Categories: Precious Metals
Topics: General Precious Metals

Legendary Investor Jeff Phillips on Navigating a Gold Bull Market: “We're Going to Have an Historic Run” (Part 1)

July 29, 2020

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, someone I'm lucky enough to call a friend, Mr. Jeff Phillips. Jeff, how are you today?

Jeff Phillips: I'm good, Gerardo. Thank you for having me.

Gerardo Del Real: It's great to have you back on. Thank you for taking the time, Jeff. The last time you and I spoke, I believe, was mid-March. COVID-19, we were just starting to learn about it in more detail. I don't believe anybody could have foreseen, or very few people could have foreseen, the economic impact that COVID-19 has had, put aside the toll on human lives and society as a whole. A lot has changed since then, specifically in the precious metal space. 

You and I talked about navigating out of a bear market last time. Now it appears that we are on the cusp or in the midst of what I think is going to be a historic gold bull market. I'd love to get your take on the difference between navigating that and approaching this cautiously for people that are less experienced than you, which is most of the world.

Jeff Phillips: Yeah, there's a lot of questions there, Gerardo. I'll start with people have been asking me, "Is this a bull market?" I actually think that the bottom of the resource market was put in in 2016. Typically when you look back, the market reaches a bottom and then for a number of years kind of doesn't do much or goes up a little bit and retests that bottom. As I've told you before personally, I think we've seen the bottom. Into 2016 we'd had a 5-year bear market. 

It doesn't mean everything's rosy coming out, but you know you're in that timeframe. You keep buying stocks, thinking that you've seen the bottom, and you end up with more and more stocks. As a contrarian, I always joke that you start to feel sick, and when you're really feeling sick about buying the quality companies, if you've done your research, it's usually time for the bull market to start. You always question yourself. That's what goes on in these markets. 

To give you an idea, when I first came into the resource business, in that timeframe I've had three times, and now I believe this is the fourth time, that the resource market turns from being a bearish market to a bubble market. It's always fun to be in a bubble market before it starts. I think that's what's happening now again. In the previous three times that's happened, I've made the biggest percentage wins. Obviously, as I've gotten older, it's more money involved.

When I first came in the business, it was '94. From '94 to '97 was a tremendously fun natural resource bull market. That was because gold had gone to $400 an ounce. There were 1,000% winners like Francisco Gold. There was lots of different things in that timeframe that preceded the '92 recession and the lowering of interest rates and obviously what I call a market disruption.

The next time the resource market saw huge 1,000% winners – and almost anybody could have picked a resource stock and made a few 100% – was from roughly... Well, I came back in late 2003. I think the market had probably bottomed in '01, but similar to what it's done this last time, it takes a few years of people being scared that they're wrong on the bottom. But by 2003 to 2007 you saw, again, a tremendous opportunity in the resource space. We went from ridiculously undervalued prices to ridiculously overvalued prices. That was after the internet crash, or the NASDAQ crash, back in 2000, right?

Gerardo Del Real: Absolutely.

Jeff Phillips: The next time we saw that was 2009 to 2011. There really wasn't a cooling off period there. We had a couple of years where we had tons of opportunity to buy lots of stuff because in '08 you had the financial crisis. Then '09 and '10 and into '11, you had the rare earths boom. You had gold stocks up thousands of percent that, again, weren't necessarily quality companies. They made a full round trip. But that was after the real estate crisis. 

I've seen three times when we've had major market disruptions where the natural resource stocks led by gold tend to go from extremely undervalued to extremely overvalued. I believe we're seeing the beginning of the fourth time in my career where we've had the ultimate market disruption, which is ongoing and the printing of money. The response probably is more printing than all three of those other market disruptions and the lowering of interest rates. It's the nuclear option compared to those. 

I believe we're going to have an historic run. You and I will be talking, whether it be 6 months from now or 12 months from now, and debating whether it's worth buying something that's already doubled now or tripled now, and it's up another four-fold. The fact is you and I think it's completely overvalued, but it doubles again. That's what I think we're heading into, but I don't have a crystal ball. I do have experience, though. That experience has shown after major market disruptions I've done really well in the resource phase.

