John Kaiser of Kaiser Research talks about how to invest in a bear market and what exploration areas he likes right now. He also shares his top stock picks for the rest of the year.
At this year’s Sprott Natural Resources Symposium, the Investing News Network caught up with John Kaiser of Kaiser Research to talk about the junior resource sector.
Kaiser, who believes we are back in a bear market, shared his thoughts on how to approach this season.
“I’m particularly keen about discovery exploration companies, valuations are extremely low in terms of their potential,” Kaiser said.
Speaking about what exploration areas he likes right now, Kaiser mentioned Nevada, saying there’s a strategic reason to look for gold in the United States even though the metal intrinsically is not used for many productive things.
In closing, he shared what his top three stocks are for the rest of the year and why he likes those companies.
Watch the video above or read the transcript below to learn more about Kaiser thoughts on gold exploration. You can also click here to view our full Sprott 2018 playlist on YouTube.
INN: We’re here at the Sprott show in Vancouver. How are you finding the event so far?
John Kaiser: Well, this event is really productive for me because there’s a large range of very good quality companies here. I have excellent opportunity to check out new ideas and also check out on some old ones. In terms of the audience, I suspect the numbers are down from the past year or so, but I am quite impressed by the enthusiasm and the mood given that we are in what seems to be the bear market that started in 2011 and had a brief interruption in 2016. So, although there’s this pervasive cloud over the resource sector somehow this conference feels really good.
INN: And as you mentioned we’re back in a bear market. In the current context, can investors still make money? What would be your best piece of advice for this season?
JK: What we’re seeing now is almost a relentless sell-off, the institutional audience is giving up on the resource sector. There was a bump in 2017 after Trump’s election because it was hoped that there would be a big infrastructure spending boom, but that has not materialized, instead the priority of the administration appears to be a trade war. Metal prices have fallen in the past couple months as the markets have realized, “yes, Trump is serious. He does want to unleash a trade war, which could have catastrophic interim consequences,” so a business cycle that maybe had a couple years left, the one that started at the end of the financial crash in 2008, it is being shortened. The interest rates are rising but the difference between 2-year and 10-year t-bills is almost flat, telling the market there is actually a recession around the corner.
Gold has retreated because as we saw in 2008, recession will cause a financial crisis and gold will be one of the hard assets that is sold first to deal with everybody’s liquidity crunch that they are in. So, we’re in this strange mode of anticipating a very negative macroeconomic downturn, which hasn’t actually happened yet, because things are still booming in places like the United States. China is grappling with a bit of a problem. Its ability to keep expanding itself is running out of room. But for the juniors, the risk capital has been sucked away by cannabis and cryptocurrency-blockchain type stories. These don’t have an obvious upside limit. So, that’s as long as the trend is positive that will keep sucking money, eventually that will stop. Think October 17th is an important date for Canada because that’s when cannabis becomes legal and then companies will have to start showing profits and demonstrate that once marijuana is not illegal, it will still be as possible to produce and sell as when it was illegal but that’ll take another six months to unwind.
For the resource sector I see it as actually an opportunity, but it is what they call catching falling knives. You have to be prepared to buy and see the stock go even lower, because we do not know how long stocks will go in a capitulation event, but we are seeing some positive developments. For example, South32 (ASX:S32) is paying $2.1 billion to buy out Arizona Mining (TSX:AZ), which was a big discovery, which became evident in the beginning of 2016. So, that’s a big cash infusion. Dalradian (TSX:DNA) is being taken out for about $500 million. So, that’s a cash infusion coming. Today (July 19) there was an announcement that Peregrine Diamonds (TSX:PGD) is being sold for about $100 million dollars to DeBeers, which in my view is so cheap that this just has to be opening bid over competitive auction. I can’t imagine that some groups like Rio Tinto and Washington companies are going to stand by and let the Friedlands give a gift to De Beers. So, even though maybe this will go for a couple hundred million dollars these are stocks held by investors, a lot of small people not just the Friedlands themselves, and they’ve been demoralized by the fact the company has been successful and yet it has not been rewarded in the market. You cash them out finally at a significant premium where the stock has been. All these little small cash infusions will start to restore the faith.
