CEO.CA Weekly Wrap
A look at some of the week’s best chats and charts on CEO.CA, a community and platform for Canada’s venture stock markets.
It’s been a humbling few weeks for the junior mining sector and multiple channels on CEO.ca have experienced market tensions and investor drawdowns boiling over into arguments and generally unproductive behavior. Investors are losing patience with the junior mining sector and falling share prices only make things worse.
The recent junior mining doldrums had me thinking about the bigger picture and why it simply feels so bad to be an investor in the junior mining sector right now. I got involved in this sector for the first time in 2003, after my father began accumulating junior mining shares with the thesis that commodities were about to enter a tremendous bull market fueled by Chinese demand. I remember how exciting and cutting edge the junior mining sector felt back then. After all, these companies were going to find the natural resources that were going to fuel emerging markets as they stepped into the 21st century with massive infrastructure build-out programs.
As it turned out, my dad was right and 2003 might have been the best year in history to be an investor buying junior mining stocks. Over the last sixteen years, I feel like I’ve seen just about every market cycle imaginable in this sector; we’ve had ripping bull markets (2003-2006, 2009-2011), we’ve had violent crashes (2008), we’ve had six month rallies that felt like the beginning of a new bull market but turned out to be quite a fake-out (2016), and finally we’ve been in the grips of a vicious bear market (since 2011), which some might argue is still in effect:
TSX-Venture (Weekly - since inception in 1999)
I believe the recent downside price action feels especially bad for many junior mining investors because there have been hopes that we were finally emerging from the bear market and entering into a fresh cyclical bull market. Instead, we’ve seen share prices fall further as trading volumes dry up more and more. Frankly, the last month has been downright depressing.
Depressed sentiment, multi-year low share prices, fading trading volumes, etc. Hmmm, come to think of it, we saw a similar setup in Bitcoin earlier this year and we have just seen the cryptocurrency double in the last three months:
Notice how the volume in Bitcoin reached its lowest levels on the above chart in March, as price was largely moving sideways. Then, at the beginning of April, a buying explosion occurred and a fresh uptrend has been carved out ever since. Here’s to cheering for a similar scenario to take place in the junior mining sector over the next few months.
I talk to different traders and investors from time to time to get a feel for what they are thinking and what they are doing. One investor that I talk to a few times a year uses market cycle analysis (his own proprietary methodology) and his timing has been about as good as I’ve ever seen. He is quiet and keeps to himself, but he is willing to share his analysis with me a few times a year when he thinks we’re near a key turning point in something. He thinks that the TSX-Venture and GDXJ are both within a week of a major low, and both may have in fact already made an important low (TSX-V last Thursday at 591). A rally back above $30 in the GDXJ and 615 in the TSX-V in the next couple of weeks would help to confirm that a major low has been put in place.
One of the better news stories in the junior mining sector last week was Irving Resources’ first assay results from its Omu Sinter drilling at Hokkaido Island, Japan. Dr. Quinton Hennigh, director of and technical advisor to Irving Resources commented on the first results from a 7.5 meter section which included .32 meters grading 118.50 grams/tonne gold and 1400 grams/tonne silver:
“Confirmation of the high-grade potential of Omu Sinter is very encouraging…. we already appear to have intersected a significant feeder vein within this robust hot spring system. The bulk of the productive boiling zone, the part of the system where high-grade mineralization is typically deposited, remains untested beneath. Other intervals of vein are evident in the remaining 150 m-long mineralized interval encountered in hole 19OMS-002. We eagerly await further assays.”
The NR went on to mention hole 3 which is currently underway and which Bob Moriarty of 321gold has high hopes for:
“A third hole, 19OMS-003, is currently underway. It is collared from the same pad as 19OMS-002, but oriented south-southeast at an inclination of 55 degrees. Hole 19OMS-003 is designed to intersect the same mineralized zone as hole 19OMS-002, but also test a possible E-W oriented cross structure evident in geophysical data.”
Assay results for hole 3 could still be another 6-7 weeks away, due to the fact that the core must be shipped to a lab in Vancouver. The good news is that I’m hearing there are no backlogs at the labs right now and likely won’t be until the end of June.
