Lessons From A Pro

Written by Gerardo Del Real
Posted September 2, 2018 at 8:00PM

Publisher's Note: Today we're bringing you the transcript of a conversation our junior mining expert and editor of Junior Mining Monthly and Junior Mining Trader, Gerardo Del Real, recently had with Jeff Phillips, president of Global Market Development.

Read on for insights from one of the biggest and most respected names in the natural resources space today.

To your wealth,

Nick Hodge Signature

Nick Hodge
Publisher, Outsider Club

Gerardo Del Real: This is Gerardo Del Real with the Outsider Club. Joining me today is President of Global Market Development, friend and mentor, Mr. Jeff Phillips. Jeff, how are you today?

Jeff Phillips: Doing great, Gerardo. Thanks for having me.

Gerardo Del Real: It's been a tough summer in the junior resource space. You said something about a month ago that worried me. You said that you were getting bored with mining stocks and you were looking at other things. Let's start with your take on the overall junior resource space. What have you been doing over the summer?

Jeff Phillips: Well, Gerardo, as you said, I also said when I spoke with you that usually when I start getting bored and worn out and thinking the mining space is dead are the times that I've seen the biggest bull markets emerge in the last 20, 25 years while I've been in and out of the resource market. Not necessarily a bad thing and it's not just this summer, every summer's bad. People go on vacation. The junior resource market is a highly illiquid, very microcap market, high risk.

I want to add I don't like to do interviews out much because you never know who's listening to an interview or what their investment knowledge is. But all of the junior resource space is a fraction of one's portfolio unless they're a professional in the industry. And even at that, you've got to have more knowledge. You shouldn't listen to someone just because I say I like something because it fits with what I'm doing, not necessarily what someone else should do with their financial background or their asset mix.

So again, this is just me talking about what I'm doing as a professional investor in the natural resource space. After six years of what has been pretty bad markets for a brief blip in 2015, it's pretty much been a mother of all bear markets for the resource sector.

Gerardo Del Real: You told me before in a private conversation and actually maybe it was during one of the few interviews you've done. You said that every 10 years, you get two good years that make the other eight worth it.

Jeff Phillips: Correct.

Gerardo Del Real: You're known for being a contrarian investor in this space. You've made your fortune by being a contrarian investor. What are your thoughts on the gold sector? What do you like in that space?

Jeff Phillips: Again, when I'm trying to invest in a commodity, I'm not looking for the commodity to necessarily go higher. Obviously, it going lower is detrimental to projects. I'm looking for projects that the current prices for commodities, or the specific commodity that they have a deposit in, or a discovery, or a development project that that project looks like it's upper quartile in both size and grade and could be a profitable project in the current environment.

Again when people often refer to gold, depending on where you are in the world, gold could be going up or down. Here in the United States, it's been a pretty bad gold market. However, if I lived in Turkey and I bought gold two years ago with my Turkish lira, I'd be pretty happy right now.

So again, gold, whether you should own it or not, is something completely different than whether you should invest in a gold discovery or gold development play. So, I quite like gold. I think most assets are really on fire as you can see across all asset classes and typically, before that ends you'll see the commodities catch fire also. Gold, obviously, is slightly different because it's also a safe haven. Again, if you lived in Argentina or Turkey or countless other places, you would want to own physical gold.

Anyway, I like projects in the gold space regardless of what I think the gold market's going to do as long as I don't think it's going down dramatically, the prices, which I don't. I look for projects that make sense to me over the next 24 months.

Gerardo Del Real: You have a very stringent due diligence process. I know you have geologists that consult for you that you send out to look at these projects. I know you go on site from time to time to look at them yourself. Is there anything that stands out right now that you'd be comfortable buying, putting away, holding, and waking up two years from now?

Jeff Phillips: There's a handful of gold companies. You had asked me before the interview if I had any new thoughts on Midas Gold. Midas Gold, if you’re a gold bug it has lots of leverage to the price of gold. I also think it's a project that makes sense at current prices. Midas Gold has the Stibnite Project in Idaho. Steven Quinn, one of the premier junior resource developers who developed several mines and companies that have been bought out for big valuations in the past, has been working on Midas now for going on seven years. They're in the advanced permitting phase. They should have their final permit in first quarter of 2020. So, we're looking at about call it a year and a half, or less.

They have some big-name shareholders, during the bear market that have come into that play. You've got Franco-Nevada that owns a royalty and paid big bucks for that, very knowledgeable group. You've got Teck Resources who have invested in the company, a very large mining company. In the last 18 months or 24 months, you've had John Paulson of Paulson & Co. in New York come in with a major investment in it. Again, a lot of people point to that. I don't know how good an investor he is. Some of the investments he's made in the gold space, I don't necessarily agree with. But Midas is one I think he'll do very well with. And then, just recently, Barrick Gold put 30-plus million dollars into Midas Gold. I believe at around $1.10 a share Canadian. The stock’s currently trading at $0.90 so below where Barrick invested a lot of money to have a chunk of that. And I find that very interesting because I think that most of these people and other companies are seeing that Midas is doing a great job doing their permitting.

It's a 6-plus million ounce deposit, would be 300,000 ounces of production a year. There's only a slightly over a dozen, probably, mines in safe jurisdictions doing that. It absolutely would make a difference to a major having that production. And when you look at Barrick Gold, you realize that a big portion of their Nevada production has low sulfur content. I would guess that Barrick looked at Stibnite and realized this would be an excellent ore to blend with their massive gold mines in Nevada to reach efficiency. Again, you have Barrick in there that I think would like to have this company. They’d definitely like to have the ore or the material to run through their systems.

