Investors Guru Small Cap Stock Observer - Tue, Apr 4, 2016

Miners I'm Buying And Why - Part VIII: Sharpshooting Alpha With Junior Mining Plays Of Substance

Learn How To Profit From Rinse And Repeat Cycles

What's the biggest mistake made by most investors? First you might recall the performance of specific stocks, which you bought or passed on buying. Then you might think about the risks versus opportunity costs of being under or over diversified, or from leveraging with margin, options or futures. Nope, the answer is much simpler and most investors are guilty of it and don't even realize it.

I believe the number one mistake most investors make every market cycle is staying fully invested. Brokers refer to proper asset allocation with delight as they move your money around, but ridicule holding large cash balances especially when fees can be had buying new securities. Selling high stocks to buy other high stocks makes no more sense than selling low stocks to buy other low stocks.

We talk about buy-low, sell-high, but we never do it because we believe high can always get higher. I was guilty of this too but hope to break the bad habit this time. Cash may soon become king for me as interest rate sensitive bonds and real-estate look almost as vulnerable as stocks are right now. If you get caught fully invested again after markets fall, this is the biggest mistake because on top of losses you will have no free capital to take advantage of really low prices.

Just keep in mind that strategic timing tests nerves and patience. I'm not worried about missing out on an extra 5% to 10% if I can avoid losing 30% to 40%, or even the half to 90% drop which many suffered as dot-com's burst in 2001 and again as mortgages imploded in 2008. This spring's U.S. debt ceiling raise should remind the world of its ever expanding debt bubble, with potential currency crises on top of the usual powder kegs which can topple history's second longest stock market expansion.

The early years of a new presidential cycle tend to be the worst for markets. Major policy changes happen and markets adjust. In two years disappointed voters usually return things to gridlock. Markets then run up again as spending increases going into the next election. Think back to stock prices under Reagan 1981, Bush 1989, Clinton 1993, Bush 2001, Obama 2009 and now Trump 2017. Saying it's different this time only makes some old investors wince—different reasons maybe, same outcome.

In any event major stock indexes are at least getting expensive, if not already there. Trump's magic formula which excited the markets recently is less revenue from tax cuts, more inflationary spending on walls, roads and war, with more debt at rising interest rates. How is this different than Bush's game plan, which only produced a lost decade for stocks, with debt and gold both quadrupling?

I'm trimming equity positions and not replacing them. My target is to be at least 50% in cash before this October's 30-year anniversary of the 1987 market crash. I hold no bonds or debt, and no banks other than via funds. The only positions I intend to increase in a Captain Chaos investing world are in commodities. Other than metals and miners, I keep telling myself to raise cash and wait for the crash!

How Junior Mining Plays Really Work

If you are familiar with junior mining marketing, from company presentations to newsletter writers, you already know about the P's: People, Property, Price, Paper (share structure), Phinancing, Politics and Promotion. Missing are the real investment value drivers: sales, earnings, dividends, share buybacks, etc.—there are none! Mining speculation is all about the Paper play on anticipated drill results or after an actual discovery, or maybe a potential buyout or production scenario someday.

The People always seem to have hundreds of years of combined mining experience and have sold past projects for gazillions of dollars. Yes this is impressive, but not exactly unique. Until they find us another mine, all we can crow is Austin Powers', "Whoop Dee Doo Basil". Of course track record is important, but I also want to know how earlier shareholders made out before their deals' most recent reincarnation finally succeeded? The answer is often not so good, as that earlier Paper may have been rolled back a few times, with stratospheric breakeven Prices. This is one reason why I prefer that a junior miner already has valuable resource assets it can finance, and won't easily give up on.

Even as grassroots exploration plays go into Promotion mode, these marketing P's always sound great. I mean who would really invest if they didn't candy coat everything and flash disclaimers that IBM's Watson isn't fast enough to read? Disclosing the truth usually reveals that you are paying Prices at multiples of cash value, the only real asset—which quickly gets burned, to hold a hope and a prayer of discovering something else of value, which hopefully they won't over dilute your equity interest in.

