Brent Cook and Joe Mazumdar, co-editors at Exploration Insights
Focus: Junior mining stocks

MARKET OUTLOOK

Mega-mergers: Newmont and Randgold were the outperformers while Goldcorp and Barrick were the underperformers over the past several years. It isn’t surprising that their executive teams are leading the shrinking gold sector.

Barrick’s motivation for a no-premium merger with Randgold back in September was to add more tier 1 assets while gaining a management team with a more streamlined approach and focus on returns. Newmont’s mega-merger with Goldcorp is an opportunity for it to increase its relevance with generalist investors in the gold sector and compete directly with ETFs: the combination will be the largest gold company and the only one listed on the S&P 500. The focus of both mergers is on generating free cash flow from sustainable production levels with less emphasis on growth and be able to deliver stable dividends. Generalists prefer passive funds because they’re highly liquid, anonymous and have trading flexibility.

Barrick Gold’s no-premium bid for Newmont maybe is its last chance to ensure that company doesn’t become the biggest gold producer and turn the tables on them. The value of combining the two companies lies in the synergies in Nevada, which also could be realized with a joint venture. Neither, however, can agree on who operates.

Divestitures: Divestitures will be the focus of many investment bankers over the next couple of years and provide opportunities for smaller producers, private equity and financing companies like streamers to fund acquisitions.

Financing trends: Precious-metal-focused assets under management (AUM) by active institutional equity funds such as VanEck and passive ones such as GDX and GDXJ, peaked at about US$54 billion in 2011. At the time, 94 per cent of it was actively managed and 6 per cent passive. Over the past six years, actively managed funds fell by about 80 per cent to US$10 billion and now represent only 33 per cent of the total AUM (around US$30 billion).

Exploration trends: The long-term issues for supply remain, as there’s a lack of high-quality deposits in the commodity sector. Therefore, a significant discovery adds value in the junior mining sector.

TOP PICKS

SANDSTORM GOLD (SSL.TO)

• Sandstorm Gold as a liquid, cash-flowing precious metal streamer with a strong growth profile linked to the development of its minority stake in the Turkish Hod Maden project.
• The increase of its revolving credit facility (US$225 million) provides opportunities to acquire more royalties on producing or near-producing assets such as the Houndé project in Burkina Faso and, as it’s been the case, the Fruta del Norte project in Ecuador.
• Over the next 12 to 18 months, the company may pick up some royalties or streams on operating assets divested by Newmont and Barrick and acquired by smaller producers in need of funding.
• The company also has a policy of buying back its shares if they’re considered undervalued versus their internal valuation, which provides some underlying support for the current share price.
• Our position was purchased back in May 2017 at $4.60 and we’re currently up about 60 per cent.

REGULUS RESOURCES (REG.V)

• Regulus Resources is a copper-gold exploration company led by the directors of the former Antares Minerals and focused on the AntaKori project in Peru. Antares successfully advanced the Haquira project, also in Peru, through monetizing events and Regulus will try to replicate this strategy and outcome at AntaKori.
• It has recently released the second resource on the project (Regulus’ first) after a few drill programs.
• The new resource hosts around 500 million tonnes grading 0.4 to 0.5 per cent copper with 0.25 to 0.29 grams per tonne gold or about 0.7 per cent copper equivalent.
• The copper-gold mineralization is partially overprinted by a younger arsenic-rich epithermal system that hosts an open pit heap leach gold deposit.
• The potential lies in the porphyry and skarn potential of the several targets identified around the area already drill-tested.
• It appears the current drill program has intersected porphyry-related mineralization in one of these targets, which bodes well for the others (we purchased Regulus soon after the release of this hole).
• It has $12 million in cash and it’s more drilling to test these targets.

MUNDORO CAPITAL (MUN.V)

• Mundoro Capital is a copper and gold prospect generator exploring on the western part of the Tethyan Metallogenic Belt (in Serbia and Bulgaria).
• It currently has a pair of drilling programs being funded by its joint-venture partners on claims proximal to the RTB Bor copper-gold mine and the Čukaru Peki copper-gold project in Serbia, both of which are now controlled by Zijin Mining , a global Chinese precious and base metals producer.
• The Čukaru Peki copper-gold deposit hosts reserves of 27 million tonnes at 3.3 per cent copper with 2.1 grams per tonne (g/t) gold in an upper zone and close to 1 billion tonnes grading 1 per cent copper and 0.2 g/t gold in a porphyry copper within a lower zone.
• The company has been in Serbia for a number of years, allowing it to stake prime real estate prior to any staking rushes.
• It has a market capitalization of $13 to $14 million with $4 to $5 million in cash, so Mundoro has downside protection with respect to its valuation.
• Over half of its 70 million or so outstanding shares are in the hands of institutional equity and high-net-worth investors.

PAST PICKS: OCT. 16, 2018

GT GOLD (GTT.V)

• Then: $1.57
• Now: $0.69
• Return: -56%
• Total return: -56%

MINAURUM GOLD (MGG.V)

• Then: $0.55
• Now: $0.435
• Return: -21%
• Total return: -21%

SANDSTORM GOLD (SSL.TO)

• Then: $5.28
• Now: $7.30
• Return: 38%
• Total return: 38%

Total return average: -13%