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Contrarian Investor Jeff Phillips with Two Stock Picks for the Coming Gold Bull Market

March 27, 2018

Gerardo Del Real: This is Gerardo Del Real with Resource Stock Digest. Joining me today is the President of Global Market Development and one of the most respected contrarian voices in the junior resource space, Mr. Jeff Phillips. Jeff, how are you this afternoon?

Jeff Phillips: I'm doing great, Gerardo. Thanks for having me.

Gerardo Del Real: Well, thank you for taking the time. I wanted to have you on and get your opinions. I mentioned that you're one of the most successful contrarian voices in the space. Everybody likes to think of themselves as a contrarian, but I can tell you from subscribers that are writing in, that are wondering why gold stocks have not kept up with the gold price, why copper stocks, base metal plays have not kept up with the base metal prices. People are frustrated, and we've talked off air in the past about how you believe that the resource space bottomed in late 2016. I wanted to get your take on the overall gold market and then talk about past cycles and what you like in this cycle.

There's a lot of questions there. Let's start with where you think we are in this gold bull market. Are we there yet?

Jeff Phillips: I think we found the bottom, like you said, in 2016. If you look at past cycles, once the bottom's formed, you sort of bounce around for one, two years or longer, and things start to move back up. There starts to be more interest in the space, but it doesn't really heat up. The real reason you're in that space is when speculation runs rampant, it's like a hockey stick. These things go along, slightly moving up along the long part of the hockey stick, then all of a sudden in a six-month period they go through the roof. So, being a contrarian, you're trying to invest along that hockey stick. And up until 2016, you had a five-year bear market, so any point you invested in probably wasn't good, whether it was copper, gold, or anything else. Starting in 2016, and you haven't missed much because it hasn't moved much across the board, like you said.

Copper's up, what, 50%? Gold's moved off the bottom. Typically, the stocks in those sectors, especially the junior exploration or development companies that actually have some copper or gold, I'm not talking about pure exploration, but they tend to move exponentially to those prices. You're not seeing that yet. You've seen them bounce off the bottom, but you haven't seen big moves.

Gerardo Del Real: You've mentioned to me privately that you've made a good bulk of your fortune in seven-year cycles. Can you explain that for people that may be new to this space and that maybe are frustrated that they've bought into what looks like a new resource bull market, yet the share price of some of these development companies hasn't budged much?

Jeff Phillips: Yeah, it brings up a funny story. It kind of goes along with what you're asking me. I had a very famous geologist I won't name that's made a number of great discoveries over a 35, 40-year career. And he joked with me one day, we were at PDAC or one of the big conferences. I said something about his last discovery, and he's, "Oh, you know, I got to thinking in the last 40 years, there's only been about three years that was really worth getting out of bed. And I got all my fame from those three years over a 40-year period." It's a lot of work, what he was saying, and then all of a sudden things happen. The discovery happens, and it's very frantic. It's very similar in investing.

What I've told you before is that, again, I'll sit there and worry like any investor. I have large positions in a dozen and a half companies in the high-risk exploration-development space. And a lot of times they just sit there, and they may go up 20%, and down 30%, and up 40%, after the bear market ends like we're seeing now. Sometimes you feel like it's watching paint dry when you're watching the marijuana stocks and the cryptocurrencies and the blockchains and whatever, the internet security, your computer security stocks right now.

You just have to be patient. Things take off, and what usually ends up happening is I end up – especially through a bear market, I've told you before – I end up buying more of companies I already own too much of. And I continue buying it, and then the market turns. And I sit there worried, and then, all of a sudden in a couple of years’ time after acquiring those positions, you get into a bull market. It's amazing how you talk to people, and they don't want to buy a stock at $0.50 because the whole world's going to end, or gold hasn't done anything, or gold's moved up, and the stocks only gone from $0.40 to $0.50. And then three years later, they're calling you, saying, "I think this is a great buy at $4. I think it's going to $10." Wow, okay.

Gerardo Del Real: Let me ask you this, Jeff. Are there development stage assets that match that description right now? Companies that have great deposits that you really like, and that frankly, maybe the share price hasn't moved much but will benefit disproportionately in the next upturn here in the cycle?

