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Global Market Development President Jeff Phillips on Minimizing Risk in Bear Markets, Crypto vs Cannabis, & a Few of His Favorite Stocks

August 31, 2018

Check back shortly for the video of Gerardo's interview with Jeff Phillips.

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 experienced and successful contrarian investors in the resource space, Mr. Jeff Phillips. Jeff, how are this morning?

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

Gerardo Del Real: Jeff, I can always tell when we're near a bottom in a market by the amount of letters that I get from subscribers that write in to tell me how disappointed they are in this market and how tough it's been. It's been a pretty brutal summer in the junior resource space for most companies. There's no better person that I would rather talk with, to talk about process and systems and how you've gone through bear markets in the past, because this sure feels like one right now.

So thanks for taking the time today. Let's start by going into your background a bit. Can you tell us a bit about how long you've been in the resource space for people that may not be familiar to you? Because I know you don't do a lot of interviews.

Jeff Phillips: It's probably been, I don't know, 23 years, 24 years. Somewhere back to 1994, I think. Obviously I was much younger and I've learned many things, as you tend to do in investing, and specifically the resource space, over the years. But I've been financing companies for quite some time.

Gerardo Del Real: Well, you've obviously seen multiple cycles, bull markets, bear markets. What are your thoughts right now on the overall sector? And let's talk about how you get through these times, and how you've made, frankly, a fortune by being a contrarian in this space.

Jeff Phillips: Well, it's a whole bunch of questions there. But we're definitely in a bear market. You saw commodity prices, specific commodities, doing pretty well over the last 12 months, copper and others. You haven't seen the junior resource space that explores for and develops those projects keep pace with the price rise in some of those commodities. And now you've seen the commodities come back a little bit.

We're in the middle of summer and summers are always bad, whether you're in a good market or a bad market. They always tend to be low volume. These are high risk stocks, definitely not for people that don't understand anything about the resource space. If someone's listening to this and this is the first time they've heard of the resource space or junior stocks, they should definitely stop listening to the interview now, because this is a very high risk space that you're playing in. You can lose all your money in these things or a large portion of it and you can make tenfold your money if you're paying attention or getting good advice on a regular basis from a financial professional in that space or a newsletter writer such as yourself.

Gerardo Del Real: Let's talk about minimizing the risk in a bear market. What do you look for when you take one company? If you're breaking down and analyzing what a company has to offer and whether it merits your speculation capital. What are some of the first things you look for? Some of the red flags?

Jeff Phillips: Well, the main thing you need to look for is a management team's that had success before, because most of them haven't. They've had success, possibly mining the market or their stock prices have gone higher. But who has developed an actual asset that's been bought out or sold to someone. So you want to look for a quality management team.

You also want to look for whatever commodity they either have, if they're a development company or they're exploring for or have made the initial discovery, that you're not betting on much higher prices in the commodity. You're betting that they're going to be able to prove that what they have or have found is going to be economic at the current prices.

And then when you get into a bear market like we've had, usually if you have a good management team that has experience, they're going to shepherd that capital well because these companies are not making money. They're spending money so again, the more they spend the more they have to raise and in a bear market the value of the assets tends to be skewed very badly to the downside. You don't want to see the dilution that can happen very quickly. Especially over what I call this last 6-year bear market, which has got to be one for the record books. So again, those are the things you want to look for in a company.

Gerardo Del Real: Excellent, what else should I be looking at?

Jeff Phillips: You mean an example of something that even in a bear market I'm happy with what they're done?

Gerardo Del Real: Definitely. You've had a lot of success in bear markets, Jeff. I've witnessed it firsthand.

