Gold Bull Engaged, Gold Stocks Cheap, The Gold Party Has Started
Update from the Allan Barry Reports
Brought to you by Advance Gold (AAX.V)
Gold had an impressive breakout of late, after we saw strong technical indicators, junior explorers are starting to come to life as well. This past week, gold had a powerful run after it passed through a bullish cup and handle trend, and a golden cross. In this report, I will open with the gold action and then an update on the picks from recent reports.
Trends in gold price action are great at helping to see when the market is changing direction, but they aren’t the whole story. If the fundamentals of supply and demand wasn’t also bullish, I would not be nearly as bullish as I am.
To understand how weak the supply chain for gold is, one needs not look further than the dramatic drop in head grades at mines and the average grade of new discoveries. Not only does this tell you the health of the current supply chain, it also tells you what will happen many years into the future.
Miners have two issues, head grades at mines in freefall, and they also have issues with their reserves on the books and projects in the pipeline. During the 2001-2011 gold bull market, the majors were on a buying frenzy, trying to grow for the sake of growth.
While doing this, they bought a lot of iffy projects, we have seen plenty of write offs due to their indiscriminate buying. Their reserves and resources are in trouble as well, as can be seen from the recent merger of Newmont and Goldcorp.
This transaction was not done to grow production, it was done purely to keep production steady. It is an admission from Newmont that they are not in a good position for organic growth. It doesn’t say a whole lot of good things about Goldcorp either. Newmont bought Goldcorp at multiple year lows, to keep the status quo, which is not a bullish sign for either company’s pipeline of projects.
To see even further into the weakness of the supply chain of gold for the long term, one can look at the industry average grades of new discoveries. When I got in the business in the early 1990s, if a project wasn’t at least a few grams per tonne, nobody was interested. Now the average grade of new discoveries, worldwide, is less than a gram.
From the time of discovery, through economic evaluation, permitting, construction, it is at least a 10 year process. That means, if the worldwide average grade of discoveries is less than a gram, it tells you what will happen over the next 10 years at a minimum with the supply chain.
The reason that grades are falling so much, whether at mines or in exploration is because all of the easy stuff has been found. Now, companies are forced to go into more risky countries, into locations with challenging access and look deeper for buried deposits.
The days of the gold rushes, where people could find gold in rivers are long gone. In the last few decades, advancements in geophysics, helped to find the near surface deposits close to where the historical surface gold was found. But, that has run its course, now explorers have to go deeper than walking over the stuff at surface or near surface.
Based on these issues, it is safe to be a bang on the desk bull for gold, looking out many years. At least a decade, and almost assuredly much longer, these trends in grade problems for the miners and explorers aren’t going to change anytime soon. If ever, it is a golden age to be a bull on the price of gold.
I’m even more bullish on the gold mining, development and exploration stocks, based on long term valuations. During my career, I’ve only seen the gold stocks this cheap, one other time. It was in the late 1990s to the year 2000, right before the decade long 2001-2011 gold bull market.
This time around, and yes I do believe we are in the early innings of another great gold bull market, I think it will be even more powerful for the growth gold stocks, especially the middle tier and junior explorers. They have really been punished over the past few years, but the ones with strong projects and cheap valuations are going to have their day in the sun. Or should I say years in the sun.
With the history I described earlier that has major mining companies in a tough spot. They are just screaming for new discoveries, a junior finds a good discovery, in a location that offers reasonable development and production cost, if they are big enough the majors will gobble them up at a premium. If they aren’t big enough for the majors, the middle tier companies will grab them to help their growth prospects to become majors.
Whenever the sector goes through a few years of challenging times, the valuations on the smaller companies get hammered. Making it really challenging for professionals in the business. With these bust cycles happening on a regular basis, it thins out the people.
In the 1980s and 1990s, those couple decades really did a number on new people entering the mining sector. It is called the lost generation. The business has never really had a chance to recover, and now the experienced people in the business are passing on to the gold mines in the sky or retiring.