Jeff Phillips: Yeah, again, there's a number of companies, Gerardo. I only have a bandwidth and a risk capital that I put into a certain number of companies. So I have a couple that I consult for and am a large shareholder. There's other companies, not as many as you'd think out of the 3,500 junior resource companies, but there's a number of companies. There's two that I work with that, again, I'm a consultant for and a large shareholder, so again, and have been for, I think, in both of them six to eight years. It's not something new. I've been patient, and we've had a bad market, and I think in the next bull market, they're going to work out wonderfully well. Do you want to hear about those two?

Gerardo Del Real: I would love to hear it. Let's start with the first one.

Jeff Phillips: Well, you and I have talked about both of them. I know you like both companies, anyway. One of those companies has been around for a long time, so just about everybody will say something nice about the management team. One of those companies is Midas Gold (TSX: MAX). Midas Gold has the Stibnite deposit in Idaho, 6 plus million ounces of gold. They're in the permitting phase which is a very boring phase, and unfortunately, they've had to go through a very bad bear market to get and keep the company going. And Stephen Quin, the CEO, has done a great job of doing that. Recently, I saw news that you just don't see very often in the mining space or, as you pointed out, in life. Both houses in Idaho, Republicans and Democrats, passed a resolution to pass to the federal government and the EPA and the Forest Service, basically saying that they would like to see this project of Midas Gold's move forward exponentially.

You're talking about both sides. You've got a number of environmentalists that want to see this built because of the trade-offs and what they're getting out of it. It's a project that's very rare. It's a brownfields project that's clean up. It's one of the largest undeveloped gold deposits in the United States. It's upper quartile in size, upper quartile in grade. And you've got the full support of the Idaho governmental bodies. So again, it's a very rare project. It's highly leveraged to the price of gold. I think gold is going higher over time, as it always has. But I think that if you see gold move up, I think we will start to see these stocks really magnify those moves. And I think Midas is probably one of the top gold stocks to do that.

Gerardo Del Real: I absolutely agree, and just to provide some context on that bipartisan bill, it was the Idaho House of Representatives and the Senate passed a joint memorial asking the President of the United States to basically fast track the project. They want to see it developed in a timely and cost effective manner is what the news release said. It was 71 lawmakers that acted as co-sponsors of this joint memorial. And so again, that's rare in mining. It's rare in life in general in the times that we live in now. I agree 100%, I think the management team is excellent. I also think the exploration potential is still world class, despite the fact that they have about 6.6 million ounces of gold across all categories, right? So that's important.

Jeff Phillips: First off, you just said what I tried to say a lot better than I did. So congratulations. I didn't talk about the exploration potential. I don't think the company wants to really talk about that. They're permitting it. But that's why I see this, once it's permitted here at the end of 2019, I see it taken out, if not earlier, because again, that exploration potential is tremendous. I don't have any doubt there's a lot more gold there.

There's been an analyst that's come out of Canada that's actually compared it to some other favorable things, has actually said it could double or triple from there. But that's what a major's looking for, not only is this a big upper quartile deposit, both in grade and size, the ability to add, once you've built that mine, and for many more years is there. A big company looks at that. It doesn't really affect your numbers in a bankable feasibility study as a smaller company. But a big company wants to see that this is a much longer life asset, and I think this definitely is.

Gerardo Del Real: Excellent. Excellent. You mentioned a second company you had in mind.

Jeff Phillips: Well, you and I have talked about it before. I've been a shareholder for eight years. Almaden Minerals (TSX: AMM), which is run by the father-son team of the Poliquins, well-known by almost everybody in the resource space, well-respected as good stewards of shareholder money and run a good company. And unfortunately, we made a discovery in Almaden back in 2010 when we had the last of the good resource market. That discovery, they continued to develop through the bear market, and it's turned out to be a 4 million plus ounce gold-silver discovery, about 50/50, down in Mexico. It's very favorable, the area that it's in, in my opinion. It's got support in the area.

The company's done a great job of community development. The asset is on private grounds, much of which Almaden owns, so you're not dealing with the ejido problems that you have in Mexico. I think it's a very, very interesting project. Obviously, they grew it from nothing to 4 million ounces. Even through the bear market, Almaden managed to spin because they believed that project was a standalone project. They spun everything else out of Almaden into a company called Almadex, which us Almaden shareholders all got shares in Almadex. Almadex had all the other assets of Almaden. Almaden continued with the 4 plus million ounce gold deposit.