Commodity Discovery Fund Manager Willem Middelkoop (@discoveries on CEO.ca) pointed out that the discovery hole for the massive high-grade Hishikari Mine was very similar to the .32 meter intersection that Irving produced:
Bob Moriarty (@fingerprint42 on CEO.ca) emphasized his bullish position on Irving and pointed out that high-grade gold intercepts like the one that Irving hit in hole 2 at Omu do not occur in a vacuum. IRV is now Bob's largest position:
Clearly, other market participants agree that Irving is indeed on to something at its Omu Sinter target on Hokkaido Island as IRV shares jumped 40% on the week and closed at an all-time high:
While I am fond of Japan as an emerging jurisdiction for minerals exploration, and I think the Irving story is great, it’s important to note the Irving now has a C$150 million market cap and the company has only released assays for one 7.5 meter section of rock. While future drill results may help to justify or even increase IRV’s market cap, I think it’s important to note that there is ample room for disappointment when expectations become elevated.
There are many recent examples of stocks getting cut in half from points in time when everything looked great and it looked like like the story was going to just keep getting better (GBR at $4.00, WHN at $1.20, MXR at $.40, RDU at $.46, etc.). It is often when the fundamental story looks the best that the risk is the highest, simply due to the fact that market participant expectations have also risen along with the share price. The bar the company must jump over is that much higher.
Speaking of RDU, Radius Gold, there was an interesting thing that happened last Tuesday in RDU shares. Heading into Tuesday’s trading session, the stock had pulled back about ~35% from its Friday morning peak of $.465 and was clearly in the mood to bounce. This created a situation in which RDU shares were vulnerable to some big orders helping to create a short lived bounce:
RDU.V (30 Minute)
A 500,000 share bid showed up at $.315 shortly after the open (:05 mark in video below), later this bid was moved up to $.35 as can be seen in this video of CEO Pro Market Depth from Tuesday May 7th:
After reaching a high of $.385 Tuesday morning, RDU shares began to drip lower and the big bid vanished shortly after 11am EST. It’s always curious and unusual when I see an outsized order on the level 2 because if someone really wanted to buy a lot of shares they would probably be more discreet about it so as not to cost themselves more by having to pay up for the shares. The same principle can be used on the sell side. If a market participant wanted to sell a large position, they probably wouldn’t try to sell it all at a single price in one order. They would chop it up into four or five orders at multiple price levels.
There are undoubtedly lots of games played in the juniors, and the RDU trading action from last Tuesday has all the characteristics of someone trying to unload shares at the best price possible the day before a disappointing NR was released. Big bids and offers have a way of popping up to influence price action and then vanishing just before they have a chance of getting filled.
As a trader, what I want to see in a stock are steady signs of accumulation with multiple bids building at higher price levels as trading volume accelerates - we saw this sort of bullish action in RDU on Wednesday May 1st, after Radius released the impressive drill results that we discussed in last week’s Weekly Wrap. RDU would go on to rally for two more days after it released the drill results from its Amalia Project in Mexico, peaking at $.465 on Friday May 3rd and falling every day since May 3rd:
Another key aspect of trading is context, knowing where something has been can help us understand where it might be going. Context is not only technical in nature, but also fundamental. Questions like “Is the company drilling now?” “When are assays due to be published?” “Who’s talking about the stock?” are all important questions to answer which help to add some context of price action and trends.
Clearly, there were some games played in RDU last Tuesday, but since then, the stock has stabilized near $.25 and I will be looking for signs of steady accumulation next week (higher lows on increasing volume) before entering a long position.
I’d like to highlight a couple of my favorite chat comments from CEO.ca last week in this week’s Weekly Wrap - these comments add value and provoke thought in a positive fashion:
Good stuff from @lukejackson. Have your own plan and use your own brain. Sure, it can be valuable to get ideas from others and follow what they are doing to add to your own process, but don’t blindly rely on anyone else for when to sell a stock in your portfolio.
@teevee makes an important point about management stock options plans. Why would management buy shares in the market when they can simply give themselves options when the stock is at multi-year lows?
