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

How One Experienced Resource Investor Is Looking at This Outbreak (Part 1)

April 20, 2020

Gerardo Del Real: This is Gerardo Del Real with Resource Stock Digest. Joining me, once again, is one of the most successful contrarian speculators and investors in the resource space, Mr. Jeff Phillips. Jeff, how are you?

Jeff Phillips: I'm good, Gerardo. How are you today?

Gerardo Del Real: I am well. It's been 15 days since the last time we spoke publicly and it seems, frankly, like months ago. The last time you and I chatted, we talked about the sell-off in the gold space at the time. And man, it sure has turned around since then, which I think speaks to the velocity of how the market is trading today. Gold is at $1,720.

There seems to be a special purpose vehicle created every day to circumvent laws that prevent the Fed from doing what it's doing. 

Let me start first off by asking you, did the steam that the gold sector picked up, did that catch you by surprise a bit, the velocity of it?

Jeff Phillips: No, not really, Gerardo. Anything's possible. Like you said, the two weeks seems like a lifetime. But I think some of those stocks I talked about are up anywhere from 20 to 40% probably since we talked about them. It's all short-term. I wasn't really talking short-term about why I like those companies or why I like the gold space. I was talking more out over the next four years why I like the space. 

Again, I expect these stocks can pull back, they can go up another 20 to 40% here in the short-term. I'm really looking at things that can be up 500 to 1,000% over the next four years.

Gerardo Del Real: It's been roughly a $250 move to the upside in gold. You're one of the people that was really generous with their time early on in my career, and made sure that I was crystal clear on the fact that things don't go straight up, and that you need to take your cue from the markets. We're seeing a slight pull back.

Do you anticipate a pause, even a momentary one, in the run-up here in the price of gold?

Jeff Phillips: Well, like I said, I can't really tell you what's going to happen in the short-term. I'm not sure anybody can on any subject, for that matter. But when I look at gold out over the next four years, I see it being a fantastic investment. I see those companies that have gold in the ground in a compliant, pre-feasibility study, feasibility study or, even better, a bankable feasibility study, as being very good investments. In the short-term, you could be down or up a lot. I'm looking out more over time.

Gerardo, if you look, this is unprecedented what's going on. I obviously don't have all the answers for that. But if you look out over my career, this is the fourth, call it recession or fourth market major interruption. I came into the market after the '92 recession, and the resource market really boomed from '94 to '97 pre-Bre-X. There were just incredible returns made in that timeframe.

I left the market after several successes in the late '90s, and decided to enter it again in late 2003, I think it was. A lot of the juniors were trading at $4 or $5 when I'd left the market pre-Bre-X. Good companies with good assets that take forever to build a mine, and all the things that go into that. I came back in '03 and '04. By '07, I think of the 14 companies I had in my family fund 10 had been bought out. Six of them were old clients and holdings of mine in my first time in the resource market.

Then, if you look at 2008, I was still in the market. In 2007, we'd sold most of those companies, but I was still in the market with several companies in 2008 when the new companies, earlier stage. As you know, I got into a number of rare earth companies right before 2008 and gold companies. We had the massive sell-off. But 2009, '10, and '11, and mostly '10 and '11, end of 2009 and 2010 were some of the best resource speculations I've ever had across the board. The resource sector did very well out of that.

So, again, I've seen these market major disruptions. This'll be my fourth one. I'm not totally convinced, even though all the charts say that the resource market and my past history says the resource market as a whole will do very well. There's a lot of changes that are going to be coming because of the coronavirus and people's habits.

But I do believe gold's going to do really well, and those gold stocks are going to do really well. And quite possibly, we're seeing uranium pick up. I'm not as convinced on what's going to happen in the base metals market, even though in the last three major disruptions in the markets over the last 30 years they've done very well too. I think there will be a time for that. I'm not necessarily looking for base metal investments right now. I'm mostly putting my money into precious metal investments in my natural resource portion of my assets.

Gerardo Del Real: You mentioned a couple of companies the last time we spoke. Almaden Minerals (TSX: AMM), Midas Gold (TSX: MAX), developers with anchor assets that have obviously a good bit of exposure to the gold price. Those companies are up 40%, 50% since we spoke. Again, this is just 15 days ago. So I've got to ask you, are there explorers that appeal to you? Because Midas Gold, Almaden Minerals, these are companies that have millions of ounces in the ground.

I tend to gravitate towards the higher risk exploration stocks, in general, for my personal risk profile. Everybody's different. But are there explorers, maybe companies that are out there doing good work, and teams that are doing good work that you feel have the potential, at the very least, to do well if they continue to successfully drill out projects?

