Mining Insights: Rocks, Risks, and Returns | Ask the Expert With Guest Joe Mazumdar

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Craig: Well, hi everybody. It is another month of "Ask the Expert" segments at sprottmoney.com. This is something we do every month, where we bring in an industry expert to give you that person's thoughts on the economy, on the metals, on the mining shares, and for the month of September, I, your host, am happy to be joined by Joe Mazumdar. Joe is the editor of the great website explorationinsights.com. He took over that from Brent Cook five or six years ago, and has continued on a tradition of excellence. Like that one, Joe?

Joe: Like that.

Craig: Anyway, I value Joe's friendship, and...

Joe: Hey, can I use that? On the website?

Craig: Yeah, put it right up there, in that thing behind you, where it says...just put, "A Tradition of Excellence."

Joe: Oh, fantastic. The check's in the mail, there, Craig.

Craig: Got it. Thank you. Joe and Brent have been friends for years, and what I always tell people at my TF Metals Report site, you know, you're flying blind if you're digging through, you know, assay results, you know, and drill results, and all these kind of things. The most expert commentary you can get, objective, independent analysis you can get, is always very helpful. So, Joe, thank you very much for joining me. I appreciate it.

Joe: Thank you for the invitation. I appreciate it.

Craig: And before we get started, just your usual reminder, this is all brought to you courtesy of Sprott Money. You can find them at sprottmoney.com, where there's always great deals on physical metal that you can stack, you can have shipped to you, you can have them store it for you. If you're in the market for physical metal, and why wouldn't you be, given the craziness of the world, always check out sprottmoney.com. Of course, you just pick up the phone and give them a call at 888-861-0775. And Joe, before we get started, tell everybody a little bit about Exploration Insights, would you, please?

Joe: Yeah, Expiration Insights is, as you said, like, we have a website, but it's really a weekly publication, a newsletter, dedicated to the mining industry, mostly of what I'm buying, selling, themes. Like, a theme would be now, I'm at the Precious Metals Summit right now, in Beaver Creek. Had about 30 meetings, and a lot of that data and insights right now will go into the letter for the weekend, and how it impacts stuff in the portfolio, potentially coming in the portfolio, and other, sort of, for fading themes right now in the sector.

Craig: Again, individual companies would get discussed as well. And again, I just can't, I, again, this is, look, I do this for a living, but there's only so many things I can keep track of. And so there are some people that I trust and value, and I would encourage everybody listening, if you wanna fiddle around with the mining shares, get some help.

So, anyway, Joe, "get some help." That sounds like, "check yourself into the nut house."

Joe: Don't do it. Just get some help.

Craig: Yeah, that's probably even better. But get some professional help. Seek some professional help from people like Joe.

Joe: I don't think that'll help much.

Craig: Well, all right, my friend. Let's dive in. I've got a couple of main topics I want to discuss over the next few minutes. One thing that caught my eye earlier this week, though, and I wanna get your thoughts on it. U.S. mining, in our jurisdiction down here, south of the Canadian border, has been kind of governed by a 150-year old law, called the 1872 Mining Act. That allows, you know, some mining in some areas, some mining in others. I mean, there's some really nice grandfathered properties, you know, that sort of thing. Well, you know, we're a little short of revenue to fund our ongoing deficits and debt down here, so everything's at play, and there have been some trial balloons floated that maybe that mining act should be amended. Now, it's probably not gonna happen as long as the Republicans control the House of Representatives. They don't want it to happen. But, you know, geez, there's another election in a little over a year. What do you make of this Mining Act, and how might that change or impact mining in the U.S. going forward if it is amended?

Joe: Well, I mean, it's almost typical of a lot of governments right now, especially the U.S., where, on one hand, and there was a, you know, they're talking about encouraging mining in critical minerals space, and giving grants out, you know, like the Department of Defense or Department of Energy, to processing facilities in the U.S., to be built, you know, as a foil to the processing that has built up in China over the last couple of decades. At the same time, what's gonna feed these plants if they're actually built? You know, that's gotta be something from a mine. And in terms of investing in a project, if you, you know, impose more royalties, and lower the potential returns, it's gonna be harder for people to invest in these projects. Like you, I don't think it's gonna pass. And as I've been having a lot of meetings this week, and I've met a lot of companies with assets in the States, it's not something we really talk about. They mention it, but everybody says the same thing like you, "It'll never pass."

