Mining Producers, Developers, and Explorers

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Craig: Well, greetings everyone from Sprott Money News and sprottmoney.com. It's now Friday, April the 12th. And that's gonna be kind of important as you watch this, because by the time this gets posted early next week, hopefully we're all still around. We don't know what the world will look like by then. Certainly a lot of volatility and concerning headlines, here on Friday. But we're recording our "Ask the Expert" segment regardless, because said expert has lot to share with us, really regardless of how much price might move between now and early next week. So, anyway, with that, I'm very pleased to welcome back my old friend Joe Mazumdar, who is the editor of the "Exploration Insights Newsletter," at explorationinsights.com. We're gonna talk a little bit of mining shares here this month. Joe, nice to see you.

Joe: Nice to see you, and thanks for the invitation there, Craig.

Craig: It's always fun to get caught up. And before we get started, just always the reminder. This stuff comes to you from Sprott Money. So thank them, in one of two ways. You can go there, maybe move your retirement accounts there, and hold physical metal in your retirement accounts, in Canada, or the U.S. You can add to your stack. My new favorite hashtag is #NeverStopStacking. And boy, at a time like this, is that ever true. But if anything, just throw them a like or a subscribe on whatever channel you're watching. There's all kinds of content that Sprott Money puts out through the month, and you don't wanna miss any of it. So, anyway, please keep Sprott Money in mind, as you move on from this podcast once we're done, but we got a lot to cover before we get done. Joe, I thought it'd be fun to have you on, because of your experience in the mining sector. Before we get started, tell everybody a little bit about "Exploration Insights" and what you do.

Joe: Right. Okay. So, "Exploration Insights," it's a weekly publication, what I'm buying and selling in the market, some themes that probably we'll discuss here as well. Yeah, it's been going since 2008. Brent Cook wrote it until about the end of 2015, and I took it over in 2016. Yeah. I mean, my background is a geologist, so we try to put a lot of technical stuff into it, but also, I come from an environment of doing market analysis as well, like when I worked for copper, with Phelps Dodge, and corporate development with Newmont, and then on the equity side, with some brokerage firms in Vancouver, and then basically went independent in 2016.

Craig: And I think people on, you know, that follow the Sprott Money channel for a while, they know I used to speak with Eric Sprott once a week, and he'd always rattle off, you know, grades, and grams per ton, you know, and all these different things. And I'm just like, "Okay." And I think probably most people are that way, and so I would just, you know, if you're interested in the mining sector, find the expert, objective analysis, all of it that you can get, to help you kind of find your way through the thing, and, because it can be confusing at times, and what Joe does at "Exploration Insights" can be very, very helpful. Joe, I thought it'd be fun to have you on because, you know, we've had this tremendous rally in the gold price, and silver, lately, has rushed to kind of catch up. And yes, the shares have rallied as well, on balance. But gosh, I see on my site, I see on Twitter, you know, people are frustrated. Like, why is this that the shares haven't really moved? They're not moving as aggressively, or as percentage-wise as people might have expected. I mean, you got any thoughts on that? Let's start there.

Joe: Yeah, I would say, overall, that, you know, I don't think we can expect the sector to be as, sentiment to be volumetrically as big as it used to be, because a lot of those types of investors, especially the retail sector, are no longer in the market. And so, you know, we're going through a transition where we're trying to, the market, or the industry, is trying to attract new retail, but now it's competing with, you know, crypto and some other sectors. And then, you know, when the NASDAQ and the S&P go up 30% to 40%, it's hard to, you know, tell somebody, "Hey, come over here, and take a lot of risk." So, that's been an issue. But I definitely, when, you know, a lot of people are talking about gold, and physical gold more than anything. And now that probably some of that's...when it's central banks buying gold, that doesn't bleed over into equities, but when people are buying gold equity ETFs, and those are institutional equity, or family offices, that could spill over, and has, to some degree, spilled over into equities. But it will start with producers, and that's basically why you see the GDX and the GDXJ coming up with 52-week highs. It'll take a little time for it to come back down to the junior sector, because they're still under-capitalized, even for this field season coming up.

Craig: Let's talk about those seniors first. I take a lot of grief because I finally threw up my hands on Newmont, back at the end of February. And all I did was just say, "The heck with this one," and I bought myself a couple of others. You know, I mean, a whopping 300 shares, Joe, so it's not like it was that big a deal. But, what pushed me over the edge one day is I pull up a 20-year monthly chart of Newmont, and of Barrick. And here gold's five times higher, and their share price is the same.

Joe: Yes, absolutely. Well, look at the denominator. Look how many shares they've issued in the interim...

Craig: Yeah?