Gerardo Del Real: Well, let's look back a bit. I mentioned that you and I chatted mid-March and it was a different market. You were very candid. You're quoted as saying that you're down at least 40% in gold positions that you initiated at the beginning of 2020. I'm just curious, here we are some 5 months later. I imagine you don't have very many positions down 40% in the gold space right now. What do those look like?

Jeff Phillips: It wasn't 2020. I was pretty much out of the market until 2016. I had a few key positions. I always keep key positions. I started buying pretty heavily again in 2016. I tend to buy during tax-loss selling a lot more because stuff's down and especially in a market that's not good. I was down 40% from 2016. Some of those positions, a couple of positions – I didn't have that many before that – were probably down more than that from 2011. But I was down on a large portion of my portfolio, 40%, from 2016 into the COVID crash, or whatever you want to call it. That's kind of correct. What was your question?

Gerardo Del Real: My question is what do those positions look like now just 5 months later? Just for perspective, if someone out there is listening and they haven't been in this space and they haven't experienced the turn between a bear market and a bull market like the one that we have. What do those -40%, -50% positions look like now?

Jeff Phillips: Anywhere from the worst being up 50% – and that's the worst – to up 150%. It looks a lot different than it did in March.

Gerardo Del Real: With that being said, Jeff, moving forward things will get overheated. There's already names out there that, frankly, I can't believe command the market caps that they're commanding right now. There's other names, frankly, that just haven't participated yet. Knowing what you're doing makes a big difference in this space, especially early on. 

What would you caution someone that is coming into this space with $10,000, $50,000, $100,000 and is looking to speculate, hoping to make that 1,000% type return that a gold bull market is famous for delivering?

Jeff Phillips: Well, pretty simple. I'd tell your listeners that all microcaps, but specifically mining stocks, are like burning matches. If you hold them long enough, you will get burned.

Gerardo Del Real: Learn to take profits is what you're saying, Jeff.

Jeff Phillips: Again, these are cycles that they go through. I think we're early in the cycle, but there's all kinds of different ways when you have a bull market, and I believe this is going to go on. All three of those markets I referenced when the resource market did really well, stocks doubled and tripled and then pulled back 40% and then doubled from there. Again, you're going to have pullbacks. Nothing goes straight up, in my belief. But again, the way they're printing money, I don't know. Again, gold seems to be pretty excited, but again I expect pullbacks. Over the next couple of years as the cracks become wider, I think gold has a good base to work from.

The main thing, Gerardo, is in these bull markets, you get every promoter and every story getting dusted off, just like you see in any space, whether it be cannabis or cryptocurrency. Things tend to get even more overvalued than you and I picture being overvalued. Right now, I kind of joke, but it's kind of true, if there's a private placement offered to you and the stock is $0.10 and it's got the word gold in it, you can probably go in that placement and make money as long as you get out because most of these companies won't make the turn when this market turns again. You'll be seeing more production in different areas come online, more capital flows to the space, these companies tend to be back to the value of what they have in the ground, which is zero.

But again, it doesn't mean you can't buy a $0.10 stock and sell it for $1 in the next 12 months. There'll be lots of those things. I tend to focus on companies that actually have an asset, an advanced asset. I look for companies, especially at the beginning here, that maybe because of the bear market their share structures got out of whack. They need to be restructured. I look for companies that I've been involved with since 2016 and before. These are companies that have gone from discovery to bankable feasibility studies. The numbers look like these are mines. Those companies are going to get taken out in this cycle. 

There's always a number of companies that get taken out, and that even excites the crowd even more and the promoters and the $0.50 stocks. I think you're going to see stocks go way up. My economic geologist and anyone else will tell you that's never going to be a deposit. The stock can still go from $0.50 to $8 because there's a lot of ounces there.

So again, you can make money speculating at the right point in this market, but just remember at the end of the day, it runs in cycles and everything will come back down. I'm really focused on companies that I think can be bought out in this cycle.

I do speculate on some stocks that, again, I would never mention in an interview or I would never offer my financial consulting advice to. I consult for a number of companies. These have to be companies I think that are going to get taken out. I play the market and invest in placements and companies and give them advice, but I'd never attach my name to it because at the end of the day, however long this lasts, they may go a lot higher, they're not going to be able to cash out because they don't have an asset that's ready to go into production.