Yet, they didn’t really have a lot of new people to mentor and hand down their knowledge to. So, now we have the echo from the lost generation.
I’m 54 and the people in the business 10 years younger or older are not that many. This as well will have long term ramifications. I was very fortunate to have been mentored by brilliant geophysicists, geochemists and geologists, but industry wide that handing down of the knowledge has not been happening as much as needed.
Going back to the toughness of the business, the lost generation, the echo from the lost generation and the lack of the batton passing from one generation to the next hasn’t happened. Which means that folks with a lot of experience from mining to exploration also causes problems for the supply chain.
There are people problems, challenges to exploration and mining, yet, the sector still needs more new mines. The industry has a barrier to entry, with a lot of demand on one side, yet not enough people and projects on the other side of the door.
This logjam will drive the price of gold, silver and other metals higher. It will also add to the premium for those that find something the bigger fish need to feed off.
While we have this perfect storm to drive gold, silver and other metals higher, we also have the demand side in a strong situation. There are plenty throughout the world, including central banks, buying gold in a serious way. Economics have a wonderful way of fixing problems.
Central bankers and governments love to crank up the printing presses for fiat currency. Especially after America went off the gold standard, which required them to show some discipline in monetary policy. I don’t think any central banker is going to want to go back to a gold standard.
Based on economics, if I was running a central bank, I sure would rather be sitting on some gold, silver, and plenty of other commodities. Instead of a pile of paper currencies backed by nothing other than governments. Those currencies can collapse, but, people will still need metals and other commodities to eat, heat themselves, shelter themselves and for practically everything in their lives.
Central bankers and governments have enjoyed being able to function without any controls. Economics will fix that as they have debased their currencies in a colossal race to the bottom for trade purposes, and to fuel their foolish spending habits. Making it a much more attractive proposition to own precious metals and other much needed commodities.
You don’t have to convince the people in the two most populous countries, China and India, that they should have some of their wealth in gold and silver. They have an inherent distrust of politicians and the currencies backed by nothing.
As much as I think the supply chains for gold, silver and other metals are in rough shape, I believe equally as strongly that the commodities that make the world function will stay in strong demand. The supply and demand fundamentals are in great condition and pointing to much higher prices.
While the supply and demand stories for gold, silver and other metals are bullish, as I said earlier, the mining stocks, from large to small are at historically cheap valuations.
I’m most bullish on the stocks that have strong potential to valuation setups. The problem I described earlier on the people side of things, makes it so that an investor in the space needs to be selective about stock picking. Being able to find bullish potential to valuation setups has started to pay off and will continue as the metals prices gain strength.
Lately, I have been able to find several juniors that have solid potential to valuation setups. With gold starting to show strength, we are starting to see more strength in the stocks as well.
I saw this happen once before, just before the 2001-2011 gold bull market and we are at that inflection point again. It is time for investors in space to be greedy and load up when they find solid potential to valuation setups.
Next up, I will talk about stocks I’ve picked, and give updates since I last wrote about them.
Gold Stocks Setup For Gains
If you want signs that the winds of change are here, you don’t need to look farther than the group of stocks I have picked in the last couple months.
My methods of making picks are fairly straight forward. I follow the news on drilling results, and look for ones that stand out to me, in stocks that don’t have blown out share structures, and have reasonable valuations.
In recent years, following that formula, has not resulted in stocks doing much. But lately, they are starting to perk up after results are reported and hang onto their gains. Even more surprising, showing some optimism for what is coming next.
Instead of investors looking for the next shoe to drop and their buys to get the smackdown, they are getting a little more greedy. As Bob Dylan sang, the times they are a changin.
Timing means a lot when it comes to investing in any stock, especially in mining stocks, even more so when it comes to the smaller ones in the sector. With precious metals prices gaining strength and valuations dirt cheap, the timing setup is ideal.
Earlier this week, I added three new companies, based on their drilling results and valuations. It has been many, many, many moons since I was able to do that. They are in places where they can drill year round, and I expect good things in the near term out of them.
