Categories: General Market Commentary
Topics: General Market Commentary

How to Successfully Invest in the Resource Space

Editor’s Note: I sat down again this week with contrarian resource speculator Jeff Phillips to talk volatile markets and some top picks to take advantage of the volatility. I hope you find it insightful. 

—Gerardo

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Gerardo Del Real: This is Gerardo Del Real with Resource Stock Digest. Joining me today is one of the most respected contrarian voices in the resource space — Mr. Jeff Phillips.

Jeff, people love our conversations. They love your insights. Obviously, you bring over three decades of experience in the markets. And I should say it's not just the resource space… it's collectibles, it's real estate. But obviously, you've been very, very successful in the resource space. So I say all that to say thank you for coming back on. How are you today?

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

Gerardo Del Real: Well listen, the last time that you and I had a public conversation, we chatted about your thoughts on the overall indices, and you said you expected volatility. You said you weren't sure what was going to break but you thought at least something would crack. And sure enough, we’ve had what I would say is a mini fracture of the tectonic plates with the regional banks essentially needing to be bailed out, right? 

What are your thoughts on the overall markets as they stand today? Do you think that was all we're going to see in terms of volatility and sectors getting themselves in trouble?

Jeff Phillips: No, I don't, Gerardo. I think last time we talked, obviously, I didn't foresee, I just think when you raise interest rates the way they've done, which they needed to do because they shouldn't have been as low as they were for 10 years, you're going to have consequences. 

So one of those consequences that happened very quickly was watching SVB bank and several other banks, basically, in 48 hours, go from high flying, great companies to, ‘Oh my God, they're not going to survive!’

So I think that there's more, if you want to call them tremors or mild earthquakes. I think we may not have a big earthquake but I think there's a series of mild earthquakes that are going to move this market lower. I could be wrong. And again, it depends on your timeframe and what you're buying and so forth. 

But I think what we'll see next is I think these banks… a lot of commercial buildings have come down in price, and a lot of these banks finance those commercial office spaces, retail, apartments. I think with the prices coming down with interest rates up, you are obviously going to have prices come down, and a lot of those loans are maturing and due in 2024… I forget the figure. But I think there's going to be some problems in the commercial real estate space.

I think there are other areas that we don't even realize yet. The student loan debt is due to come back and have people start paying in August. You can't keep postponing that forever, or you just can wipe everybody's debts out from everything else. You can have a debt jubilee like they used to in the biblical times. But the fact of the matter is I think there's going to be more earthquakes, and I think we're going to test the lows of last year and probably go through those.

That being said, every market I've ever been in for the last 30 years, when you have a major shift in the financial thinking with interest rates or whatever, and the markets correct, the market that does the best coming out of that, both from the real estate crash to the dot-com crash to the '92 recession, has always been the resource market. 

The base metals, the precious metals, almost all resources do well coming out of those corrections because they're real assets that the world needs to continue moving forward. So I think we're coming into a really big bull market for the resource space. But I don't think it's this year.

Gerardo Del Real: You don't think it's this year?

Jeff Phillips: I don't but I could be wrong.

Gerardo Del Real: So let me ask you this… you're a contrarian, and I know this from the many years that I've known you now: is this the year, then, to position for that bull market that you see coming?

Jeff Phillips: Yeah, and I think you have to be careful positioning. Obviously, in the resource sector, I don't focus on production, which is a great way… if you believe uranium is going higher and there is going to be a uranium shortage… most people should look at Cameco, one of the largest uranium companies in the world. If you believe gold is going higher, which I do over time, then things like Newmont and Barrick and Newcrest and things like that are what you might want to focus on.

I tend to be in the lower end of the spectrum from what I call exploration plays that have something that I think looks really interesting and it's high risk to go drill and see if it's bigger than what we think — and that's high risk. And those companies are always burning money and they're drilling, and even if they're doing it right, they're burning money. 