And just recently, you saw that Almadex had, over the last year and a half, has made a pretty good copper porphyry discovery and expanded on that down in Mexico. It's a big company type project, needs a lot more drilling. It's going to be something most likely. It's very large, so recently, Almadex announced that Newcrest Mining is going to invest in that project, or invest in Almadex for 19%. I believe it's about $19 million dollars, which is definitely going to see that project get the drilling it deserves. And on top of that, what Almadex is going to do is spin out all the other projects that are in Almaden besides that one, along with the royalties on both that project and Almaden's flagship project into a third company. So I'm going to end up with another share of a third company. That's what I want to see. I've been patient and it's been a bad market for the last eight years or seven years since they made the discovery, seven and a half years.

In those seven and a half years, I've ended up with three companies. My average price is lower. I've paid higher and lower, but my average price is lower than where I started. I believe in the right market, all three of those companies are going to do very well.

Gerardo Del Real: It's interesting that you mentioned Almaden because it's actually very similar to Midas in the sense that the mine is in development. Actually, they just hired, obviously as you're well aware, a Vice President of Projects and Operations to oversee the development and the construction of that gold-silver deposit, Mr. Laurence Morris, who, of course, most recently was the mine manager for First Quantum Minerals at their $5.5 billion Cobre Panama project. And so they're obviously serious about developing it, but it also has world class exploration potential, as recent news demonstrated. Can you speak to that a bit? Because again, it's a company that's anchored by a great asset, but also a company that has phenomenal upside.

Jeff Phillips: Basically the company's moving forward with developing the asset. They're going to be permitting it. They're going to move forward with a person they've put in charge now that has built mines before. But again, as you and I have talked in past interviews, I'm never interested in building a mine. I'm interested in selling the asset to someone else, and if it's a large enough asset, it will attract someone else that has projects in that area or that part of the world and needs to add to their reserves. I think Almaden is doing everything right, and quite honestly, I get people asking me all the time, and I'm friends with the largest shareholder of Almaden and Almadex, which is Ernesto Echavarria, a very wealthy and very nice gentleman out of Mexico that obviously is well-connected in Mexico and is the largest shareholder of now three companies.

I wouldn't want to sell the company right now. People have asked me why isn't Almaden to be bought. Well, I don't want to sell. It's very seldom in my 30-year career that I see something taken from scratch, that looks very economic, to a 4 plus million ounce deposit with tons of exploration potential in that area. You recently saw some drill results a mile and a half away from the deposit that are showing a little bit of fire. I think they'll follow up on those, knowing Almaden. But again, what I think you see happening is in a better market, I'm not interested in selling that asset. It's hard to get those assets. This is the contrarian play. Don't offer me $1.75 for the asset because I don't want to sell it, personally as a shareholder, because I know how hard it is to find an asset like that.

I'd much rather wait for the coming bull market that I see coming, when the share prices are doing better, the mid-tiers and major producers, they're willing to pay up a lot. In the last bull market, there were assets that I don't think were as good as Almaden's asset that sold for three, four, five hundred million dollars. I'm not interested personally as a shareholder, and I hope that Almaden doesn't decide to do that, and it doesn't seem that they are. They're pushing the project forward, and eventually someone will pay up for it in the right market.

Gerardo Del Real: You mentioned assets in past cycles that sold, likely inferior assets that sold for three, four, five hundred million dollars. Just some context there, Almaden's current market cap is about $112 million Canadian. So again, being a contrarian, that's the upside. You wait for a better cycle. Would that be accurate?

Jeff Phillips: Yeah, you don't want to get rid of an asset just because the markets are bad and make a little bit of money. It's too hard to find assets like that. We'll do well on it, and we'll wait for the market to take off like it does.

Gerardo Del Real: How important is it, Jeff, for speculators in this space that may be new to this space, that are coming into this cycle and saying, man, gold is at $1,335 an ounce right now. The junior equities haven't kept up. Companies like Almaden have a market cap of $112 million dollars with, justifiably, a potential for double or triple current prices, with the current gold price. How important is it for speculators to define their timeline, how long they're willing to sit through a cycle and let that cycle bottom and come back?