Jeff Phillips: I'm laughing because I've often told you my greatest successes are those companies that are quality companies that I invest in during a bull market or in a better market. When the bear market comes, because I keep financing those companies, I end up with very oversized positions. I have large positions anyway, but through the bear market they become oversized. Even I begin to squirm and become uncomfortable and typically some of those have been my best investments because when the market turns – what nobody would put a bid in at $0.50 is all of the sudden a $5 stock and everybody thinks it's the greatest thing since sliced bread. You find yourself having an oversized position because no one would buy it during the bear market. A lot of the times it's because I have to keep financing companies and I want to keep them moving forward.

Anyway. An example you wanted is what you said?

Gerardo Del Real: An example would be great.

Jeff Phillips: There's a number I can think of. Let's pick one that's kind of complicated, but a good example. I financed a company called Almaden Minerals (TSX: AMM). AAU on the New York Stock Exchange. But probably going back almost eight years ago now and I thought they had a discovery. They'd put one hole into an asset they had. They had thirty, forty properties and royalties throughout North America; Canada, Mexico, and United States. And they had made a discovery.

So very quality management, between Duane Poliquin and his son Morgan who run the company, are well known in the space by everybody. And again, they are good shepherds of capital. They're good at the discovery process. They've had a number of discoveries. So when they made that discovery I financed the company. It was the end of the last bull market. Lo and behold that discovery became a 4-plus million ounce gold and silver deposit in Mexico. But again, we've had a bad market so I've continued to finance and they've actually done quite well with not diluting shareholders in that bad market as much as many companies have.

But more importantly, what they've done over the last really four years I guess, is as that deposit grew they spun out all their assets into a new company called Almadex (TSX-V: DEX). This was four years ago and all of the shareholders of Almaden, me being one of the larger ones, also received new shares in the new company with the spin out and the gold discovery sitting in the old Almaden. So we got more shares and have two companies trading. And even more recently they made another discovery in Almadex and have interest from a number of majors and took on Newcrest as a partner, who put in $20 million dollars to that asset called El Cobre. They basically spun all the other assets out into what is now also called Almadex, but the discovery that Newcrest financed is in a company called Azucar (TSX-V: AMZ) and we all got shares in that company.

I basically financed Almaden originally and I've ended up with three companies. One of which has a major deposit. The second one, Azucar, now has what looks to be a gold-copper porphyry discovery in Mexico and Newcrest is their partner, drilling massively right now. So we should see lots of results. And then I have the other spin out, which is now Almanex which holds the royalties on both those projects along with a number of other advanced projects and early stage projects plus a lot of good exploration ground.

And that's what Duane and Morgan do. I believe we'll see drilling, end of the year, beginning of the year on one of those properties. And the last two times they've drilled they made discoveries. I've ended up with three companies. All of those companies are trading very inexpensively, bear market valuations. And one of those I have exposure in gold and silver in Almaden. In Azucar I have a copper porphyry with a gold asset that's being drilled by a major, the large shareholder that owns 19% of the company now. And then I have the royalty company which is Morgan and Duane's bread and butter, trading at not much. They all have cash. The assets are all trading extremely cheap right now.

The reason I'm bringing all this up is I've ended up with three companies. All of which I think are undervalued at this point and if we do, as we usually do, when people throw in the towel and there's no interest in this sector, that's usually prelude to a bull market. I think all three of those companies are going to do exceptionally well in the next bull market. So, my hat's off to Duane and Morgan Poliquin for creating real value in a bad market that I think I'll look back on two, three years from now and go, "Wow, I'm glad I bought a lot more stock during the bear market in all of those."

Gerardo Del Real: And just to bring a little context to each one of those three companies, they each have a very solid share structure. They're each well capitalized. And again, Morgan and Duane continue to find exciting discoveries time after time. It seems like, well you mentioned the very fact that one company has now turned into three. And this isn't new for the Poliquins, right? This is something that Duane has been doing for decades prior to Morgan assuming control of the companies.

What sectors do you think are the most beaten down sectors right now that make your contrarian antennas perk up?

