During my two week visit to the Yukon and Vancouver I was fortunate to have had the opportunity to interview one of my favorite voices in the junior mining sector, Eric Coffin of HRA Advisory. Eric has the unique skill of offering deep insights into the macro-market picture while being one of the most well versed commentators on the intricacies of the junior mining sector. This is my first ever interview with Eric and it did not disappoint.
Goldfinger: It’s been a pretty tough year for junior mining investors. From your vantage how does sentiment and price action feel to you compared to past markets?
Eric Coffin: It feels disappointing. I was hoping to see more strength through the middle of the year. I’m a little surprised that gold is as weak as it is, I mean the US dollar is up a little bit but it’s not up that much. On the base metals side we’re having some problems that look wholly political to me. I think a lot of the trading on the base metals side is trying to get ahead of whatever wacky thing Trump is going to think up in terms of tariffs. As long as this doesn’t turn into a protracted large scale trade war that cuts back on world growth and curbs Chinese metals demand I think traders have priced in too much already.
When I look at China for example, unless Trump is able to do things that really slow the Chinese economy I don’t think it will impact base metals demand as much as traders are thinking. Particularly in the case of copper and zinc. Not a lot of that gets re-exported, which is to say that China losing export sales short term isn’t going to impact copper and zinc demand all that much.
This is not a small thing. You’re American so you would know better than I but i’ve been quite surprised that the New York market has held up as well as it has.
Goldfinger: I think the market is thinking that Trump is a pro-business guy, he’s a pro big corporations guy (see his tax cut) so they’re thinking he’s not going to sell the big business interests out and this is just a negotiating tactic to get what he wants for his base. This a tactic on Trump’s part to get what he wants for his core constituency, so he can wave the flag on stage and say that he got one over on our trading partners who are no longer taking advantage of us thanks to him. It all plays to his “Make America Great Again” narrative. The problem could come in when he gets called on his bluff, which looks to be the scenario that’s currently unfolding.
Eric Coffin: It’s good that Congress has to vote on these things and that Trump can’t unilaterally implement trade tariffs. I’d like to think that the GOP being the free-trade party traditionally would mean that somebody grows a pair and talks some sense. And i’m not saying China is perfect by any stretch of the imagination. Some of the stuff he accuses them of he’s right about. If they can find an opportunity to get technology cheap and free, they do it. But the China today isn’t the China of twenty years ago, the size of their economy is totally different. They have the 2nd biggest economy in the world today depending upon how you measure it. Bullying them isn’t go to work, I think they’re going to tell Trump to fuck off.
Goldfinger: I agree. So the macro is completely out of our hands but as an investor oftentimes buying when stocks are beaten up and sentiment is depressed can be the most lucrative times to get into the market. What are a few of your favorite names right now? Some names that you think offer real value at current levels.
Eric Coffin: There’s usually two ways to go about this and I cover both ends in my newsletter. You can buy development stage companies that are near production or you can buy more speculative exploration-stage juniors.
One I would mention is Excelsior Mining (TSX:MIN, OTC:EXMGF). They just received their final permit for Gunnison and I was expecting some selling on the news of the receipt of the final permit but I’ve been surprised as to the extent of the selling. My cynical side wonders if the larger entities that took part in the C$1.00 financing at the end of last year might be selling under the assumption that they can reload in the next financing (phase 1 mine construction capex). However, I know management’s preference is to do predominantly debt or 100% debt for the next round of financing at Gunnison. I don’t personally see why that wouldn’t be possible but of course that’s going to depend upon the terms that they get. They have about US$25 million in the bank right now and they need about US$50 million for the phase 1 build at Gunnison. I think if we saw a debt financing you’d see the stock turn around pretty quickly.
MIN.TO (Daily - 18 Months)
Another name I like is Orezone (TSX-V:ORE). This is another one where there is some potential for selling on news when they release their updated feasibility study which could be released as early as next week. One thing about Patrick Downey is that he has a successful track record, both as a mining engineer and a guy who’s actually run engineering firms. He and I walked through everything he’s doing to keep things on track, i’m pretty comfortable that it’s done and it will be released next week. Another thing Patrick has done is simplify their flow sheet for their Bombore Project. They should have pretty good production numbers although they’re essentially going to be using the same resource they generated about a year ago, it’s going to be a while until they generate a new one.