One of the big traps I’ve seen is people like myself have backed companies, The companies have made fundamental progress and yet we’ve not seen validation of that progress in the form of increased market capitalization instead we’ve seen dilution through addition of financing and nobody wants to or they can’t even buy anything new because they’re stuck in all these quality positions for which there is no liquidity. The glass is half-empty. So, the big bad mouse to look at these types of companies and say this wall of worries about this trade war toppling the global economy into a recession or even a depression is wrong that in three to six months it’ll have proven unfounded and there’ll be a reversal. The metal prices will snap back. The big mining companies, which don’t really have much in a development pipeline, they will start to make more acquisitions such as South 32.
Of course we don’t expect huge metal price gains like we did during the China super cycle because there’s not that scale of a demand or magnitude of a demand increase coming. So, there’s going to be a focus on discovery exploration. I’m particularly keen about discovery exploration companies, valuations are extremely low in terms of their potential and there’s as you know, many of the companies here are optionality type companies, but there’s also quite a few these companies, which hope to make a big discovery that works at the metal prices we have. So, getting rid of you know, assuming that low prices aren’t going to go significantly lower than they are now, that they are going to come back a bit and stabilize, you’ve got to make that assumption if you want to be in this space.
INN: As you mentioned you’re looking at the exploration sector and here at Sprott you gave a presentation and talked about the different regions that you like right now. Can you talk a little bit about what’s happening in Pilbara?
JK: Yes. Last year I introduced the Pilbara at this conference because this was something brand-new. This was possibly widths of 2.0 and widths of 1.0 in South Africa. That’s a 2.6-billion ounce system of which 1.6-billion ounce has already been mined at the you know, good grade of 10 grams per tonne or better and all of a sudden there was this possibility that something similar was present in Australia, in the Pilbara and this was all owned by juniors. Novo Resources (TSXV:NVO) was, of course, the flagship company that had scooped a 10,000 km2 land position once Quentin Haney realized that “wow this actually did happen in this area too” and that sort of discovery and off the scale discovery something as big or maybe bigger than South Africa over 100 years ago, that would really breathe life into the junior sector all of a sudden the glass is more than half-full other projects risk capital comes in.
Unfortunately in the year since then, they haven’t found a widths 1.0 style of mineralization, which is even though it’s detrital it is still relatively fine-grained and you can measure it the conventional drill core assay over the you know, half to one meter thickness of these gold-bearing high-grade reefs, here it just seems to be it’s all nuggets it’s not fine gold. It’s in the conglomerate bed but there’s a nugget here and nugget there and they’re trying to figure out what scale of bulk sample is needed to measure the gold content and then, of course, there’s the problem is even if the precipitation theory is the correct explanation as to how all this gold formed and why it’s all over this 350 by 400 kilometer large craton. The question is how do you measure when it changes here and there because of its been alluvially retransported? So, sometimes it’s higher up in the conglomerate, sometimes it’s lower, sometimes there’s a channel here with at least the widths 1.0 gold it’s all this fine gold which has been winnowed down to very fine grain size and when you find a pastry cut yeah you drill it off. Here you just don’t know where to begin.
So, that whole play is stalled right now. Other companies like Pacton Gold (TSXV:PAC) have gone in there and picked up both significant land positions it’s not all about the what I call “the edge of the wedge” where the basement and the mount role conglomerate meet and you can wear peaks and there you can get your tractors and stuff in there backhoes and dig it up and collect buck samples as far as going down dip that’s problematic because nobody at this stage is going to put big capital into doing driving a shaft down sinking a shaft and then taking bulk samples until we know that this gold can hang together at 5 grams per ton or better and be large about mineable target. So, it could still happen but we have to wait for noble to really show us how do we measure this stuff.
INN: You also mentioned that you’re looking at Nevada. Can you talk a little bit about the company you like the most there right now?
JK: What I like about Nevada is I call it Nevada 2.0, which is looking under the gravel cover and in some parts there’s a younger volcanic cover that has obscured the incredible carlin type gold deposits that were laid down 45 to 25 million years ago and there’s been all 250-million ounces already identified. Nevada is the biggest gold producer in the United States. Since the late 60s it has emerged out of nowhere and just dwarfs all American gold production, but because of this basin range event that happened 15 million years ago well after these deposits formed half of Nevada has been down dropped and literally hidden from the explorers and they found the stuff that’s close to the ranges where you can sort of chase stuff they under the gravel and grit drill and find it, but the next wave is to use a lot smarter geology, geological sleuthing and new tools like hydro geochemistry to identify potential hotspots where you can focus traditional exploration.
