Categories: Base Metals / General Market Commentary / Precious Metals
Topics: General Base Metals / General Market Commentary / General Precious Metals

Exploration Insights' Joe Mazumdar on His COVID-19 Investing Thesis & Precious and Base Metals Stock Picks

Gerardo Del Real: This is Gerardo Del Real with Resource Stock Digest. Joining me today is the editor and analyst of one of my favorite newsletters in the business, Exploration Insights, Mr. Joe Mazumdar. Joe, how the heck are you this morning?

Joe Mazumdar: Doing well. Thanks for inviting me, Gerardo.

Gerardo Del Real: Well, thanks for taking the time. First and foremost, how are you and your family dealing with the new paradigm, social distancing, COVID-19. How are things on the home front?

Joe Mazumdar: Well, I think clinically I'm an introvert anyway. So social distancing, it comes natural to me. That's not an issue. And we just bought a dog, so that's helped out quite a bit. I would recommend that for anybody in terms of having something to do during this break. Otherwise, we're loaded with toilet paper, so we're good for at least a couple weeks. I don't know what else to say.

Gerardo Del Real: I'm glad to hear that everything is stable on that front. There's a lot to get to. 

I want to start with the most volatile part of the commodity space as of the last day or two. Silver has been absolutely clobbered. We saw a break below that $13 level. I can tell you from conversations I've had, looking to buy physical silver, that there really isn't any available at the current price. So I want to talk a little bit about silver and just get your thoughts there. 

Then we'll pivot to gold, we'll pivot to copper, and then we'll talk ETFs and what you're looking at out there. Thoughts on silver opportunity, physical, silver stocks, any names you like out there? Give me your thoughts, Joe.

Joe Mazumdar: So we liked silver when the ratio was like 80 to 90, hopefully going down to 70. Now it's more like, I don't know, 110, 115. So we got that one really wrong. What I would say is that I'm still bullish on precious metals and that ratio, I think that's a bit of an aberration right now. Silver suffers from “industrial demand.” It's not a pure speculative, monetary analog like gold is. It's a separate beast. That sometimes weighs on its ability to take advantage of things gold can take advantage of, like being a safe haven asset. But now that the ratio is blown out to where it is, yes, I would be looking for some liquid silver stocks. 

One that I recommended previously was Pan American Silver (TSX: PAAS). Pan American Silver, post the Tahoe acquisition, started generating free cash flow basically, ignoring the one-time Tahoe acquisition in the fourth quarter of last year. And now that appears they've made a significant discovery at La Colorada. They've found a skarn deposit below where they're currently mining. So that's a positive. And then you get some option development plays with a potential restart in Escobal in Guatemala, and potentially something, maybe a startup in Navidad in Argentina.

So you've got those options, you've got a good management team, it's a liquid stock, and it brings you gold and silver exposure. Most of how they generated operating cashflow in Q4 was actually from the gold assets that they bought from Tahoe.

Gerardo Del Real: Right.

Joe Mazumdar: I picked up another good project this morning. I'm not going to say it right now because I'm still waiting for my subscribers. I just recommended it yesterday. I got a little bit this morning.

What I'm looking at right now is owning... Okay, let's just take an example. I talked to an investor last week and basically what he's doing is sitting on cash and waiting to get stocks like Apple or Amazon or something like that that he could never hold or buy before. So I would take that example of an investment thesis and then apply it to the mining industry.

If you've got capital to deploy, I'm not saying to sell your current stocks because right now you're just selling to a bloodbath and there's not much point. But if you have capital, additional capital to deploy, if there were companies that you could see that you've always wanted to own – and that's what I'm doing – but never could because you always thought they were a little bit too expensive, those are the ones I'm picking up.

Gerardo Del Real: Excellent. Let's pivot a bit to gold because obviously gold leads the resource space, right? Brien Lundin is notorious for saying that you can't have a resource bull market if gold isn't in a bull market. I want to talk gold as a commodity. But I actually want to start with the ETFs, because they have not been acting the way they were expected to act. I would love your thoughts.

I mean, it's been an historic couple of weeks by all means, right? The VIX, percentage moves up and down, the hourly percentage.