I don't think it'll pass, but there's a lot of old laws in the States that a lot of people that don't like mining are trying to evoke right now, in terms of, you know, some copper projects in Arizona that, hey, you know, you can't build a processing facility if there's no minerals there. I mean, these aren't little, small 100-ton-per-day operations anymore. These are, like, 40,000 to 50,000 ton-per-day open pits. You can't have the processing facility anywhere near there. So, there's gotta be some changes in these laws to accommodate what's actually happening right now in the mining industry, and especially if they wanna go forward, and, you know, foster a domestic industry that could be, you know, counter what they see as, you know, competition from China and other sources.

Craig: Yeah. I do worry, though, you know, if we get into a new Congress, that's controlled by one party, you know, with the same party as president, and all of a sudden we get another commodity bull market, and that's making headlines, and all of a sudden, you know, it's like, "Hey, we're gonna stick it to the mining companies."

Joe: You know what's interesting, is, I think [inaudible 00:06:34] the government knows that it's problematic to do anything in the U.S., such that they're going around the world and signing new bilateral agreements to try and get the metals from those countries that they traditionally, I mean, that they don't have free trade agreements for, and potentially push down the processing at those countries, knowing that, you know, it's not China, but maybe we can get it from there, you know, because we, you know, like getting copper and cobalt from the DRC and Zambia. You know, doing, you know, agreements like that, building up processing facilities in other places. Or, they're doing, potentially building a railway from the DRC to the west coast of Angola, to try and compete, and get the access to copper from that part of the world, but not using Chinese infrastructure.

Craig: Yeah. Boy, interesting going forward, no doubt about it. And again, it's challenging to try to assess the mining shares on your own. And I know I struggle with it myself. And, you know, one of the things driven me crazy this year, you know, the large producing companies, you know, if you wanna measure it by the GDX, they're about unchanged on the year. You know, and a lot of them, Newmont, Agnico Eagle, are all about unchanged as we sit here nine months into the year. But, you know, the sustain, the all-in sustaining costs and the energy costs, the cost to get it out of the ground and do everything else with it, just keeps going up, while the prices are flat. I know you don't really get too excited about the big companies, you know, and you focus a lot on explorers and juniors and things like that. But how do you think a... What's the impact of higher energy costs going forward? Does that kind of tend to skew you even more towards exploration companies, or how do you look at that?

Joe: Well, I mean, my background is mostly big companies, and, you know, I used to work for Newmont [crosstalk 00:08:31] so, and then, also, if you're looking at M&A and what's going on, and you have your junior developer, you're concerned about what's going on in the higher-tier companies, because those potentially could be the suitors. You know, what are the cash balances? Are they making any money? What's their equity at? So, yeah, it is good to keep abreast of that, and then I take... I'd, like, two or three years ago, I did have some precious metal production with respect to companies. I switched that over to royalties when I saw margin compression coming. And now that, you know, I believe Russia and also Saudi Arabia, have, you know, done these production cuts on oil to try and get the price up, and now it's, you know, back a little while ago, was, you know, let's say more than a year, almost two years ago, was negative. But, you know, now it's, like, gone from 60 bucks to about $80 per barrel, and that will hit gold companies, especially those ones that have big open pits, because they still use a lot of diesel. Not all these things are electrified, even though we'd like them [crosstalk 00:09:43] So, that has a, there's a risk of margin compression over the second half of this year, because I don't see those production cuts being lifted anytime soon.

Craig: And the only solution is then a higher price, maybe, to get the margins to widen back out?

Joe: Well, yeah, but that's not how gold works. Gold is not a marginal-cost industry. It's not looking at, hey, to get the next ounce here, you know, I, there's a lot of ounces in banks and central banks. The other issue is, is that most, you know, even though gold is, you know, flat to up slightly year-to-date, and actually not done badly, in the U.S. dollar and other currencies has actually done quite well. The issue is that, you know, it hasn't gone up as much as their costs have gone up. And now, you know, we're seeing higher labor costs as well. So, those things will creep in for companies, especially those that want to issue dividends or have big capital cycles coming.

Craig: Yeah. All right. Well, you kind of...

Joe: And they're gonna be hit by higher interest rates, so their financing costs also are gonna go up.

Craig: The margin just gets squeezed tighter and tighter, right?

Joe: Yeah. Yeah, yeah.

