Don't Be Late To The Party

Written by Gerardo Del Real
Posted April 2, 2018 at 8:45PM

There is some quality exploration work going on in the junior resource space and yet the sector has not attracted the attention of the retail or institutional investor.

The contrarians in the space are using the lackluster response in share price performance to accumulate quality management teams and assets at levels I don’t believe we’ll see again until the next cycle.

Keep in mind these cycles tend to run for 5-7 years.

Whatever your risk tolerance, everything is on sale. Explorers? Yep. Developers? Yep. Producers? Yep.

Gold companies, silver companies, uranium companies, and base metals companies are ridiculously priced.

Take the gold juniors, for example. RBC recently put out a report comparing takeout valuations last year vs. this year.

The average price per ounce over the past five years was $64. Last year that dropped to $59 and thus far this year that number stands at $44 per ounce.

Almaden Minerals currently has a valuation (across all categories) of just $17 per ounce and $21 per ounce if we just include the Measured and Indicated categories.

The company has a market cap of C$114 million and owns a mint-condition mill that once upon a time fetched a price tag of approximately US$70 million.

At the historic five-year average of $64 (which is modeled during a brutal gold bear market), Almaden could be worth at least three times the current value.

Don’t get me started on the exploration upside.

Midas Gold has a valuation of $23 per ounce (across all categories).

As speculators, we usually are either looking to allocate capital in value stocks or stocks that provide leverage.

It’s rare that the value stocks in the junior mining space are also the leverage stocks but that is exactly where we’re at and, frankly, I see it as a contrarian’s dream.

What does that mean? Personally, it means I’m as aggressive a buyer of companies in the portfolio as I’ve been since 2008.

For the portfolio, it means that I was early on many of the picks.

The selection process is relatively straightforward.

Identify and get ahead of a powerful trend, find good management teams with good assets, and then allow the individual catalysts and the overall trend to merge into a multi-year bull wave that washes away the bear market sins of the past.

In 2008, gold went from around $850 when I started positioning to just over $1,000 a few months later (I thought "this is easy"), and by mid-October of that year gold was back to nearly $700.

The rest is history. In September of 2008, Lehman Brothers blew up. Everything was being liquidated and for the next several months many wondered whether the entire financial system was about to collapse.

By the end of 2009, gold was at $1,100. By the end of 2010, it had surged to approximately $1,400, ultimately marching towards the $1900 level in September of 2011.

All of that happened within a three-year timeframe and the gains from the juniors were truly life changing for many.

We’re entering a similar period.

Do I know if Deutsche Bank is the next Lehman? No, but I know it’s in trouble.

Shares are down 21% in the past 12 months compared to a 1.1% gain on the Bloomberg Europe 500 Banks and Financial Services index.

The underperformance is due to Deutsche Bank reporting a full-year net loss of 735 million euros ($906 million) last year versus the initial forecast of a 497 million-euro loss it issued just last month.

The bank's losses were nearly 50% greater than it anticipated just a month ago.

The bank has responded by handing out $2.3 billion in bonuses. Sound familiar?

Here’s a three-month chart.

Let me be absolutely clear that I’ve seen this play out before. The faces and the names change but the story always plays out the same way.

A good indicator of just how discounted the juniors are is the recent buyout of Klondex Mines (TSX: KDX) by Hecla (NYSE: HL).

On March 19, 2018, the companies announced Hecla was acquiring all outstanding shares of Klondex in a deal valued at $462 million.

The deal represented a 59% premium to Klondex’s 30-day volume-weighted average.

A disproportionate amount of the gains, when the momentum changes, are captured in the first weeks and months.

We’re entering drilling season and while some will miss — because it’s exploration — companies that make discoveries will be re-rated quickly.

2018 is the year to initiate and add to positions aggressively. Do I care if I’m a bit early? Absolutely not. I would much rather be early than late to this party.

It gives me more time to add to the best names, meaning a larger payout when things turn.

Be patient. Don’t confuse price for value or leverage.

Everyone’s situation is different. Allocate your capital accordingly.

Do your own due diligence, sit tight, define your timeline, and let the trend be your friend.

To your wealth,

gerardo-sig

Gerardo Del Real
Editor, Junior Mining Monthly and Junior Mining Trader.

For the past decade, Gerardo Del Real has worked behind-the-scenes providing research, due diligence and advice to large institutional players, fund managers, newsletter writers and some of the most active high net worth investors in the resource space. Now, he is bringing his extensive experience to the public through Outsider Club, Junior Mining Monthly, and Junior Mining Trader. For more about Gerardo, check out his editor page.

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