Joe Mazumdar: Well, the VIX topped the peak from 2008. I think the peak was around the high 50s during that time and then last week it got up to 75. So the market volatility is through the roof and you can obviously see that with the way the S&P 500 and every exchange is moving, basically. 

Then in terms of the ETF, that started back, what was it, 2009, 2010, and it loaded up, especially the GDXJ. A lot of explorers and developers back then, everything was liquid and you had explorers with no resource trading in a market cap of a billion.

And so it's never been able to achieve that valuation again, probably for good reason. But now we're seeing wild swings. In one week, it dropped 45% whereas gold dropped 9%. A beta of 5 is just not what the GDXJ normally has. It's usually like 1.5 to 2. So that was quite unusual and I think one day it closed at a 14% or 15% discount to its net asset value.

So there's an issue with the ETF. And I think, potentially, this trading volatility probably shows people how this ETF may not be the best investment in terms of, “Hey I don't want all that company exposure, this is a diversified portfolio, I get solvency, I get all this other stuff.” But really, you don't. It doesn't trade like you think it should trade. If it does that when gold goes up and it's not trading as high because something else is holding it down, it's a little more suspect right now.

Gerardo Del Real: Makes sense. Do you feel that in the junior equities that we saw that capitulation sell-off this morning? I can't help but notice, there's a lot of stocks in the green despite the moves in gold and silver. Do you think we've finally reached the bottom in this space for the liquid and well-capitalized explorers, developers and producers that don't need to go back to the market for the next 6 to 12 months?

Joe Mazumdar: Well, that's what I'm looking at. So when I'm looking at picking something up – and I am, I'm not selling anything that I own. But then again I'm looking for things that I've always wanted to own. But all the ones that I'm buying, or keeping, because basically when I put something into the portfolio, I'm thinking that they're funded for at least 12 to 24 months with catalysts. And that's what's in the portfolio. There's not a lot of crap in there that I'll dump because it's highly levered and I don't know where they're going to get the money from. I have no problems keeping what I have. But when you have an opportunity to pick up something that you would never get, I take advantage of it. So right now, in terms of that value proposition, try and pick up companies that right now, based on its own net asset value, it's trading at a significant discount.

It might be difficult, and it is difficult, to pick the absolute bottom on any of these stocks. But what I would recommend is picking a value that you get with your own work and you can put a number on it and start picking it up at that level or below. And then knowing that it might be a V shaped recovery, but I'll be somewhere in that V, and then I won't miss it when it does turn.

I remember in 2008, when I worked for Newmont, initially the big thing was financial crisis, oh where are we going to get funded? Where is our money going to come from? Okay, no capital expenditures. We're going to reduce G&A. All that sort of stuff. And then in a short two to three months, we turned it around and then you're looking at M&A because the gold price rebounded so quickly. And it should.

Because now what we're seeing is similar. We're just seeing the Fed reduce interest rates to zero to 25 basis points. That's the target rate. That should be a positive for gold, but right now people are thinking recession and maybe in the near term people are thinking gold's not going to hold up. But what is going to hold up as you've got $13 whatever, $14 trillion dollars of negative yielding debt out there? It's not improving. It's getting worse.

So this Coronavirus is showing more stress in the financial system. In the end, in the medium term, that's good for gold. And now I'm just trying to position myself and those companies I think could take advantage of it the best. Not necessarily levered, but would work in any kind of environment and potentially would offer me an M&A sort of support, like as a put there.

Gerardo Del Real: You mentioned the M&A that followed the previous financial crisis. A lot of that M&A was a gross misallocation of capital.

Joe Mazumdar: Yes, absolutely.

Gerardo Del Real: And it absolutely decimated exploration budgets for the following decade, which brings us to where we are now with very, very few significant discoveries being made on an annual basis. 

Jurisdictionally, where are you looking, Joe? Do you still have the same view today that you did three months ago as far as where your capital is willing to go to get that exposure to those potentially very significant mineral discoveries? Or are you hunkering down and refining that as this COVID-19 pandemic evolves?

Joe Mazumdar: Yeah, I'm not going nuts and buying everything right now, but I've got a list of four or five companies shortlisted that I'm looking at at certain price levels. But jurisdictionally, I would say that from the retail sector, if you want that kind of premium, then focus in on places like Canada, the States, Australia, that sort of thing, because there's jurisdictional risks everywhere. I mean, it's gone up in Chile, for God's sakes.