Another thing that I expect from ORE, although it won’t be for a couple of months, is that they have about a quarter million ounces of oxide that was excluded in the previous resource because there’s a seasonal water course there. It just sorts of pops up again during the rainy season. They’ve talked to the government and the government is fine with adding it to the resource as long as they show a plan that doesn’t involve mining it during the rainy season. The main thing in the feasibility study is that I think you’re going to see strong numbers, I’m expecting an NPV up in the C$350 million range with an IRR north of 40% after-tax. I think it will be a very strong study. Resource Capital Funds just wrote a very big check, and a private equity firm out of Burkina Faso named Corus that I’d never heard of before have been telling him all along that they want a piece of the debt financing. These guys have the capability to get it done and get this thing started. I think they’re a pretty strong takeover candidate within 6-9 months and I think the takeout would be at a significant premium to the current share price.
ORE.V (Daily - 18 Months)
Another company I follow that has suffered from hold ups due to third party engineers is Vendetta Mining (VTT-V). Their updated resource is quite overdue, but I think we’ll see it in the next two weeks now. I think the next resource will bring them close to the 15 million tonne in-pit and 12 million tonne mineable resource they wanted before embarking on a PEA. They will be close enough to complete a PEA either way. That should be quicker as most of the other parts are done. Their project, Pegmont, is unusual in that its an open pit mineable resource in the heart of one of the world’s premier lead-zinc camps and most of the resource is on permitted mining licences. I expect them to open a data room once the resource is done and think they have high odds of being taken over. The delays are not helping the stock but delivery of the resource and news a PEA is underway should help a lot.
VTT.V (Daily - 18 Months)
Goldfinger: Thanks for sharing all of that Eric, very insightful. I was just in the Yukon on a tour sponsored by the Yukon Mining Alliance. Do you like any Yukon plays?
Eric Coffin: About the only company in the Yukon I am following closely is Fireweed Zinc (TSX-V:FWZ, OTC:FWEDF).
Goldfinger: Can you give us some thoughts on Fireweed and why you like it here? With the Arizona Mining takeout by South32 suddenly Fireweed has the largest zinc project in the Americas held by a junior.
Eric Coffin: I think both the Arizona Mining and Dalradian transactions are actually very important for the sector and so far they’re sort of being ignored. You’re looking at north of C$2 billion, much of which is likely to be recycled.
When it comes to Fireweed they did such a great job of maintaining share structure and it’s easy to forget how tight the share structure is. You’re dealing with a very small float and it’s not going to take a lot to move it plus I think it’s pretty well cleaned out now. I really like what they’re drilling this summer and I expect some really good results out of Fireweed during the next 3-4 months. Where they’re positioning the drills right now I think we should see some really nice high grade intercepts.
It’s very interesting that they’re using gravity surveys. One of the things they’ve done is a very tight LIDAR survey which should give them very tight and accurate topographic contours. Being able to very accurately determine elevation at sample stations is a necessity to properly correct and interpret a gravity survey. Gravity is a great way for interpreting massive sulphides and some of their stuff is definitely in the massive range. FWZ has been cautious about doing it because of the topography but if they have figured out a workaround with the LIDAR, there could be some pleasant targeting surprises in store. I’m very interested to see these gravity surveys and I think they’ve got a great chance of finding something similar to the existing deposits. There’s literally tens of kilometers of the right stratigraphy that have never been looked at. So I think the potential for Fireweed to come up with something new this year is pretty good.
FWZ.V (Daily - 1 Year)
Goldfinger: What do you have to say to the comment that Hudbay would be the natural buyer of the Macmillan Pass Project and Hudbay was the one who sold it to them?
Eric Coffin: I never thought that Hudbay was the natural buyer to be honest. Hudbay made the decision a few years ago that they were more interested in developing copper projects than zinc projects. Sure they might find it to be irresistible at some point but I never really thought that they were the natural buyer. I would say the natural buyer is really an Asian smelter group or large Asian mining company that wants to lock down a highly significant supply of lead-zinc concentrate. By the time they’re done drilling this thing out it’s probably going to have a 25-30 year mine life and there’s simply not many things like that around. If you’re one of these big smelter groups that wants to know you have concentrate for the foreseeable future there’s really not many other options around.
Goldfinger: Great answer Eric. Do you have any thoughts on Yukon plays White Gold (TSX-V: WGO) or ATAC Resources (TSX-V:ATC)?
Eric Coffin: I really like ATAC and I like the guys running it. And perhaps i’ve underestimated Barrick’s entrance into the equation. Barrick certainly understands better than most companies the model and the type of deposit they’re dealing with. The only problem i’ve ever really had with ATAC is the simple fact that you’re dealing with a classic Carlin Gold system which means that the ore is almost always refractory. They can be big and they can be high grade but you’ve got to roast the ore. That means that you’re either going to have to build a roaster up there which seems improbable given the location or you’ve got to build it to ship concentrate. You’ve got to find a roaster that can take high arsenic content ore. They might have a side door with Tiger and Rau, which are not refractory. If they can show a path to production that’s obviously going to help the valuation a lot, however, with the location of that project it’s not going to be cheap to put into production. It’s one of those things where if it gets big enough then there’s certainly an opening for ATAC to get more value simply as an optionality play, it’s worked for other companies like Novagold. Donlin is a comparable to ATAC’s project in that the grades are good and it’s big but it’s also refractory and the capex is going to be enormous.