The company that I’ve backed for the last 10 years is Nevada Exploration (TSXV:NGE) and they’ve generated an incredible target in what they call South Grass Valley or they have lower plate rock that’s reasonably close to the surface and that’s the best host for these carlin type deposits. They’ve got the gold and groundwater hydro geochemistry along with the carlin pathfinder elements they’ve done all the geophysics and if they raise the money needed to drill this and confirm that here is a blind deposit and others have drilled holes in the vicinity and only provided evidence of alteration that there’s a system there but they didn’t hit the gold itself but Cortez Hills deposit, which would be worth $2 billion if you found another one, it’s almost a near-vertical thing.
So, it’s easy to not hit something like that but when you can see that there is a prize with potential big size through clues like hydrogen chemistry, that creates the will to hunt this and new science about how fluid flow behaves in rocks of the alteration patterns what isotopes drop out here and there allows now even with drilling to start vectoring in. So, if you need a bigger program it’s not like come up to a sniper kill shot and a target and hope you deliver the goods you have to have a vectoring project. So, Nevada Exploration is the one that has developed several targets like that. It has a map of Nevada, where the regional sampling has showed here’s other potential areas under the under the basin gravels that need to be followed up. So, not only would they if they are right that there’s another Cortez Hills at South Grass Valley and stock you know, you can go there like $20 to $30 if it didn’t have to undergo too much dilution along the way. They could start repeating this and obviously they can’t stake all of Nevada. They would unleash an incredible exploration boom.
One of the consequences of Trump’s trade war policies in this you know, fortress America retreat to America is this back to America theme and I think there’ll be a wave of interest amongst American investors in finding more deposits new deposits in the United States on domestic soil. So, that we end up some sort of war with China or Russia or whomever and the supplies from these countries are cut off we have everything we need inside the country. So, it can almost become a patriotic thing to invest in companies that are looking for gold and other metals in the United States. With regard to gold, the US dollar is the reserve currency but what the policies Trump is pursuing, he is alienating the rest of the world almost forcing them to work around the United States and that is a way of accelerating the marginalization of the US dollar. So, having a domestic beefed up resource of gold in the United States might come in very handy. So, there’s also strategic reason to look for gold the United States even though gold intrinsically is not used for many productive things.
INN: Looking ahead to the second half of the year, any other factors that could impact the exploration sector that investors should pay attention to?
JK: Well, I think the critical event is the November 6 midterm elections in the United States and the Democrats are hope to regain at least the House and once they’re in there then we have the situation that we had in 2010 when the Republicans seized the house and stopped Obama from pursuing any further policies. So, Obama had to kind of negotiate with the Republicans about what was going to be done. So, Trump’s decision-making will have some practical brakes put on it and the Republicans will have covered. They can blame the Democrats for stuff not happening, but they can get back to a pragmatic strategy, “okay, let’s get stuff going that works and yes, Donald this was great but you got everybody worked up by both the trade wars and stuff like that, but as you can see, it’s not really working,” but let’s talk about everybody getting tariffs much lower and getting back to a proper free trade where you know, you don’t have 10 percent tariffs in this country now this just will make it zero tariffs.
So, that’s the kind of the exit strategy for this trap that the Republicans have been led into by Donald Trump. So, and even if they retain everything then they got two more years of doing as they please then Trump we find the brakes put on them the pressure to do crazy things and stop the Democrats and rally the base that disappears. So, there could be a moderation that starts to kick in no matter how it plays out. We may see this perceptions realization even happen in September where all the craziness of the summer disappear. So, that’s what I would be watching for, but to be on the safe side look for discovery exploration plays that are cheap and beaten up because none of this stuff matters if you have a really big gold discovery saying up in Nevada at that South Grass Valley project.
INN: So, speaking about finding good companies could you tell our audience what are your top three stocks for the year and why you like those companies?
