Categories: General Market Commentary
Topics: General Market Commentary

How One Experienced Resource Investor Is Looking at This Outbreak (Part 2)

Click here for Part 1 of my interview with Jeff Phillips.

Gerardo Del Real: I remember early on, a little bit over 12 years ago now, I emailed you about a company I was vetting and I said, "I really like this company. They just secured a brokered private placement. That must mean that it's gaining some traction, has brought in good shareholders  and it's probably a good speculation, right?" 

I'll never forget, you told me, "The brokers oftentimes are the problem." 

Obviously, it's not the rule. But it definitely pays to listen to that bit of advice that you just gave. Oftentimes near-sighted and short-term shareholders are not to the benefit of the company.

Again, I like Chakana as well. I'm biased. I'm a shareholder. That project so far, the Soledad project consists of 60% gold. The remaining is taken up by silver and 40% of very high-grade copper. Great team and I think they're well on their way to a resource estimate hopefully by year end if the macro situation plays out.

Before I let you go, Jeff, I have to ask you the amount of money printing, and I mentioned special purpose vehicles, which are just legal roundabouts to allow the Fed to buy almost everything. It includes junk debt now. They call it high-yielding debt, but it's not that. It's just junk debt that it's buying. 

Any thoughts on that? This is historic. I've never seen it. I've never read about this. Have you seen anything like the amount of spending and what it's spending the money on from the Fed? Have you ever seen anything like this in your career?

Jeff Phillips: Absolutely not. Two things. One is on your prior thing. When I'm talking about Chakana, I'm talking about what I'm doing for myself.

Gerardo Del Real: Correct.

Jeff Phillips: Realistically, that's not advice for your listeners because I don't know their financial position. I don't know what they're trying to do. The simple fact is you want to have a broad base of a number of companies because something can go wrong with any company or any country that they're in. So, to be aware, I'm just telling you what I'm doing with my own money.

Again, the resource sector, I approach it like a pyramid. On the bottom, you've got your producers and your advanced assets. In the middle, you've got things that may not be as advanced. On the very top of the pyramid, you may have a few pure exploration plays. 

Again, if somebody listens to a bunch of interviews and buys 10 companies that are all pure exploration plays, that's not a good spot to be on the pyramid. It's like buying all the dessert at the top of the food pyramid. Again, that's not advice on that.

But back to your question. Yeah, I've never seen anything like this. I can't figure it out. I've tried to sit there and put it together and show where the money's going. I don't think anybody knows. They printed so much already. There's so many problems when the government spends money. We've seen it for 30 years in accounting and tracking. This is unprecedented amounts of money.

Someone told me today that the small business funds are already all taken up. I've talked to people that own businesses that really need that money. I also know people that have businesses that are doing fine, but they're taking the money also because they can get their payroll, rent and electricity paid for three months. So why wouldn't they? That's actual people I've talked to.

Again, when you look at all the ramifications, none of the money that's been printed so far, they said we've got here in California, different cities are passing 6 months moratorium on evictions and mortgage forgiveness for a year. What about the commercial real estate owners that their business people are asking for a break but they have a mortgage on their property and they count on the money coming in to pay that mortgage? That hasn't been addressed yet.

There's so many things that haven't been addressed yet that I think the market doesn't realize the ramifications of how much more printing is going to be needed to be done and how this is going to change our habits in the future. Regardless if we can all go back to work to some degree in June, this isn't going away for the next couple of years and I think it's going to change a lot of things.

Gerardo Del Real: You mentioned uranium and I said I was going to let you go, but I'm going to keep you here for a couple of more minutes, if I may. You touched on uranium. It's at a 4-year high. It appears that the supply that's come offline is actually making a material difference now with that spot price that everybody keeps track of. 

Are there any names in that space, whether you own or not, that merit due diligence?

Again, for everybody listening, you should always take these mentions of companies as ideas to further your due diligence. You have to make your own checklists, like Jeff said. Everybody's got a different risk tolerance profile, financial situation. Take the ideas, do some due diligence, figure out if it fits your profile. 

But with that being said, Jeff, are there names in the uranium space, which frankly, the whole sector has been sold down. They've rallied recently, but we're still near very, very baseline lows. Are there are any names out there that appeal to you?

