the shares at least have rallied and hung in there and, kind of, held some support. It's been a crazy month. What do you see going forward?

Joe: The problem, I think, that people have right now is trying to predict the near term, because, you know, we call inflation initially transitory, which it doesn't appear that it is. And for me, just looking at precious metals, with gold, one thing that I really look at is not the absolute real rate, whether it's negative or positive, but the trend. And so if there's a negative trend in real rates, that they continue to decline, gold is where investors tend to want to be in.

And so, if inflation basically rises higher than the Fed is willing to raise rates, real interest rates could still decline. And so gold would still be something that, you know, investors should be looking at. But right now, it's whether inflation is transitory, and then suddenly it'll abate in a year, once we get over our supply chain issues, or is it something, you know, related to like labor rates that might be more long term such that, you know, it might not go away anytime soon? And if it doesn't go anyway anytime soon, and interest rates aren't raised at the same pace, then I could see negative rates, real rates still declining, which, I think, in the end would still be good for gold.

Craig: Yeah. You know, and in the meantime, that's all part of what's been such a frustrating year, is the market believes those real rates that are so sharply negative are transitory, just like inflation. And so we've had this period where the gold prices, I mean, it's down $100 here today, but yet inflation has soared. And that seems to be a rather toxic mix for margins and profits at the producing miners. You see it that way?

Joe: Yeah. Well, we saw that in the S&P 500 last week, you know, the plunge in the S&P. And some of that related to the fact, you know, that if interest rates rise, discount rates, you know, are higher, that that way the valuations should be less. But what we also notice is the S&P 500, in terms of price-earnings ratio, is trading right now higher than it was pre-COVID. So, some investors are looking for a reason to sell, as well, thinking that the P/E ratios are quite high and there's nothing else to invest in. So, you know, they took some money off the table when Omicron came out, the new variant that was identified in South Africa.

A new COVID variant brings in another, you know, wrench into the machine with respect to saying, you know, will we still get the global growth that we're talking about we are rebounding post-COVID? Is COVID over? And what are the implications of that? And I think that's another thing that the market is trying to understand. How is that gonna work? Are we gonna completely shut down again, or is something else going to happen?

Craig: Yes. That's exactly right. And it makes you wonder about the supply chain issues, and they're already as screwed up as it is.

Joe: Yeah. Well, we're up here in, like where I am in British Columbia in Vancouver, we're getting impacted, obviously, by the weather. And so we're having supply chain issues right now because of highways being cut off, and also, you know, in terms of supply of certain goods and services that come from the interior, but also stuff from the Port of Vancouver that's supposed to be going, you know, to the interior. We've got all that happening right now, which is raising local inflation rates.

Craig: Yeah. Just in kind of a bigger picture, you know, the whole world these days lives, you know, almost minute to minute. And especially in investing, it's all about momentum, and I don't wanna have any money there when I can make 5% in a day in some, you know, meme stock.

But it would seem as if there's a continued movements, particularly here in the U.S., you know, infrastructure spending, all sorts of things that augur for higher commodity prices in the not only, you know, months to come, but years to come. Do you see that, as well? And does that, kind of, factor into the analysis that you do?

Joe: Yeah. I mean, the thing is that there's trading, like you're talking about, that links a lot into the fear of missing out on, you know, a micro trend that you might see in the market right now. But then, in the long term, medium to long term, what you see is that with infrastructure requirements, also with the idea of having a carbon-neutral economy, which requires a lot of these metals that, you know, help reduce people's greenhouse gas emissions, you know, those metals have to be mined before they can actually be put into a car or put into wherever.

And if they're not mined, then, you know, you've got a world that you're hoping to get to in 2050, that if you don't do anything before, I don't know how you're gonna get there. And that's really the issue with a lot of these plans to get to carbon-neutral by 2050, is, well, what are the plans in between? Like, what else are we doing to ensure that, hey, if we do have massive penetration with these electric vehicles, you know, where's the power gonna come from? Or, you know, where's the nickel gonna come from? Where's the copper gonna come from? And if the penetration's not that quick, you know, where are we gonna get the palladium from?

And then, layer supply chain issues onto that, you know, with freight and everything like that. And then put on geopolitical risks like, you know, some countries going, "Hey, you know, I don't want to export this anymore because I need it for myself." And then knowing that, in China, a lot of the refining of the metals and the actual products that are required for the future are actually happening in Asia, especially in China. So, we got to think about the fact that, you know, we could produce more copper in North America, Mexico, Canada, and South America as well, all the Americas, we can produce more copper, but the refining capacity is in Asia, not here.

