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The Upside of a Down Mining Market

Source: JT Long of The Gold Report  (11/30/15)

Bob Moriarty Adrian Day When the instinct is strongest to curl up in a ball and wait out the ravages of the down market is also when smart companies snap up distressed projects and get to work while capital costs are low. In this interview with The Gold Report, veteran investors Bob Moriarty of 321gold.com and Adrian Day of Adrian Day Asset Management share their messages to mining company CEOs and investors about advancing frugally to avoid being left in the dark. To make investing in teams doing the right things even easier, they identify a dozen companies that have already taken the contrarian advice to heart.

Gold roller coaster

Bob Moriarty, founder of 321gold.com, has some advice for CEOs of mining companies: "Hoard your money when the market is bubbling, and spend your money when the market is dying." It seems obvious, but in his words, the majority of investors are "sheep who will lose their money." Pressure from conservative investors can make it difficult for resource managements to make smart decisions. That is why he focuses on the companies that already got the message about the importance of adding value when everything is on sale.

Adrian Day, founder of Adrian Day Asset Management, wants to see companies move forward while still conserving cash. "It's not easy. But a joint venture can help offset work expenses. If a company is constantly raising money in a depressed market, the stock can just collapse," he warns.

Movers and Shakers
A classic example of a CEO who understands the cyclical opportunities in the resource markets, according to Moriarty, was Rob McEwen at Goldcorp Inc. (G:TSX; GG:NYSE) circa 2000. "He issued the Goldcorp challenge to find the next 5 million ounces of gold at Red Lake. It wasn't anything but a promotional gesture, but it made everybody in the business view Rob McEwen as a leader moving the industry forward. In that situation, illusion became the reality," Moriarty says.

"NOVAGOLD is exactly the kind of aggressive company you want to look for right now."

Day points to Goldcorp as a producing company that is still advancing new projects during this downturn. "It takes a long time to develop a major mine, decide to go ahead, and then bring it into production. Despite that, this company has three new mines ramping up this year, hopefully just in time for a recovery in the market. But even without that, these are operating mines making money at today's prices. That is an example of a company continuing to advance and position for upside," he says.

Another company that Moriarty thinks gets the "buy low, sell high" idea is NOVAGOLD (NG:TSX; NG:NYSE.MKT). "This was a $0.09 stock in the summer of 2001. The company did a joint venture deal in Alaska with Placer Dome that required it to spend $6 million ($6M) in eight years. NOVAGOLD did all the work in 18 months and ended with a $20 stock. That's exactly the kind of aggressive company you want to look for right now," Moriarty says.

"Pretium Resources Inc. is advancing the Valley of the Kings project."

Moriarty recently visited California Gold Mining Inc. (CGM:TSX.V), which is in the midst of a major drill program in California on the mine that made John Fremont rich in 1850. "The company had to issue a lot of shares to raise the money, but the drill costs were half of what it was two years ago. That is a smart move," he says.

Almaden Minerals Ltd. (AMM:TSX; AAU:NYSE) would be an absolutely perfect example of this value-added thinking, Moriarty says. "I happen to like the father/son management team of Duane and Morgan Poliquin. I have been to the project and love it. The company is moving toward production on the Tuligtic project in Puebla, Mexico. It spun the other assets off as Almadex Minerals Inc. (AMX:TSX.V) in a 2-for-1 special for shareholders.

"That's a perfect example of what you need to do in a market bottom. Investors tend to forget that commodities move up and down and you can't kill a project because today's price is too low. You have to weather through it. Is Almaden going to be able to produce silver and gold at a profit at a 5-year/10-year trading average? My belief is absolutely yes, so I don't care what the price is today. I want to see it move forward. The cost of diesel is cheap. The cost of iron is cheap. The cost of labor is cheap. It's a tremendous opportunity to take advantage of that.

"If you go down to your local Corvette dealer and a brand new Corvette was quoted to you six months ago at $70M, but today the same red sports car is on special for $6M, that sounds like a hell of a deal to me." Almaden applied that logic to its recent purchase of the barely used 7,000 ton-per-day capacity Rock Creek mill, a move that could reduce the initial capital cost estimate of ramp-up for Ixtaca by $70M. "It was an absolutely brilliant move on Almaden's part," Moriarty says.

"Silver Wheaton Corp. is making smart deals right now."

Day also sees Almaden's purchase of the discounted mill as a plus, particularly because of the structure of the sale as an option to purchase with payments spread out over three years. "For less than $1M, it has locked up this key piece of infrastructure. That is a wonderful example of taking advantage of a downturn," he says.

