Mining Markets


Eric Coffin: High-reward potential still exists in this market wasteland

After two years of pain for resource stock investors, there is a little bit of light at the end of the tunnel. Gold has moved almost 20% off its late June low and trading volumes and interest in resource explorers has increased a bit....

After two years of pain for resource stock investors, there is a little bit of light at the end of the tunnel. Gold has moved almost 20% off its late June low and trading volumes and interest in resource explorers has increased a bit. That’s good, but the market has a long way to go before I would consider it “healthy.” Going forward I believe we will see higher precious metal prices but there could still be nasty dips along the way.

The biggest near term issue is “tapering” by the US Federal Reserve Board.  I’m not a hardcore gold bug and not of the opinion that monthly bond purchases by the Fed (quantitative easing as it’s commonly known) will go on forever. I think the Fed starts cutting back on bond purchases, and probably soon. Traders’ opinions on the timing and severity of the cuts swing wildly every day but based on bond yields, major equity market indices in the U.S. and, yes, gold prices, I believe at least some of the impact of tapering has been priced in. That said, there is a real chance of another spike down in price when the Fed formally announces a tapering decision. It could be a large drop if the first cutback in bond purchases is bigger than expected.

This helps explain continuing low trading volumes and level of financings, even with a recently rising gold price. I’m hoping a tapering decision, whatever its short-term effect on precious metals, could be seen as a final bottom some traders continue to expect. If metals hold recent price levels and don’t revisit the June lows during the start of tapering, traders’ confidence levels will increase. That could help draw some money back to the sector, almost regardless of where gold and silver are trading at that point.

This adds up to a dangerous environment for resource speculators. HRA has tried to alleviate the risk to some extent by looking for cash-rich explorers (and a couple of third-party funded ones) that are testing or about to test high-potential targets. HRA also has a number of companies on its list that are growing already discovered resources. Those have moved with gold prices and will keep moving back up if the metal does. High potential explorers on the other hand can move higher even in flat or slightly downward metals markets, if exploration is successful. A good discovery has its own momentum. A successful early-stage explorer can buck the market trend for a long time — as long as traders think new results continue to expand the potential value of the find quickly enough. These are not low-risk situations, but we’re in a market that is starved for news and discovery. A successful explorer will immediately garner a lot of attention in this sort of environment. If you’re up for that sort of trade, what follows are a few suggestions.

I’ve focused on several companies in the newsletter that are testing or about to test “virgin” targets and that have the backing or the funds on hand to survive failure and move on to new targets if need be. One of those companies, Colorado Resources (TSXV: CXO) has already made a discovery at its North ROK copper-gold porphyry project since coverage was initiated. Traders were disappointed with the grades in the last set of results. While that generated a price drop for the stock, it doesn’t negate the underlying speculative thesis. Colorado was trading at 15¢ (below the value of its bank account) when HRA readers were introduced to it. The stock rose as much as 900% post-discovery and HRA recommended taking enough money off the table to cover entry costs.  It’s currently trading at three times its pre-discovery level backed by 20¢/share in cash and continues to test the main and other targets at North ROK. It’s still a good speculation and proof of concept. Several other companies HRA is following are earlier in the exploration process and will deliver results during the next couple of months. A few of them are briefly outlined below.

Mirasol Resources (TSXV: MRZ) is already a successful explorer. Coverage was initiated before Mirasol made its high-grade silver discoveries at the Joaquin and Virginia projects in Argentina. Coeur D’Alene Mines (NYSE: CDE) optioned Joaquin and ultimately bought the project outright from Mirasol. This has left MRZ with a very strong working capital position of over $40 million (more than $1 per share) in cash and Coeur stock.