Part of the reason investors hold precious metals and mining stocks is for inflation protection from central bank overprinting of currency units. Ironically, junior miners issue away their unique product advantage and lose investor confidence when not delivering value after regularly diluting with cheap Paper. Failed miners reorganize and rename so often because they fully expect us to forget, lick our wounds and bet again. Another P which should be on the valuation list is my "Pissed off" factor or "Past mismanagement" reason to avoid any company, mining or otherwise, which seems to imitate running their own Fed-like share factory. Fool me once shame on you, fool me twice shame on me.

Exploration is always risky and most virgin discovery plays fail honestly. Typical greenfield rinse and repeats eventually run out of money and crash to pennies, with hundreds of millions of outstanding shares as trading volume dries up. I also try and not waste time on low potential projects which seem more like shareholder funded make-work programs for old miners. This is why I am not a fan of the project generator model, with several projects and JV partners who pay the expensive drilling costs. It sounds good, but if something big is actually found most of it will have been optioned away by then.

I look for potential multimillion ounce discoveries trading near cash, or with a base to build on and opportunistically Priced at less than book, or the net present value (NPV) of its resources. Size matters and I'll pay more per ounce for a large 5Moz. resource, but not if the gold is spread over ten deposits located far from each other. I like diversification too, but not when this means building ten mines instead of one; especially by companies that don't build mines, meaning it should be valued lower as a project generator or royalty play. I also want my stocks to control their own destiny and news flow.

Many newsletters rave about the People but say little about Property or Price. They would have you buy discovery plays based on cash and expected news flow alone, even if the stock market cap value already Prices in best case potential news scenarios. Unless these companies already have resources I like, with measurable economics in a PEA, PFS, NPV etc., I avoid pure discovery plays trading at multiples of cash, even when marketers highlight the People with superlatives such as "legendary".

Before the Promotion starts, friends—like the newsletter writer—are invited to buy cheap shares in a private placement, with warrants attached. These shares cannot trade for four months, around when the Promo usually gears up. Warrants provide extra leverage for when things go really well, or shares can be blown off flat to move into to the next play while still holding the free warrants upside. It's usually true that they bought shares, but not on the same terms as their higher Price recommendations.

Still, a few discovery plays do hit big, with much better odds than the lottery, especially if you know the game. Almost as good and much safer is when drilling success fades into a bear market or enters the mine development stage. New discoveries are roller coasters with excitement or heartbreak, while developments are escalators with valuable assets to help preserve capital. I buy both with a goal of selling as high as possible before a new discovery plays out, and years later position back in to a severely beaten down, quiet, news deprived developer, if its resources seem economic and cheap.

The point is that near-term exploration or development Price swings are definitely worth the effort, but long-term cycles are often so severe that they are not worth riding out many years from discovery through production. Hopefully I scared off any day traders, who usually don't have the patience to read this far anyway, so we can now go over a few well positioned plays which I believe pass muster.

Gold Discovery Plays Set To Expand On High-Grade Resources

I have always liked where (TSXV:BTR)(OTCBB:BONXF) BonTerra Resources' Properties are located in the prolific Abitibi Gold Belt. I'm sure you have heard the best place to find a mine is next to an existing mine, and BTR's projects are surrounded by producing and past producing mines. As for Politics, Quebec and Ontario Canada are always ranked top-tier mining friendly safe jurisdictions. Urban-Barry and Windfall Lake are hot area plays with juniors easily raising over $100M recently.

I think this is my first time writing about BTR in our monthly Small-Cap Stock Observer newsletter, although BTR has filtered onto our technical Hot Sheet once this year at C$0.32, and once last year at C$0.46. In 2014 BTR's Paper structure was cleaned up with a 20 for 1 share consolidation. Recently I looked closer at its gold plays and with the drilling expected I tiptoed in for a half position. I'm holding back dry powder until BTR's very good drill results can finally convince the market to chew through shares issued over the past year and break and hold above its 52-week high of C$0.51.

