The Precariousness of Resource Stocks

Gerardo Del Real: This is Gerardo Del Real with Resource Stock Digest. Joining me once again is a mentor, friend, and one of the most respected contrarian voices in the space — Mr. Jeff Phillips. 

Jeff, it's great to have you back on… we're making it a weekly thing! I've had an absolute blast doing this. How are you doing today?

Jeff Phillips: I'm doing well, Gerardo. Thank you.

Gerardo Del Real: Well, listen, the last time we spoke, we talked markets, we talked gold, we talked copper. We've talked a lot about how high-risk, high-reward this junior resource sector tends to be, right? One minute you can feel absolutely brilliant and the next minute, the thing that seemed like the most obvious buy turns into an absolute debacle. 

And so I thought that would be a good approach for this week's conversation. And maybe you could share some stories on some things that have worked really, really well… maybe even some things that surprised you… and some things that surprised you to the downside because we know this sector presents that downside risk more often than not.

The Precariousness of Resource Stocks.

Jeff Phillips: Yeah, Gerardo, we've talked in these past interviews about some of the important things to look for in the junior exploration/development space, such as share structure. 

And it's not necessarily the total number of shares outstanding. It's who owns those shares. Does management have a vested interest? Is it a big vested interest? Who are the other shareholders? Do they have large mining companies that have large stakes? Do they have well-known resource investors that have large stakes? And what are the motivations of those people? Because I like to see people that are looking to develop a company and give it time, not the typical financing that you see in these companies, which is people looking to get out in four months and collect a warrant.

So we've talked about share structure. And hopefully I've come across as that I'm not giving investment advice. I consult for some of these companies. Some I don't. Some I'm just a large shareholder. 

When I consult, it's really just helping them understand — while protecting the money I've put into the company — that when they do future financings, that they're looking at the quality of the shareholders they're bringing in. And it's not me bringing them in. They might tell me, ‘We have this offer from a brokerage firm. What do you think?’ Or, ‘We have this offer from a major mining company.’ Well, I'd go with a major mining company. It's stuff like that.

So it's making sure, because the money they're taking in in private placements — being that they don't make money — it’s money that they're really renting and it's a cost. And if you're selling shares to people that aren't going to be long-term shareholders, it can be a very vicious treadmill. 

And really, what I think you and I talked about was that, even when you feel like you know what you’re doing in speculating, things don't always work the way you think they're going to. Shall we go through a couple of examples?

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Gerardo Del Real: Absolutely, fire away! It's easy to talk about the wins, and it's easy to talk about the fortunes that have been made in the space. But again, as you mentioned, we know it's a high-risk sector, and there are definitely some good examples I think we could highlight.

Jeff Phillips: Yes, so the first thing is that you can't own one or two companies in this space. The bare minimum is half a dozen to a maximum of around a dozen. And I see so many people that get into the resource space that own dozens of companies, and I don't know how you track all of that. And when you do get a meaningful winner, it's not as meaningful because it's spread out over dozens of companies.

So like I said, 6 to 12 stocks in your high-risk exploration/development category across multiple commodities. That gives you an opportunity for a winner, and perhaps a big winner, or maybe you hit a strong bull market and you’re able to get all or most of them on the positive side of the ledger. 

An example you and I both know well is Patriot Battery Metals (TSX-V PMET)(OTC: PMETF). Patriot has made a tremendous lithium discovery in Canada. In one year, the stock has gone from around C$0.80 to around C$14 today. I financed it even earlier at the C$0.16 range… so that's obviously a big win. And it could go higher still. 

A win like that can make a big difference in your portfolio against any losers you may have in those 6 to 12 junior resource positions. I believe we’ll see a major lithium company or mining conglomerate come in when Patriot feels they're ready and when the valuation is right. And I think that'll start the next leg up.

Weighing against that, lithium, as a commodity, has taken a hit but seems to have bottomed. It has fallen about 60% from recent highs. That factor has dealt a headwind to many lithium stocks, especially those that don't have a deposit of merit. So with Patriot, what you have is a company that, although I've taken some money off the table, I believe can continue to perform well. 

Another company that's still developing but is on the right track is Bravo Mining Corp. (TSX-V: BRVO)(OTC: BRVMF). We've talked about their PGM asset in Brazil. We've talked about the fact that 50% of the stock is owned by the chairman of the board and another 20% is owned by two major funds, including BlackRock. So it's a structure that I like. I financed the company at C$0.50 cents. It went public at C$1.75 and it trades around C$3 a share now. 

