In an interview, Eric Coffin and Gwen Preston address a number of issues facing the junior mining stock market.
“What separates our Forum from other events is that the companies that make presentations are invited by the newsletter writers. Companies can’t just write a cheque to participate,” said Coffin. “We have found that our audience tends to be more sophisticated and engaged investors – people that want to hear about undervalued companies in a presentation. The audience can also speak to management directly.”
Preston added, “The fact that the participating companies are all recommendations by at least one of us matters. We are each trying to find value in the current bear market in junior miners so these companies are the best of the best. Some of the companies we view as near-term upside and some of them are long-term upside. We believe these companies provide the best exposure for investors in the exploration and mining sector.”
Right now we have a perfect storm of negative circumstances in the mining sector: low commodity prices, prevailing negative investor sentiment, hard-to-find exploration financing and strict accredited investor regulations. On top of that, many exploration companies have built up good mineral reserves and their stock has done nothing.
So the question is: What is your strategy for finding mining stock capital gains?
“I would say that my strategy is to focus on management teams that are finding ways to advance their assets regardless of the â€˜perfect storm of negative circumstances,'” said Preston. “I think that for a few years of the bear market many companies – maybe most companies – focused on how to just survive in the bad times. And if they survived, then they would be able to do well once the market improved. Companies have now realized that it is not just about surviving. It isn’t just about keeping the lights on until the market recovers. It’s about finding ways to advance your assets – bear market be damned.”
“It’s getting out there and finding the few contrarian investors or using your stock to ink some kind of deal that adds value to your company – maybe partnering with a company that has a project next door,” Preston added. “There are ways of adding value to your assets despite the prevailing downside forces that are surrounding us. That added value doesn’t necessarily manifest itself in a company’s share price immediately but, nevertheless, it’s present. The added value sometimes does show up in share prices and some companies have been in their own independent bull market for the last year. It’s a matter of creating a solid foundation so that as soon as one aspect of sentiment changes they are ready to move with it faster than anyone else.”
Coffin said, “What I have always said is that I try to take the current circumstances into account while seeking companies with excellent management with projects that make sense at prevailing prices. Some companies have defined a great deal of resources but they are not economic at today’s low commodity prices. I think the bloom is off the rose for the idea to buy a gold company because it will do well if gold ever hits US $1,500 an ounce.”
On the other hand, Coffin thinks that there are fundamentals in place for uranium to rise in price – and consequently – shares in select uranium companies. “When this will happen is an unknown,” he said. “There are uranium companies I know with good projects that are well financed or have strong joint venture deals.”
In his newsletter, on occasion Eric Coffin discusses big trends such as the impact of what the Federal Reserve is doing and the growth of modern lifestyles in developing countries. The questions is: How do these things affect Canadian junior mining stocks?
“These things affect the prevailing investor sentiment,” said Coffin. “If you look at the implosion of commodity prices in the last two years, there has been a big impact on junior mining shares. With most commodities going down in price, it becomes next to impossible for juniors to raise funds unless they have a really strong combination of management and projects. Anybody who deals with the commodity space hates sounding like a contrarian. But we are getting to the point where we are starting to see an impact on the supply side. The pipeline has been pretty much cleared out. Most development projects are not going to get built. In addition, some larger companies are finally starting to cut production back. The big question is China – nobody really knows how much their growth is going to slow.”
Coffin noted, “I think it’s far to say that we are getting to the point where things are going to start bottoming out.”
Is it a good idea to select a particular metal or mineral and then choose stocks active in that sector?
Preston said, “Absolutely. Right now when I look out at the spectrum of mined commodities, if I need to choose the one that I am most bullish on for price action it would be uranium because it has the strongest supply-demand fundamentals. For uranium that means watching nuclear utilities and contract prices and durations and assessing how well future requirements are covered.”
She added that “there is good reason to believe that within the next year uranium prices will start to move up because long-term supply contracts need to be re-signed. Bearing these thoughts in mind, I bought shares in NexGen Energy, a company that I had been watching for quite some time. Yes, sometimes it’s the commodity first and the company follows. But at the end of the day, the company has to have all the other boxes checked for the perfect combination, including management, project and jurisdiction.”