Walker River Resources (WRR.V)
Walker River Resources reported some exceptional drill results from their project in Nevada, including 1.5 metres of 198 g/t gold. This wasn’t an isolated hit, they had other holes with high-grade gold as well. I would encourage readers to go to their website and look for the video they have on their homepage. The company leader Michel David does a great job telling the story about the historical work on the project, and how wide open it is for exploration. They have a key structural feature, with at least a couple cross cutting structures that you can see from Google Earth. These are big structures, with high-grade gold mineralization. They have more holes pending, and I don’t think they will have any problems delivering a lot more high-grade gold in their future drilling. I would also point out that the project is in Nevada where companies that have success with the truth machine always get premium valuations. I think that is exactly what is in store for them. I’m a shareholder of the company with an average purchase price of just over 11 cents.
Viva Gold Corp. (VAU.V)
Viva Gold is another explorer that has released high-grade gold results from their project in Nevada. While Canadian juniors are frozen in, at places like the Golden Triangle of northwest BC, the Nevada exploration companies are able to work almost all year. The state is mining friendly, and for explorers it is also friendly when it comes to exploration costs. It also offers great geology with gold mines all over the state. Viva Gold hit some nice high-grade drill results, fairly close to surface and they have more holes pending. They have a nice tight share structure. I’m looking forward to seeing more drill results and expect them to get more drilling going soon after they report their next assay results.
Newrange Gold (NRG.V)
Newrange is also a Nevada exploration play, the news that caught my attention recently was actually not really new. It was from twinning a hole that was previously drilled using reverse circulation (RC) drilling. Somebody on their exploration team suspected that the RC drilling could have been losing gold. This can happen with fine gold, when using RC drilling. Sure enough, they drilled with core and the grades in the lower grade sections came back with much better grades. Equally as impressive was that the high-grade was significantly better. This one hole shows the potential that the RC drilling is under reporting the gold grades. They have more holes pending to see if this was a one off or if it is time for them to switch from RC to core drilling. With significantly better grades in the low-grade and high-grade sections, and the problems that can arise from RC drilling, I don’t think it is a fluke. As I mentioned when I picked them, exploration is hard enough, no need to add to the challenge. Sure RC is cheaper, but sometimes, cheaper can turn out to be expensive when it costs in the stock price and in the ability to raise additional funds. I think they are at a seminal moment in their exploration and will switch to core and see a significant change in their profile to investors.
Westhaven Ventures (WHN.V)
Westhaven is in southwest BC, right beside a major highway, that offers them year round exploration and low costs. They have a marquee name in the mining sector on the board and as a big shareholder. This combination, plus, early high-grade gold drilling results sent the stock from 20-30 cents up to a high of $1.43. The early drill results were so impressive, that it got pretty much priced for perfection. When their recent results were not as eye popping, the stock got hammered to around 75 cents, where I though the market had overreacted on the downside. They are still early in their exploration, and with their attributes, I thought it would rebound, and it cooperated. The stock has recovered nicely, they are doing IP to see if geophysics can light up more veins and they will be drilling again shortly. Epithermal veins systems often have several veins in the cluster, so I will be eagerly awaiting to see if they can find more, and also keep growing the couple they have found so far. Another thing to keep in mind about these systems is that they can have zonation of the grade, so, they can come in and out of the high-grade along strike and at depth. I’m looking forward to the next round of drilling, based on the geophysical work, following up on their past drilling and getting a handle on the grade distribution.
Amex Exploration (AMX.V)
Amex is in Quebec, which is a fantastic mining-friendly jurisdiction that offers great geology. They also have a tight share structure and have delivered high-grade with their recent drilling. The Perron project has seen a lot of past work, but importantly, not in the area where they have made the recent high-grade discovery. As can often happen, sometimes it takes a new look at a known project to open things up. This new look, has caused them to drill further east where they have found a fairly broad low-grade zone with a narrow high-grade zone right beside it. These two zones look like they can come together at depth. It also looks like the immediate area could have more zones. All the drilling so far is fairly close to surface, and the strike and depth are wide open. Because Quebec is such a mining-friendly jurisdiction, stocks can get premiums like I mentioned earlier with the picks from Nevada. I’m very optimistic about the pending hole they have from their narrow high-grade zone. All of the other holes in this zone have returned high-grade and the pending hole is the closest one they have drilled to surface. When I first picked them, I noted that they have moved up a lot since they announced the results, and due to the spike I was looking at it as something investors would want to take a starter position and keep some powder dry. I think it is time to use up some more of that powder as it looks like the market really likes the results, the potential of the pending results, the tight share structure and prospects for future drilling. The market doesn’t always get things right, in this case, I agree with Mr. Market on this one.