And 90% of these companies aren't even doing it right. They're just burning money, not doing stuff on the ground, paying themselves. And so that's a very high-risk arena. But you can get 10-, 20-, 30-fold returns, especially when the bull market starts — all the turkeys fly.

But that's probably not what you want to focus on now. If you want to come down from the producers to companies that — depending if I'm wrong and the markets do well and resources do well this year — you want to be in some companies that have more leverage to going up. It's probably the development stage companies; those companies that have a resource, have a PFS, are expanding their deposit, are good at raising capital. So you really probably want to look at companies that have an asset and can raise money.

Gerardo Del Real: Companies like that tend to provide in what's still a high-risk, high-reward sector — the junior resource space — but they do tend to provide a mitigation of risk, right? At the very least, there's usually, if there's already a robust deposit and some economics tied to it, there's at least a baseline of value that's built in that you can measure the company by. 

What companies do you see in the space right now that provide that for you personally? And obviously, I know you don't give investment advice and you always caution everyone that what you do is good for you and may not be good for someone else, everybody has to evaluate their own decisions. But what are you doing with your capital and what are some of those companies that you see that have a robust resource, that have an anchor valuation tied to them?

Jeff Phillips: Well, you and I have talked about several of these companies before but one that I know that you've been a big supporter of and that I own a few million shares of is Patriot Battery Metals (TSX-V PMET)(OTC: PMETF), which has the Corvette lithium discovery in Canada, which, again, is growing every time they drill. 

The stock has gone from pennies to a C$17 high. I think it pulled back to C$10 in this last pullback. I have people call me and say, ‘I see my portfolio. It's easy if you calculate a couple million shares times a dollar, you can figure out when it goes down from C$17, it looks pretty ugly.’ But I don't really worry about that. 

I mean, again, if the world all falls apart, it could be a C$8 stock. I don't think that's going to happen. I think it's a world-class discovery, a once-in-a-generation type discovery. So whether it goes from C$17 to C$11 back to C$20 next week, as it's up 25% today on the news that Liontown turned down another offer from Albemarle or however you say the big league lithium producer.

Gerardo Del Real: Albemarle, yeah.

Jeff Phillips: Yeah, if you look at Liontown, it's a smaller deposit than Patriot’s. I believe when Patriot continues to drill, it's a deeper deposit. The metallurgy is not as good. It is further along. But when you're talking about a C$3.7 billion offer for that, and you've got Patriot trading at, you know what, C$1B or something like that, I fully believe Patriot over time will achieve that market cap and probably be taken out. 

That doesn't mean it can't go lower in the short term. And last week, when it hit C$10, I was on the bid. And I'm not selling the shares I've had, and those shares are pretty cheap because I believe it's a generational discovery. So a company like you mentioned — that's one. Do you want a couple more?

Gerardo Del Real: Absolutely, and I absolutely agree with everything you said. And just to be clear, I was adding a little bit on the bid here when it touched between the US$8 and US$9 level on the US side, which would have been, obviously, a tad bit higher on the Canadian side. I would love a couple of more names.

Jeff Phillips: Yeah, one we've talked about before is Bravo Mining (TSX-V: BRVO)(OTC: BRVMF). I think it's got about a C$330 million market cap. That company is run by Luis Azevedo, who owns 50% of the company, fully-reporting, chairman of the board. We've talked about this before. He's been involved in helping permit and get through Brazil the last six or seven mines for majors and smaller companies that have been permitted there. 

This is his own company. His last company he started that he wasn't chairman of the board he sold for AUS$416 million as one of the largest shareholders. So Bravo has the Luanga PGM deposit in Brazil. They currently drilled that off. It's a historic resource done by Vale. They should have a resource out later this year, and I think the company can justify a much higher market cap with that resource coming out.

But what's interesting about Bravo is they obviously have access to capital. They've raised money at C$40 million tranches. And I think because of the structure, you've got someone like BlackRock, a major player that owns 10%, and Tembo, the other major resource fund, owns 10%. You have a company that is really locked in to improve that. And recently, they've made a nickel discovery that's a different type of mineralization that may be the feeder stuff that has the PGMs at Luanga.

