Interview with resource analyst John Kaiser

With rising metal prices, a recovering mining sector and a great deal of exploration activity, now is an ideal time to invest.

by Ellsworth Dickson

WELL-RESPECTED mining stock analyst John Kaiser, often a standing room only speaker at resource investment conferences, spoke to Resource World regarding his current bullish views on mining exploration stocks.

RESOURCE WORLD: After the run-up in mining stocks in the first half of last year, things quieted down unless there were fantastic results. Some stocks such as Ivanhoe Mines have seen over 5,000 trades in one morning. This tells me there is a great deal of money waiting in the wings for something attractive. What are mining stock investors waiting for that would create a general bull market in mining stocks?

JOHN KAISER: The two main drivers are upwards-trending metal prices with a rationale behind it as to why it’s not going to end next week. The other is a major discovery that restores faith that the juniors can make great discoveries which have a scale large enough to pull in enormous capital to replenish what is still a pretty depleted system since the bear market began in 2011. Its brief reversal last year largely tracked the price of gold until it counter-intuitively went down in mid-August last year.

Now, gold is trending up again. Base metals across the board are trending up.

There seems to be a surprising economic strength driving the higher metal prices and gold, of course, is being driven by geopolitical concerns about the leader-ship role of the United States on the global stage.

RW: What do you think of the discovery potential of the Golden Triangle region in northwest British Columbia?

JK: Northwestern British Columbia has extraordinary metal potential and we’re even seeing one place suggesting that maybe there’s significant nickel potential up there. One bad thing about the Golden Triangle is that it gets the most snow of anywhere in BC. Exploration pretty much dies down after November. But we are heading into a period where companies got financed and are doing large exploration programs.We have a significant discovery by GT Gold involving the Saddle Project on the Tatogga property.

Essentially, this is a result of climate change – a retreat of glaciers exposing areas for sampling and new anomalies. We have a potentially high-stakes exploration program going with Eskay Mining where SSR, the former Silver Standard, is drilling to try and find Eskay Creek No.2.

There are other juniors up there that could provide interesting results but the problem is everything stalls once the snow flies.

RW: Do higher gold prices have much of an effect on grassroots gold exploration projects?

JK: Higher gold prices do not affect and, in fact, are harmful to exploration discovery programs because there are already so many known mineralized systems that were marginal at the prices that prevailed yesterday. You get a higher real price and all of a sudden you get the institutional money coming into the space and saying, “Well, here’s the money needed to infill drill and do metallurgical studies, get the prefeasibility done. Get the feasibility study done and then hopefully, one of the mid-tier or even top tier producers will acquire you and you will get cashed out to recycle it elsewhere.”

Grassroots exploration needs a symbolic discovery that captures the public’s imagination such as we saw with the diamond discoveries of Dia Met in 1992, the Voisey’s Bay discovery in Labrador and, while it lasted, the phony Bre-X discovery in Indonesia. These produced multi-billion dollar market valuations that pulled in brand new money and that resulted in the recycling. The investors who sold too soon looked at something else they could buy those companies hoping to repeat the success of others. Of course, as companies got fuel in their treasuries they were able to take on riskier exploration. A higher metal price doesn’t stimulate that type of appetite.

RW: Do you think that mining stock investors want to do their own research or just be told what to buy?

JK: This is a controversial topic. In the old days of the 1980s and 90s when brokers still played a significant role as a gateway between companies and investors, brokers would do all the homework, pick up the rumours and pass those onto clients. Then the momentum would get going and investors would trade it as long as the momentum was positive. This doesn’t really happen anymore.

The brokerage industry has retreated from these high-risk types of commentary. There are a handful of newsletter writers still out there. Yes, the speculators would like to be told what to do but now the problem is “By the time I hear it, it’s prob-ably too late.” So there is a shifting onus onto investors to do a lot more homework on their own in order to be in a position to make an investment decision in a high-risk junior stock that has a chance of paying off.

RW: Should mining stock investors follow companies with a specific commodity currently in vogue? For example, today cobalt seems to be an attractive commodity.

JK: Investors should have a big picture vision of the future. If they believe electric cars are going to be in widespread use in three or four years and that the supply of cobalt is inadequate to fulfill the needs of this burgeoning electric car industry, then yes, they should focus on projects that already have a cobalt deposit that may benefit from a stronger cobalt price. Or exploration plays where the grade that might be deliverable might not have worked 20 years ago but when the demand for the metal has expanded two to four times, then a lower grade would work.

This is kind of like a mini super cycle except its metal specific. It’s driven by new technology, new applications and new usages that expand total demand for metal.

RW: With last year’s financings going into exploration, are you expecting some significant mineral discoveries to be made?

JK: Last year was a significant water-shed in the junior space because we shifted from money being raised just by the feasibility demonstration companies to companies that had mineralized sys-tems that really weren’t good enough to go into production at prevailing metal prices and also needed a substantial metal price increase to really qualify as an optionality trade. So this is a rethinking of existing mineral systems with new exploration models and putting a lot of money into it.