JK: My absolute favorite and one that’s perfect for this type of uncertain times that we have is Scandium International Mining (TSX:SCY). They have their mining lease. They want to produce a scandium from the Nyngan Project. They need to raise $100 million but management has decided that rather than trying to promote the stock up and raise money to build a mine, they have spent the past 12 months developing offtake markets, identifying many different fabricators. They have bypassed the master alloy middlemen and are doing it themselves so that they can deal directly with the customers and their goal is to do little tiny to the four-ton off takes with maybe a 10 or so different groups and that makes sense because there’s no guarantee that the mine will produce as expected.
So, the fabricators, who plan to use, this they can’t take a big risk and commit to taking all 35 tons and what we’re waiting that the market is now quite cheap at 15 cents because if you say, “Huh, when is this ever going to happen? This is really boring.” So, it’s being discounted because it’s like watching paint dry, but the day they say one of these done all these other ones that are working with the material will see it and you’ll see boom, boom, boom, all of these little small off takes and then they have 20 tons spoken for and then the stock goes up and the capex gets done at a better price than say 15 cents maybe 50-60 cents and then people all these different parties if it delivers as expected, they’ll have the potential to increase that to say 10-15 tons. So, all of a sudden you have in place the ability to expand from 35 tons a year to 100-120 tons of output per year and that’s when the market gets that then you’ll see the valuation of a stock like this in the $1 to $2 range.
It’s all about taking 2 percent of the $100-billion aluminum market and penetrating it with scandium and it’s not done very much because it has never been a primary scalable source of that available for this. So, it doesn’t matter if we have a recession. So, the contracts are 20 percent. You’re still only tackling that same physical volume that you can put 0.1 to 0.3 percent scandium into. So, it’s actually immune it’s a technology innovation. It’s not really disruptive. It’s more of enhancing thing. It creates all kinds of cost savings for fabricators and it falls into that whole lightweighting category of you know, using less energy to move stuff around. So, that’s my first top pick right now that I think is crazily undervalued.
The second one is Nevada Exploration. Now, they need to raise money. So, there’s either going to be a dilution hit either through an equity financing or a farm out they’ve been dealing with various groups of companies and so far there’s no deal, but if a deal were to come well then they’d lose probably at least half of the South Grass Valley project, but then they have the other things to work on and the stop it and go high and they could finance and that is off to the races.
The third one is InZinc Mining (TSXV:IZN). Zinc has retreated back below $1.20 as part of this anticipatory wave of the trade war and recession, but they are in the midst or they just finished a drill program they’ve drilled five holes or most of them are deep holes they’re awaiting assays or four. They have confirmed the extension to the west so the west desert deposit, which isn’t the money even at today’s $1.18 zinc price. They will be able to build that bigger. We have to see what the eastern potential is all about. You know, they got sulfides in the core but until they have assays. They don’t know what’s going on over there. They will be returning later this year and the stock think they did this big financing 35 million units at a dime last year, which will spread amongst the different brokerage firms and so, we’ve had this problem that all these frightened shareholders have been selling the long position and just clipping the half warrant to ride it out and have no exposure.
So, this is kind of the predicament everybody’s so afraid. So, risk-averse right now that none of these companies are getting any traction, but at ten cents on this– this stock is a bargain even if all the drilling is a bust but we’ve already seen that the drilling is at least partly successful and we’ll see what the rest is like. So, these three stocks you know, two of them 15 cents one 10 cents fundamental assets in the case of Scandium International and InZinc Mining already in place and then incredible blue sky opportunity in Nevada with replication potential not like they found that one best spot. They have many, many spots that the treasure map of Nevada and if they make one breakthrough the glass is half-full for all their other targets and everybody will want into that game.
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Securities Disclosure: I, Priscila Barrera, hold no direct investment interest in any company mentioned in this article.
Editorial Disclosure: The Investing News Network does not guarantee the accuracy or thoroughness of the information reported in contributed article. The opinions expressed in these interviews do not reflect the opinions of the Investing News Network and do not constitute investment advice. All readers are encouraged to perform their own due diligence.
Editorial Disclosure: Pacton Gold is a client of the Investing News Network. This article is not paid-for content.