The recent 2009 World Resource Investment Conference was moved to the new Vancouver Convention Centre in Vancouver BC, constructed in advance of the 2010 Winter Olympics. The fresh venue for the conference did not seem to carry the enthusiasm equal to the new venue or previous conferences at the neighboring waterfront convention center.
The number of companies attending the conference seemed to be lower than normal, most likely due to belt tightening. There also appeared to be an absence of "mini-bubbles" that seemed to accompany conferences in past years over molybdenum, uranium or potash. This would appear to be due to the reticence of investors to replace their risk aversion with greed, or lack of cash and/or leverage, to fuel momentum in fashionable investments. A lack of speculative spirit seemed to haunt the event.
We found this to be surprising, considering both gold and silver prices were close to their 52-week high. While this may be expected due to seasonality in precious metal demand, enthusiasm for a store of value didn't appear to be measuring up to flagging confidence in the U.S. Dollar and other world currencies. Interestingly, one might assume that a nuclear North Korea with intercontinental delivery systems capable of crossing the Pacific might generate anxiety, pushing investors toward a safe haven.
In many ways it appears that the market is in the process of completing its revaluation of equities thrashed during 2008 and the dead cat bounce in the first quarter of 2009. This bounce followed a near collapse of financial markets and tax loss selling fueled by an increase in the monetary base, increased inflationary expectations and stocks at prices that were too cheap not to buy. The "smart money" is now back, and now that the easy gains have been made, investors simply don't know how to proceed.
This confusion appears to extend beyond the conference. Last year the "safe" place to be was out of the market, and now with the latest bounce, investors appear unsure. Clearly there are initiatives to stimulate the U.S. and world economy through fiscal policy, but very little has actually been spent. The banking industry appears back from the brink but there is questionable evidence that borrowers or lenders are willing to take risks with an uncertain future. The unemployment rate in the U.S. is now above Canada and the U.K., and even that of Europe for the first time in decades. With U.S. Administration's promises of 600,000 jobs in the U.S., investors are at risk of suffering both "job illusion" and "money illusion"; in other words, stagflation. Even though the money supply may have increased, the reduction in the velocity of money is holding back economic growth and inflation and propping up the U.S. Dollar.
Investment Themes Return to Cash Flow, Discovering Ounces and Consolidation
Stock picking based on cash flow, resources and takeover potential appears to be regaining traction as investment themes. We see the lowest equity prices in years providing an opportunity for investors in some of the companies we visited with at the conference. Despite the noticeable absence of larger precious metal companies or producers, Minefinders Corporation (NYSE.A:MFN) (TSX:MFL) continues to attend and remain available to investors.
Minefinders recently announced full commercial production at its Dolores gold-silver project in Mexico. Dolores has been cash-flow positive on an operating basis since February of this year. As Minefinders remains unhedged, and fully exposed to benefit from higher metal prices, cash flow is likely to increase through the end of 2009 as production is optimized at higher leach rates. Minefinders' market capitalization is less than one half the undiscounted net asset value of its Dolores project, which does not include the potential for adding a mill to process higher grade ore or upside from additional resources including its La Bolsa project.
NovaGold Resources Inc. (TSX:NG) (AMEX:NG) was also available for investors. We were particularly impressed with management's adapting and surviving the "planet killing" event of a failed takeover attempt during inflating construction costs preceding the global financial meltdown. Due to the size of its 50/50 share of the world-class Donlin Creek gold project in Alaska, NovaGold remains highly leveraged to the gold price.
Donlin Creek is also set for positive revaluation when NovaGold's partner Barrick Gold Corporation (NYSE:ABX) announces its intentions to advance the project or provide additional details on permitting. We suspect that even with its share of about 15 million Proven and Probable ounces of gold, the project should bring in more ounces with optimization of the pit or inclusion of other resources in the Donlin Creek district. This leverage to the metal price, improving clarity on development and potential for increase in resources provides untapped value. While there is also unrecognized value for its Galore Creek and Nome assets, the core management team appears focused on advancing projects and locating new opportunities at this low point in the cycle.
Notable Junior Resource Developers Receiving Investor Attention
There were several junior resource companies receiving an above-average level of attention due to exploration success or project advancement. Northern Freegold Resources (TSX.V:NFR) recently announced exceptional high grades of gold at its Nucleus Zone at its Freegold Mountain project in the Yukon Territory. The current non-compliant resource of about 400,000 ounces of gold should be updated in the next month. The area of interest should expand from a 150 by 150 meter footprint to an area closer to 600 by 750 meters. The perspective of the target should change from a low-grade gold open pit resource to a larger pit, with high-grade gold component, open to expansion in all directions. This is only one target in the 166 square km district-size land position. Northern Freegold has retained its geologists and staff through the winter to update the geologic interpretation and is working to maintain momentum through the summer months.
Two other gold resource ideas include Rainy River Resources Ltd. (TSX.V:RR) and PC Gold Inc. (TSX:PKL). Rainy River has a 2.2 million ounce Indicated resource and close to another 2.0 million in the Inferred category that may be upgraded with redrawing the pit outline. PC Gold is targeting completion of a compliant resource estimate on its Pickle Crow project with good potential for pursuing high grades of gold, deeper and similar to other mines in the area. Both projects have better-than-average potential for expanding resources and are located in mining friendly areas of Canada where further success should be difficult not to notice.
Still Room for Special Situations
Bullion Monarch Mining Inc. (OTCBB:BULM) is an interesting special situation. The company receives revenue from a number of royalties sufficient to cover corporate overhead and development. Presently, Bullion receives revenues on only a few square miles, which could, depending on the outcome of litigation, extend up to 256 miles. Current cash flow has funded the development of its oil shale deposits in Eastern Utah. Bullion is advancing a pilot plant to demonstrate the efficacy of its proprietary technology to produce oil at prices significantly less than oil price forecasts. The potential for judgment or settlement for the royalties or potential for developing shale oil deposits is quite interesting.
Channel Resources Ltd. (TSX.V:CHU) is also an energy play with its Fox Creek Lithium Brine Project in Alberta, Canada. Lithium is now used in batteries in electronic devices, including cell phones and laptops. Capacity for lithium presently exceeds demand, but this could change should power management issues be resolved. Lithium batteries are expected to replace nickel metal hydride batteries in hybrid automobiles. While the price of lithium will be highly impacted by demand leading to speculation and price volatility, Channel appears reasonably well located with substantial infrastructure in place to advance to production. Channel will tap into its resource, brines held in refilled aquifers, to reprocess the brines and remove the lithium. Depending on the selection of power sources for automobiles in coming years, lithium, while highly speculative, remains interesting.
Klondex Mines Ltd. (TSX:KDX) (OTCBB:KLNDF) received an unsolicited offer at the conference by Silvercorp Metals Inc. (TSX:SVM) for C$70 million or about US$25 per ounce for the identified Indicated and Inferred resource at its Fire Creek project in Nevada. The offer is interesting as it may suggest an above-average level of investment activity during typically slower summer months as both investors and companies seek and execute on acquiring potentially undervalued or under-appreciated companies.
DISCLOSURE: Mike Niehuser
I personally and/or my family own the following companies mentioned in this interview: NG, MFN
I personally and/or my family am paid by the following companies mentioned in this interview: NG, MFN and NFR
Mike Niehuser is the founder of Beacon Rock Research, LLC , which produces research for an institutional audience and focuses on precious, base and industrial metals, and substitutes, oil and gas, alternative energy, as well as communications and human resources. Mike is also on the faculty of the Pacific Coast Banking School and was nominated to BrainstormNW magazine's list of the region's top financial professionals in 2007.