Craig: Well, you've led me into, then, one of the other things I wanted to ask you about. On my side, people know that, I mean, I kind of swore off the mining shares in about 2013, and then an old employer of mine sent me a lump sum distribution for a retirement plan, luckily, at the end of 2015. I was like, "Oh, the hell with it. You know, we'll just buy some mining shares and see what happens." One of them that I bought, as part of a "diversified portfolio," which is, "a diversified portfolio of miners" is kind of an oxymoron, but...at least this year. One of them I bought was Franco-Nevada. And now, here's seven, almost eight years later, that thing's gone from $45 to $145, and seems like it just grinds higher all the time. What is the value...? You mentioned royalty companies versus producers in a period of, you know, higher costs and flat metal prices. But what is the value of a good royalty company in a portfolio in general, versus, you know, as kind of a... I, you know, I think of the barbell thing about, you know, in a regular portfolio, bonds and equities, you know, and that kind of thing. Is there a barbell for royalties versus miners?

Joe: Yeah. I mean, if you're looking at, you know, leverage, definitely producers have more leverage to the gold price. You know, if you have somebody that's only making a dollar an ounce, and somebody making $10 an ounce, you know, that's leverage on the equity side. A royalty company, their production, or their revenue, is not gonna change much. Hence, they're really valuable for people seeking dividends and steady income, you know? As long as it...the bigger, the better. The problem is, incrementally for them to grow, it gets harder and harder and harder. Just like a big mining company. But, so, they do have a bit of leverage, and, but it's really, if you don't like, you know, just to buy gold, a big thing like Franco-Nevada is almost as good. You know, or better, in some respects, especially if they pay a dividend, versus a gold ETF that won't pay you a dividend. So, one of my top picks is actually a junior royalty company. And why do I like them? They have cash-flowing royalty. And currently, in the space, as you know, it's hard to get anything from the capital markets. So, to have your own cash in a time when nobody has anything, it's like, you know, the one-eyed man in the land of blind people, you know, you've got a comparative advantage.

And then, also, they have a royalty on a growing resource owned by a major. And so, when you look at royalty companies, royalties have value even when they're not in production. And how do you know they have value? Well it's got a decent amount of resources. It's in a decent jurisdiction. And it's also already operated by the person or the company that will put it into production. All those three things happened for this royalty company, and it's, you know, it's hitting 52-week highs in that. But that's the sort of thing, if you're looking at a royalty company, a junior one, is what you wanna look at. The royalties that are coming up, who owns them? Where are they? And what's the potential that they'll come into production? Knowing that they don't have to be in production to get a pretty decent value for them.

Craig: In a way, I guess, then, maybe the royalty companies helps to kind of zig when the rest of your mining portfolio is zagging, a little bit?

Joe: Yeah, but be cautious, because the royalty companies, some of them who don't evaluate projects well, might get a very marginal development project, that, when the gold price goes down, will never get developed. You know? And you know, you know, it'll never get bought either. The beauty of a royalty is when you might do it with a junior, you take a little bit of equity, you keep the royalty, you give them the project, like as in a project [inaudible 00:14:56] and you keep the royalty, but then that asset gets bought by somebody else. Then they're the ultimate, let's say, developer of it. You have had that royalty, but now that royalty, without you doing anything, has just gone up because it's been significantly de-risked. It's gone from a company that has, you know, significant capital financing risk to one that doesn't. And the ability for this company to put into production is much higher. But again, all that gets valued embedded in the royalty without it actually even going into production.

Craig: Yeah. All right. You know, another hot topic here in September of 2023 is uranium. I think this month, it's up maybe 10%. Bouncing up at $65, $66 dollars a pound. Do you follow that sector as well?

Joe: Yeah. So, I mean, I've been following uranium, and I just sort of, like, picked one company with leverage, with a lot of resources in situ, that requires a higher price, so it's a bit of a leverage story. And also, in the background, you know how hard it is to permit a processing facility, they've got a processing facility that's already permitted, and are just waiting for the price to go over $55 a pound, to bring some production in. Over $65 to $70, more production would come in, and that sort of thing. So you can get leverage, in terms of growth, that way. And in the interim, when uranium wasn't very good, that processing facility has helped them do other things in critical minerals, like vanadium and rare earths.

Craig: That's something that I'm sure you keep an eye on, some of those companies in your newsletter, too.

Joe: Yeah. I mean, well, when I was in Brazil, you know, because, as you probably know and your audience knows, you know, a lot of the rare earths are mined and processed in China. So, in terms of criticality, rare earths are almost the critical of the critical. And so, a lot of money is being put out not only for development processing, but also exploration. And, you know, one of the companies I saw at Rick Rule's conference, in June or July, I can't remember now, in Boca Raton, was basically an ionic clay rare earth deposit in Brazil, when originally, the company was looking for gold. And so, that ability to pivot on prospective ground is what a lot of juniors are doing, because, you know, your access to capital is somehow dictated by the commodity you're searching or developing.

