Junior Miner Junky’s David Erfle on Why He Likes Junior Miners Over Bitcoin in 2018 and Shares a Few of His Favorite Junior Mining Stock Picks

January 16, 2018

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Gerardo Del Real: This is Gerardo Del Real with Resource Stock Digest. Joining me today is the founder of Junior Miner Junky, Mr. David Erfle. David, how are you?

David Erfle: Good, man. How are you, Gerardo? Nice to talk with you.

Gerardo Del Real: I'm doing well. I'm doing well. A little background for listeners, David and I met at a site visit in Idaho. We were at a bar having dinner. I was watching my Chicago Cubs and in walks Mr. David just as the Dodgers and the Cubs are going at it and he says, "The Cubs are going to lose." And the next thing that happened is Mr. Turner hit a home run and that was the end of the game. So, we got off to a bit of a rocky start, but despite that I decided we'd have him on the show. So, thanks for making time for me, David.

David Erfle: My pleasure, my pleasure. It didn't turn out very well for the Dodgers, though, did it?

Gerardo Del Real: Well, 2018 couldn't come fast enough and we're a couple of months away from opening day, which I'm excited about.

David Erfle: Me too. Me too.

Gerardo Del Real: Well, listen, during that site visit I got to know you for a bit and subsequent to that we've met at various conferences and interacted a bit, but you have a pretty fascinating background. So, before I get your takes on the gold market and base metals and bitcoin even, I'd love for you to share your background because I was mentioning off air that I don't think your story is going to be a unique one in the next few years. I think there's going to be a lot more people that have stories like yours that they can relate to. And frankly, my story is somewhat similar as well. My story is a real estate background for a bit and then having a couple of pennies to rub together and eventually pivoting to a different asset class and falling in love with the junior mining space. And here we are over a decade later. But enough about me, if you could share some of your background, David, I'd love that.

David Erfle: Sure, sure. Yeah, it's been a wild and crazy ride. I'll tell you that, Gerardo. I sold my house in 2005 and not only did I just sell it – it was a house in Pasadena that was a period house built in 1910 that I restoring – I was doing all the work myself and the only thing I had left to do was the kitchen and some landscaping, but it was June of 2005 and I had all this equity. The real estate bubble was in full force. I had a job that I was really bored at. It was a velvet coffin job where you're paid a decent salary but you really can't go anywhere. After I'd gotten into the juniors a couple of years before, I had been following them and they were consolidating for a couple of years. They were consolidating on a huge move from 2001 to 2003 and they built a huge two-year base, and at the same time the real estate market had topped out. If I'm going to do it I'd better do it now.

The house sold in a month and I put all the money into juniors, tripled my money in a couple years, quit my job, threw all my stuff in storage, traveled around the world, lived in Buenos Aires for a while while I was traveling around the world and just had a really good time. Learned a big, huge lesson in 2008 when the global margin call hit. I'd sold some of my miners for some profits, but not nearly enough like most everybody else, and a lot of those profits went down the drain. I always say that the best way to be successful in the stock market in any sector is to lose a lot of money in it first. That's the only way you're going to learn the lessons you need to learn to be successful later on.

Gerardo Del Real: I couldn't agree more, David. I think that's very, very well said. You obviously understood the power of a trend very early on. You understood that with the real estate market, that translated into the junior space and obviously now, over a decade later, here we are. Gold sitting at $1,332 as we speak. It's had quite a start to the year here in 2018. Do you think this is a breakout or do you think it's a head fake?

David Erfle: Well, I don't really think it's a breakout yet, but what you're seeing is the everything bubble has really taken off. Everything has gone up and I've said this, I've been saying this for the past few months. I even wrote an article with it in its title, that the mining sector is the last deep value play left. Everything else has taken off. I mean, stocks and commodities. Commodities are the lowest they've been in relation to stocks in history, and the miners are just really, really undervalued in relation to the gold price. What we had last year was we had cryptocurrencies going crazy, we had US equities going crazy, we even had gold up 13%, but the miners didn't do anything. They really, really underperformed the metal and I believe for a couple reasons. The major reason being people were just selling everything for tax loss at the end of the year that they had. Any miner could've had any kind of loss there and they just sold it. Fundamentals didn't matter, valuation didn't matter. If I got loss in it I'm selling it, I'm going put it into the market for Santa Claus rally or I'm going put it into bitcoin because it's going crazy, and it just created an incredible opportunity for patient money, patient contrarian money sitting on the sidelines waiting to buy these cheap juniors because historically June and December are the best time to buy juniors.

Gerardo Del Real: Agreed.

David Erfle: I mean, this December didn’t disappoint. One stock that I purchased has already doubled in less than five weeks, so it's a select bull market right now in a lot of these juniors. Even today the juniors are just being yawned at while miners are being bought because you've got the market, the US stock market, just keeps screaming higher. It's getting parabolic and it's getting really, dangerously too far above its 200-day moving average, the S&P and the Dow, and the bullish percentage is well over 60%, which it hasn't been since 2011. I mean, we're due for a correction here. We haven't had a 10% correction in the S&P for two years. Hell, we haven't even had a 3% correction in the S&P for two years. So once that correction begins some of that money's going to find its way into miners.

