Since 2011, the idea of making money on
early stage exploration stocks seemed quaint.
The market only cared about producers and didn't care much about them.
It was extremely difficult to raise money for exploration. Even if a company
succeeded and made a discovery the market ignored it or used it as a "liquidity
event".
After four years of pain the resource
stock sector has finally put in a bottom.
This followed a bottom in the gold price, not surprising since gold
market sentiment is the most important driver for the junior mining
sector. I told HRA subscribers late last
year that the US Dollar was about to top when virtually no one else believed
it.
I'm no "all fiat currencies are going
to zero" perma-bear doomsayer. This
wasn't a "broken clock" call finally proved right. My reasons were based on my
predictions about real interest rates, economic growth and central bank policy
differentials across the major currency blocks.
Those predictions proved to be correct...
HRA positioned readers for the closing
bear market, with one eye on the horizon looking for companies that would shine
again when the market turned. More
advanced companies were focused on in the past year or two. Three of those (SilverCrest Mines (SVL-V), True
Gold (TGM-V), and Sunridge Gold (SGC-V)) announced mergers or major asset sales in the past six months that
generated triple digit gains for subscribers.
As the general market started to accept
we are at the start of a new gold bull market the development level names that
HRA has kept subscriber attention on also started to outperform. Developers on the HRA list have racked up
gains of 100-200% in the past few months and are trading 350% (Kaminak Gold: KAM-V) to 800% (Reservoir Minerals: RMC-V) above the
prices where HRA initiated coverage. (Editors note: On May 12, Kaminak received a take-over offer from Goldcorp (G-T; GG-NY) of $2.60 per share - 550% above the price HRA initiated coverage at. Chalk up another one for HRA!)
As I have told subscribers since early
in the year, we are seeing the resource sector come back into favor with market
generalists ("outside money"). This changes the landscape since this group can
draw on and direct far more money at the sector than resource sector insiders that
have endured four or five years of market pain.
The move to negative interest rates
(real and nominal) across so many major economies is the fundamental
underpinning for this change in investment view. This is not a short term issue. The world's
central banks have flooded markets with liquidity and moving rates back up will
have to be done very slowly and very carefully.
Negative rates will be with us for some time.
There are more gains to come as this
new bull market unfolds but I want to talk about a different sort of trade
today; the drill speculation. Before going into a little detail and
before discussing specific companies I'll lay out a number of rules of thumb
you should keep in mind as you review new drill results:
1) Drill speculations work best in a bull
market (duh!). Trade these situations if
you accept the thesis that a new resource bull market is underway.
2) The earlier the stage of drilling, the
higher the potential return. But higher
risk goes right along with that higher potential. Don't lose sight of that.
3) If you see a hot drill result get
published, you should immediately try to determine a few things before you
trade it:
a) Is the drill result "in-fill" or "step-out"? Step-out holes expand the potential resource size or
indicate potential new zones. In-fill
holes can confirm continuity and grade - which is important - but won't
generate as much excitement.
b) Look at sub-intervals. If a company reports "100 metres at 2 g/t
including 6 metres at 30 g/t" it's telling you (or maybe not telling you) the
rest of the 100 metre intercept is less than marginal (100*2-30*6=20 grams
across the remaining 94 metres or about 0.21 g/t). The high grade interval in this example is
quite good (if it's gold) while the 100 metre interval touted is basically
meaningless.
c) Look at the depth of the
intercept. A long interval of oxide gold
(look for that word too) grading 1 g/t or more might be quite interesting. If it starts at 500 metres down hole, not so
much.
d) Is the intercept "true width"? Drilling
a steep vein or structure at an acute angle (the angle of the drill hole is
close to the angle of the mineralized structure) can yield long impressive
intercepts from a structure that is actually much narrower. In fairness to management, understand that
they often won't know the geometry of a new discovery and hence the true width
of intercepts until many holes are drilled. This is especially true of "blind"
discoveries that don't outcrop at surface.
4) Drill holes from a new target or
discovery will have a bigger impact, other things equal, than one in an area
that is heavily explored and doesn't seem to have much "virgin" target or room
to grow.
5) Drill holes encountering a commodity
that is hot or in play will have a bigger impact than a new intercept reporting
concentrations of a metal people don't understand or care about. Gold
intercepts tend to be well received. Traders are comfortable with and think
they understand gold so I tend to favor gold targets myself when looking at
speculations in the HRA newsletters.
6) Try to understand the nature of the
target being explored and what a "good" hole should look like. A long intercept of 0.5% copper in a new
porphyry discovery could set off a frenzy while a similar grade over tens of
metres from something that could only be mined from underground could elicit a
yawn, or worse, from the market. Some
understanding of the deposit type being sought and what economic deposits in
the region (if any) look like helps with this.
7) You can look at plenty of drill
speculations without ever trading them. Doing some of the homework before the
results arrive puts you in a better position to make a quick decision. (Subscribe
to HRA and save yourself time! "Hail Mary" list stocks commented
on the HRA Special Delivery Alert
service are those I haven't bought but thing are worth monitoring.)
8) In a bull market, anticipatory buying
ahead of drill results is common. This
is especially true if the company has strong looking targets being explored by
respected management. You can use this
to your advantage if you're willing to get in early. If you do get a run of several tens of
percent before drill results arrive you can take some profits, lowering your
average costs and improving the potential risk/reward.
Resource stock traders call the drill
"the truth machine" with good reason.
The first couple of major drill programs can make or break an exploration
project. For that reason, resource
traders take early stage drill programs and the results they generate very seriously.
The market is a voting machine and a
beauty contest. Traders constantly
re-evaluate company values based on the market backdrop and new information
released by the company. When a new
project is getting drilled the market's opinion of the potential for the
project will fluctuate wildly based on hope, rumor, management credibility and,
finally, drill results. In the early
stages (hopefully) the potential for target areas will be wide open and
optimists will be betting on high value outcomes if the first few holes are
good.
The odds of any early stage project actually becoming a mine is very
small. But
the potential implied valuation can be high, especially if the zone(s) have not yet been constrained
by missed drill holes. As early results
arrive and speculators trade based on how large they think a discovery might
be, company valuations can move tens or even hundreds of percent through the
reporting period for a drill program. That is one reason new target drilling
can have an impact even with companies that have an established resource.
HRA covers many developers and a few
producers but it's no secret that I have a special fondness for early stage
drill plays. My training is in finance but I come from a mining family and have
had a hand in starting exploration companies and owned an exploration consultancy
with my late brother before we started the Hard
Rock Analyst newsletters. I love the
process of discovery and watching new exploration plays unfold. I also know that when you are lucky enough to
be early in a new discovery play, you're exposed to the potential for truly
massive gains.
On the following pages you'll be
introduced to five companies that are or will be drilling important targets in
coming months. All of these companies
are covered much more extensively and are updated regularly in the Hard Rock
Analyst Journal newsletter and/or Special Delivery Alert services. They were chosen intentionally to give you a
number of risk levels. Two of them have
existing resources that are or should be minable. Success with the drill will be additive to
underlying value. Two others have
resources that likely are not economic yet, but could be, and are drilling new
target areas or projects. The risk is
higher with these but so is the leverage.
The fifth has a series of JV deals with other companies' spending money
on its projects. That lowers the risk to
this company's treasury but it's a pre-discovery story that will need one of
its partners to hit in order to see large gains.
