Categories: General Market Commentary
Topics: General Market Commentary

Legendary Investor Jeff Phillips on How He's Playing the COVID-19 Panic Cycle & a Couple of His Favorite Junior Resource Companies (Part 2)

On March 19, 2020, I had the opportunity to speak with one of the most successful contrarian investors in the resource space, Jeff Phillips, about the COVID-19 panic, how he has positioned himself, and a few of his favorite junior resource companies. Here's part two of our three-part conversation.

Click here for part one of our conversation.

Gerardo Del Real: So in the context of a frozen up treasury market right now, a global currency war, we have the dollar index over 100, it's flirting with 103 you believe. Do you believe, is a better question, that all of those factors are favorable to gold?

Jeff Phillips: I do. Yeah, I do. Again, you already had a credit problem in my belief from student loans to auto loans to corporate debt to government debt before all this happened. Since the financial crisis, they've printed money. And what's going to happen now? Gold's trading pretty well. I mean, again, it's down from its high, but it's up. It's in that uptrend that you saw in 2007 and '08 when it more than doubled by the end of it. So I would expect that we'd seen gold double from the $1,100, $1,200 level here. And again, I think there's a whole new generation of people that kind of understand the fact that money is printed and there's no backing of that.

That comes from all these young people that have been in cryptocurrencies and older people. With the story of cryptocurrencies for the last six years, their argument has been there's no fees, you don't have to rely on anyone else. There's a fixed number. They understand that money just gets printed. So again, cryptocurrencies haven't done very well. Nothing has obviously lately. We're about to flood the market with it. It's going to be unprecedented. It's going to be more than we spent in 2007 and '08, to try to float this thing.

And I'm not going to bet that they can't float it. But, I think what'll happen, they're going to throw so much money at this and we're going to see inflation. We're going to see probably markets come back across the board. But I think the gold stocks and gold will probably lead that. And again, the only thing I own that I don't worry about is my physical gold. I don't care if it's up $200 or down $200, in this market I'm happy to own it.

Gerardo Del Real: Absolutely. You mentioned a company that you wrote a check for recently and you mentioned quality gold companies. You define that as companies that have liquidity, companies that are anchored by robust assets, not so much the exploration companies right now. I know you don't give the investment advice, Jeff, but can you share a couple of ideas of companies that are at least on your radar, that you would encourage people to do due diligence on and maybe just decide whether it fits their risk profile?

Jeff Phillips: Yeah. Everybody's got a different investment and a different financial thing. So this is just what I'm doing. Like I said, I plan on buying a dozen or so companies that I don't own over the next six weeks in the gold and precious metal space. 

An example of two companies that I own a lot of shares in that I bought more shares in recently would be, which you're familiar with, Midas Gold (TSX: MAX)(OTC: MDRPF), which is in the final permitting stages of their Stibnite Gold Mine in Idaho, which should be permitted. Well, again, things are going to slow down a bit because government agencies aren't working around the world. But sometime early next year I suspect it'll get permitted. It's a 6 million ounce gold deposit in final permitting. Barrick Gold owns a big chunk of that. They paid $1.10 for that several years ago or last. Their largest shareholder is a gentleman by the name of – I can't think of Paulson's first name right now.

Gerardo Del Real: John Paulson.

Jeff Phillips: John Paulson.

Gerardo Del Real: Of Big Short fame.

Jeff Phillips: So John Paulson, who's obviously The Big Short and did well in the real estate thing, was their largest shareholder. He owned about roughly, I'm not exact here, about 22%, 24% of the company. There's more gold there, but they're permitting the 6 million ounces that they know they have, and not exploring. But John Paulson, just recently because of the slowdown, and Midas announced a $35 million US financing. It was backstopped $25 million was a month ago, which John Paulsen was taking and the other $10 million was going to some gold funds and a couple brokerage firms. 

Well they just completed that financing four days ago, which makes them look very smart in light of this market. They completed it above the share price with everything selling off. The brokerage firms and the funds that have probably seen redemptions as people raise cash, even the gold funds, backed away from it. So John Paulson took all $35 million US down of Midas Gold and has basically made sure they're funded through a production decision on that 6 million ounces. So effectively by increasing his position by another 20% or so, the total is somewhere in between 40 and 50% of the company, he just bought another for $35 million, figure it out, what is that? Probably another million or two ounces of gold in the ground. I don't know what that works out to be, but he obviously believes that gold's going to do very well in the coming environment. And again, I don't mind being aligned with someone like John Paulson. And what's strange, I'm making this a long answer, Gerardo.

Gerardo Del Real: It's a good answer.

Jeff Phillips: But what's strange is because of the panic right now you can actually buy Midas, what 20% percent cheaper or something like that.

Gerardo Del Real: Almost 30%.

Jeff Phillips: 30% cheaper than John Paulson just wrote a $35 million US check for it. So I'd say that's a pretty good bet long-term. They're not going to be raising money anytime again soon. You can pay 30% less than one of the most famous investors in the world just paid for it and he knew it was lower. I don't think he really cares. I think he's looking out two years from now and saying my permitted gold mine that's got already 6 million ounces, it's going to be worth a hell of a lot more than this right now. 

So Midas is an interesting company to do some due diligence on. I plan on buying some, I own a bunch as I said. I find I'm buying more in the market. Matter of fact, when I hang up from you, I'm going to take a look at it since I brought it up with you.

Gerardo Del Real: And just to be clear with everybody, I'm biased. I bought some last week and am likely looking to do so again here soon if these prices hold up. 

Jeff Phillips: In the next two weeks, Gerardo, I don't know what you paid for it, but whether you paid $0.45 and it's at $0.35 now or $0.30 or whatever, you're not buying it because... I mean, again, you could if you think I'm relatively sure it'll be higher than what John Paulson paid for it, so you can make 30%. But it doesn't really matter if you're looking at this as a two-year play because whether you paid $0.30 or $0.40 for this, you're looking at dollars and that's what Paulson's looking at. It's not going to make a difference to him to turn his total of about $70 million investment in the company into $100 million, it doesn't make a difference to him. He's looking to change that $70 million into $700 million.

Gerardo Del Real: Absolutely, absolutely.

Jeff Phillips: I'm looking at it now. I consider it a pretty good buy personally for my own self and my portfolio because I can buy it 30% less than Paulson paid for it five days ago.

Gerardo Del Real: Absolutely. Quick point. I know that that financing was completed without a warrant as well, so 25 to almost 30% premium to what it's trading at now without a warrant. I think that's a heck of a vote of confidence in Midas, Stephen Quin and the team there. 

Click here for part three of our conversation.