Joe: ...and value they presented. And I did this math in the letter, about, you know, the myth of gold leverage. And, you know, what I saw was, I mean, I took an example, Newmont, but I'm sure that you could take it with other seniors, but, you know, back a couple years ago, when their reserve price was $200 lower, they were showing this, you know, leverage that, you know, hey, if we just increase, you know, the gold price by, you know, $200, look how many, you know, 10 million ounces or something like that we add. But in reality, when they did that, if you exclude the ownership of Yanacocha, which they increased by buying Buenaventura's stake, they would have been flat. They didn't grow their reserves any, nothing. It was, like, I don't know, 0.3% or something like that, if you took out the Yanacocha purchase. And most of that was driven by cost. So, once they updated the reserve for all the additional costs, labor, power, water access, you know, what have you, you know, those reserves just weren't the same reserves. And so, they're basically running to stand still, because the size of the company, they cannot grow anymore.

But then you say, "Okay, that's fine if you don't grow. Just give me low cost." But the problem is that when you're growing, I mean, running to stand still, you're constantly trying to put another 10 or 12 million ounces into the kitty, you're putting that, sometimes, at lower grade [crosstalk 00:07:12] because you're not doing any exploration, and lower grade means lower margin. And that's what's impacting their margin. More exposure to labor, more exposure to fuel, more exposure to all these costs. And so, you know, they might have been getting 30% or 40%, you know, EBITDA margins, you know, when they had $1200 gold reserves, but now you're adding a bunch of, I don't know, 5% or 10% EBITDA margins on the new stuff that you added. Average that out, your leverage is actually going down.

Craig: Yeah. Yeah, yeah. So, Joe, in that, I guess, in that vein, there's, mining term for you, we're looking for some higher-grade miners. I've been tempted to kind of allocate my own IRA more toward producers, but that aren't at that senior level, you know, in that 100,000 to 300,000, 500,000 ounce-a-year. But you also mentioned they're kind of strapped for cash. Where does one turn if you don't wanna just, you know, pull it out of the drawer and go, "I'll just buy some Newmont?"

Joe: Yeah, well, the thing is, I mean, I did this thing for one of the Rick Rule boot camps, on royalty companies. And basically, I did a little bit of a chart about if you're coming into the gold sector, it's how much risk are you willing to take for how much reward? And if you're not willing to do a lot of work, and don't wanna do anything, and just want leverage, or just want exposure to gold, you know, buy a gold equity ETF. If you think that leverage is achievable, but you don't wanna do a lot of work, you know, buy a gold equity ETF, your GDX or your GDXJ.

But if then you're thinking, "Well, you know, I'd like dividends," then you might have to think about a senior producer, that sort of thing, but that'll take more work. You know, then you'll expose yourself to a lot of their capital risks, you know, and these other risks that they have. And, you know, as you go down, then you're talking about your intermediate producers, who are probably more capital-constrained, and have a higher cost of capital than your seniors. But they would show growth. You know, but then you gotta wonder what capital [inaudible 00:09:26] they are on.

So, what I've done is I do have a few gold development plays. I've got gold exploration plays as well, and what I'm looking at in terms of the gold exploration plays is this is something you gotta think about. When money's hard to get, you want more bang for buck on the drilling, and so it's hard to pick a lot of remote projects where it costs $800 to $900 a meter to drill. You know, versus somebody else that could do a 10,000-meter program for the same money, somebody else could do a 1500-meter program. That's something you gotta take into account when you're doing the junior explorers. In terms of leverage for gold, in terms of production and ounces and cash flow, I've gone to more junior royalty companies. So, they're cash-flowing, they can show growth, they can use their capital to buy new royalties, and they don't have as much exposure to the margin compression.

Craig: Yes. That's something, you know, I think that's a part of the sector a lot of people kind of forget about.

Joe: Yeah.

Craig: You know? How those companies operate like that. How about M&A, Joe? I mean, we've seen a little bit, you know? Maybe one headline a week, of...

Joe: Which is encouraging. [crosstalk 00:10:47]

Craig: Yeah.

Joe: I mean, we've seen... I think a good sign, for me, was Twin Hills, Osino, where we had multiple bids, and they kept getting higher, and it was a good return for the shareholder. It wasn't like Sabina, where it was just a liquidity event, I just want out. This was a good purchase, and this was a good cash bid. Let's see if the Canadian government allow the Chinese company to buy the TSX-listed one. That's still a risk. But right now, it looks good on paper, and the share price, you could have got out without the transaction actually having closed.