As mentioned, I prefer discovery plays with resources to build on. Shareholders prior to the last rollback may have been thrilled over BTR's past drill results, but that Paper now has a nosebleed breakeven. However, the Price of BTR today seems to offer value to expand on an existing resource base in addition to new discovery plays. Quote V.BTR at our website which shows a market cap of ~C$38M at C$0.40 per share. Then click the "Financials" tab, and select "Quarterly", which shows BTR's November balance sheet with ~C$2.2M cash, no debt, ~C$21.7M in shareholder's equity, and this needs to be updated with recent cash raised and additional gold resources drilled last year.

A C$6M Sprott bought-deal Phinancing on February 6 was increased three times to total ~C$14M for 36.16M shares at C$0.28 and 11M flow-through shares at C$0.35. On March 14 another ~C$1M closed for 3.66M shares at C$0.28. Then on March 27 (TSX:K)(NYSE:KGC) Kinross Gold made a strategic 9.5% investment of ~C$5.2M for ~15M shares at C$0.35. BTR's share capital page shows ~114M fully diluted as of August 23. This bumps up to ~180M shares with these raises—somewhat toppy again. However, the Price seems right at not much of a premium to book, with a loaded treasury now over C$20M and at least four rigs ready to aggressively drill 40k meters and Promote results.

BTR's 8,126 hectare Gladiator Project is in the Urban-Barry Greenstone Belt, 170km NE of Val-d'Or Quebec. Its three main Properties are West Arena, East Arena, and Coliseum. Inferred resources so far are 905,000 tonnes grading 9.37g/t Au for 273,000 ounces of gold. Eight grams is higher grade than 90% of mines globally. BTR just needs to step out and drill a bigger, higher category deposit. March 21 news shows more near surface high-grade with 5.0m at 23.6g/t Au and 6.0m at 41.01g/t Au.

BTR's main focus currently is Gladiator Property consolidation and drilling. Strategic acquisitions include the Thubiere Gold Property on March 15, located northwest of Arena and surrounded by Osisko. Thubiere shows historical high-grade gold drill results but was poorly explored. BTR also staked four mineral claims at the north edge of the Lacroix Lake block and added other nearby claims. On March 30 (TSXV:DGO)(OTCBB:ATOXF) Durango Resources optioned all of its Trove Windfall Lake Property for BTR to earn into, a direct extension of Gladiator's southwest mineralized trend.

BTR also has the 2,221 hectare Larder Lake Gold Project located in the Cadillac/Larder Lake break in eastern Ontario. The Bear Lake deposit historic estimate is 3,750,000 tonnes at 5.7g/t for 683,000 ounces of gold inferred. The Cheminis deposit historic estimate is 335,000 tonnes at 4.1g/t for 43,800 ounces of gold indicated, and 1,391,000 tonnes at 5.2g/t for 233,400 ounces of gold inferred.

Cheminis is a past producing mine with a deep vertical shaft. In 2012 (NYSE:GFI) Gold Fields had 60% of Bear Lake, which terminated after 3-years as it pulled worldwide exploration activities. GFI spent $6M drilling 59 Holes, which are not in BTR's geological model yet. BTR's resource development and exploration program is underway to update Larder Lake's gold to be NI 43-101 quality compliant.

Again, grassroots explorers are hit or miss with no safety net. If they miss, they usually run out of money and die, or eventually rollback, rename etc. BTR offers much better odds with a Price at close to book, with greenfield discovery drill targets to test and brownfields to develop further. BTR's fallback position is already ~1.2M ounces of gold resources, which should continue to grow.

If you take BTR's fully diluted market cap of C$72M (180M shares at C$0.40), then subtract ~C$20M cash on hand and divide this C$52M by ~1.2M ounces, you get a per ounce gold value of ~C$43, or divided by 1.34 equals only ~US$32 an ounce. It's easier to buy or expand an existing high-grade resource than to discover a new one, and nearby producer (TSX:KL)(OTCBB:KLGDF) Kirkland Lake Gold and (TSX:OSK) Osisko Mining must be watching. BTR's blue sky is just a bonus.