But I would say, medium to longer term, my jurisdictional risk or scope is expanded to include anything people with deep pockets, whether they be companies or strategic investors, are willing to go and fund companies when the market's not there. Even though we saw post-2008 lots of financing and funding of everything, and I'm not saying and I don't think anybody should be saying all that money went into the right companies. 

Gerardo Del Real: No.

Joe Mazumdar: It was misallocated exploration because more money does not necessarily get you better results.

Gerardo Del Real: Correct.

Joe Mazumdar: The issue for me now is, hopefully, people have a little more capital discipline and they're thinking that hey, I've got to allocate capital to the people with the projects that make the most sense if they can find something, discover something. And that's really the value-added exploration. It's not, hey I got it a cheap warrant. That sort of thing. Or hey, I came in with founder's shares at a penny. That sort of thing is really not what adds value for us. What we want to do is actually drill something that finds something that somebody is going to want at the exploration stage. 

Now all we see – and this is going to help, not hurt – the issue about the pipeline of projects, whatever commodity you want. The high-value project pipeline doesn't exist for many commodities, whether they be gold or copper. They just don't exist. So this is going to make it even worse because now a lot of those companies won't have access to capital to actually advance those.

That's why I like Trilogy Metals (TSX: TMQ), despite what's going on with the copper price. South32 is in there. They're funding the next two to three years and Trilogy's not going to need a dime. And really, the pocket, the hole in the copper market is coming in 2025. And this is when this project, theoretically, will come into production. And that's what South32 thinks, because they have to think longer term. We can't commit to a retail perspective for these juniors. We have to think, has it got a chance to actually fit the thesis that I want? I want a copper project that fits in the lower quartile cost curve, safe jurisdiction, that comes into production in '25. How many of those are there out there? Not very many.

Gerardo Del Real: Not many.

Joe Mazumdar: And how many of those are in the hands of a junior? Much less. So that's what I'm looking for. That's an example to the copper space.

Gerardo Del Real: Are there juniors out there, Joe, that are explorers that you feel have the potential, that have a land package right now that has the potential to yield one of those big, monster discoveries that really ignites the base metal sector again?

Joe Mazumdar: In terms of base metals?

Gerardo Del Real: In terms of base metals, specifically copper.

Joe Mazumdar: If the arsenic issue in the concentrates for copper are sorted out in China and other places that they actually start taking these arsenic-rich copper concentrates, because in the future that's basically where we're heading. 

Regulus (TSX-V: REG), at these price levels. They're drilling, they're actively drilling. That's one.

And then I bought a real grassroots explorer. Like grass grass, really grassroots explorer in Peru that's looking for sediment-hosted copper. I mean micro cap.

Gerardo Del Real: I know where you're going and I'm a shareholder and biased. I wrote a check and I've been buying more of it, so please continue.

Joe Mazumdar: Then you say it. I'm not going to say it. You say it.

Gerardo Del Real: Hannan Metals (TSX-V: HAN). Am I right?

Joe Mazumdar: Hannan Metals. I've known Michael Hudson for a while. Here's one where I've liked to have owned a company that he was involved in but I didn't see the value in this one or that one. Now I see this one and then I see him there and I get more confidence. I put money into that one. So that's really, really grassroots. It's not for everybody, but it's one that's not going to go up and down based on the copper price because it's a grassroots explorer and it's a long-term thing. As you know, grassroots to discovery to production to development, S&P Global Intelligence put it at 15 to 20 years or more to do that. So that's where that kind of a stock moves. It moves in a different space than moving with the underlying commodity.

Gerardo Del Real: Let me stick to Hannan really quick because I had a very interesting conversation last week with Quinton Hennigh, who of course is involved with Hannan. I'm familiar with Mike Hudson, as well. Again, I said it. I'm biased, I'm a shareholder.

Joe Mazumdar: Quinton is involved with half the TSX Venture.

Gerardo Del Real: He's the geologist version of Eric Sprott on the money side, right?

Joe Mazumdar: High quality. High quality, absolutely.