The other one that happened recently, which is a good sign that the market, well, the industry is doing sensible M&A, is the acquisition, you know, of Argonaut with Alamos. Argonaut, you know, was floundering, had a lot of problems with Magino development, the big open pit in northern Ontario. They're right next door to the Island mine, which has been a big winner for Alamos. Alamos has managed to get out of a lot of overexposure to Mexico, and almost more importantly, now, to Turkey, and now they're all about this rich, you know, the Island mine that they acquired from Richmont, you know, what, almost five years ago or something like that. And now they're buying infrastructure, permitted tailings, you know, to basically reduce their timeline to grow their own mine. So, that makes a lot of sense, for me. And then that's another good sign of the kind of M&A that we're seeing.

Craig: Yeah, that one caught my eye, what was it? Two or three weeks ago, maybe.

Joe: Yeah. Oh, yeah. It's about two weeks ago, [crosstalk 00:12:31] But it made a lot of sense. It made a lot of sense. You're buying somebody that's undervalued...or not undervalued, but cheap. You've got the cash. Your share price has done quite well. You use your share price. These guys will want your shares, because they've done quite well, and they're more liquid. And you get out of the story which is Magino.

Craig: It is, I mean, it's one example, so it's kind of anecdotal. But then I pulled up that chart [crosstalk 00:12:53] of Alamos, and I thought, you know, we just got done talking about Newmont, and Barrick, and these companies that, you know, they run up and then they go straight back down over time, or sideways. That Alamos has a very attractive chart. I'd encourage everybody to check it [crosstalk 00:13:07]

Joe: Yeah. Absolutely. But if you looked at Alamos maybe a couple years ago, you know, they had a lot of exposure to Turkey, Mexico...

Craig: Yeah.

Joe: ...so it wasn't looking so good. But the Richmond acquisition that they made has, you know, it's a big winner. And it's those kind of, you know, unicorn assets that really grow after you acquire them. You know, Agnico's had some of those [crosstalk 00:13:29] positions. I would say the Fosterville mine in itself is probably a unicorn, that was purchased several times, and grew in value. So, those are the ones you want exposure to. They're hard to find, but those are the ones you want.

Craig: Joe, let's, just kind of talk in broad strokes about the exploration companies. You know, they face so many challenges. You know, the... Eric is on the bandwagon with Save Canadian Mining, you know, and the predatory short selling that goes on up there. And so, they're, it seemed like they're constantly having to come back to the market to raise cash, and dilute their stock and all that kind of stuff. Again, now, this is, we're broad strokes here. Does this rally, you know, to 20... And what if gold continues on to $2500 or $2600, some of these numbers that some of the big banks are throwing around? Does that eventually make some, you know, projects just look more realistic and economical, and, you know, kind of rising tide lift all boats for their exploration companies?

Joe: Yeah, I would say what we'd wanna see is, like, probably your intermediate producers start taking punts on the development projects [crosstalk 00:14:41] probably the most severely undervalued, because, you know, the sentiment is negative, but also retail, what little retail there is, hates development projects, so they're just sitting floundering. They can't raise that little bit of equity that, or whatever equity they need to develop the project. And if you have synergies with them, you know, that would be the acquisition to make. And that's probably a lot to do with how Alamos and Argonaut worked out. You know, obviously, you know, Alamos was not interested in their marginal, you know, deposits in Mexico and other places. They basically spun that out into a different vehicle. So, and I think that makes a lot of sense. They didn't want those assets. So, I think that would be a good sign for us to see that happening.

But going forward, in terms of the juniors, right now, there's a lot that need money, right now, for the next field season in North America. So, we're gonna see a lot of these deals come out. But as we were talking about off-air, you know, the deals didn't, for me, don't look great. They're bought deals, but the one that happened recently, with i-80 was, you know, they wanted $85 million. They got $100 million, or $115 million, and the thing was that, it was at market or below, a 10% below market, you know, made the share price fall.

But also, they issued a warrant, a half warrant, that was only 30% premium to the unit, and it was a long-dated warrant, four years. So, you know, that's another, you know, millions and millions of shares that are gonna dilute that company even more in the near term. So, if you're gonna buy it, and the market goes...even if it gets 30%, there'll be, like, a bunch of shares being sold there, as soon as you hit that number. So, you know, do I want exposure to that? So, even though the market's going up, the sentiment's up, you know, their assets are in Nevada, so it's not geopolitical risk. But, you know, it's just, people, yeah, don't like development, they need a lot of money, and this might not be enough.

Craig: Well, Joe, like, almost unwittingly, I suppose, you kind of made a point for your service and services like yours, you know, that help the average retail investor to kind of see through this stuff, because if you're just reading the headlines, that i-80 Gold thing, you'd go, "Wow. Look at that. They raised more than what they wanted. [inaudible 00:17:11] almost like it's oversubscribed," you know, "What a great deal." But if you're not, I don't wanna say sophisticated enough or knowledgeable enough, whatever, to read between the lines, to see what's really going on, and that's, you know, what an expert like you can do.