Craig: Yeah. Well, all right, Brent. Er, Brent. Geez. Joe. [crosstalk 00:17:29]

Joe: Oh, my god.

Craig: Geez, I see that sign behind you, and I just... See, that's just a senior moment. I'm... Anyway, tell Brent hello for me. Anyway, Joe... Hey, I would, if anything, maybe just ask you on the way out, you obviously, you guys do great work, and, in keeping track of the sector, perhaps. I've been waiting all year for a rally, with the Fed pivot and that kind of stuff. We might get that to happen. We might get some focus back on the sector, and some flows of funds coming in. I don't know. You wanna throw us a bone or two that, you know, that you're hot after at this point, that might, people might follow, to pique their interest in Exploration Insights?

Joe: Well, I mean, in terms of grassroots exploration, one that we have in Nevada, a prospect generator that we added the latter part of last year, is called Headwater Gold. And they have a bunch of projects in Nevada. I visited them in Idaho and along the Oregon border. And it's epithermal gold and silver. And they've done a significant deal with Newcrest, such that the major is funding their work. And they're doing the work, so they control the news flow. And they've got a pretty big drill program coming. You know, in terms of exploration, what I'm trying to look for is companies that, in this environment, are still drilling. And that way, and still, in this environment, if you hit a good hole, the market will take notice. And so, but if they're not doing anything, it's harder to get excited.

Craig: Yeah. Isn't that kind of a give and take, you know. You gotta keep the drills spinning, so you need the cash to do it. And so often, they've gotta go to, you know, get a private placement to get more cash, or maybe something with a royalty company, you know, sell off some future income to get cash. Have to keep those, you know, to juggle those balls, I would think.

Joe: Yeah. I mean, as somebody who owns, you know, quite a few different exploration stories, is I wanna be excited about news flow coming. I don't wanna just have it being mundane, [inaudible 00:19:30] here's the quarterly. Oh, you still have working capital. Oh, great. You've reduced your G&A. You know, we'll keep the oxygen going for another six months. You know, I wanna see, "Oh, wow. You know, that drill result," you know, I really wanna see what that comes from this prospect. And that's really what drives me. You know, geological risk is not the issue. That's what we take the punt on. What we don't want is all that other risk, that hopefully, management can mitigate. And so, again, it comes back down to people, as well as the rocks.

Craig: Yep. Yep. You gotta know the people too. That, absolutely right. We always talk about the people, the team, if they've done it before, the jurisdiction. You know, why you looking for gold and silver there? Why, you know, it's the old line about "why do you go rob a bank?" Well, that's where the money is, right?

Joe: Yeah. And then, also, you want that person, you know, you might have a person with 25, 30 years experience in, let's say, looking for gold, and then suddenly they're doing rare earths. He goes, "Well, hang on a second. What do you know about that?" You know, so, you do want to align people with what they're doing, and also jurisdictionally, they know how to operate in that particular country. Because that, again, will mitigate your risk.

Craig: Again, adding value to what you do. Obviously, I'm a big fan. Again, explorationinsights.com. When they get there, well, they're gonna find some testimonials. They're gonna find ways to subscribe, right?

Joe: Absolutely. And there's some free stuff as well. I went down to Brazil and did a thing on lithium geology deposits and metallurgy. That presentation's available as well. And there's something on critical minerals that's there, and any recent interviews, like this one, will be on there as well.

Craig: Great stuff, Joe. And, again, I just remind everybody, this is all brought to you by sprottmoney.com, whether it's the monthly "Precious Metals Projections" with Chris Vermeulen that I do, or, you know, we're gonna have the "Monthly Wrap-Up" here in a couple of weeks, just keep Sprott Money in mind. Thank them for putting this content out there for you. Least you can do is give them a like or a subscribe on whatever channel you're watching. That, you, believe or not, that actually helps. But then check out their website any time you're in the market for precious metal. Doesn't matter if you're in Canada or the U.S. sprottmoney.com should be on the list of sites you check, because you'll always find great prices there. Great prices on storage too. Joe Mazumdar, explorationinsights.com. Joe, thank you so much for joining me this month. I really, really learned a lot. I thank you very much.

Joe: Great. Thanks a lot, Craig.

Craig: And from all of us here at Sprott Money News, sprottmoney.com, thanks for watching. Keep checking this channel. We'll have some more content for you later on this month.