Gerardo Del Real: Absolutely. But what is it about Hannan at such an early stage that attracts you? Because that's not the typical stock that you see in the Exploration Insights portfolio.

Joe Mazumdar: We did that with Japan Gold as well. We're looking at new things in new jurisdictions that make sense. Peru, there isn't any sediment-hosted copper deposits in Peru that are noteworthy. But the model exists and it makes sense and they're finding stuff in the southern part of Ecuador and now they're tracing that basin and that mineralization into Peru.

So these guys picked up a big land package and they're exploring and it's really grassroots. It's geological prospecting, it's still rock chip sampling, some geophysics and maybe a bit of drilling before the end of the year, permits pending. So it's something I put my money in. Let's see that happens. It's not like one that I'm going to buy and then sell tomorrow. Let's see. And you've really got to trust the management teams that they're going to use their money well and most of it's going to go in the ground to advance the project. As long as I find a grassroots player that I have a lot of confidence in the management team, which is a hard one to find, then yeah, that's one I don't have a problem putting money in at the level I did.

Gerardo Del Real: Excellent. Any producers before I let you go, Joe, any producers, be it in the base metal space, the precious metals space, that for you right now, just scream bargain? And I know there's a lot out there, but one or two that maybe people could do due diligence on that your subscribers have had an opportunity to vet out?

Joe Mazumdar: In terms of base metals?

Gerardo Del Real: Base metals or precious. Give me two names that you really like. You mentioned Trilogy earlier. I completely agree. You mentioned Pan American Silver earlier. We've talked Hannan.

Joe Mazumdar: Yeah, another one I would say is Lundin Gold (TSX: LUG). That's a good one in terms of that's just gone into commercial production. One of the probably highest value gold projects out there, and there's not a lot of development projects in gold coming out. So if you do see a rebound, they're going to see it in cash flow as they're converting from a development story to a production story. And Newcrest owns 30% of it. So you have a bit of the underlying support of an M&A bid eventually. So I like that one.

I like SilverCrest (TSX: SIL). I haven't picked that one up yet, but that's still one I'm looking at. And that's gone down. I think they did an equity financing at I think at $7.50. It's gone down way below that. But it's got a very high-grade development project, Las Chispas in Mexico. So that's another one I would look at.

And I always keep an eye out for what Ivanhoe's (TSX: IVN) doing and see if they go below $2. So that's one I always have an eye out, especially if they're not in the development mode and they're more in the exploration mode. Because we made our money on Ivanhoe going from $0.60 to $4.80 because they found Kakula. And it's a great prospective belt that they're still in. So if they use a lot of their money and keep finding new things, that's what would really move the stock more than people wanting them to develop it right now. Eventually, it will get developed and Zijin's in there. Really in terms of what made us the most money last time was actually the new discovery at Kakula.

Gerardo Del Real: Joe, we've talked gold, ETFs, base metals, I got more names out of you than I'm used to hearing. Is there anything else?

Joe Mazumdar: There's so many. Just buy anything. You'll look smart (laughs). The other thing I would tell your readers is don't ignore the Australian market because the Australian dollar's going to get hit because China had the big drop and they might have a hard time meeting their GDP goal of 6% this year. So that's going to impact iron ore and every other metal under the sun that they produce in Australia. And they produce a lot. So the gold price in local currency should go up. 

So what you want to do is think about those high-quality Australian names that might do well in this environment as well. Because not only will they not be competing with labor costs, which is a big deal, especially in Western Australia. They won't be competing with labor costs with iron ore or anybody else. Also you're looking at, and this is important, you're dealing with $30 oil. Oil is a big cost input in a lot of these semi-remote production operations, especially in Western Australia. So if you look at that, that might be a perfect little thing where you get the margin. Even if gold stays where it is US, it will be higher in Australian dollars. Also you get the margin appreciation with respect to the oil prices.

Gerardo Del Real: For people that want to follow your excellent work, Joe, where can they find it?

Joe Mazumdar: ExplorationInsights.com.

Gerardo Del Real: Fantastic. Joe, pleasure as always. Stay safe out there and let's have you back on here in the next few weeks and months as things develop.

Joe Mazumdar: All right. Thanks a lot, Gerardo.

Gerardo Del Real: Appreciate it.