Gerardo Del Real: Well said. You were generous enough the last time we spoke to share two names. Just for reference here, Midas Gold (TSX: MAX)(OTC: MDRPF) was trading in the mid-$0.50s level. That's currently trading at $1.50. So that's nearly tripled since then. The second name that you shared back in March was Almaden Minerals (TSX: AMM)(NYSE: AAU). It was $0.37 Canadian at the time. It's trading at $0.92 here 5 months later. How do you feel about each of those companies? What else do you like out there, Jeff?

Jeff Phillips: Again, both of those companies have assets that are very advanced. Midas is in the final permitting stage, and now they're heading into a gold bull market with a 6 million ounce deposit. It's been delayed. I always laugh when someone says, "Doesn't that company have permitting problems?" I've never seen a company that doesn't have permitting problems in any country, including the United States. Everything takes longer. Midas was supposed to have the decision from the Forest Service of the US Government so that people can make comments on that about what, a year and a half ago? It's just taken longer. They finally got their act together – not Midas but the government. Now it appears they're on track and that's going to be released here in August. It starts the countdown to being issued the permit. I believe they will be issued the permit. Midas is a company, if you've interviewed me, I've said I'm very certain that it gets bought out by a major because it makes a meaningful difference. It's probably going to happen when we have a permit.

The only thing I can't tell you is what price that's going to be at. If you'd talked to me in 2016, it's the same thing. I could have said, "I've been buying that stock at $0.50, $0.60, $0.80, $0.90, $1 off and on since 2016." But again, what it really comes down to is I believe it's going to get bought out. If it gets bought out for $0.40 a share, well, I lost money. I was betting on the price of gold being somewhat higher, not this high, and then having a permit at the same time, and I'd make money on my position. In this market, it's highly leveraged to the price of gold. The official countdown will begin in August.

It's good timing for people who just became shareholders. Again, the companies had to suffer through a bear market and not a great market for the last 8 years, even if it did end in 2016. Again, for new shareholders I think Midas offers tremendous leverage, and with that permit is a buyout candidate. 

Same thing goes with Almaden. They've had issues getting their permit issued on time. They were very close, and then Mexico basically suspended all permitting, mainly because there's court cases in Mexico that were nothing to do necessarily with mining, but a bunch of NGOs – really backed by US interests which is funny – that are suing the Mexican government on behalf of the local people. I don't know the right term.

Gerardo Del Real: The local eijido. Correct. The nearby community.

Jeff Phillips: Yeah. It slowed the permitting process down. But in Almaden's case, there's a company that in 2011, the last bull market, made this discovery, tremendous drill results. No one knew what it was and was hoping it was a multimillion ounce discovery the stock went from $0.80 to $5 a share in the space of – you'd have to look it up – maybe 6 to 9 months.

Gerardo Del Real: Correct.

Jeff Phillips: On a number of good drill holes. You have a company trading at the same share price today or there about. Now it's a 4.5 million ounce global resource with a bankable feasibility study focused on 2.5 million of those ounces. I don't have the numbers in front of me. Your listeners would have to look it up. It's traded on the US exchange under AAU. But if you look it up, I believe that their base case, which is like $1,350 gold or something like that. You correct me if I'm wrong. You probably know those numbers better than I do. Essentially you've got a deposit that even their base case, which was gold nowhere near worth that, was close to a $500 million NPV. They have a $75 million plant that they already own to put to that into production. They're just waiting for the permit.

I don't believe Almaden ever puts this mine into production. I think there's already probably interest out there. The largest shareholder of Almaden is Ernesto Echavarria, who's a Mexican billionaire. He has no interest in selling the company at these prices. He obviously wants to see them get the permit. I think he has considerable influence in Mexico. I still like Almaden at these prices. It hasn't gone up as much as some of these other companies, even though it's got a tremendous asset. That's because there were some people because of tax reasons that had to sell a position, but I think that's going to change. I think Almaden is one of those that gets bought out.

