Joe Mazumdar of Exploration Insights on Minimizing Risk when Investing in the Junior Resource Market

December 8, 2017

Gerardo Del Real: This is Gerardo Del Real with Resource Stock Digest. Joining me today is Joe Mazumdar, analyst and co-editor of one of the best resource newsletters in the business, Exploration Insights, together with Brent Cook. Joe is an economic geologist and analyst with an impressive background that includes positions as Senior Mining Analyst at Canaccord Genuity and Haywood Securities, Director of Strategic Planning, Corporate Development at Newmont, and Senior Market Analyst and Trader at Phelps Dodge. Joe also has about a decade of experience as exploration geologist with major producers like Rio Tinto, MIM, North, and IAMGold in Argentina, Chile, Peru, Ecuador, Australia, and Canada (BC/Yukon, NWT). Thank you so much for joining me today.

Joe Mazumdar: Thanks a lot for having me.

Gerardo Del Real: We had the pleasure of meeting at a recent site visit to a couple of lithium projects in Argentina. One of the first questions that I want to ask before we touch on that is you've worked for majors and banks, and you decided, I believe in 2016, to focus specifically in the juniors, being co-editor at Exploration Insights as I mentioned in the intro. Why the pivot?

Joe Mazumdar: When I became an analyst at the brokerage firms up here in Vancouver, I started focusing in on juniors because those were the types of companies the brokerage firms would end up raising money for and covering. Prior to that I had less experience with the junior market; my only experience would have been when I worked in corporate development at Newmont as we were looking for companies to acquire. So over the last eight years, I’ve primarily dealt with the junior market and I’ve come to like it a lot. I enjoy the aspect of  de-risking the early stage of a project as much as possible by picking out any fatal flaws early on, leaving the risk and reward more symmetrical and focused on the exploration risk. This is really where we add value with Exploration Insights.

Gerardo Del Real Excellent. Now you mentioned something that's important. It's a very high-risk, high-reward sector and a lot of people tend to focus, especially the speculators, on the reward part of that equation when you really should, in my opinion, minimize the risk first. With your extensive background, how do you go about minimizing that risk?

Joe Mazumdar: At the beginning of the year Brent and I take a look at our portfolio and we narrow down the commodities we want to expose ourselves to. We then decide on which stages we want to work with? Do we think exploration works better here? Or a development stage company? Or a junior producer?

We also look at jurisdiction, where do we want to be or, better yet, which places do we want to avoid? We are trying to find assets that we think producers would want to acquire so, in the end, we have to think like them and to look at projects from their perspective. That's the way we try to narrow our focus. Once we have the set up,  we'll look at the fatal flaws that might hinder a project.

There's a lot of different types of risks that these companies face such as commodity, geopolitical, technical, execution, and financing risks, among others. We try to mitigate the commodity and geopolitical risks by selecting the commodities that we think have strong fundamentals and mining friendly jurisdictions.

The management team is critical as its members are in charge of mitigating the technical, execution, and financing risks. Investors need to pay attention to the amount of experience the team has in the jurisdiction where the asset is located and also in the type of deposit that they're looking for. Experience with the capital markets is also important, as you could have a really good technical team with no capital market savvy. Speculators also need to take a look at the company’s balance sheet and understand if it has enough cash to fund the catalysts that we think will drive the stock price up if they are positive. The 10-bagger model on the reward side only exists because there's so much underlying risk embedded in these stocks.

Gerardo Del Real: Absolutely. You touched on getting together with Brent at the beginning of the year and looking at what commodity exposure you wanted to have. You and I spoke briefly in Argentina about base metals, precious metals, and it was a lithium site visit, so we touched on lithium a bit as well. I'd love for you to share your insights and we can go in order here. Where do you think we are in the base metals space in terms of that providing support of fundamentals for great returns if you happen to pick the right stock?

Joe Mazumdar: In terms of base metals, we've been moving towards more exposure to copper and zinc in the portfolio because we think that the supply demand fundamentals are positive for both of them. We haven't dabbled in nickel yet, but we might consider it in the future. Those are basically the key base metals that we're focused on in terms of exposure on the junior mining side.