So we can only get so far. And so the problem is that, you know, one, in North America, specifically in Canada, Mexico...well, specifically in the States, I would say, it's not easy to permit anything. So you could talk about electric vehicles, you could talk about all this other stuff, but in the end, that material, those products that you need to build these vehicles is gonna come from Asia, and mostly from China. And if they stopped wanting to give it to you, you know, I don't know how are you gonna actually build these things if you don't actually produce those kinds of products locally?

And until the States starts permitting not only the mining projects, but also the refining capacity and the downstream capacity, I don't know how they get there if we layer on these geopolitical issues and supply chain issues that we already see right now.

Craig: Yeah. Well, let's, kind of, segue that into the first of some of the questions that were sent into us for you. Again, anytime we have guests here on the "Sprott Money" podcast, you can always use the email address, submissions@sprottmoney.com, and send stuff in.

And we had a couple of questions about uranium. You know, Sprott Inc. has taken over that big uranium trust. They've been buying all kinds of physical uranium. And again, you touched on this when you were talking about electric vehicles. You know, it's not like you just wave a magic wand every night and the thing recharges.

That power, that energy's gotta come from somewhere. And uranium is, kind of, coming back...I don't wanna say into vogue, because, you know, probably one more Fukushima away from shutting down reactors again. But it certainly seems that there is a bull market building in uranium. And so we had several questions for you about, are there uranium companies, uranium miners, uranium royalty companies, things like that, ways that you can get involved in that sector that you know of?

Joe: Oh, yeah. There's plenty of uranium companies from exploration to production that are highly levered to uranium prices coming back to over 50 bucks, which is really what a lot of companies need to actually come back into profitable production, talking about double digit returns from capital invested. There's a lot of company. One I own that's done really well has been Energy Fuels, that's, you know, U.S.-based small producer, but a lot of permitted capacity that requires that higher uranium price to come into production.

You know, they're one of several like that. Or [inaudible 00:13:04], that sort of thing. But the thing is that what Sprott had done was, you know, that spot market, they tightened up the smart market for a while that, you know, shot the price up to 50 bucks. And the issue is that a lot of those inventories are not held in a open market, but more so by the nuclear power plants or by other producers that are holding back supply because they don't want to sell it into a $30 or $35 world.

So, you know, my question still is, is how much global inventory there is out there. So once we start seeing global inventory declining, and then long-term contracts being signed, that have an equitable price in it for the producer to generate a decent return, like $50 plus, I think that's really when the market turns in terms of uranium producers. That's really where it turns.

What Sprott had done, sort of, put a little bit of testosterone into that market short-term. But whether that leads into draining enough, you know, global inventories to force these nuclear power plants to start signing long-term contracts, that hasn't been the case yet. That's really what I would look for, is like when I start seeing long-term contracts being signed at a price that's reasonable for these producers to actually generate free cash flow.

And then in the U.S. specifically, for companies like Energy Fuels and others, you know, the strategic stockpile, when does the U.S. start actually buying that uranium that they said that they were gonna buy, and at what price?

Craig: And, you know, it gets back to what we talked about earlier, Joe. I mean, this is 5, and 10, 15-year kind of stuff, you know, to build new nuclear power plants or whatever, all these different ideas for cleaner, less carbon-based energy. But yet people have a 5, 10, 15-minute timeframe in a lot of their trades.

Joe: Exactly. I mean, the thing is that, you know, competition, whatever you want to call it. But, you know, a command economy like China, they have, you know, a bunch of five-year plans that rolls up into a 20-, 25-year plan. And so they're one of the biggest growth sectors for uranium consumption, and they know it. They're not gonna wake up, you know, 30 years from now and say, "Oh, hey. Geez, I need uranium." They're already building that up. And some of the operations and mines that they're actually acquiring require $50 uranium to be profitable. But the way they think is that I need the uranium. And by the time I need it, you know, it might be 70 bucks.

Craig: Good point. Well, that is certainly a sector that has been, like you said, gotten a shot of testosterone earlier this year. It'd be interesting to see how that continues to play out. You mentioned another thing that was actually sent in and asked, we had a question about. And it's kind of roughly dovetails into this ESG component, and companies that work with the local community, the indigenous people to try to make sure that they get their permitting done, and that the business runs as clean as possible. How important is that as a factor going forward in determining, you know, the viability of mining companies, or maybe more importantly, even exploration companies?