What does Preston think about mergers and acquisitions in the mining sector?
Preston said, “That’s the kind of story I like in this market because it is what should be happening – for example, the Alamos-Carlisle merger. Instead of a larger company [Alamos] earning in to part of smaller company Carlisle’s land package with a time frame, it made more sense, given that capital is hard to come by, to clean that up. Now the market isn’t paying for two sets of salaries, two sets of accounting staff, extra legal costs and so on.”
“I also like mergers and acquisitions for the reason that larger mining companies need to replenish their depleted resources and project pipeline,” Preston added. “Things are really cheap now so it makes sense to do that.”
Do Preston and Coffin look for short-term, medium-term or long-term investments?
“All three,” said Preston. “In my portfolio that I follow in the newsletter I label each holding as short-term, medium or long-term hold. Right now, I see some opportunities in the short-term to make money before the resource market as a whole starts to move. There might be interesting arbitrage opportunities due to pending deals, maybe there is news pending for companies, maybe seasonality or an impending uptick in the price of gold. An investor may be able to pick up 20% capital gains – that’s nothing to sniff at.”
“For medium-term are the companies that I see moving first as the market starts to strengthen,” said Preston. “These would include companies such as Kaminak and Integra that are on the cusp of development with good projects in good jurisdictions that make sense at current metal prices.”
“For long-term are the companies where I see incredible under valuation,” said Preston. “I don’t know exactly when or how the market is going to realize that under valuation but it will eventually do so over the mining cycle.”
Coffin concurs and said he is always looking for investments at all three stages. “On the uranium front, I have been looking for a company that will directly benefit from a rise in uranium prices down the road,” said Coffin. “So I started following uranium producer Energy Fuels because a price rise could prompt them to grow production quickly. I also like Kaminak – a company that could get taken out by a major.”
With countries such as Russia and China storing huge amounts of gold, Coffin is of the view that those countries are not comfortable with the idea of US dollar hegemony. “Russia doesn’t like it because they are essentially a petro economy and see oil getting pressured from the US dollar on top of the oversupply problem,” said Coffin. “China ultimately wants to have a floating reserve currency and it is moving towards that now. I think that China feels that it is not in its long-term interest to be dependent on the US dollar as the pricing mechanism and wants to diversify its reserves with gold purchases. Being gold producers it’s relatively easy for both countries to accumulate gold from internal production.”
Preston said she doesn’t expect one particular event such as a big discovery to jump-start the junior mining sector. Rather than sudden changes, she thinks the prevailing downturn’s eventual recovery will be like a wide letter “U” at the bottom that gets going via a slow strengthening of the market. She noted that the US bull market is getting tired and investors will soon be getting out of, say, tech stocks and into mining stocks that offer growth potential.
She expects there will be a slow strengthening of fundamentals such as higher commodity prices – uranium, for example – as well as good news from resource companies. “Basically, investors will need to feel confident they can make some money in mining stocks,” said Preston.
Eric said he expects a combination of events and circumstances to prod the recovery in junior mining stocks. One event could be a bear market in New York-listed stocks and a mild recession in the US. The bloom is starting to come off big tech stocks. Therefore, investors will be taking a look at undervalued mining stocks. However, many juniors just don’t have great projects, outstanding management and lots of money – investors will need to choose carefully. He expects the recovery in junior miners will be like that in 2002 – a slow climb.
The Metals Investor Forum will be held Saturday January 23 from 9:00 AM to 4:00 PM at the Pan Pacific Hotel in Vancouver, British Columbia. Following up on last year’s successful Forum, this one should prove just as interesting.
The event is being hosted by three online newsletters specializing in the junior mining sector: Gwen Preston, publisher of the online newsletter Resource Maven (www.resourcemaven.ca), Eric Coffin of the HRA Advisories (www.hraadvisory.com)