Contributed Commentaries
Four Exploration Juniors with High Leverage to Silver
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The second leg of the precious metal miner bull appears to be just about ready to begin. The July trading action in the sector was typical for this time of year while the 12-month consolidation of the initial 179% impulse move in the GDX has traded sideways on historically low volume. Realized volatility in the global miner ETF has been in a downtrend since November, as market participants (who are not on vacation) have mostly ignored the miners while continuing to focus on the high-flying US equity market.
This consolidation has reminded me of a similar period during the previous miner bull. After a huge move in which it more than doubled from mid-2005 until early 2006, the HUI Gold Bugs Index traded sideways just below the 340 level for 11 months, from November 2006 until September 2007. After this period, the index surged 37% in just two months.
Despite the lethargy in the miners, the best in class juniors continue to bifurcate from the rest of the pack and many have made 4-year highs this year, while both the GDXJ and the TSX Venture exchange have traded sideways. Highly respected sector investor Rick Rule likes to repeatedly inform us that 85-90% of the junior sector is “valueless” and the trading action thus far this year in the space has been proving his point.
Since the miner bull began in early 2016, I have chosen to keep myself, and my subscribers, out of primary silver producers as most are unprofitable below $18.50 silver. However, I have invested in a few silver developer/exploration juniors which have been distancing themselves from the pack and have huge leverage to the silver price.
- Bear Creek Mining (BCM.V) This Peru-focused silver exploration and development company has been a favorite of mine for the past decade. The stock is tightly held and has a low retail float of just 35% of 103M shares outstanding. The company controls the Corani Project, which is one of the largest undeveloped silver deposits in the world with 230M oz of silver, 1.8B lbs of zinc and 2.8B lbs of lead in proven & probable reserves. The Corani NPV rises approximately US$ 120M for every $1 increase in silver price with proportional increases in lead and zinc. The project is funded through to a production decision and the company has US$35M cash, with no debt, but it needs a solid $20 silver price floor before a construction decision can be made. Bear Creek Mining is a very good optionality play on the silver price as the firm has been keeping G&A expenses to a minimum. The most recent company presentation can be found here.
- Defiance Silver (DEF.V) The San Acacio deposit is the flagship project of this silver explorer and is located in the state of Zacatecas, Mexico, one of the most prolific Mexican mining states. The deposit is hosted within the historic San Acacio mine which produced over 200M oz of silver since its discovery in 1546 and is on track to become one of Mexico’s premier high-grade, wide-vein silver deposits. The recently updated resource increased the silver equivalent cut-off grade by 54%, resulting in a new silver equivalent grade of 192.89 g/t Ag. Total contained silver equivalent ounces is 17,917,000 and the inferred resource is hosted within 1km of the vein system which is over 5.6km long and has vein widths up to 20m. The company just announced the appointment of Roy Bonnell as the new president and CEO who stated in a recent press release: “Our goal is to aggressively drill and grow the resource at San Acacio”. I imagine this would require raising more funds in the not too distant future with the company having a little less than C$1M cash at this time to further explore the property. The stock is tightly held with just a 22% retail float of 92M shares outstanding. The most recent company presentation can be found here.
- Minaurum Gold (MGG.V) Most exploration companies would be happy to control one district scale sized property. Minaurum has 3 such properties which are all located in separate regions of Mexico and contain 5 projects. The ultimate goal of the company is to give shareholders the ability to receive additional shares through “spinco’s” as discoveries are made. The company’s flagship Alamos property, in the Southern Sonora State of Mexico, contains the Quintera vein swarm, which produced the majority of the silver mined in the historic Alamos Silver Camp and has somehow eluded systematic exploration for over 100 years. It is fully permitted from exploration to production and the company is applying modern epithermal vein exploration concepts to this system. Mag Silver forefather and Minaurum director Dr. Peter Megaw is on record as stating Alamos has the potential to be larger than Mag Silver’s high-grade Juanicipio Property. The stock is tightly held with just a 15% retail float of 236M outstanding shares and the company has C$4M in cash. The most recent company presentation can be found here.
- Alexco Resources (AXR.TO) This company owns the 233 sq km Keno Hill Silver District in Canada's Yukon Territory, historically one of the highest-grade silver districts in the world, producing more than 200M ounces of silver at an average grade of approximately 1,250 g/pt Ag. The firm released a PEA on the Keno Hill District in March 2017 which has an IRR of over 75% @ $18.51 silver with an initial capex of just $27M and an 8-year mine life. I strongly believe the silver price will have a solid floor of $18.50 by the time they are in production by Q3 2018. The cloud hanging over this company has been the Wheaton Precious Metals (WMP.TO) streaming agreement, which was made in October 2008 and entitles the firm to 25% of all silver mined in the district for 40 years. However, this deal was recently re-structured to the benefit of both companies and the details can be found on page 23 of their most recent presentation. Alexco has a US listing and has kept the shares outstanding very low at 101M, with management owning a significant percentage of the company. I believe the firm will need to raise a bit more cash sometime next year as they currently have working capital of $23.5M, with no debt.
As I pen this missive, the algorithm trades set sell the sector off of key statistics in a strong US Non-Farms Payroll (NFP) report are selling off the miners, creating more buying opportunities in the best in class juniors. The US Dollar is also having an overdue bounce, putting pressure on the gold price.
Full disclosure: I own shares in all four of these companies which I purchased in the open market. I have also recommended them to my subscribers.
