For much of 2018, gold was under pressure, mainly due to the strength in the US dollar, which was being supported by rising interest rates. Then in late 2018, the market got the sense that the rate increases were over, or at least coming to an end, which has caused the US dollar to top and start rolling over.
Since November 2018, the USD started the rolling over trend. In the past couple weeks, it has staged a bit of a rally, although not to test the high of November. So the question is, does the rolling over in the latter part of 2018 represent the new trend or is that breakout in the last week or so, a breakout or fakeout?
The rolling over is likely the dominant trend, most of 2018 was strong for the USD, primarily due to the interest rates rising. I’m expecting to see the last week or so action as a fakeout, and gold, silver and other commodities to firm up as the rolling over and downward pressure gets more significant. Mainly because I think the Fed is done raising rates which will be bearish for the USD and bullish for gold and silver.
Gold on the other hand has formed a cup and handle, since the April 2018 highs to the August lows and then the late 2018 strength. This is a very bullish trend, adding to reasons to be bullish, as this is happening, we are also seeing a Golden Cross with the 50-day moving average about to cross over the 200-day moving average.
It really is a beautiful three punch combination setting things up for a strong move in gold. The USD is rolling over, at the same time as we have a cup and handle trend on the gold chart and a Golden Cross about to happen.
With these bullish indicators for gold, we are also seeing recent mergers and acquisitions with the largest of gold miners. Barrick Gold took over Randgold, which was more of a reverse merger, as it is mostly Randgold people lead by Mark Bristow that will be running the newly minted Barrick.
Barrick has been a laggard for a couple decades as they were the poster child for the hedging in the 1990s of many gold miners that put pressure on the price of gold. While many gold investors were talking about conspiracies of a grand cabal pressuring the price of gold, the real culprits were the big gold miners hedging their production. It was something that the gold investing community never forgave Barrick for and was the main reason they have been a chronic underperformer for the past couple decades.
While Barrick has been a laggard, Randgold, lead by Mark Bristow, had stayed focused on profit. They have been very disciplined in not joining the race to get bigger for the sake of being bigger, instead focusing on running a profitable gold mining company. This discipline will be a good thing for Barrick going forward with Bristow running the show. I doubt they will continue to be an underperformer compared to their peers.
Another big merger has just happened in the past couple weeks, with Newmont taking over Goldcorp. For a long time, Goldcorp had been a low-cost producer with high margin mines, but, in the past few years, they joined the get bigger for being bigger sake and the stock has been a poor performer.
It doesn’t take a lot of missteps to cause serious problems for a gold miner, it has cost Goldcorp their independence. Now Newmont will take them over and upon announcing the takeover indicated they did it for corporate synergies to reduce management costs and plan to sell off some assets to the tune of a billion or two.
They also indicated something that I think speaks volumes about what investors in the space should pay particular attention to. They said that this merger, was not done to increase production, it will only keep production steady.
This stood out to me, as it indicates a serious issue for the entire gold industry, from the new behemoth gold miners, right down to the smaller producers and explorers.
To do a deal like the Newmont and Goldcorp deal, to keep production steady says a lot about the long term weakness of the supply chain. They aren’t merging to grow, they are merging for steady production into the future.
It highlights, how badly in need the industry is for new discoveries to replace the old mines that are being mined out every year.
These mergers are not the only signs, you can see it in the declining head grades at mines and the declining grades of discoveries. When I got in the business in the early 1990s, if a project wasn’t over a few grams per tonne, nobody was interested. Now the average grade of new discoveries is less than one gram per tonne.
I would contend that these trends highlight the importance of new discoveries, especially well located ones that are near infrastructure and could have low costs and high margins.
So in this report, I’m going to present some of the exploration companies I’m following. Another important factor for investors to pay attention to is that while the gold supply chain is weak, the cost of exploration has gone up. This makes it so that many explorers have blown out share structures due to higher costs.
Costs of exploration and mining, plus grade, truly are the most important attributes to look for in a gold explorer and miners.
If a junior has serious discovery potential, combined with a share structure that has not be blown out, it really is a perfect storm to see exceptional performance. Avoiding blown out share structures, even if a company has a significant discovery is a smart plan. While looking for companies with strong potential, tight share structures and reasonable valuations is a recipe for success.
I have some on my radar screen that fit the bill, and will present them next.
