Gerardo Del Real
May 10, 2023
Gerardo Del Real: This is Gerardo Del Real with Resource Stock Digest. Joining me today is a mentor, friend, and one of the most respected voices in the junior resource space. Once again, it's Mr. Jeff Phillips.
Jeff, it's always great having you on. I always get great feedback from your insights. How are you today?
Jeff Phillips: I'm doing well. Thank you, Gerardo, for having me.
Gerardo Del Real: Well listen, let's get right into it. We had a fed decision last week that at least the precious metals market interpreted as dovish. The overall market pulled back a bit.
You and I have talked off-air privately about our thoughts on the macro environment and how that has real world implications in the resource space. So I thought maybe we could start our conversation there.
Jeff Phillips: Yeah, basically everyone's got an opinion and no one has a crystal ball. And the most important thing… you can be right and have your timing wrong and get wiped out. So my general feeling is that the interest rates that we've seen — unprecedented raising over the last 12 months — hasn't even gotten reflected in earnings and other things yet.
We've already had five banks fail this year, two very big ones. I don't think those problems are done. I don't think, after 10 years of essentially zero interest rates, it's even gotten into the system. I think people can manage for a while until it really hits the fan.
So I'm expecting, and I could be wrong, but I'm expecting we're going to have a 20% downside in the S&P 500. Last year is not the end. This rally we've seen in early 2023 is going to become a second half of the year wipeout. I could be wrong, of course. We'll see.
Gerardo Del Real: What are you seeing in the resource space… and, specifically, is there potential for a parabolic rise in the precious metals space?
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Jeff Phillips: Gerardo, I was in the resource space and in the financial markets, in general, in the mid nineties, and there was a tremendous natural resource bull market after that recession, which lasted up until the late nineties.
Following that, you had a very poor market environment for about three years. And then, things finally began to stabilize in the resource space, which ended up producing an incredible resource and commodities market lasting from around 2003 to 2007.
Of course, following that, we had the financial crisis, or the real estate crisis, I guess we'll call it, in 2007, with things completely selling off. Yet, right after that, from 2009 to 2011, we entered into one of the better resource markets I've seen.
From about 2011 to today, we’ve had a couple of upward blips but nothing you’d label as a bona fide resource bull market. It's really been a picker's market as opposed to a bull market where you know you can pick 12 stocks and 10 of them are going to triple or quadruple because everything's going up, up, up.
I do think we're going to have that resource bull market that everyone wants. But again, I think it comes after you have that financial reckoning and that rebalancing of debt.
But you know me, Gerardo. I still invest in these types of stocks despite the ever-changing winds. It’s what I love to do.
I look for certain things. I’m doing some private placements here and there. And I'm fully aware that I could be looking at some losses on paper. Yet, I know over time that if I’m picking quality companies, I'll have an opportunity to make money as long as I can get to those better markets.
So I don't want to be out of the natural resource market. I just want to be very picky on what I'm doing.
Gerardo Del Real: Well, let's talk picky. You taught me very early in my career, when I was first getting going, how important share structure is. And I wanted to touch on that just a bit because I know, for you — and I don't mean to put words in your mouth — but that's the very first thing you look at when analyzing a deal or vetting a deal or considering writing a check in a company.
It's the very first thing that you always ask about even before the asset and the management team.
Jeff Phillips: Yeah, I mean, the easy answer is that you're looking at the number of shares outstanding, which shouldn't make a difference if it's a market cap to asset value. But a lot of times, the market doesn't reflect the asset value.
And really, what we're doing is speculating. You're speculating in the natural resource market. Investing is more along the lines of whether you should put your money into a CD or a government treasury or buy a dividend fund. Things like that. But in the junior resource space, you’re speculating — plain and simple.
The natural resource sector is a small space… yet with a wide range of things within it. I tend to focus on the very early exploration side of the spectrum. The hope with these companies is that they’ll find a mineral deposit of merit that a larger company might want to put into production.
And within that practice, I pay close attention to things like share structure and management. The number of shares… management’s level of skin-in-the-game. I actually don’t like that term. It’s more about how vested management is in the long game… the various participants, whether that be large individual players, institutional investors, other larger mining companies, or what have you.
Are the major participants simply looking to make a quick buck (like probably 90% of junior resource stocks) or are they in it to advance the project or projects to a level that produces actual value? So that's what I look for.
Gerardo Del Real: Excellent. So what sectors are you most bullish on, macro economic indicators aside, for the time being?
Jeff Phillips: Again, I think all commodities over time are going to go higher because most of the easy deposits around the world have already been discovered and mined.
Exploration and permitting is simply getting harder and more costly… and jurisdictional risk is increasing in most places.