Osisko’s Windfall Project is the classic example of this deposit with 1.6 million ounces of 8 grams/tonne gold that still wasn’t worth developing. Then the Osikso team goes in and says, “This is a misunderstood Timmins-style system that needs to be drilled at this angle and that angle. It needs a completely different model.” So now there are 400,000 metres of drilling going into this project in an attempt to turn it into a district-scale operating asset. A significant change took place last year and, in March this year, we had the biggest funding month for TSX Venture Resource Juniors since June 2011.

It was still a relatively small percentage of the companies that got the money but we’ve had a quiet period since April. A lot of money has been going into the ground. There should be a lot of news coming out in the final quarter of this year and, hope-fully, will be of a positive nature that confirms, for example, “Yes, the Windfall district has many more ounces at a grade and in a form where it is mineable at a profit at the metal prices we have.”

RW: I guess the trick is to identify the best investment candidates before a big run-up in the stock price?

JK: Yes, and this is where the company website becomes very important. This is now the new platform where companies show their stuff and their presentations. How do they tell their story? Do they provide an analogy in terms of another similar deposit? Do they show all of the data sets that are defining their targets? Do they do a good job explaining what they are trying to accomplish?

RW: When you seek out good mining stocks, do you favour a certain stage of exploration?

JK: I prefer the earlier stage juniors because those companies tend to be valued relatively low and when they start making a discovery, the market undergoes what I call “S Curve Action” where you will see a market valuation that equals what ultimately, if it is a success, the project ends up being what it’s worth when it goes into production. So you can get these enormous 5, 10, 20 times gains during the uncertain period as a discovery is unfolding where we do not yet know what the limits of the deposit will be nor what the grade will be. That is the most exciting part of the junior exploration game.

The optionality feasibility demonstration trade tends to be fair value. The system’s pretty good at accessing what the problems are with this deposit and what it needs as a higher price. You are ultimately at the mercy of factors such as what the metal price is going to be and what the feasibility worth demonstrates. Whereas, in a discovery play, you have a war between bulls and bears with volatility. There’s excitement and, if the discovery has scale, you have potential for extraordinary gains.

RW: Could you briefly explain what your Share Collective program is?

JK: The Share Collective is an attempt to clone myself. What I like to do in my newsletter service is to look at a company’s prospect and imagine: “What if they did find another Eskay Creek deposit in the Golden Triangle? What would it be worth?”

I come up with a deposit and grades. I look at the costs and so on and then run the discounted cash flow model based on some sort of a mining rate scenario. You get a net present value and there is something called an uncertainly ladder used by the industry which prices a future outcome based on the uncertainty.

An exploration target in the Golden Triangle that’s potentially worth $2 billion when the discovery has not yet been made, might be fair value at 1-1.5% of, say, $2 billion, which is a $20 to $30 mil-lion valuation. That would be a fair price and as the company starts to deliver and because of the overshoot, the stock could end up getting a much higher valuation before it is actually deserved.

The Share Collective clones me because one person doing this for a company is not interesting. A lot of individuals anonymously doing this with a simplified discounted cash flow model and sharing the results in a public space is interesting. The other members can argue about the assumptions. It enables a consensus expectation to emerge which other investors can look at and decide whether they are going to place their bets on the negative end of the spectrum or at the positive end or somewhere in the middle of the consensus. The beauty of this is when new results come in everybody rushes back to their little models, adjusts accordingly and re-shares it. Of course, if the metal price goes up, the system automatically recalculates so that people can see how if gold is suddenly up $200, how it changes and what should be fair value for the project at this stage.

RW: Would you name some of the companies you are following?

JK: The one that I am most excited about is Novo Resources. It has a very substantial valuation. The latest financing prices it at $800 million and it doesn’t even have a drill hole on the property.

What they have is a context of scalability such as I have never seen in my career. It is possible that they have discovered an equivalent to the Witwatersrand Reef that was found in 1886 from which 1.6 billion ounces of medium to high-grade gold was mined and where another billion ounces are too deep to be profitably mined.

If this is present in northwestern Australia, where Novo Resources has tied up probably half of the prospective ground, not only would this end up sup-porting the valuation, it would an ‘off the scale’ discovery. If it is the real thing, this would be the biggest discovery in over a hundred years. It would be controlled by a junior and would capture the public`s imagination and pull in enormous new capital. That capital would enrich the people that sell their shares too soon and will end up being reinvested in other juniors with an interesting creative idea because this story came through creative geology, not some optionality rethinking of the failure from a past exploration cycle.

An example of another company would be one in which I own shares called InZinc Mining which has an existing zinc-copper resource in Utah which is in the money at the current zinc price. Because it’s relatively small, it has not yet attracted the market’s attention.

However, there is exploration potential that has never been chased by past operators which in this type of emerging climate, this company could end up raising the several million dollars needed to follow up on a short high-grade interval about 600 metres from the known deposit. Perhaps they can come up with what happened with Arizona Mining and its Hermosa Taylor Project where they ended up exploring beneath the pit that was the subject of the feasibility study a few years ago. They discovered an extraordinary silver-lead-zinc deposit that is supporting a valuation of +$1 billion.