Orla Mining - Developing Large Oxide Deposits, With Major Porphyry Discovery Potential

My November 17 newsletter detailed (TSXV:OLA)(OTCBB:ORRLF) Orla Mining, which used to be a penny shell called Red Mile Minerals trading at cash with Ontario gold Properties and no debt. OLA is now C$1.20, but last September it closed a huge C$50M private placement at C$1.75 with insiders buying 44.1%. OLA completed its acquisition/merger with Pershimco Resources in December, and on January 19 started a large drill program on its 100% owned 14,800 hectare Cerro Quema Gold Project in Panama. March 6 OLA news adds two more rigs after the sixth hole with assay results pending.

I lucked into this play early but probably would have bought it higher than it is now considering the key investors buying at C$1.75, low market cap versus net present resource values, and high potential porphyry drill targets in addition to near-term producing high-grade oxide deposits to build on, with 878,700 ounces of gold already. And I dare say that Pierre Lassonde, co-founder of ~C$16B gold royalty company (TSX:FNV)(NYSE:FNV) Franco Nevada, really is a living legend in mining circles.

Minco Silver - Trades Near Cash With No Debt, Means 200Moz. Ag + 1/2Moz. Au Almost Free!

I have always liked silver, more than even gold, and (TSX:MSV)(OTCBB:MISVF) Minco Silver is still my favourite high-grade Ag value play. MSV is not on brokerage analysts' radars because it does not need Phinancing yet—MSV's last raise was for ~C$45M at C$5.95 per share in 2011. Promotion-wise most newsletter writers lost track of the story as the last real MSV news release was on July 31, 2015 when it purchased the Changkeng Gold Project, adjacent to its Fuwan Silver Project in China.

I started buying MSV at C$0.50 last year and the play remains as detailed in my May 16 newsletter at C$1.22 per share. As of September, MSV shows ~C$53M or C$0.88 per share in cash with no debt, and ~C$101M or C$1.67 per share in shareholders equity versus ~C$75M in market cap at today's C$1.24 per share. Minus cash means MSV's silver and gold resources trade at C$0.36 per share, times 60.5M shares, or ~C$22M. For easy math use BTR's C$43 gold value to subtract C$21.5M for MSV's half-million gold ounces, leaving C$0.5M divided by 200M silver ounces, or under a penny an ounce. Alternatively, divide C$22M by 200Moz.-Ag, equalling 11-cent silver and 500K ounces of free gold.

MSV's robust feasibility study needs to be updated with its gold, but shows just US$81M CapEx to build, 9.2 year operation, 91% mill recovery, 2.3 year payback, 33% pre-tax IRR, 5.5M silver ounces per year at a low US$5.65/oz cash cost, and this is based on US$13.57 per ounce instead of today's $18+. MSV has more high-grade showings along its 10km Fuwan Silver Belt but has only explored 2.8km, and would attract more buzz if it used some of its cash hoard to drill and grow its resources. Then MSV could again Phinance at high share prices, with less dilution, towards mine construction.

Through the bear market MSV did a great job keeping its cash burn low and Paper structure tight. MSV's 52-week high was C$2.05 last summer as silver prices touched US$20 an ounce. I still believe $20 silver is the magic level when MSV finally comes out of news stealth mode and gets active again. Until then, show me any high-grade, high-IRR, very low CapEx, significant silver deposit this cheap?

Quick Update On Northern Dynasty Minerals And Exeter Resource

My May 16 newsletter detailed four other discounted developers with leverage to higher gold and silver: (AMEX:XRA)(TSX:XRC) Exeter Resource, (TSXV:CKG)(OTCBB:CHPGF) Chesapeake Gold, (TSX:NDM)(AMEX:NAK) Northern Dynasty Minerals, and (AMEX:THM)(TSX:ITH) International Tower Hill Mines. In addition to buying MSV I also bought NDM at C$0.46 per share.

My reasons for still holding all shares of both companies are in that safari themed article where I describe NDM/NAK as the 81 billion pound gorilla (copper that is, plus 107Moz-Au, 5.6Blbs-Mo, 514Moz-Ag). A hedge fund's recent short and distort campaign against NAK hasn't changed anything for me. Sure I wish the stock price didn't get cut in half from C$4.54 in a hurry, but NAK's charts now look stable to up-trending again. I actually wish they would flatline a while longer to get rid of the rest of the wingnuts flipping shares all day with their milk money, who flinch as the algo-bots and market makers dictate, while not even realizing NAK by metal value is more about copper and not just gold.