“I think it's vital, I think it's one of the most important things that a shareholder should look at, when they invest in a company. How much skin in the game does the management have? There's a massive difference between being an employee and being an owner. Being an owner of your company, through owning a significant portion of shares, is a really strong testament to your dedication and your focus on making it a successful venture. For example, at Pure Gold, we recently had five year options that were about to expire last month and everybody in the group, all the board and senior management, exercised those options and held the stock, adding three million shares of insider ownership to the books.
One of the things I have learned over the years is that when you have a project that you truly believe in, own as much of it as possible. I'm one of the largest shareholders in each of the oxygen companies, and have been regularly adding to my position at Pure Gold and Liberty Gold.”
Skin in the game is vital from a shareholder perspective. If management is simply collecting a salary and awarding themselves options from time to time, they are going to be a lot less urgent in their actions than they would be if they were regularly purchasing shares on the open market and had a significant portion of their net worth tied up in the company’s shares. In the former case (collecting salary and awarding themselves options), there is more of an incentive to keep the status quo as opposed to actually advancing an asset or making a discovery that leads to a transaction that’s accretive to shareholders. These sorts of companies where management is more incentivized to maintain the status quo are called “lifestyle companies” and they are notorious for shredding shareholder capital year after year. Avoid the lifestyle companies and find companies that are committed to creating value through real exploration work.
One company that I’d like to mention before wrapping up this week’s Wrap is Sunmetals (TSX-V:SUNM). I spoke with Sunmetals CEO Steve Robertson on Friday and I was impressed by his clarity and laser focus on advancing SUNM’s flagship Stardust Project in northcentral British Columbia, Canada.
SUNM probably doesn’t need much of an introduction to most readers, however, I will say that SUNM boasts 29% ownership by insiders, founders, & board members. Add in TECK’s 11% ownership and only 60% of the outstanding shares are in the trading float.
Last year SUNM drilled a hole at Stardust that intersected 5% copper-equivalent over 100 meters. This hole (hole 421) got a lot of people’s attention, including Teck Resources, and the potential for a large copper-gold-zinc bearing carbon replacement deposit in the middle of British Columbia had some people beginning to call Stardust a "disruptive discovery".
According to Mr. Robertson, the Stardust Camp will open this week with both drill rigs being fully operational by the end of May. The first hole will target an area just to the south of hole 421 where geophysics indicates the system could extend:
SUNM has a fully funded C$5 million budget for drilling this summer, which means that SUNM could drill up to 20,000 meters given a C$250 all-in drilling cost estimate.
Sunmetals has done a good job of getting the Stardust story out to a wider audience of investors during the first half of 2019 and investor anticipation for this summer’s drilling has helped SUNM shares to vastly outperform a soft junior mining sector in 2019:
CEO Steve Robertson cautioned that SUNM will take its time carefully logging the drill core and he doesn’t expect the first assays to come out until the end of July. Perhaps, he is under promising so that he can over deliver, however, I think it’s wise to be conservative with assay timelines particularly for companies that are drilling during the summer in British Columbia. Sunmetals has investors attention this summer, now it's all up to the truth machine (drilling and assays).
Disclosure: Author owns shares of SUNM at the time of publishing and may buy or sell at any time without notice.
DISCLAIMER: The work included in this article is based on current events, technical charts, company news releases, and the author’s opinions. It may contain errors, and you shouldn’t make any investment decision based solely on what you read here. This publication contains forward-looking statements, including but not limited to comments regarding predictions and projections. Forward-looking statements address future events and conditions and therefore involve inherent risks and uncertainties. Actual results may differ materially from those currently anticipated in such statements. The views expressed in this publication and on the EnergyandGold website do not necessarily reflect the views of Energy and Gold Publishing LTD, publisher of EnergyandGold.com. This publication is provided for informational and entertainment purposes only and is not a recommendation to buy or sell any security. Always thoroughly do your own due diligence and talk to a licensed investment adviser prior to making any investment decisions. Junior resource companies can easily lose 100% of their value so read company profiles on www.SEDAR.com for important risk disclosures. It’s your money and your responsibility.