So I think Bravo Mining, again, I bought some today, so you know, a few thousand shares. I saw their news today, and they're starting their Phase-2 drilling, which is all exploration. They're going to hunt for these feeder zones for this massive PGM deposit that they already have outlined at surface and will have a resource out on. 

I think the company's easily backed up by the existing deposit but if they start finding the feeder zones, I think this thing could be, we could debate whether Bravo or Patriot are going higher in much higher share prices. So anyway, I like Bravo a lot. And Bravo, I actually own a lot of shares like Patriot. I actually consult for Bravo as a financial consultant… so advising them on when to raise money and how to do it with the right people. So I want to be clear on that.

The other company I own a lot of shares on that I don't consult for is Aldebaran Resources (TSX-V: ALDE)(OTC: ADBRF), which is a company that has the Altar Copper-Gold Project in San Juan Province, Argentina. 

It's another company you've got to look at the structure, and I like structures. And RouteOne, a major fund out of the Bay Area, owns 40% of the company, fully reporting. They made money the last time. John Black, the CEO of Aldebaran, sold this company for C$600 million to First Quantum. So they're in it to see this thing get sold.

Sibanye-Stillwater, the minor owner, owns 20% of the company. The deposit that's there is very large already. It's 13.1 billion pounds of copper, 43.2 million ounces of silver, and 3.8 million ounces of gold. But if you look back at their, I think it was two press releases ago, their first drilling, they've got three rigs, maybe four now they're turning. 

One of the holes went in between the deposit, which was waste, and into an anomaly that they'd seen from geophysics and other stuff that they've done, and it hit higher grades. And again, I think what this is going to do over time with these rigs turning is they're going to be able to double those numbers I've just told you about.

And recently, I can't think of the name of the company… you probably know it… who just came into, the Australian minor that just came in for 10% and financed Aldebaran? What's the name of the company? I can't think of it, Gerardo.

Gerardo Del Real: I'll find it and we'll include it here. It escapes me right now.

Jeff Phillips: Yeah, include the name of it (ed. note: It’s South32). But that's the major minor that just bought, at current higher prices, 10% of the company. So you really need to look and see the structure, the people, the size of the deposit. 

We need more copper. That's a great speculation and it's got about a C$120 million market cap. So all three of these companies I've talked about aren't per se micro cap exploration. They have major assets, major shareholders. They've raised money through good and bad markets. So those are the companies I've looked at right now. 

And again, I've bought some of those recently and I'm a major shareholder anyway because I think that whether the overall markets go down in the near term and they get a little cheaper, I can buy some more. But I think all three of those companies can go much higher in the future, so I'm happy to own those assets.

Gerardo Del Real: And just to be clear, that company was South32. So Aldebaran is another company that absolutely has the right structure, already a monster deposit. And much like the Luanga deposit for Bravo Mining, if indeed they are onto what they think they're onto in regards to the 500-meter step-out hole that just hit over a thousand meters of mineralization, that's a lot of copper-gold leverage that you add to what I think is going to be a rising copper and gold price here for the foreseeable future.

Jeff, it's always insightful. Any words of wisdom? Any final words of wisdom here before I let you go today?

Jeff Phillips: Yeah, you've got to be patient. You've got to stay liquid. If you're not liquid, you're screwed, especially if the overall markets get bad and so forth. And I think those three companies we talked about, I think if you owned a few shares today and you looked out 18 months from now, they may get cheaper, they may get more expensive in that timeframe, but 18 months from now, I think they're all going to be a lot more expensive.

Gerardo Del Real: I agree with you on all fronts. Jeff, great having you on. Thanks again for your time.

Jeff Phillips: Thank you, Gerardo.

Gerardo Del Real: Alright, let's do it again.

Jeff Phillips: Alright.

Gerardo Del Real
Editor, Resource Stock Digest