Great Bear Resources (GBR.V)
Great Bear is a company I picked in the middle of December and then again on January 21. They have really caught the market imagination with their high-grade gold discovery in Red Lake. I used to do consulting to the company a few years ago and was instrumental in bringing Bob Singh into the company. I had worked with Bob Singh for close to a decade, and think he is a genius when it comes to exploration and using computers to compile geological data and modeling. In addition, he has spent most of his career working in Red Lake. The company got their hands on the Dixie Lake project, compiled all the data and took a fresh look at the project. In the second half of 2018, they hit some impressive holes that got the stock rolling and also brought Rob McEwen into the picture. He is famous for taking Goldcorp from a junior, to a major gold producer with low costs and high margins from their mines in Red Lake. He is now Great Bear’s largest individual shareholder, if anybody gets Red Lake, it is Rob McEwan. I highly recommend readers go to the company’s website and look up the media section. In there you will find a webinar video, watch it and you will get a much clearer understanding of how big this project can be. Bob Singh does a presentation of the 3D model of the geology and makes it very easy to understand how it is wide open along strike, and at depth, most importantly, the realistic potential of how big the system can be. I rarely speculate this early in an exploration project about the potential for a junior to be taken over, in the case of Great Bear, I don’t think it will be much more than a year, if that long, before a major comes in to take them over at a premium to the current valuation.
Advance Gold Corp. (AAX.V)
Advance Gold is the company where I’m the President/CEO, we are in the early days of drilling into an epithermal vein system, in Mexico. We have found a cluster of veins, in a region that has been mining these kinds of veins since the 1500s. It is a region that offers exceptional geological prospects, year round exploration, at low costs due to well developed infrastructure. We have two projects in the area, both have road access and power lines going through the projects. Fairly close, in the same kinds of rock, Fresnillo Plc. has several mines, mining epithermal veins. They are the lowest cost producer of silver in the world due to the grades and the low costs of mining. Close to the Fresnillo Plc. mines, is where MAG Silver has found their mine that is partnered with Fresnillo Plc, when the Fresnillo and MAG mine goes into production it will make MAG Silver one of the lowest cost producers of silver in the mining business. As we mentioned in our most recent news release, our next drilling program will be focused on two targets. Penoles historically mined close to surface in the oxide portion of one of the veins. The production was confined to around 150 metres of strike and 80-100 metres of depth and the vein there is around 2-4 metres wide. Our step out drilling around 100 metres away, opened the oxide portion of the vein to an approximate 12 metres. The project is fully permitted for mining, and we plan to step out along strike from where the vein is wider in the oxides to test the potential for near term production. The second target is to get deeper into the cluster of 30 plus epithermal veins we hit. All but one of the veins was blind, just like the veins over where Fresnillo Plc. and MAG Silver projects are located. This is an indication we are at the top of the system and we look forward to drilling deeper into the system. The geological model is well known for the region due to the long history of mining, we are very optimistic about the depth potential. I hope to have developments to talk about in the near future about our two-pronged approach to drilling our Tabasquena project.