Joe: Yeah. That's been a critical component of mining, you know, for the last few decades, I would say. Like, when we look at geopolitical risk, we tend to look at it from a country level, when it's really at a community level. Where the mine is, what it's impacting. Not only where it physically is, but downstream of where it is. And, you know, issues like water, not only consumption, but also, you know, potential contamination. Power, where are you getting it from? You know, local inflation. You know, not only are you bringing jobs, are you, you know, raising the price of everything else for local communities?

All of that matters, because, you know, whatever the government's policies are federally, or provincially, or state, local opposition...and we've seen this before, can easily kill projects. Like, you know, in my time with Newmont, you know, we had the Cerro [inaudible 00:18:06] project, an open-pit leach in Cajamarca that was taken off of reserves because the local community was against it. More than five years later, you know, we had the big Conga copper/gold project, a multibillion-dollar capital investment, you know, proximal to Yanacocha, that basically Newmont took out of reserves because the locals were opposed to it.

I mean, these two examples are specifically in Peru, but it's not only Peru. I mean, we see it, you know, in Arizona, for God's sakes, and, you know, we saw it with Pebble with Alaska. So these things can happen anywhere. So, as an exploration company, when you come in, if you want to eventually get acquired and you don't have really good, you know, social license to operate where you are, your chances of getting acquired, regardless of how good the asset is, the probability is pretty low, because no big company wants to get stuck with that.

Craig: Right, Joe. It augers into that, what I mentioned earlier. If you're gonna be in the sector, you need help, because how can you as an individual investor, with all the other things that you're trying to process over the course of your day, understand what possible jurisdiction issues might be, you know, all the way down to the local level? Anyway, just another challenge that what you do obviously helps to address.

Joe, I also had some questions specifically about some specific names. I asked Joe ahead, just so people know. We asked some of the names got sent in. Know anything about, like Green Mountain Mining was one, and we talked about Aurcana, not much about Walbridge, just some companies that we did look at, but those aren't currently ones that you follow. But, Joe, I wanna, as we go to wrap up, hit you with some of these to get some of your thoughts. One of them was HighGold. Is that one you can address?

Joe: Yeah. HighGold is one I own in the letter, and it's H-I-G-H on the Venture, and it's also listed on the OTC, I'm not quite sure what the ticker is off the top of my head. But it's an exploration company that has a resource at a project in southeastern Alaska, which was a project that was formally drilled, very high-grade, that, you know, the company that was working it more than two decades ago was looking at actually direct shipping it to a plant in British Columbia. So that already tells you it's high-grade, but the [inaudible 00:20:52] prices at that time, you know, it didn't work out.

But they've drilled what they call the Johnson Tract area, JT Deposit. It's polymetallic. Looks like a volcanogenic, massive sulfide deposit. And so they built up that resource and now they're looking for extensions of it. But importantly, this last summer, their biggest drill program in that area, probably ever, found other indications of mineralizations farther to the north, which is really what exploration and retail investors are looking at. You know, they value the known, but really it's the unknown and how you quantify the value of that, that's what drilling does. And they drilled some veins up there and got really good intersections.

And on the back of that, importantly, as junior miners don't have money and don't make money, they have to raise money, they raise capital on the back of that. So they're pretty well-funded for their next program as well. So it's well-run. It's got a management team that's got a lot of experience in Alaska. I visited a project last summer. And one thing about Alaska which was interesting was that, you know, usually when I go there, it's pretty dry around that time of year, but it was very wet.

And so companies around that area were having issues with functioning, you know, under those conditions, but, you know, these guys did manage to get their drill program done. Probably a little bit smaller than they thought, but it went well. And because of the assay, you know, issues that we've seen throughout the industry, I mean, the results have been slower to come out than we'd like. But we should see more results coming out from this program as well.

Craig: All right. How about a company called Westhaven?

Joe: Yeah. Westhaven, I've owned before and I've sold it. It's got this low-sulfidation epithermal system that they discovered, you know, not far from where we're actually experiencing a lot of the flooding in Merritt, B.C., in British Columbia. So I'm sure they're probably having a little bit of logistical troubles right now, as is Kodiak Copper, which is around the same area. But my problem with it that, you know, the drilling campaign, you know, they did find something, and they did discover it, and they do have a resource.

Well, they don't have a resource yet, but I calculate a resource which is less than a million ounces. But what they really needed to do was find another one. And just like HighGold or any of these countries continually show that, you know, the property has more upside. And their drilling campaigns have, for me, not really shown that they've got another one of these resources along that same structure. And so I sold it. But, you know, good team. I mean, it was a great discovery, and all that. I guess I just got a little bit frustrated by the way the program was advancing.