Gerardo Del Real: Excellent, so you like supply/demand fundamentals there. How about precious metals, pivoting a bit.

Joe Mazumdar: We have a lot of exposure to precious metals, specifically gold, as it is a major focus for our subscribers. Silver tends to be more volatile than gold but if you think the precious metal market is going to turn, silver's probably the one you want to be in. At the beginning of 2017, we were thinking that gold was going to trade sideways which it has. It has been range-bound and finding it difficult to break out of the US$1300 per ounce level for a sustained period of time. Safe haven demand has not been very supportive despite the elevated global geopolitical risk.

The more the gold price stays range-bound we think that the more the demand will be for assets that make sense in this gold price environment that the majors don't have in their current pipelines. That's really our focus in the junior gold mining sector. It's not on development plays. We have a few low cost junior producers but the majority of our precious metal exposure is towards grassroots exploration plays and prospect generators seeking assets that a producer would want and those companies would not develop on their own.

Gerardo Del Real: Joe, do you look for margin and scale when you're looking at an asset? Take a company that's got a certain deposit and when you break that down, if you like the metallurgy, if you like the jurisdiction, if you like the management, do you look first for margin and scale? Because I know a lot of people say grade is king. I'm a fan of saying that margin, I'd rather have margin than grade. What do you look at?

Joe Mazumdar: Absolutely. Grade obviously makes the ability to get good margin better but if it's a 10 gram per tonne gold deposit that's underground and metallurgically refractory in a remote part of the world, the capital and the operating cost will slowly eat away at that grade and the margin. If you can find a lower grade deposit that can be extracted at a lower cost, for example, a heap leach amenable that requires no crushing, it would generate a larger margin with lower upfront capital. Economically, the rate of return would be better than the 10 gram per tonne deposit.

Gerardo Del Real: Excellent. I mentioned earlier that I had the pleasure of meeting you for the first time, formally anyway, at the Advantage Lithium and Orocobre site visit, visiting their lithium project in Argentina. I believe you had access to a third company and I thought that I would be able to get in there but I'm not there yet. Can you share some of the insights from the visit and just your thoughts on the bigger picture in the lithium space? I was pleasantly surprised to meet you on that site visit, because you, and Exploration Insights, are much better known  for precious and base metal coverage, not so much the critical metals.

Joe Mazumdar: The reason we weren't very much into lithium is that we saw so many lithium companies being spawned so rapidly by this positive trend in the production of electrical vehicles that we decided to hold back. We attended a lot of conferences this year, and almost every one of them had a presentation on battery metals, but most of the discussion was led by market analysts and not the junior companies. As I read through this really good article by UBS on the battery market, which discussed the preferable metal exposures and potential changes in technology, I was more convinced that this was something we needed to discuss with our subscribers. The question was how to expose ourselves to that market and to which metal?

I figured that out of all the metals involved, we were already in copper, and between lithium and cobalt and some of these other smaller market metals, we preferred lithium because the level of lithium demand in the forecast evolution of the battery technology stays about the same. It doesn't drop off like it seems to do for cobalt, and the supply of lithium is mostly as a primary product. It's not like cobalt where a significant proportion of it is actually generated as byproduct credit from copper mines. A metal that is mostly supplied to the market as byproduct has an exceptionally low cost curve as it’s essentially at no-cost for the miner. Whoever produces primary cobalt will always be on the high end with respect to the cost curve.

We see lithium being mostly derived from primary production as a positive. Another positive is the high execution risk associated with lithium projects. I don't think a lot of lithium will be produced to meet the demand just because of the technical issues related to bringing some of these projects online. This is borne out from recent history of the poor execution of lithium development project. Therefore, management is very important with respect to its technical capacity to oversee these operations, and because the lithium market has been so small for a long time, there’s very few people that know what they're doing in it.

Gerardo Del Real: Right.

Joe Mazumdar: That's a significant constraint in terms of supply which would be very buoyant for lithium carbonate prices going forward. So when we look at a potential investment, we want to invest in management teams that we think have the technical capacity to succeed. Separating the wheat from the chaff in that respect is really the job we've been trying to do.