Sokoman Iron Corp. (SIC)
Sokoman has a new discovery of high-grade gold, in Newfoundland, which is located right beside a highway. It is another no helicopter project, which is a common theme among all the companies I’ve picked of late. The project offers year round exploration. They made a discovery in late 2018, that caught investors attention, including billionaire mining investor Eric Sprott. The stock took off, then settled down, mainly because although they have a reasonable amount of stock out, it is kind of loosely held. Last week the stock was trading just over 20 cents, they put out results that disappointed the market and it sold off to around 13 cents. They are early into the exploration of this high-grade gold discovery, now that they have all the holes in from their late 2018 drilling, they are ready to start a third phase of drilling. High-grade gold discoveries are not easy to figure out sometimes, but, the new drilling will be focused on drilling the extensions of where they have found the high-grade gold. The drilling they completed so far, is giving them a much better understanding of the directions to look for more of the high-grade gold and I think they have a very good chance to deliver in their drilling of phase 3 that is now underway.
Minaurum Resources (MGG.V)
Minaurum is focused in Mexico, with one of their key people being Peter Megaw who is the geologist responsible for MAG Silver’s high-grade low cost future mine. He is an extremely talented geologist, and is trying to do it again in Mexico. Their Alamos project is a district scale project with a cluster of veins, that has hit high-grade and they have a lot of veins to look for and drill off. They recently had a bunch of warrants exercised for over $3 million which gives them a treasury of close to $10 million. They are loaded up with cash, have lots to chase with the drilling and a talented guy picking targets. I like their prospects to deliver a lot of good news this year.
Equinox Gold Mines (EQX.V)
Equinox is run by a rock star of a mining guy in Ross Beaty who is a serial entrepreneur throughout his career in mining. He is often ahead of the crowd, and has said that this is sort of his swan song. He has mentioned in public that it is his intention to build this into the biggest gold mining company he can, as fast as he can in order to take advantage of the upcoming bull market he sees coming for gold. He has put a lot of money into the company so far to grow its portfolio of gold mines, and intends to put much more in. To say Ross Beaty is swinging for the fences with Equinox is no understatement. With his money, vision and deal making skills, I think he will deliver in a big way. He has been grabbing projects on the cheap and moving them forward. I agree completely with his assessment of where gold is headed for the various reasons I mentioned earlier in the report. I consider Equinox a core holding for investors that want exposure to gold mining companies. It doesn’t hurt that at current prices investors can get into the stock at pretty much around the price Ross Beaty put his money in. Investing at the same price, alongside Ross Beaty has often turned out to be a lucrative investment as I foresee it will be with Equinox.
Premier Gold Mines (PG.T)
Premier Gold is a new mining company over the past couple years that has graduated from being a junior exploration company. What sets them apart is they are very good buyers and developers of projects that also adds value to their acquisitions with the drill bit. I’ve been following the company’s many successes over the years, as in the past they were a long term supporter of my reporting with sponsorships. They aren’t currently, but I would love to have them back any time. I have had the chance to interview Ewan Downie who leads the company many times. If you would like to see some of those past interviews, go to my website and search for Premier Gold. I first started covering them when they first went public. Since then, I’ve watched them have success as an exploration company and in the past couple years become a profitable gold mining company. I admire their ability to have great timing on buying assets, their portfolio of projects from exploration to mines and their ability to have success with the drill rig. They are what I consider a classic, old school mining company that can grow with the drill rig or the cheque book, with a strong pipeline of projects and the skills to make their projects into winners. They are also a company that I consider a must own for investors that want exposure to gold miners.
I’m getting into a nice flow with writing the reports, picking stocks during the week and then these wrap up reports during the weekend. With the trends in metals and the cheap valuations in gold stocks, I anticipate continuing this reporting schedule.
When I first got into market commentary, I did a lot of writing, I’m really enjoying writing again. I’m also working on bringing in some guests to do interview shows in the near future. Writing reports and doing shows have long been something that I enjoy doing to help my audience learn about good stocks and the sector.
In the past couple years, I have also added running my own public exploration company to my plate. Which gives me the opportunity to use my 25 years in the business as an explorationist to good use.
Lately, I have also been approached to revive my consulting business. I have a lot on the go, running Advance Gold (AAX.V), plus doing my market commentary, but if the right situation arises I will consider it.
What can I say, I love being a treasure hunter.
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.