Brent Cook, economic geologist and co-author with Exploration Insights 
Joe Mazumdar, co-editor with Exploration Insights
Focus: Mining stocks
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MARKET OUTLOOK

Our principal theme continues to be the lack of grassroots, early stage exploration among the major producers to generate high-quality and margin deposits. For example, in the gold sector we have observed a secular decline in grassroots explorations expenditures as a proportion of total exploration budgets since 2003. Some companies used to spend 6 to 8 per cent of their sales revenue in exploration and now the range is more like 2 to 4 per cent, similar to their G&A expenditures.

Flat production profiles and falling reserve levels combined with the decimation of exploration budgets and personnel has led some major companies to fund juniors to do their exploration for them. We've observed a significant pickup in private placement led by producers and also JV/earn in deals. From a junior perspective, the involvement of a major producer either passively or actively helps its treasury and endorses its project and potentially the team. From the major perspective, it helps to support its depleting project pipeline. Therefore, our focus is more on the early stage exploration projects in multiple commodities (gold, silver, copper, zinc, lithium, among others), leaving us rather commodity agnostic. 

TOP PICKS

EVRIM RESOURCES (EVM.V)

Evrim is a prospect generator with a focus on the Americas and precious and base metal prospects in Mexico and British Columbia. Recently, they signed a deal with a silver producer, Coeur Mining (CDE.N), on a grassroots low sulphidation epithermal (LSE) silver-gold prospect (Sarape) in Sonora, Mexico. The company has JV deals with Antofagasta Minerals (ANTO.LSE) and First Majestic Minerals (AG.N, FR.TO). The company also has a strategic alliance with Newmont Mining (NEM.N).

As a highlight, in the first few holes at its Ermitaño West LSE prospect, First Majestic, the earn-in partner who operate the nearby Santa Elena Mine, hit 18 metres grading 11.4 grams per tonne (g/t) gold and 86 g/t silver including 3.3 metres grading 34.6 g/t gold and 242 g/t silver. 

In 2018, we anticipate plenty of news flow as its partners will be spending $7 million in 2018 drilling well over 20,000 meters on its projects. Historically, it has had a ratio of spending about spending $1 for $4 dollars spent by its partners. The company has a market capitalization of $25-30 million. 

ALMADEX MINERALS (AMZ.V)

To provide some exposure to one of our favorite commodities, copper, we continue to think that Almadex Minerals' principal prospect, El Cobre porphyry copper-gold in Veracruz, Mexico, has room to grow (market capitalization of $75 million). 

The company has a long-term strategy for advancing its knowledge of the prospect as it has permitted the construction of 640 drill pads. The company also has intersected supergene enriched copper zones of  about 94 metres grading 1.36 per cent copper with minor gold, which is a good indication of a productive system. Yet it's still early days on the Villa Rica prospect. In the hypogene zone, 115 metres grading 0.29 per cent copper with 0.57 g/t gold.

Almadex brought in a major gold-copper producer, Newcrest Mining (NCM.ASX) to help fund a major drilling program (US$19-20 million) with a private placement. It's currently raising $5-6 million at $1.40 per unit to support a spinout transaction and working capital. Spinning out remaining exploration and royalty portfolio in a new company/ The transaction will close in a couple of months and then the company will put together a drill program to test the Villa Rica prospect in the El Cobre Project.

PREMIER GOLD (PG.TO)

Our last pick is a higher market capitalization ($640 million) but still junior gold and silver producer, Premier Gold. It has two operations, the first is a joint venture with Barrick Gold (ABX.TO, ABX.N) on the South Arturo Gold Mine (40 per cent Premium Gold,  60 per cent Barrick) in the Carlin Trend of Nevada. The second is its wholly-owned Mercedes Silver-Gold Mine in Mexico. It's a low-cost producer in safe jurisdictions with growth potential in both assets.

The company was one of the few junior producers to actually generate positive free cash flow in 2017 (three quarters, $50 million) and its last reported cash position was $170 million  at the end of September 2017. It's got growth opportunities in strategic partnerships with Barrick on a few projects in the Carlin Trend, including McCoy-Cove, Rye and toll milling opportunities. 

2018 guidance of 85 koz of gold and 300-325 koz of silver at an AISC of US$800-850/oz per oz of gold predominantly from Mercedes Mine as this year will be a transition period for South Arturo to new open pits (Phase 1 and 3) and potentially an underground mine (El Nino). More drilling at Mercedes Mine in Sonora, Mexico with 40,000 m for 2018 for resource delineation. Potential exists to add new vein systems. 

PAST PICKS:  MARCH 6, 2017

MIRASOL RESOURCES (MRZ.V)

Mirasol Resources continues to be a top prospect generator with multiple JV deals with majors producers such as Newcrest Mining (NCM.ASX), OceanaGold (OGC.TO, OGC.ASX) and Yamana Gold (AUY.N, YRI.TO) in Chile and Argentina on both precious (low and high sulphidation epithermal systems) and base metal (porphyry copper) prospects. Only removing it from the top picks due to market capitalization ($100 million). Risk-to-reward is not as favorable, in our opinion, as our new top pick, Evrim Resources (EVM.V).

• Then: $1.70
• Now: $2.19
• Return: 28.82%
• Total return: 28.82%

ALMADEX MINERALS (AMZ.V)

• Then: $1.12
• Now: $1.54
• Return: 37.50%
• Total return: 37.50%

TINKA RESOURCES (TK.V)

We continue to own the Peru-focused zinc explorer as it advances the Ayawilca zinc project (5.6 billion pounds grading over 7 per cent zinc equivalent). The company has been under some pressure as some believe it will need to raise money in the next few months, but we think there's an opportunity to resell a 1 per cent NSR royalty on the project. The company is currently drilling a new area, Zone 3, that is outside the known resource area. Zone 3 is intersecting some high-grade zinc (5 metres grading 20 per cent zinc) that is only observed in the higher-grade West and South Ayawilca areas within the current resource. These areas drive the grade. 

• Then: $0.425
• Now: $0.57
• Return: 34.11%
• Total return: 34.11%

Tota return average: 33.47%