Goldfinger: What should a novice investor look for in terms of red flags and pitfalls to avoid? Also, this will be a two part question. What are your thoughts on averaging down? Should you ever do it or is it a bad idea as a rule?
Eric Coffin: I think it’s important to keep seasonality in mind. There’s a lot of work being done in the Golden Triangle right now, and even with good projects there will be a time to exit the trade. Ideally you want to be able to trade the seasonality play. You also want to look at recent financings, because if a stock has moved and you’ve got a free trading date looming a bunch of it is going to get sold regardless, no matter how well the company is doing.
When a company starts drilling, if at all possible if you can look around and find similar companies with similar deposits and get an idea of what good results are going to be i.e. what’s a good result for a porphyry, what’s a good result for a high grade vein deposit. Get an idea for the issues that projects have such as infrastructure. When drill results start coming in be aware that some companies have more of a habit than others of smearing grade. I always look at sub-intervals. My friend Brent Cook, god bless his heart has put together a good interval calculator on corebox.net which can be very handy, though I usually just use my own.
Also keep in mind when you’re looking at drill results for a new deal get an idea of whether these results are infill or step-out holes. One of the most common things that I’ve seen happen, and I see this on CEO.ca all the time, is that infill drill holes are mistaken for step-outs.
In terms of averaging down I’ve done it more than i’d like to admit. I’m not sure there’s any hard and fast rules for these types of things, and I guess that’s my answer. You need to look at each individual situation and I don’t think there’s a rule you can apply to all situations.
Goldfinger: From my perspective it mainly depends on the individual investor’s bankroll and how heavily weighted they are before they decide to buy more of a particular stock.
Eric Coffin: I’ve seen you comment a number of times about position sizing, I think those are important comments. It’s easy to fall in love with a stock and I think that’s something that will always end badly. I should know because i’ve done it a number of times myself. You always want to be clear-eyed and rational, and you never want to let your emotions take over. I own a bunch of stocks that I think are dirt cheap and i’d probably buy them all day long if my rational side didn’t take over and say “Hey! That’s already X% of your portfolio and you shouldn’t do that”. Even if you’re right you still shouldn’t do that, because if you put all of your eggs in 1 or 2 baskets and you wake up and shit happens it’s going to be devastating. You don’t want to put yourself in a situation where you don’t have any good choices left. Another thing that can happen in the juniors when you build too big of a position is suddenly your short term trade becomes a long term investment because the liquidity isn’t there to get out.
Goldfinger: You never want to fall in love with a stock.
Eric Coffin: I think you’re aware that I tell readers that i’m trying to find situations in which there are the right ingredients for the market to get behind them when they start putting drills in the ground. And if i’m right about these situations I always tell readers that if we got in at C$.20 and the stock moves to C$.35 sell enough to bring your cost down significantly. Just do it. I know it’s hard to do if you really like a deal but as i’ve gotten older i’ve learned to get firmer about telling people to take some money off the table. That being said, I know there will be times when I tell people to take some off at C$.35 and the stock moves to a buck. But oh well, you’ve got to remember that the vast majority of projects are not going to become economic deposits. You can’t forget that, Mother Nature is just not that nice. It’s not easy to find mines and you’ve got to trade accordingly. If the market gives you a freebie you’ve got to take it.
Goldfinger: What’s the sweet spot in terms of buying a junior explorer? Is there a spot in the life of a junior that you aim to get in at?
Eric Coffin: If you can look at early stage stuff and identify a big target that the market hasn’t appreciated yet that’s usually a good spot to get in. The caveat to add there is that in order for the market to get excited there’s got to be a drill program which means that there’s got to be a financing. I usually try to get in when they’ve pulled together enough resources to close the financing. That’s often a nice time to get in because then you get the anticipatory buying ahead of the drill results. It should also be a fairly substantial drill program with 4-6 sets of drill results so that if things work out early you can really see a lot of momentum happen with the stock on the way up.
I’d like to thank Eric for sharing his insights and I highly recommend Eric’s HRA Advisory to anyone who is serious about being a junior mining investor. You can try Eric’s HRA Journal or HRA Special Delivery premium services with a 30-day money back guarantee.
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