NAK is still a permit play and with Trump's enviro-denial slashfest last week I'd say our odds have improved. Mine veto-happy EPA'ers may want to negotiate something soon or start looking for sales on banker boxes. While there is no guarantee and it will take years to build Pebble's giant mine, one way or the other I believe NAK will be allowed to advance to the next step in the approval process.

A January 23 Bloomberg article indicates this catalyst could attract a major mining partner, which NAK expects by this October. The article also mentions billionaire mining magnate and philanthropist Frank Guistra being very sad about leaving a lot of money on the table after selling his NAK stake prior to the presidential election last year amid criticism over his ties to Bill Clinton. Now that this is a non-issue, it begs the question with the recent price drop whether he intends to buy back his NAK?

The first stock in my May article was Exeter, then US$0.87 per share. Caspiche's huge Chilean gold-copper resources are near Arizona Star's Cerro Casale deposit, which I bought shares in at ~$2 before (NYSE:ABX)(TSX:ABX) Barrick Gold paid C$18 per share for the company in 2008. XRA was also a cheap potential buyout play on higher gold prices, with a new near-term development scenario. I say "was" as March 28 news shows (TSX:G)(NYSE:GG) Goldcorp paying C$247M or C$2.58 per share.

Iron Ore Developers - Trading Way Below Book With Billions Of Tonnes And Lots Of Cash

Balance sheets are certainly not exciting or legendary, but do give a pretty good idea of what a stock is worth. I haven't personally met management of even my biggest mining holdings. What I do like is when lots of money was raised at market tops, at many multiples of current Prices. For example, last year iron ore stocks were hated and ignored, but had the cash to sit on their assets for years if needed.

In 2011 iron ore crashed from $200 a tonne to under $40 last year, now $80 but nobody seems to care. Iron development plays might take years but can survive without diluting, some with market caps less than cash alone, with billions of tonnes of in-situ iron ore resources. I whittled my list down to three names: (OTCBB:AXXDF)(TSX:ADV) Alderon Iron Ore which I own and may offer the best overall value, (TSX:CIA)(OTCBB:CHPRF) Champion Iron now C$1.03 which just completed its Bloom Lake Mine Feasibility Study, and (TSX:NML)(OTCBB:NWLNF) New Millennium Iron now C$0.18.

Two to 3-year charts for all three plays, which focus on Quebec and the Labrador Trough, look like a dead person's EKG until they came back to life suddenly last October. More impressive are the long-term charts which show these stocks traded in 2011 at many times their current share prices as iron ore topped. These development plays are also leveraged optionality bets on higher iron ore prices.

I started buying ADV at a dime last summer and detailed the play at a quarter in my November 17 newsletter, now C$0.40 after touching 3-year highs of C$0.80 on January 30. On February 28 ADV released an updated Preliminary Economic Assessment which details its robust Kami Project re-boot. While some companies change focus to the hot metal of the month, Alderon remains committed to developing its huge 2B+ high-grade tonnes and on March 8 even changed its symbol to (TSX:IRON).

Final Thoughts With A Question

When first considering a mining stock, at least most of the exciting P story must make sense. What many forget is that dispassionate financial reports also need to support value, before pulling the buy trigger. This is a subjective and objective weighing exercise with biases, but we need to take the time to work through these details to truly know what we own and what it's really worth. When we focus on patiently investing in quiet undervalued resource assets, we can sit back and wait for hopefully higher prices, active news flow and momentum traders to cue the monkeys these are sexy plays again.

So, are you a rational informed investor who positions to win, or an emotional blind speculator who wonders what went wrong? Either way you're invited to sign-up at our site to get all of our free e-newsletters.

My calculations and observations are as an individual investor and are not recommendations. Data comes from financial reports, news releases, company websites and other public sources that may not be accurate, complete or up to date. There may be conflicts of interest as I own stock in some of these companies. I share these ideas in hopes that readers will comment on them and on other company stock boards at our website with your own insights, opinions and anything I may have missed.

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