Recent political events in Argentina have made it something of an investment pariah. Mirasol has several good projects there, including Virginia, but has decided to focus on Chile until the political issues in Argentina are resolved. Mirasol has just completed a maiden drill program at the Titan project in Chile, and has been trenching the nearby Atlas project as well. Both of these properties contain very large targets represented by large alteration systems with coincident soil geochemical, some hard-rock geochemical anomalies and geophysical targets. Mirasol believes both these projects protect the upper levels of high-sulphidation mineralized systems. Trenching and drilling will test to see if the grade and continuity of the gold and silver mineralization improves at shallow depths. These are both good-looking targets with plenty of scale potential, and Mirasol has the funds to immediately accelerate exploration if results are good — though the company may choose to joint venture the projects. In either case, Mirasol represents junior with very good management, a successful track record, and the working capital to continue pursuing new ideas without shareholder dilution. At 30¢ a share enterprise value, I believe downside risk is limited.

Mundoro Capital (TSXV: MUN) is currently completing a maiden drill program on one of several concessions in holds in Serbia that directly adjoin either the large Bor mine complex of projects held by the Reservoir Minerals (TSXV: RMC)/Freeport-McMoRan Copper & Gold (NYSE: FCX) JV that announced an impressive copper-gold porphyry discovery last year. HRA follows Reservoir as well, and I went looking for other companies with holdings in the area. Reservoir has a 45% JV interest in Timok and has garnered a $180-million market value thanks to it. Mundoro holds several concessions covering similar geology next door and began a 4,000-metre drill program in late July to test similar geophysical/structural targets to Reservoir’s Timok discovery. These are totally blind targets being tested with 700 metre holes. It’s by no means low-risk exploration.  Mundoro does have a big ace in the hole though — its bank account. The company had $13.2 million in cash and equivalents at the end of June. The junior is trading for cash value: in other words, there is no discovery premium whatsoever right now. If Mundoro misses during its current drill program, there could be some selling, but the downside is limited by its strong balance sheet and the fact the company is also at work drilling other areas to the south of Reservoir/Freeport and at another project in Bulgaria. If Mundoro is fortunate enough to drill a hole that looks anything like the broad high-grade intercepts Reservoir has reported next door, it would trade at a multiple of today’s price. This is as good a risk/reward scenario as you’re likely to get in a weak market.

San Marco Resources (TSXV: SMN) is following a joint-venture model on two of its three main projects in northwest Mexico. I’m a big fan of this area even though Mexico is much less on most traders’ radar screens now than it has been in the past. Mexico, and Sonora state in particular, has been home to several new gold mines and most of them have proven to be high-margin/low-capex operations even through, in most cases, the head grade is low. It’s a good place to find a mine. Exeter Resources (TSX: XRC; NYSE-MKT: XRA) is earning into San Marco’s Angeles and La Buena projects. Phase-one drilling has been completed at Angeles. While the results were OK and indicate a structurally controlled zone with large strike and dip potential, the drill intercepts were not good enough to keep traders interested in a market like this. Crews have moved on to La Buena and drilling should have started there by the time you read this. Exeter can earn a 60% interest in La Buena by spending $15 million over five years with a firm commitment of $1.4 million in the first year.

The partners have undertaken a large induced-polarization (IP) survey which has highlighted several new targets under pediment cover, but the main target of interest is still Julia, where the drill program will begin. Julia is a roughly 800 by 1,200-metre target based on coincident gold in soils, anomalous gold in rocks, IP chargeability and surface alteration. The area of the chargeability anomaly/alteration patterns is several times larger if we don’t use geochemistry to limit it. It’s a large enough area to host a substantial resource. Julia bears some resemblance to the targets drilled to discover the resource at Goldcorp’s (TSX: G; NYSE: GG) Peñasquito mine next door. The target at Julia is a breccia pipe and/or stockwork zone similar to the Peñasquito resource areas.  There are several other targets that will be prioritized as Julia is being drilled and some of them should receive drill testing too. SMN also has earlier-stage projects, particularly Carlos, which is being moved to drill targeting stage. San Marco does not have a large cash balance, but its burn rate is low thanks to the JV’s. With a $6-million market value, San Marco has room for large gains if drilling at La Buena is successful.

— Eric Coffin is the editor of the HRA (Hard Rock Analyst) Advisory newsletters