Craig: All right. How about Seabridge?

Joe: Yeah. Seabridge is a very...I mean, if you want leverage to the gold price, and a tight share structure, definitely Seabridge offers that. But if you're looking at a development project that a major would want to acquire, you know, this is a big capital investment. I mean, I would put this, you know, well over the $5 billion ticket with respect to building, you know, tunnels through mountains and stuff like that.

And what we've seen on the M&A side, you know, the trend always has been...with the mid tiers and the majors, is production. Overdevelopment, overexploration, production has been what people have been going for. And like Newcrest which operates now 80% stake, I believe, in the Red Chris copper/gold project in the Golden Triangle. They acquired Pretium. And that was, you know, an operating asset 300, whatever, 70,000 ounces a year of gold, British Columbia, low carbon footprint. And also with Agnico and Kirkland, again, acquiring production.

So it's hard for me to see people acquiring development projects that need that much capital and there's not...unless there's a lot of synergies with current operations, it's hard to see people acquiring, like, a greenfields development project that requires that kind of capital.

Craig: Lastly, you mentioned Pretium. What are your thoughts on that merger acquisition? And then, also, if you think that that leads to more mergers and acquisition up in B.C. Specifically?

Joe: Well, I guess, like, with Agnico and Kirkland, that acquisition put them probably in the rarefied space, you know, more proximal to Newmont and Barrick in terms of being a major producer in the gold sector. Newcrest was third until it was surpassed by Agnico-Kirkland.

The acquisition of Pretium puts them higher up, but puts Newcrest in fourth position in terms of valuation. But it's an easy add-on for them now that they, you know, put themselves truly in British Columbia. There are some potential synergies there with treating some of that concentrate that they produce there potentially at the plant at Red Chris, and also with the logistics in the area. And also it adds 370,000 ounces of production, you know, right now.

There is some exploration upside there, but really you're getting a low-cost, you know, producer in British Columbia with a very low carbon footprint. And Newcrest has operations in places like Papua New Guinea and other places that some investors might not like. You know, having more exposure to places like British Columbia would probably appeal to new investors, potentially, in Newcrest.

Craig: It's, kind of, more specific to this deal then it ended up being in British Columbia than it is, "Hey," all of a sudden, "let's all buy something in British Columbia."

Joe: Well, I mean, a lot of the mining companies, especially the gold companies, they're looking at British Columbia, Ontario, you know, Canada, as a place to be because, one, the infrastructure's pretty good, permitting is pretty transparent and projects do get permitted. And also, you know, this is the kind of place investors want exposure to.

And so they are looking at assets here. Three big gold projects are being developed that I would say are, you know, marginal. But, you know, $1,800 gold price, you know, they might work, like Argonaut's Magino, IAMGOLD's Côté, and now Equinox Hardrock. Those are three big open-pit projects that are being built, that have been permitted, all in northern Ontario with cheap power, being all hydro, low carbon footprint. So that's kind of exposure that companies are looking at.

Craig: Awesome. Again, this is all what you get from Joe Mazumdar at "Exploration Insights." Joe, tell everybody again where do they find your work?

Joe: It's explorationinsights.com. And also, I just want to let your listeners know that I've also got a podcast with Paul Harris of the "Mining Journal," where we talk about certain themes. And, you know, one theme about environmental social governance, we've got a podcast on. So if you google Joe and Paul's another mining podcast on YouTube, you can find some of our products. And they're free. You can just access them, and, yeah, great to hear any feedback on those.

Craig: Hey, that's fantastic. Again, just right on YouTube, right?

Joe: That's right. And they could also get them from our website.

Craig: Terrific. And, of course, you can always get updates direct from Sprott Money on the Sprott Money website, too. Sign up for the newsletter so that you don't miss any of the content. Again, whether it's calls like this or the "Ask The Expert" segment, or what we'll record next month, or next week actually, with the "Precious Metals Projections" with Chris Vermeulen.

And as we get into December, we'll actually have an annual, a yearly wrap up with a very special guest. And you'll want to make sure you don't miss that, if you get my drift. Okay, everybody, thank you for listening. Joe, thanks so much for your time.

Joe: Great. Thank you very much, Craig.

Craig: From all of us at Sprott Money News and sprottmoney.com, thank you for listening. Have a great rest of your day.