So I am currently staying in downtown Vancouver while I attend the 2019 Vancouver Resource Investment Conference. This is my second year coming here and it is usually quite the learning experience. Tons of companies come to show off their projects and discuss business with investors; while what I am most interested in is research into the gold, silver, and other commodity space to bring valuable insight to my readers.
The theme so far on the first day is that while gold is doing well in 2019, the gold miners aren’t doing so hot. The HUI Gold Bugs index is down for 2019 despite gold’s gains.
And not as many people are interested in silver, which is curious to me since I think the upside for that metal is astounding given the march of industrial demand and what will be monstrous demand should any of the current fiat currencies around the world fail this year.
It seems we may be in the depth of despair in the precious metals mining sector, and that actually is a positive for investors in the metals. You see, gold and silver are very cyclical investments that have very pronounced up and down periods. And when they are hated and ignored by most money managers, this is a signal that the bottom for the market is probably in.
According to Oreninc, a company which tracks financing in the mining sector, Canadian resource financing is at a cyclical low. Look at the following chart:
Kai Hoffman, CEO of Oreninc, stated that there are not a lot of companies that can get financing without giving away warrants, which is a future additional new stock that is issued at a future date and typically considered as sweeteners in finance deals. Warrants dilute the existing stock base, and all things equal, devalue the existing shares in the market as new ones are issued. This is a sign that money is not given for free in the mining sector, another indication of a cycle low in the resource industry.
One of the types of financing that has saved Canadian miners in 2018 is flow-through shares, which is a type of stock that allows expenses to be booked by individual stock holders, thereby reducing their cost basis for shares and allowing tremendous stock savings.
One of my favorite companies, Mene, was featured in a Top Picks Competition of six companies. They won the audience vote for most promising company. Mene started when Roy Sebag formed a gold jewelry company while with Goldmoney, and it was so successful they decided to spin it off as its own entity. They produce 24k gold and platinum jewelry that is sold by gram weight with an intended profit margin of 20%. Given that most jewelry is sold for 80% markup and devalues the minute you take it out of the store, Mene is a disruptive company and should change the way people buy jewelery.
Goldspot Discoveries looks very interesting. They are a data company that uses machine learning to map out what are the most likely success stores in mining. By taking resource and financial data for all mining companies, along with geological data from districts around the world, they intend to predict which companies can mine most efficiently on the best deposits, and will therefore be the most successful. If their methods works, it will completely change the investment model for the industry by eliminating a lot of guesswork and providing investors with a data driven model for successful investment.
I came away from the first day of the conference interested in EMX Royalty Corp. They utilize a three-prong method to create value through royalty investment.
In addition to precious metals, the company invests in base metals and other mineral assets. They have $4.7 million Canadian and just sold property worth $69 million, making them highly liquid. They have investments in properties all over the world including major producing areas like the Carlin Trend in Nevada. I believe they are a promising royalty company with much more upside than some of the larger, established ones that are trying to maintain their current growth and profitability.
Equinox Gold has a producing gold mine in California, with two near term mines in California and Brazil. Multi-mine companies trade at much higher multiples than single mine ones, so the upside lies not only in the gold price but the potential expansion in production for the company starting in 2019. They have $23 million in cash but are not profitable yet. The good news is that they have reduced cash losses in 4 consecutive periods and should reach profits once their new mines are online. The market hasn’t priced them the same as other 200,000 ounce peers, so they are cheap right now. They recently spun off their copper assets into a new company, Solaris Copper, in which they own a 40% stake.
You may have noticed that I am covering up and coming names, and not the senior producers. The facts are that the senior producers have been struggling for well over a decade to replace their reserves as they mine the gold. Their long term outlook is not bullish unless they can acquire additional reserves in large numbers. Those reserves will have to come from consolidation, such as the Barrick/Randgold and Newmont/Goldcorp mergers of late. I fully expect much more consolidation to come in the form of large companies taking over quality exploration and early stage development companies with sizeable reserves.
Therefore, there are two ways to profit from some of these names I am giving you. First is that they take the mine to production and make money from sales. The second is that they will be gobbled up by larger producers, which will provide a premium in most cases for the holders of the smaller company’s stock. Either way it is a win for you.
I am not offering you investment advice; rather I am just passing along information on potential targets for you to do more research. Further, I fully advise buying real physical gold and silver to add to your portfolio before speculating in mining stocks. These are speculations and not core holdings for your retirement account.
However, I think these are the type of long term values that will build real wealth much more effectively than investing in overvalued general or technical stocks in the broad market. That bull market ship has already sailed, and it is likely we are on the downside of that market headed somewhere into the deep south. The precious metals sector, on the other hand, looks much more promising over the next several years, in my humble opinion.