Gerardo Del Real: Just going back briefly here, to quote those numbers. They use $1,275 an ounce gold and $17 an ounce silver. Even in that scenario, the net present value is just over $400 million Canadian. Again, the current market cap is less than $100 million Canadian. They have, as you mentioned, a plant, a mint condition mill that in a bull market like the one we're in can easily justify the entire market cap of the company. If you want to get a bit more creative, and I will, if you use $1,425 gold and $20 silver, the net present value rockets to over $600 million Canadian or over $6 per share. Again, that's the type of leverage that I think you were speaking to.

Jeff Phillips: Absolutely. Just so we're clear, I own a lot of shares in both of those companies. I am a consultant for those companies. I really like to make sure companies that I and other people I know own a lot of shares in aren't wasting shareholder money and raising money at dilutive prices for their shareholders and not making mistakes. Again, I do consult for those companies. But even more so, I'm a very large shareholder in both. Those are companies I believe are going to get bought out. 

Like I said, I own lots of other companies, and I have other companies like that that I own positions in. But I have other companies that, when the stock is up 500%, I'll be a seller because it's not going to be bought out. It's part of what I see coming, which is a bubble market in the precious metals space.

Gerardo Del Real: Both those companies, Jeff, already have a robust resource base, top-notch deposits, top-tier management teams. Are there earlier stage companies that you see could turn into an Almaden or a Midas that finally have a bull market that allows the company to, frankly, raise the money needed to do the exploration to find a quality deposit, which are getting harder and harder to find by the day?

Jeff Phillips: Yeah, that's a difficult question also. Yes, absolutely. There are quite a few companies. You can't buy everything. There's a number of good companies out there that I think can take where they're at and they're definitely going to be able to raise capital at higher and higher prices and advance those deposits quickly. A lot of these companies go through multiple cycles. Even the best management teams often go through two cycles before they sell their assets. 

I always remember Minefinders because I worked with it and Metallica Resources back in '95 and owned shares in those companies. They eventually went on to both be bought out, but it was in the next cycle, 2003 to 2007.

Silver Standard Resources, which is now SSR Mining, that was actually a client of mine in the mid-'90s. The stock went from, I don't even remember, originally went from $0.75 cents to $5. It even went higher. But then in the bear market, I think I bought that stock back for $3 in 2003. They put the assets together, but obviously the bear market between '97 and 2003 had taken a toll on all these companies, like Midas and Almaden. But Silver Standard went on. I purchased it again at $3 or $4, and I think even at $5, and it went to $35 in 2007. I don't know what SSR Mining is trading at, but I bet you it's doing really well right now.

Gerardo Del Real: $24 US.

Jeff Phillips: Yeah, there you go. So again, it was probably lower. That's a company that put a bunch of silver assets together when no one wanted them and actually built mines and is now a producer. There's lots of companies and the few that I own that I think have assets that they can advance. Again, you don't have to get as far as Midas and Almaden to a bankable feasibility study and permitting. 

In a bull market, companies get taken out at earlier stages. So it can be a pre-feasibility study or in some cases, even a PEA if it looks very, very robust because remember all of these one-mine producers and bigger companies, their share prices and cashflow are going through the roof right now. If you're producing gold, you're making a lot more money at $2,000 gold than you were at $1,200. So they'll buy earlier stage stuff. Again, you don't have to be as advanced. There are companies that will make it in this cycle and get bought out because these larger companies are going to be handed tons of cash, like they always do, and then they begin to overpay at the end of the bull market. That's the time to get rid of your burning matches.

Gerardo Del Real: Well put. Jeff, I've taken 20 minutes of your time. I want to thank you for that. Is there anything else that you'd like to add out there, something for people to look out for in this market? You mentioned that a lot of money will be made. Prices will go higher. We've talked management teams in the past, how to vet a share structure. People can always reach out if they have any questions on my end of it. But any words of wisdom here before I let you go?

Jeff Phillips: Yeah, you asked me to give you a couple of names of companies. What I suggest is I can tell you a couple of earlier stage companies that I like in this market that have moved up and why I like them. But why don't we do a part two of this interview at some point?

Gerardo Del Real: I would absolutely love that. Maybe you come back next week and see if we have $2,000 gold here in the US?

Jeff Phillips: That sounds good.

Gerardo Del Real: Perfect. Thanks a bunch.

Jeff Phillips: Thank you.