Among juniors, Day sees a lot of companies doing good work in this market. "Pretium Resources Inc. (PVG:TSX; PVG:NYSE) is advancing the Valley of the Kings project. The company had to raise new equity, but if a company has a good asset and is demonstrating that it's advancing the project without being wasteful, the market should give it credit for adding value."

Day calls out Lara Exploration Ltd. (LRA:TSX.V) as a company taking advantage of the downturn by entering into agreements with other companies at very low cost. "It is optioning properties out to other people, in many cases receiving payments sufficient to enable it to continue operating without raising equity, which I think is a smart way to continue to work."

Another one Day sees as an example of a company using property options or earn-in partnerships to conserve cash is Riverside Resources Inc. (RRI:TSX.V). "Riverside acts as the operator, and the partner pays a small management fee. The company has also been able to generate some key strategic alliances that call for the partner paying for the generative work. That is a great deal. Someone else pays it to go out and look for properties. Obviously, the partner has the right to earn in to the property if it likes it, but if it declines for whatever reason, then Riverside has generated a project at someone else's cost. This company is active largely on someone else's dime and earning a little bit of money for it. Lots of companies are doing this kind of thing without having to raise additional equity. It's mostly small stuff, but it keeps the company active without raising money."

Day's final example of a junior taking advantage of unique opportunities right now is Midland Exploration Inc. (MD:TSX.V), which has been active in the wake of a $15M equity raise, largely through the Quebec pension funds. "That is a lot of money and it puts the company in an exceptionally strong position if it sees something that it wants to buy. This company had zero projects dropped in the last 12 months, and it has added at least four new partnerships in that time. Midland was very active even before the equity deal, but now it can both do more work on projects and shop its projects to bigger companies and get better deals. It's an outstanding arrangement," Day says.

Streaming Deals
Day sees a down market as a golden opportunity for royalty companies. Last year, Franco-Nevada Corp. (FNV:TSX; FNV:NYSE) added a billion dollars' worth of new royalties, both major streams with big-cap companies and some small royalties. "A lot of those were distressed companies, so they were able to take advantage of other companies' distress and get large, attractive, long-life royalties. This year, it's probably on its way to almost another billion in bargain shopping," he says.

"Osisko Gold Royalties Ltd. (OR:TSX) acquired Virginia Mines Inc. (VGQ:TSX) and an attractive royalty on the Éléonore project. More recently, it acquired a package of royalties from Teck Resources Ltd. (TCK:TSX; TCK:NYSE), another distressed company," Day reports.

"Royal Gold Inc. (RGLD:NASDAQ; RGL:TSX) and Silver Wheaton Corp. (SLW:TSX; SLW:NYSE), on the silver side, are also making smart deals right now. The royalty and streaming companies are generally taking advantage of other companies' distress because typically they have better balance sheets," Day says.

The Contrarian Conclusion
"The companies aggressively moving projects forward right now are going to be the leaders tomorrow," Moriarty concludes.

Moriarty's parting words are for the investors. "The people who make money in investments are contrarians. What you need to understand is popular psychology. When everybody wants to buy something, sell it to them. When everybody wants to sell something, buy it from them. It is that simple. There are no gurus. There's nothing magic about the market. When everybody's screaming, buy page 1; when everyone is happy, you want to be selling page 1 and buying page 23."

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DISCLOSURE:
1) JT Long conducted this interview for Streetwise Reports LLC, publisher of The Gold Report, The Energy Report and The Life Sciences Report, and provides services to Streetwise Reports as an employee. She owns, or her family owns, shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of Streetwise Reports: NOVAGOLD, Pretium Resources Inc., Midland Exploration Inc. and Silver Wheaton Corp. Goldcorp Inc. and Franco-Nevada Corp. are not affiliated with Streetwise Reports. The companies mentioned in this interview were not involved in any aspect of the interview preparation or post-interview editing so the expert could speak independently about the sector. Streetwise Reports does not accept stock in exchange for its services.
3) Bob Moriarty: I own, or my family owns, shares of the following companies mentioned in this interview: None. I personally am, or my family is, paid by the following companies mentioned in this interview: None. My company has a financial relationship with the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I determined and had final say over which companies would be included in the interview based on my research, understanding of the sector and interview theme. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.
4) Adrian Day: I own, or my family owns, shares of the following companies mentioned in this interview: Franco-Nevada Corp., Goldcorp Inc., Osisko Gold Royalties Ltd., Royal Gold Inc. and Almaden Minerals Ltd. I personally am, or my family is, paid by the following companies mentioned in this interview: None. My company has a financial relationship with the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I determined and had final say over which companies would be included in the interview based on my research, understanding of the sector and interview theme. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.
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