Jeff Phillips: I only own two uranium stocks, Gerardo. One is Azarga Uranium (TSX: AZZ)(OTC: AZZUF). The symbol is AZZ on the Toronto Stock Exchange. It's got an advanced project in final permitting in South Dakota, and also has several other projects in Wyoming, all in the same area and expansion potential. It's an ISR project. I like it quite a bit.

But like you said, we had a uranium boom back in '05 and '06 that saw share prices go up 10 and 20-fold on companies that didn't even have any uranium, just had uranium in their name. Uranium went from around from $12 a pound to over $100 and something dollars a pound. So, it's been a pretty bad market since then. The fact in the market is that, besides Kazakhstan, at $20 uranium no one can really produce it and make any money.

You've seen Cameco, even before the situation with COVID-19, a year and a half or more ago they shut down part of their production at one of their mines because they can buy it cheaper in the market. Why would you dig it out of the ground if it costs you more money and they can fulfil their contracts? Since then, because of the low prices, even Kazakhstan – was it a year ago? I lose track of time – they cut their production.

Now we have COVID-19 and we've seen Cameco announce a whole bunch of other cuts, even on their processing facilities. Basically, they had to shut down a number of them, but I don't believe those are going to open up anytime soon. Kazakhstan, I believe, announced another cut to their production. Obviously, they're being effected by COVID-19.

So, the fact of the matter is that uranium needs to be at $40 to $50 a pound for companies to be incentivized to go dig it or get it out of the ground. At some point, uranium has to go over that price. I'm not jumping into the uranium sector and buying tons of companies. Although I do see, because of the supply problems that we are going to have and security of supply, and we've already seen that before COVID-19 in the uranium space with the US government and Section 232. 

It's strategic and we need to have our own production. We only produce 3% of our uranium. So, those things are all going to come into play. But right now, I just own one company in the space, and that's Azarga Uranium.

Gerardo Del Real: Low-cost, ISR, high-grade, in the US, obviously good exposure to domestic incentives. If the government gets around to it, those recommendations and incentives that were rumored are now months past due. Maybe the Fed will create a special program since everybody else seems to get one. Jeff, is there anything else that you'd like to add?

Jeff Phillips: Yeah, back on Azarga though. Again, that's something I own and it's higher risk and I believe higher potential returns. If you really want to buy a uranium company for the longer term – again it's still risky – but something like Cameco, which again, is what your big funds and people will first start flowing back into when they get bullish on the uranium price and it keeps moving up like it has recently. Those are the bigger companies. Like in gold, you've got your Barricks and your Franco-Nevadas and your Newmonts and Gold Fields and things like that.

Cameco is a flagship uranium company and it's a $12 stock now. It was once a $45 stock. So, clearly, if you bought it at $45, it was a high risk. But those are the types of things you look at first. Then if you want to go down the risk profile, the companies that have compliant resources, that are in advanced permitting, something like as Azarga offers higher risk, but much higher potential returns.

Another company I own is Skyharbour Resources (TSX-V: SYH) (OTC: SYHBF). I like management, it has multiple JV-funded projects seeing work done and assays pending on the flagship. Additionally they’re in a basin that has yielded the highest grade uranium discoveries in the world. So it makes a good speculation.

Gerardo Del Real: Fantastic. Jeff, always insightful. Thank you for your time. Be safe. Hopefully, we chat soon and we're talking about another $150 or $200 increase in the price of gold, right?

Jeff Phillips: I don't know, Gerardo, in the next two weeks what we'll be chatting about if we chat again. I think over the next couple of years, when we chat about gold and gold stocks, we'll laugh. 

When you asked me, "Is this company a good buy at $4?" I laugh at you and say, "We struggled with it when it was a good buy at $0.50 a year and a half ago." And that's the type of market I expect to be coming. Then it's a question of these markets typically last two to four years in the resource boom and you've got to pick your spots to get out.

Gerardo Del Real: Well, I'm looking forward to having that problem. It's been obviously a challenging few years, but it does feel different right now, despite obviously the macro volatility that comes with that, right?

Jeff Phillips: Correct, Gerardo. Well, it was good talking to you.

Gerardo Del Real: Pleasure. Thank you, Jeff.

Jeff Phillips: Take care.