Jeff Phillips: Well, again, that's a loaded question, Gerardo. As you know as a guy who writes a newsletter, you have a lot of different subscribers. So again, people speculate. There's speculators that are billionaires, and there are speculators that have $5,000. And all of this, this is high-risk investing. This isn't something that you're trying to make some money to buy something next month. Your timeframe needs to be two, three years. You need to invest in management companies and longer.

Look, that's typically what you want to look for, but the bear market lasted five years. Again, you want to add to those positions in the bear market. I don't think the stocks have taken off that much, so you still have an opportunity. But you need to have a two, three year time horizon. You need to be playing with money that you aren't going to have to come up with on any certain timeframe. Too many people speculate, use margin, borrow money, and try to play these things because of the quick moves they can have in a bull market, but they can also have down moves.

And again, it should be money that you don't need for two or three years, and you can be patient. And again, you should have extra capital in case something does happen, like the bear market we just went through, where you can add to that position. A speculator is all different, but definitely, if you're looking at any of these stocks, you're at least giving it a two-year timeframe.

Gerardo Del Real: You mentioned past cycles. You talked about the five-year bear market. We bottomed, let's use the 2016-2017 timeline, so that's two years, that's seven years there. Typically, how long do bull cycles last in your experience, Jeff? You've seen several of these now.

Jeff Phillips: One or two years.

Gerardo Del Real: Excellent. So you want to be positioned beforehand?

Jeff Phillips: Yeah. In those one or two years, the real moves can come in three-month periods and so forth, you know? Again, you've been around, Gerardo. You've seen what happens. I can talk about the cycle that we had in 2010 and '11. In '08-'09 there were stocks that had been hammered from the last bull market cycle and were trading at $0.50, $1. Things like Almaden, other companies that had $500 million dollar market caps that were at $100 million and were trading at $1. And then by 2011, they're trading at $9 or $10.

Gerardo Del Real: Right.

Jeff Phillips: And then, of course, you have the bear market, and a lot of those companies come right back down. But what you want to be in is the real companies that are actually developing something, and you want to realize that time horizon. You don't want to be that guy that is right now saying, "Oh, Almaden's $1.20. I'm not too sure." And then a year from now, saying, "Oh, it looks great at $3, and I think it's going to $10." And it gets to $6, and you think it's going to $12. You got to set a parameter.

So again, I look at something like Almaden, and because I've seen what assets have sold at in the past, and this is all speculation, and again, to remind you I consult for the company and I'm a large shareholder, so I hope it works out. I'm biased. I look at companies like that, and again, at the current prices, I've got to see a four or five hundred percent type return is doable. And I think that company has that ability to do that with the asset they have. But again, it takes the speculation coming back into the resource space.

Gold's had a little bit of a move off the bottom. If it has another hundred dollar move or breaks $1,400, you're going to see more people coming into this space and speculating. And then if it's gets to $1,500, you'll see all the articles written about how gold's going to $3,000 or $2,000. Then everyone speculates, and a lot of these companies will go up two, three, four hundred percent. I like doing the real ones that have real assets that have a chance to be taken out, so that's what we're talking about.

Gerardo Del Real: Jeff, insightful as always. Anything else that you'd like to add?

Jeff Phillips: Don't bet. You're betting money in a space that you shouldn't bet any more than you can afford to lose because, again, a lot of people in the last bear market who used leverage, lost a lot, and picked the wrong companies, because if you have the wrong companies, unlike the companies we've talked about are still the same capital structure through the bear market. I still own my shares. Lots of companies in that period that were less than run by stellar management teams without resources, and great stories when people heard them have ended up going to – they may have not gone to zero, but after they've done a five for one, ten for one rollback, you're pretty much wiped out. And they're reloading for the bull market. So you really want to be in companies, again, we've had the bear market, so I don't see another bear market before we have a bull market.

That's not usually how it works, but again, you want to be in companies that have assets and are good shepherds of shareholders, and the two companies we talked about, you can see have managed through the bear market and kept their share structures in relatively good shape. And again, have persevered, and so all shareholders stand to benefit.

Gerardo Del Real: Jeff, thank you so much.

Jeff Phillips: Thank you for having me.

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