Permitting isn’t easy… even in the US and Canada. They like to call these things “critical metals” but there’s a problem if you can’t permit, drill, and mine. Some countries are easier and safer to work in than others… but it's difficult pretty much everywhere nowadays.
I like gold… and that includes physical gold. I like speculating on gold discovery plays. And we’re in a good gold market right now. We’re currently above US$2,000 an ounce — close to record highs. And even if we don’t go much above that, well-positioned companies in this space can still make a lot of money at these levels.
I also think copper goes a lot higher in the coming years due to the electrification of everything. So I’m looking at companies with good copper assets right now as well. Of course, resource stocks can take quite a bit of time to get to the point where they’re delivering value… so you want to make sure you’re not over leveraged so you can get to whenever that next bull market arrives.
Gerardo Del Real: Any specific companies you'd like to highlight before I let you go?
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Jeff Phillips: Yeah, I mean, there's probably five or six companies I've bought or financed of late within that spectrum. And what I mean by that is I’ve also offered to be a consultant on their future financings where I can hopefully guide them to raising the right kind of money that's longer term.
One is Gladiator Metals (TSX-V: GLAD)(OTC: GDTRF). Gladiator has about 28 million shares outstanding; around 33 million fully diluted. Gladiator’s current market cap is roughly C$16 million.
And above and beyond the flagship copper asset in the Yukon’s Whitehorse District, the Coyne Brothers — who run an international drilling company with 250 rigs and 1,500 employees — have come onboard as the lead investor in Gladiator Metals.
As a group, they own 34% of Gladiator and have agreed to participate in all future financing rounds. They also have a keen understanding of the project’s geology as they were involved in assembling the land package — privately, by the way — and have drilled the property themselves.
They’ve also agreed to provide Gladiator with drills at a discounted rate, which, in mining, as you know, Gerardo, can go a long way in terms of reducing the finding cost per ounce of resources in the ground.
I really like Gladiator’s flagship asset up in the Yukon. It's called the Whitehorse Copper Project, and it’s a past producer with multiple deposits. Hudbay produced it way back in the 70s and into the 80s.
Gladiator’s land package includes the Cowley Park prospect, which actually reached the Feasibility stage before the mine was shut down — and as a result, that particular deposit was never mined. So it’s literally just sitting there ready to go.
Gladiator is drilling 3,000 meters at the project now and should have a maiden resource estimate out by early next year. They also have 10,000 meters of historical core that has yet to be assayed. So we could see results from that rather quickly.
As a past producer, it’s considered an advanced stage project with both greenfield and brownfield opportunities… and, to me, the tight share structure and highly committed insider ownership make it a very appealing speculation.
Gerardo Del Real: Excellent! Gladiator Metals… you like the scale, you like the share structure, you like that it's a past producer, and you like the jurisdiction. Any other company you'd like to touch on or would you rather save that for next week?
Jeff Phillips: No, I'll touch on one more, and then we can talk about some later stage deals and some earlier stage deals that I put money into, and why, in our next interview.
So Headwater Gold (CSE: HWG)(OTC: HWAUF) is another company I like a lot. It has about 62 million shares outstanding. I participated in their recent C$0.36 per share financing. It’s currently trading around C$0.40.
I like the fact that about 32% of those 62 million shares are insider family ownership, mostly insider reporting. Another 10% is owned by Newcrest, the major gold mining company.
Headwater’s co-flagship is a group of four early-stage gold exploration projects, including the Spring Peak project, where Newcrest has the option to earn-in up to a 75% interest by spending an aggregate of US$145 million and completing certain milestones. Headwater’s second co-flagship is their 100%-owned Katey gold exploration project right along the Oregon-Idaho border.
There are a lot of near-term catalysts lining up for Headwater Gold in the coming months and quarters as the team anticipates having a total of five drill rigs combined going at the Newcrest earn-in properties, where Newcrest is footing the bill for the drilling, and at its 100%-owned projects.
Newcrest has already hit significant gold grades at Spring Peak — something like 2.5 grams per tonne gold over 9 meters — and they’ll be doing more drilling there later this year. And like I said, Headwater isn’t spending their own money at that particular group of properties.
So with that and the favorable share structure, I think Headwater’s an excellent speculation. It's currently trading close to what I paid for it. And I think they’re set up to do really well… especially in the current gold environment.
Gerardo Del Real: Excellent. Headwater, Gladiator, macro thoughts, resource thoughts… always insightful, Jeff. Let's do this again next week and talk about some of those developers and, potentially, producers that you like.
Jeff Phillips: Sounds good, Gerardo. Thank you.
Gerardo Del Real: Thank you for your time.
Gerardo Del Real
Editor, Resource Stock Digest