Again, I think this is a company that absolutely is going to be bought out 16 months from now or so, give or take. And the question is if you think gold's going to be the same or higher, it's going to be a higher price than it is today. If you think gold's going to be a lot, lot lower, then it may be lower. I don't think that. I think Midas was going to get multiples of where they trade at today for their project once it's permitted. So that's one of a handful of gold companies I like.

Gerardo Del Real: Excellent, let's pivot to Uranium. The uranium spot price is up over 30% from the 2018 lows. A lot of money is made by being early. I'm notoriously early which can be painful for a bit but when you get it right, it's always worth it. Who do you like? What do you like in the uranium space?

Jeff Phillips: The uranium space, you've seen the price pretty much collapse from 2007 to now. Fukushima obviously took a lot of demand off when the Japanese shut reactors down. You still have the underlying scenario that's been around that whole time which is the Chinese are building dozens of modern nuclear power plants that are going to need uranium. You have the country of India also building quite a few nuclear power plants, all modernized and state of the art. So they're going to need uranium for that.

It's a long-term type thing. The utilities here in the States have contracts. Those contracts are running out here. I believe, next year a lot of them run out and some of them this year. So at some point, people are going to have start filling long-term contracts again. The current uranium price, even with a 30% bump that you alluded to, is well below what it costs most uranium companies, except for a few of the Kazakhstan lines, to produce uranium. You've seen Cameco shut down a majority of their uranium production. They don't want to sell their assets for less than the cost. It's cheaper for them to buy it in the market and then resell it to their contracts that they still have long-term than eat up their asset in the ground.

I think prices are going higher. You've also seen with the United States and the trade war stuff going on which, as you know, has highlighted more of the ramifications and a number of commodities that we're dependent on other countries. Some of those not so friendly to get those commodities from, whether it's rare earths, graphite, cobalt, uranium. Again, there's different countries at play but we've seen recently the United State has had the Section 232, which is, I believe, in comment period in Congress which would require 25% of the utilities in the United States to buy U.S.-produced uranium. Well, there isn't much U.S.-produced uranium right now so the overall picture for uranium's good. I think U.S. uranium assets are excellent. I think Canadian assets, the basin up there is a good investment. I'm more in the higher-risk sector, so I'm not buying the Camecos of the world. I own two or three uranium companies and that's what I like.

Gerardo Del Real: Before I let you go, give me two names you like.

Jeff Phillips: I've been a long-term shareholder in Fission Uranium, which has an incredible deposit up in Canada and I think is very leveraged to the price of uranium. It's a bigger market cap company and should do well.

But two of the names that I see with lots of leverage to this space, one would be Azarga Uranium. Off the top of my head, I don't know the stock symbol but Azarga has the Dewey Burdock project in the United States. It's a ISR project which is a very interesting type of uranium production. It's in advanced permitting. They have most of their permits and I think in the next six months, they'll have their last permit that they need. It's high grade and again, it's U.S. based. I see that being a possible take out candidate by someone who wants U.S.-based uranium production that's already permitted. They have a number of other assets. They just sold one of their assets and I believe, starting in January, that it will be bringing in $225,000 roughly a month in payments. It goes a long way to pay your G&A. So I really like Azarga Uranium. I think it could be multiples of this as they get their final permit and it's a known ISR high grade and big and lots of exploration potential in that area also. So Azarga is one of those.

Even a little further down would be something like Skyharbour Resources. Skyharbour has some resources in their Canadian projects. They do have some leverage to the price of uranium, especially if you have a uranium bull market with those resources, but it's more of an exploration play. Skyharbour is run by a very capable gentlemen by the name of Jordan Trimble, very hardworking young man that's very focused on Skyharbour. They've got three drill programs and results coming over the next six months.

They're drilling their Moore Uranium Project. They're looking for the source of some of the pods they've already found in the resource they have there. We should see results in November, December from that. AREVA, the giant nuclear producer and miner out of France, is joint ventured on the Preston property. I believe they just finished the drilling program so we should see results there and I think they'll be doing a winter drilling program on that project and that is near two major discoveries that have recently been made in the last decade.

Then also, you have a small junior drilling a third property of theirs which is called Azincourt, which is drilling East Preston. They haven't begun and I think they're raising money to do that but in this uranium environment, I believe they'll probably be able to do that. So, Skyharbour has three projects seeing drilling. Two of those are in an area that had two major discoveries made in the last decade and the other one, their flagship property Moore Lake, has a uranium resource. They're in pods near surface and they're looking for the source of that. So, I think that there is a lot of leverage in Skyharbour, also.

Gerardo Del Real: Excellent.

Jeff Phillips: So Azarga and Skyharbour will be two high risk. Again, they're high-risk companies and I do consult. I'm a large shareholder for those companies along with Midas Gold. So, I want your listeners to understand that.

Gerardo Del Real: I always say it's important to eat your own cooking. Jeff, I hope you calling the bottom this summer, if that's what we want to say, is something that comes to pass and as always, I want to thank you for your time.

Jeff Phillips: Yep. Well, when everybody's sick and tired of an investment as they are in commodities, it's usually pretty darn close to a bottom.

Gerardo Del Real: Well, sure feels that way. Thanks a lot, Jeff.

Jeff Phillips: Have a great day, Gerardo.

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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