Joe: Well, the thing is, if you got into the private placement, it would be a good thing. I think it's a good private...

Craig: Right. For you. Yeah. Those people behind the scenes. Yeah.

Joe: Exactly. But if you're like me, and held the shares for, like, two or three years...

Craig: Right.

Joe: ...it looks like a capitulation. Like [inaudible 00:17:41] "Oh, my god. That doesn't look very attractive at all, because I'm in it here, you're getting these guys in it here, and then they're gonna get a lot more shares at here." And, like...

Craig: Yeah. Yeah. Right.

Joe: So, I was not impressed, at all.

Craig: Right. And I didn't mean to make it sound like you were in the private placement. I was making an aside comment. But that's exact kind of thing that frustrates people because they don't really get all the details at the time. And that's where, like I said, I just, I've got a few people that I trust, and I encourage everybody watching us to find people that they trust, that can kind of help them sift through this.

Joe, in our final minutes, what are you watching? I mean, what should get people excited? You know, it's like, well, okay, gold keeps going up, but if we see the Toronto venture begin to outperform, or... What should we keep an eye on as we head into the summertime, that should make people feel like, "Okay, things are really turning around," especially down the ladder? You know, the juniors and the exploration companies.

Joe: So, what I'm looking for is, like, explorers, I definitely like... We're talking about site visits. I'm going on one tomorrow. But, you know, I really get encouraged by seeing the people at site, and their knowledge of geology, and how they're bringing these grassroots exploration programs to the forefront. I got a lot of that when I went to Australia, about six weeks ago now, I guess it is. And I'm looking for projects not only in, let's say, safe jurisdictions, if there's a word for that, but good jurisdictions, where permitting is easy, but the drilling costs, like we said, are reasonable. So, somebody can, you know, do more with the money that they have. So, in a place like Victoria, an hour out of Melbourne, you know, the Southern Cross Gold is drilling there at their Sunday Creek project, you know, for $200 Australian per meter.

So, that, for me, is attractive. So, they could do these big programs, and not, you know, kill their budget. And even people drilling under cover, in the northern part of the Macquarie Arc, in New South Wales, they could do it for $250 or less, Australian per meter. You know, my problem is that with the volatility that you started off talking about, it's tough to raise money. And when you do raise money, you probably wanna try and raise it for two years, because, you know, in that time, you wanna have enough news that you can go back to the market. One field season might not be enough, but the more you could drill during that field season, the more likely you'll have something that you could take back to the market, and potentially raise at a higher price.

Craig: Yeah. And hopefully, we just keep the metal prices going up, to keep focus on the sector, and keep people interested.

Joe: Yeah, and the interest certainly is there, but I also look for hated sectors right now, where, you know, there is no eyeballs on that part as well. So, every now and then I will go into that.

Craig: Well, and I should mention that. I mean, you do a lot of precious metal work, but you're looking at rare earths, I would imagine lithium, things like that too.

Joe: Yeah, lithium, I've got a bit of an issue with, because I think that there's a lot of technology on the supply and demand side that, you know, could, you know, really warp that market.

Craig: Okay.

Joe: So, I do have my concerns. You know, I, you know, have a little bit of nickel, very little. But I also, you know, added a palladium play recently, because I think, you know, the movement to hybrid, to EV 100%, has been overdone, and then when people still want, you know, low carbon emissions, but don't have EV infrastructure, and still want the idea that I could drive somewhere and I don't have to worry about where the next EV station is, maybe there'll be some retracement, back to hybrids, which I think is probably the solution. And then, you know, that might increase the palladium [crosstalk 00:21:40]

Craig: Yeah. Great stuff, Joe. Again, I wish you safe travels as you go out and turn over some rocks yourself, and I hope we can speak again soon. We've been speaking with Joe Mazumdar of "Exploration Insights," at explorationinsights.com. Joe, it's always a pleasure. Please be safe out there, and keep us posted on your travels.

Joe: Great. Thanks a lot, Craig. Really appreciate it.

Craig: It's been a, always great to talk to you, Joe, and again, please keep Sprott Money in mind every time you're in the market for metal, because you're always gonna find great deals there, and always thank them, or subscribe to whatever channel you're watching. We got more content coming. We're only halfway through April, so there's gonna be more coming up in April, and of course, through the summer. So, subscribe to whatever channel you're watching on, so you're be sure to be notified, and not miss out. Again, thanks, Joe, and thanks everybody for watching. We'll have more content for you from Sprott Money, either next week, the week after that, as we get deeper into April.