Exploration for Big Gains
Great Bear Resources (GBR.V)
Great Bear has an impressive new high-grade gold discovery in Red Lake, Ontario with many of the same geological features as Goldcorp’s Red Lake mine. The most important is, high-grade gold, recently the company reported 1600 g/t gold from drilling early this month. It isn’t often that you come across gold intersections that can be referred to as 1.6 kilograms per tonne.
This isn’t their first big hit on their Dixie Lake project, it has been an exciting new discovery for the past 6 months or so. The latest numbers are eye popping, but, it doesn’t look like they are isolated. Recently the company did a webinar, going over the corporate presentation and modelling of their discovery. I highly recommend folks watch it here to get a handle on how big this could be.
Back in the 1990s, Goldcorp was just another junior, then they found the deep high-grade gold deposits at their Red Lake mine and the rest was history. They turned from a junior into a major gold producer with low costs and high margins.
This all happened under the leadership of Rob McEwen. The new discovery Great Bear made impressed Rob McEwen enough that he became the largest individual shareholder of Great Bear. Nobody knows the history of Goldcorp like Rob McEwen. It looks like history may repeat itself with Great Bear’s discovery of high-grade to bonanza grade gold at their 100% owned Dixie Lake project.
A few things stood out to me in their recent webinar. One is that this is a very big system, they are really only scratching the surface so far. Also, they have a handle on the gold mineralization and that the geological system is wide open along strike and at depth.
The geological features that make up the Red Lake mine, are also present at Dixie Lake and few other places in the Red Lake mining camp. They are cashed up with enough funds to keep a couple drill rigs working all year. The lab in Red Lake is not very busy so they are able to turn results around quickly.
In the coming months, I’m expecting to see them pumping out drilling results on a regular basis, and each time they drill a new hole they are learning more about where to look for gold in this big gold system.
These kind of discoveries don’t come along very often, like maybe once a generation. If it keeps going in the direction it has shown so far, they could be a buyout target at a significant premium to its current valuation. They have around 50 million shares out on a fully diluted basis, with a large percentage held by big shareholders, so the public float is small. This is the kind of potential to valuation that could be an exceptional performer that the gold exploration business needs.
Advance Gold Corp. (AAX.V)
Advance Gold is the company I lead as the president/CEO, I’m building it to be what I look for in every exploration company. For example, it all starts with projects, our 2 key projects in Mexico, Tabasquena and Venaditas, are well positioned in one of the most important mining camps in the world.
They are in the state of Zacatecas, which is where 10% of the silver ever mined worldwide has been mined. They are in the right kind of rocks where the major mines all around the projects are found in. At Tabasquena, we have found a cluster of epithermal veins, which are what all the big mines in the area from Ojocaliente to Fresnillo mine, and have been mining them since the middle 1500s.
What started the mining in the region back then was a cluster of epithermal veins, beside the city of Fresnillo. To this day, Fresnillo PLC, which trades in London, is one of the lowest cost producers of any metal in mining. A couple thousand metres from the cluster of veins beside Fresnillo, is where Mag Silver is developing their epithermal veins, when their project comes into production they will join Fresnillo PLC as a low cost producer with a high margin mine.
This region is endowed with extremely good geology, plus it is well developed with infrastructure and easy access which makes for low costs of exploration and mining. At the Tabasquena and Venaditas, there is paved road access with power lines going through the projects. The weather is also ideal offering a year round drilling season.
Tabasquena was a historical producing project, in our early drilling of seven holes has enabled us to establish some important developments.
One is that, in the historical mining by Penoles, they only mined in the oxide zone of the Tabasquena epithermal vein, near surface, and the vein ranged from 2 to 4 metres. We stepped out to the north, and in the oxide zone we hit a 12 metre intersection. This is significantly thicker than in the historical mining. It gives us the option to do additional drilling to test the potential of near term mining in the near surface oxide zone to the north of the historical mining.
The other important discovery came from drilling below the historical mining, which was focused on drill testing to see if the vein continued below the oxide zone. We have been successful in not only showing that vein continued, but, we also determined that there is a cluster of epithermal blind veins with some of them much thicker at depth than in the historical mining.
These blind veins don’t come to surface, which is important to point out because most of the veins in the cluster near Fresnillo and the Mag Silver veins, plus the other veins Fresnillo PLC mines nearby, are blind veins.