Jeff Phillips: Explorers is a big term, Gerardo. You have everything from pieces of land that have old drill holes on them from 100 years ago to companies that have had some tremendous drill holes and starting to get some geometry on what they might have, but they don't have the resource yet. Or they might have a 43-101 compliant resource, but it's still not a big enough size to think it would be a mine, but there's indications that it's going to get bigger.

So when you say exploration, it's a wide range of up to actually producing a PEA, or a feasibility study on a project to show that it could be economic. It's everything from a piece of ground and, as you know, a lot of the people in this space – the term “moose pasture” comes to mind – rehash old things and it's more of a take the shareholder's money, not try to build something. That's probably 80% of the exploration companies.

So, you're talking about 20% that are actually really trying to do something. And then narrowing that down to where you want to be in that space. Companies that are getting ready to produce a PEA and on a resource that they've outlined. Or companies that have tremendous drill holes, again, that haven't started doing a 43-101 compliant resource. 

So, there are companies I like. One of the ones, you actually introduced me to it. Actually, a couple people introduced me to it. Earlier on, I didn't like the company because of the share structure because the people that put it together are giving themselves a lot of cheap shares. But the asset was a really good asset. The people that brought it to me at the time, I said, I'm not interested because the share structure is horrible and there's no cost basis for these guys that aren't even management. It's an incredible management team. But the guys who put the deal together aren't going to be around long. So, I didn't pay attention. You brought it to my attention again later and it was called Chakana Copper (TSX-V: PERU). The symbol's PERU.

Gerardo Del Real: P-E-R-U. You got it.

Jeff Phillips: That's a company that interests me. You brought it back to my attention. I looked at the structure. It looked like all those cheap shares had been sold. You know more about the financings probably than I do. But they've raised money at $0.40, $0.60, I think as high as $0.90. Then you and I talked about it a year and a half ago because Gold Fields came in and wrote a check for $8 million dollars. I think that was at $0.51.

Gerardo Del Real: Correct.

Jeff Phillips: I still thought that's interesting, but the markets had been bad. Then you and I talked again. It might've been the Christmas before this last Christmas, but definitely this last Christmas when the stock was under $0.20 and it had quite a bit of money in the bank. They've had some permitting problems in Peru. 

They've had tremendous drill success on what they could drill, and their best targets haven't been drilled down there yet. They don't have a resource yet, but it's shaping up to be a very interesting play. And obviously, Gold Fields thought so at $0.51. So, I started buying the stock under $0.20. Was it two Christmases ago that it first went under there and then bounced back?

I started buying a whole heck of a lot more. I think it got down to $0.15. Now, in this market, I think it's been down below $0.10 and it's bounced back up to $0.18. Well, I've liked it under $0.20 there. It's a company that I think will, when governments go back to partial work, which I think is what's going to happen, I don't think we're going back to normal anytime soon. But I think they'll get their additional drill permits. They don't have to raise any money. So, you don't have a financing risk with a company like that. They have about $7 million, just shy of $7 million in the bank.

That's a company I like because I know that they're not going to suddenly do a sweetheart deal financing with someone. Gold Fields is in at a price that is much higher than mine and many people financed it higher than that. I think the stock's washed out. So, that's an exploration play that actually has had 30,000 meters of drilling since 2017, and had tremendous success in the drill holes. So, I'm excited to be a shareholder over the next couple of years.

Gerardo Del Real: Excellent. And just to be clear, they do have approximately $7 million Canadian in the bank, just under the market cap, even after the recent run-up in the stock, still trading under $0.20, has got a market cap of approximately $16.6 million Canadian. Again, you have 40%, 45% of it backed up in cash and a drill rig ready once we start phasing into getting back to not normal but the new normal, whatever that's going to look like coming on the other side of this COVID-19. 

So, that's a company, Jeff, you didn't like the share structure, it kept you away. Once that improved, everything else about it was attractive is what it sounds like.

Jeff Phillips: Yeah, correct. I think the important thing on any company in the exploration space, or any company for that matter, even the development space that has an asset, a compliant resource or some stage of feasibility study, is what's their cash position at? Because if the market knows that they're going to have to raise cash, that can be an anchor on the stock price. Obviously, with so many scoundrels I'd say in the market lining their own pockets, often these financings are done in 80% of these companies across the board, at not fair prices with warrants.

Again, you want to make sure if you're buying something, one, you like the asset and two, you like the management team. Really, the management team's the most important, then the asset. But just as important is are they going to have to raise money any time soon and where's that money going to come from? Because if it's going to come from a large shareholder or a major mining company, that's a positive. If it's going to come from the brokerage community where people have a very short attention span, it's probably not something I want to be buying in the market right now, especially in these uncertain times.