Jeff Phillips: Throughout the financial markets it would be commodities. Are you talking about specific commodities? The commodities sector, I think every other asset's at record levels. The commodities sector is not at record levels. That's one of the few asset classes I see that is trading at very attractive valuations, whether it's a producer or a development stage or a discovery stage company.

Gerardo Del Real: Fantastic. Jeff, is there anything else you'd like to add? Do you want to give an opinion on whether you feel that the cryptocurrency craze and the cannabis craze has taken some of the speculative dollars out from the junior resource sector? I know that's an opinion that's shared by many in this space. What are your thoughts there?

Jeff Phillips: Absolutely. Absolutely it's taken out. But you have to remember that 80% of that money that goes into that space is charlatans and people racing to create the next stock play. But absolutely it's taken a lot of the average investor who likes to speculate on hopefully hitting the lottery ticket into those areas. Cryptocurrencies have had a hard time of late. I don't think they're probably done. I think there's a few more runs in that. But again that's just my opinion and it doesn't count for much in that arena.

As far as the marijuana space, absolutely, because you've seen these companies do very well, probably ahead of their valuations. But in that space's defense, in the cannabis space, you've seen some real things happening. You saw Constellation Brands come in two weeks ago and invest, what, $4, $5 billion dollars into Canopy which is a cannabis company. I think like the mining sector, 90% of the companies in that space aren't real, but there are some real ones. The cannabis space is a sea change, like prohibition. So again, owning the right companies in that space isn't necessarily a bad speculation. I'd probably rather be in the cannabis space than the cryptocurrency space.

Gerardo Del Real: Excellent. Jeff, in the commodities space and the gold space in particular, you mentioned Azucar, you mentioned Almadex, and you mentioned Almaden, the Poliquin family of companies as I like to call it. Is there anything else you like out there that people should take a look at and maybe dedicate a few minutes to do some due diligence on?

Jeff Phillips: Again, I like all three of those companies. You get different commodity exposure and they're all trading at very inexpensive for what they have. And like you said, they all have cash. They're not going to be diluting shareholders anytime soon. If you want to own it, it's not like the banker's going to sit back and wait to finance it. When we get that bull market, they're going to have to buy those stocks.

Another one I like is Midas Gold. I think you and I talked about that in another interview and Midas has multiple partners. They have the Stibnite Project in Idaho, which is a safe jurisdiction obviously in the United States. It's a 6 million plus ounce deposit. Some of the major shareholders include Teck Cominco, John Paulson out of New York. Barrick Gold just put $35 million dollars into the company at $1.10 a share. I think it trades at $0.90 right now in the summer months.

That's a company, I think they'll get their permit. Things are moving forward. They'll have that permit in early 2020. I think it's absolutely going to be a buyout candidate. I don't know what price, but it's a tremendous asset that, again, would be a good asset for any of the major producers because it's a 300,000 ounce a year potential producer. I quite like Midas Gold.

But again, if you believe gold's going to drop in half in the next twelve months, I wouldn't buy any gold stocks. I like the leverage. I own physical gold for different reasons and I own Midas Gold because at current prices, I think it's an attractive buyout around those prices. So again, I don't think that has to change to the upside to be a buyout. So, Midas is a very interesting company.

Gerardo Del Real: Fantastic. Jeff, anything else you would like to add? Thanks for taking the time.

Jeff Phillips: Yeah, the only thing I would like to add is I don't know who your listeners are. I do consult for Almaden and Midas, and because they've spun out companies out of Almaden I consult for those companies and try to give supervision to make sure I'm not diluted. So I'm a paid consultant in that arena. I'm also a large shareholder. For people that understand the junior space, these are all good things to do your due diligence in and do your own research and talk to your own financial professional. But, for most people, if you're a listener and you don't know anything about junior resource stocks, this isn't something you should be looking because it's extremely high risk.

Gerardo Del Real: Well sad as always, Jeff. Thanks again.

Jeff Phillips: Have a great day.

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