Gerardo Del Real: Well, you mentioned the gold juniors not performing well and I think you're absolutely right. I think for the most part that's carried on into 2018. That's also very true in a couple of markets I really like, the copper and the zinc space. Although the metals have performed beautifully, the juniors haven't followed yet and I happen to think there's a great opportunity there. I'd love to hear your take on the base metal space, particularly the copper and zinc space, and if you believe that there's a similar sentiment there in regards to the juniors underperforming the actual metal?

David Erfle: I do, I do. These things are highly speculative and very risky. So, when you've got everything else going up where's my reason for taking huge risks in these things? I see zinc at a 10-year high, okay. Why am I going to put my money into a risky zinc play if it's already at a 10-year high and all these other things are going crazy. I don't want to miss the boat in these things. Markets, they revert to the mean eventually and we have a huge mean reversion catch-up rally just waiting in the wings. It's going to happen. It's going to happen soon and I think it might have started happening already in the mining sector when GDX touched $21. It touched $21 four times in 2017, and I think it's built a solid base there. I just really think this mean reversion catch-up rally is coming and the base metal stocks will join in that party as well.

Gerardo Del Real: Wonderful. Now, towards the end of last year you wrote a piece entitled, “Due Diligence Tips in the Precious Metal Junior Space in 2018.” Can you share some of your insights and some of your due diligence process that you go through when you're looking at juniors and you're deciding whether or not you're going to put your hard-earned capital into these plays?

David Erfle: Yeah, absolutely. Absolutely. I'm also doing a presentation at VRIC and the title is going to be, “How to Build a Successful Junior Resource Stock Portfolio.”

Gerardo Del Real: Well, let's front run it. Let's get some tips on the record now, David, before VRIC. It's got the exclusive, right here.

David Erfle: Absolutely, absolutely. KITCO asked me a really good question to open up that piece, which was, "If you had $100,000, where would you put it in the mining sector?" My answer was, "I would split up the first $30,000 into three growth oriented producers." First of all, I don't invest in majors, I like the leverage in growth oriented producers. If I'm going to invest in a producer and I like the leverage in developers and explorers and early stage explorers, but anyway, I digress here.

The first $30,000; I would put $10,000 into three growth oriented producers and they would have to have proven management team who's aligned with shareholders. Someone like Rob McEwen is aligned with shareholders like no other CEO I know. He owns 24% of the company and he pays himself no salary. If that's not being aligned with shareholders I don't know what is. Also, they would have to have a solid balance sheet with a substantial cash position and manageable or preferably no debt. I know that's difficult to find. They would have to have 100% control of low-cost mines and projects with blue sky potential, operate in safe jurisdictions, and solid ownership in the stock with preferably a global miner owning at least 9.9% of the company.

Then I would put another $40,000 into four developer explorers, meaning a company who already has proved up a deposit of at least a couple million ounces or it's a possibility that there's a couple million ounces going to be there. It has a district scale land package with blue sky potential in a safe jurisdiction, that is key. I'm not going to mess with anything that doesn't have blue sky potential because I'm basically thinking like a major when I'm looking to invest in a developer or explorer.

And finally, exploration stage stocks I would split another $30,000 into at least five of those because those are really, really risky. They have to have pretty much the same attributes as the mid-tiers and the developers; great management team and big land packages and safe jurisdictions and enough cash to fund its entire 2018 budget is key as well, because you don't want to invest in something that's going to have to do a raise pretty soon and dilute the shareholders right away.

Gerardo Del Real: Absolutely. That was great. Now, David, I know when I write and speak with subscribers, especially newer subscribers and people that are newer to the juniors space, one of the key points that I always try to make is that different companies in a different part of each cycle are going to outperform at different times. And I know the juniors space you mentioned what a wild ride it's been. You can have four companies up 30%, 40%, 50% and have two companies down 50%, that's not uncommon. How do you see that, how do you see the different types? You mentioned the explorers and the developers and the producers, can you explain a bit about how you approach the performance and the portfolio in regards to where they are in the cycle?

David Erfle: Oh, yeah. Sure. That's a good point. It depends on where they are in the cycle and it also depends on where they're at as a company. There's so many things you have to factor in, and by the way, I've never had a stock that's been down 50%. I have rules. Anything that I've purchased that has gone below 20% I will sell it. I don't have the cash to be someone like Rick Rule who can be down on something 50% to 60% and hold it forever and wait for it to come back. I've got a limited amount of capital to invest and if I've made a mistake and the market has told me that I've made a mistake – and I have if something's gone down 20% – I will quickly take my loss and put that capital into something else. You have to cut your losses quickly.

Gerardo Del Real: So, liquidity's very important for you as well.