Gerardo Del Real: Absolutely. I'll tell you one of my main insights during the visit and then I'd love to hear your thoughts on that. Advantage Lithium has, to me, one of the key differentiators of any junior and that's its partnership with Orocobre. Them being able to leverage that technical team, the Miguel Peral exploration team, and having the proximity to infrastructure really sets them apart for the time being anyway. I'd love to hear your thoughts on Advantage and Orocobre, and also if you like to highlight the third company that I did not unfortunately have access to, you're more than welcome.  I'd love for you to share your thoughts on that, Joe.

Joe Mazumdar: Okay, to help your readers out, the third project was operated by two companies. It’s the Cauchari joint venture between Sociedad Química y Minera de Chile, or SQM as it's known, and LAC, Lithium Americas. They have a joint venture which takes up a lot of the southern part of the Cauchari Olaroz salar in the Jujuy province of northwest Argentina. Advantage Lithium basically has ground that straddles it and its joint venture is with Orocobre, the only company that's actually put a lithium brine operation into production over the last few years.

This deposit is a bit different from the one from which SQM produces lithium carbonate in the Salar de Atacama. I would say that Orocobre probably has more experience extracting lithium from this type of salar than most producers despite the fact that it has had its share of hiccups from development to achieving commercial production.

Given the technical risk regarding advancing a lithium brine project in northwest Argentina, Advantage Lithium has a comparative advantage in its joint venture with a producer like Orocobre. The other positive is the competitive tension between Orocobre and SQM/LAC as the former wants to expand its production while the latter is looking to develop a larger lithium brine project.

The SQM/LAC joint venture wants to start at 25,000 tonnes of lithium carbonate (LCE) per year and go quickly to 50,000 tonnes per year. SQM appears to be desperate to mitigate its risk of a significant production shortfall if its operations at the Salar de Atacama comes to an end in the next five years. The company has been actively investing in global lithium development projects, both brine and hard rock ones, to maintain its market share in the lithium space.

So there's an interesting competitive tension to consolidate the area. The one with the smallest market cap, the one that's right in the middle and will need to be dealt with, I believe, is Advantage.

Gerardo Del Real: I agree 100%. That was very well said. It's been very cautious, let's say the last five years, in the resource space. This year there were more smiles and more checks being written. We had a sideways pattern in the precious metals market. The base metals started to break out. I'm as excited for 2018 as I have been excited in a while and that includes uranium, that includes the base metals and the precious metals despite thinking we have one last leg down that'll scare the wits out of people. What are you excited about? What are you and Brent over at Exploration Insights excited about for 2018?

Joe Mazumdar: We're not very excitable people. Our focus has been and continues to be on grassroots exploration plays because we can see a real paucity of exploration being done by the producers such that the juniors are having to do it on their behalf. We continue to look for the right management teams advancing the right projects in mining friendly jurisdictions. We want to expose ourselves and subscribers to the companies we think are most likely to find the next big one. That's really what gets us going.

Gerardo Del Real: Excellent. Joe, it's been very insightful. I want to thank you for your time. How can people find you and people that are looking for, again, one of the most premium newsletter in the business, Exploration Insights, how can they subscribe to it?

Joe Mazumdar: They just go to the website, There's free stuff on there so they get an idea of what we do and how we think. In the about us section there's a lot about previous portfolio performance and monthly subscription can be canceled any time. You can take it for a test drive and see how you do.

Gerardo Del Real: I don't do this often, I don't think I've ever done it on the show but I can absolutely recommend that anybody that speculates or invests in the junior resource space, specifically, should be subscribing to Exploration Insights. It is an absolutely quality newsletter. Joe, thank you so much for your time today.

Joe Mazumdar: Thank you, sir.

Gerardo Del Real: I hope to have you back for that exciting 2018 that you're not very excited about.

Joe Mazumdar: I am excited. Just don't get too excited.

Gerardo Del Real: Appreciate it, Joe. Thank you so much.

Joe Mazumdar: Okay.

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