This cluster of epithermal blind veins, is strong indicator that we are at the top of a large epithermal vein system. There are other indicators, such as the quartz in the veins and amethyst, that tell us we are at the top of the system. Another important factor is that we have found gold mineralization in several of the veins in the system, from low grade up to high-grade. Which is typical when at the top of an epithermal vein system.
It is very exciting to find a cluster of epithermal veins, in such an important mining camp where many big mines are located. It looks like this a big system, fully intact with no erosion of the system.
The next important steps at Tabasquena is to do some shallow drilling near the 12 metre intersection in the oxide zone, to test the potential for mining the near surface oxide zone. Most importantly, to really open this project up, will be to test deeper into the epithermal vein system to explore for the boiling point of the epithermal vein system.
I recently did a video of our corporate presentation, to explain our story to viewers, and I would like to invite to view it here.
A couple other factors that stand out for us, is that we have a very strong share structure with only 25 million shares on a fully diluted basis, with around 35% held by directors on a fully diluted basis.
Another important factor to consider is that our exploration team is lead by Senor Jose de Jesus Parga. He ran the geological survey of Mexico for over 30 years, and is one of the foremost experts on Mexican geology, especially in the state of Zacatecas. Recently, Senor Parga and I did a video presentation of our exploration efforts at Tabasquena, watch here.
Whenever I look at an exploration company, I like to look at the potential relative to the valuation and I believe that one would be hard pressed to find an exploration junior with the potential to valuation that Advance Gold offers.
Sokoman Iron Corp. (SIC.V)
Sokoman is another company that has made an important new high-grade gold discovery in the second half of 2018. I purchased stock in the company, for several reasons. One is, high-grade gold discoveries are not easy to make, their access is also exceptional as it is right beside the highway and they can drill pretty much year round.
Recent drilling, with pending assay results, was going until just before Christmas break and they are preparing to drill again shortly, once they have a chance to compile all the assays from the late 2018 drilling. I’m really exciting about the upcoming drilling as they will be able to drill from the ice on the shallow lake where they have made the high-grade discovery in 2018 from drilling angled holes.
The angled holes are not the ideal way to explore the discovery. The reason is that it looks like the discovery is more of a flat horizontal zone, which can better be drilled with vertical holes. Once they get drilling on the ice on the lake, they will do series of vertical holes to step out on the high-grade discovery.
In addition to the high-grade discovery under the lake being wide open, there are also a couple other key zones that could bust the project wide open. They got this project off Altius, which had drilled a bunch of holes to the west of the lake. It looked like that was a near surface lower grade zone. Recent drilling by Sokoman indicates the potential that the geological interpretation may have not clearly understood the high-grade potential to the west of the lake. Or that what is under the lake and to the west could be part of a big high-grade gold system.
These two zones aren’t the only ones that look impressive, to the north around 1km of those two zones, they have done some drilling and found visible gold in the holes. The three zones, the one under the lake, to the west of the lake and to the north, could all be related. They don’t need to be for them to find a lot of ounces, if they are, they could be looking at something truly world class.
The only things that concern me about the company is the share structure, they have more than 100 million fully diluted, and a fair chunk of it seems to be loosely held. My thinking is that this shouldn’t be too troublesome if they keep delivering high-grade gold. That news would help tighten up the float on the stock by putting it into stronger hands that want to own it for big exploration success, not as a flip for traders.
As I mentioned earlier, they have pending assays, and the upcoming drilling from the ice to expand on the high-grade discovery. This drilling should generate a lot of news that as the stock is cleaned up and put into hands of more serious people could make for exceptional performance. The mining industry is in drastic need of more gold discoveries, they aren’t easy to find, but, it certainly looks like Sokoman is onto a special gold project.
I strongly believe that the price of gold is going higher in 2019, and even more strongly about the need the gold mining industry has for new discoveries. The above are the three exploration companies that I think can deliver. I have more on the radar screen, when the timing is more favourable, I will write about them in future reports.
I don’t think the chronic need the industry has for new gold discoveries is going away anytime soon, but, it is not easy to find exploration plays with strong chances to make discoveries and not have blown out share structures.
The group of explorers in this report offer solid potential to valuation setups and I think all investors interested in the space should follow news from this group closely.
All the best,
Allan Barry Laboucan
Allan Barry Reports
Advance Gold (AAX.V)
P.S. my reports are for information purposes only, before making any investment decisions it is important to do your homework and speak with your financial advisers.