David Erfle: Absolutely. You have to cut your losses quickly in this sector and let your winners run, and that's another point. People sometimes sell too soon. Everybody has their own rules in where they're successful. A lot of people will sell something automatically if it doubles, they'll sell half of it, and I don't do that. You have to take each stock and look at it on its own graces. Something like NOVO Resources is a good example recently. If I would've sold half of that after it doubled I would've left a lot of money on the table. I waited until it went a lot higher before I sold any of it. Sometimes that backfires on you, but more often than not you end up making more money.

Gerardo Del Real: And that really comes down to a personal preference as far as style and risk tolerance, and as you mentioned, liquidity. Is that correct, Dave?

David Erfle: Absolutely. Yeah, absolutely. I mean, we're talking about each individual person and what their goals are as far as selling strategy, and that's another main thing. You have to have a selling strategy before you buy anything.

Gerardo Del Real Perfect. Perfect. That's great. That's really insightful. Another article that you recently wrote is titled – and I referenced this earlier a bit but I want to touch on the bitcoin aspect of it – “Everything & Gold Will Rise in 2018, Except Bitcoin.” And I think this article's actually featured on KITCO, correct me if I'm wrong. But I thought it was well written and I thought it was insightful and I'd love your take and I'd love for listeners to get your opinions on bitcoin and the crypto-craze.

David Erfle: Well, anything that's gone up 1,700% in one year, that's a bubble. I'm sorry.

Gerardo Del Real: Is that a red flag for you?

David Erfle: Admittedly I'm not an expert on bitcoin. Admittedly I still have a problem figuring out how the thing works. I know it takes a lot of energy, extreme amount of energy, and I know that 40% of bitcoin is held within a select few people. If any of those select few people get nervous and want out it'll collapse very quickly. But the thing I'm worried about the most is government regulation. There's no way that government is going to let this thing run without getting on top of it. Once they regulate this thing it's going to remove the anonymity of bitcoin and all the other cryptocurrencies and the idea that there's an alternative financial universe separate from government. That's a big reason why people are investing in these things, and I think that's going to be its ultimate downfall. I also just saw an article about Warren Buffett and why he isn't investing in it, and I read it and I went, "That sounds like me." I mean, I'm not going to invest in something that is this volatile and that I can't understand.

Gerardo Del Real: You get enough volatility with the juniors.

David Erfle: Absolutely, man. I've always said that the junior gold and silver stocks are the most volatile stocks on the planet and uranium stocks are the most volatile in the universe, but now cryptocurrencies, I mean, that just trumps both of them. It's crazy.

Gerardo Del Real: Yeah, no pun intended there, but fair enough. Well, listen, I would be doing listeners a disservice if I didn't ask you for some top picks. I'd love for you to share three, share four, share as many as you'd like and just give us a brief primer on why you like them.

David Erfle: Okay. My favorite right now is Marathon Gold (TSX: MOZ). They just put out a recent updated resource and they have nearly 3 million ounces of indicated and inferred in Newfoundland. It's the highest grade open-pit deposit now in Canada owned by a junior, and it's still pretty much under the radar. It's not covered that much and they still haven't got a strategic major finance yet. This thing is still undervalued and the chart is really, really solid. It looked like it was about to break out here recently and then it came back, but have a look at that one.

 Another top pick would be one I mentioned earlier, McEwen Mining (TSX: MUX). It's had a really big correction and if you look at the 5-year chart it's building a beautiful head and shoulders base and they're cashed up now. They're trying to be full production by 2020 and they're trying to tie up a district in Timmins now. They bought the old Primero Black Fox mine and they've got another deposit there to feed that mine. they're building another mine in Nevada right now and they've got some silver exposure. They've even got copper exposure with the huge Los Azules project in Argentina that I know Rob would like to monetize, but because it's a $2 billion Capex, it's huge. So, even got exposure to copper as well. So, I really like that one.

I'd say explorer right now, one of my favorites is one that's been shunned by the market recently. It used to be a market darling but it's been shunned recently is Balmoral Resources (TSX: BAR). They've got a really nice project wedged between two hungry majors in the Abitibi between the Casa Berardi Mine and the Detour Mine, and he's been punching holes. Darin Wagner, who's a solid Geo and CEO, who sold a project before to a major, he's punching a lot of holes there and has yet to even announce a maiden resource and the market has gotten really tired of them not announcing a resource, and also, tax loss selling really hit the stock hard. So, I purchased it recently in mid-December and they're finally about to release their maiden resource, and I know he was trying to get it out before roundup but I don't think that's going to happen now. I'll be speaking with him at VRIC to find out when that's coming out, but it's going to be at least 2 million ounces I think. It's going to be at least 2 million ounces of high-grade gold. They've also got a nickel deposit, Grasset nickel deposit, which the market is giving them no value for right now. So, I think that's really undervalued here.

Gerardo Del Real: Very interesting, David. It's been insightful. How can people find you? Where can they look you up?

David Erfle: Okay, my website, www.juniorminerjunky.com, and I also write a weekly column for KITCO every week. You can find me there.

Gerardo Del Real: Excellent. David, it's been an absolute pleasure. Thank you so much for making time today.

David Erfle: Thank you, buddy. It was fun.

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