They already have a deposit that's growing by way of the drill bit, and they're going to come out with a resource on that later this year. But I think they've found a new style of mineralization that could lead to the discovery of a feeder zone. Of course, all of this takes time, money, and drilling. They're doing a massive drill program, which will also look at some of the exploration potential outside of the main resource area.

So Bravo Mining, obviously, has been a success when you buy shares at fifty cents and it's at three bucks less than a year later. I think the stock could eventually hit double digits. And if they’re able to zero in on a potential feeder zone, well, all bets are off and the stock is going much, much higher. 

Gerardo Del Real: So just to be clear and to provide some context on that new discovery, which I think could be a game changer for Bravo: it's a nickel-copper sulfide discovery that I know has a lot of people much brighter than I — I'm not a geologist but I've spoken to several that are very familiar with the nickel space and the copper space — and they are excited for the potential of that discovery.

Jeff Phillips: Absolutely. And what was the second part of your question you wanted to go over?

Gerardo Del Real: You wanted to provide a couple of examples. And I think a couple of examples of things that have worked — well, that's always great. I would love a couple of examples of things that haven't worked as well and perhaps when to cut your losses. 

I think it's important in this sector to know when to cut your losses and maybe when to double down. I've done really, really well with companies that have been down 50%, 60%, 70% where I understood the business model. I understood the plan. I knew the shareholders. And I felt confident writing a check or buying in the open market, even being down 50%, 60%, 70%. And 6 to 12 months later, I'm up 200%, 300% on that same company. 

But I've also had situations where I’ve held on for too long and have turned triple-digit gains into almost complete losses. So any examples to the downside there, Jeff?

Jeff Phillips: Yeah, it's funny because it reminds me of the song by Kenny Rogers that goes, ‘You gotta know when to hold ‘em, know when to fold ‘em,’ which I think is one of the best songs ever written for entrepreneurs and speculators.

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Gerardo Del Real: Agreed!

Jeff Phillips: A good example of a company that hasn't worked out to this point, not to their own fault, is a company that I'm still buying at a very high-risk speculation. It's called Almaden Minerals (TSX: AMM)(NYSE-Amer: AAU). I got involved with Almaden through a financing back in 2011. And it was a C$0.80 stock that had been down from C$2 in what had been a robust resource market. 

But I believed they were going to drill some of their own properties and not follow a pure prospect generator model, which I liked. And they ended up drilling a property in Mexico called Ixtaca. They made a significant discovery and their stock went to C$5. In hindsight, I should have sold some at that point. As the markets deteriorated, they kept drilling off the deposit and were able to outline a deposit of more than 4 million gold-silver ounces.

Yet, in the last three or so years, as they went into permitting, governments changed and permitting all of a sudden got a lot tougher. Next thing you know, you have environmental groups in the US filing lawsuits against the Mexican government and using Almaden as an example. 

The end result is that the permitting process has basically gone on and on in the courts. Almaden’s deposit is worth much more than the current market cap of the company. But with things in limbo, the stock has suffered. The stock is now trading around C$0.16 at a market cap of about C$22 million with an asset that, at current gold prices, is probably worth over a billion dollars.

I'm still buying the stock but I'm using this as an example of a situation that I did not foresee happening. I think Almaden has a very strong case in the world courts, of which Mexico is part of, and that the company will be compensated if the deposit is taken away from them. I think things will eventually work out in Almaden’s favor and that they’ll get to keep their project and continue to advance it. But it has been a painfully slow process to say the least. 

One of the main reasons I’m still buying the stock is because, if things end up going in favor of Almaden, the potential reward could be massive just based on the immense value of the Ixtaca deposit. 

So that sort of underpins the idea of owning multiple stocks in this space. I always joke that if someone asks me for two picks and then tells me, ‘Well, I can only afford to do one… which one should I pick?’ I always say, ‘Pick the one I didn’t pick’ because you never really know in this space! 

Gerardo Del Real: That answered it perfectly, Jeff. It's exactly the kind of example I wanted to provide to the audience. I hope people find it as insightful as I have. Obviously, you and I have continuous conversations on all things in the junior resource space. And so I want to thank you for your time. I want to thank you for your insights. 

For those who are reading this, this is a gentleman that brings over three decades of experience in the resource space and has made himself quite successful doing so. As always, do your own due diligence; definitely not investment advice… but hopefully it helps you with that due diligence. Thanks a lot for your time, Jeff.

Jeff Phillips: Thanks for having me, Gerardo.

Gerardo Del Real

Gerardo Del Real
Editor, Resource Stock Digest