Month: August 2018

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Maria Smirnova – Silver, Jurisdictional Risk, and the Current Market

Maria Smirnova

The junior resource sector is fraught with risk, and in the midst of a bear market, it becomes even more evident as the market continues to trend downward. For those who choose to participate in bear markets, it truly is where the ‘wheat is separated from the chaff.’

Being diligent and researching the companies in detail, understanding their catalysts and not being afraid to take profits is, in my opinion, of the utmost importance for giving yourself the best odds of success in the current market.

Fortunes are made in the resource sector by buying when others are selling and vice versa; it just takes time and fortitude to ride out the bumps along the way.

Today, I’m sharing my recent interview with Maria Smirnova, Senior Portfolio Manager at Sprott Asset Management LP. Smirnova has over 16 years of experience in the financial services industry, and is currently part of the precious metals team and manages Sprott Silver Equities Class, Sprott Gold and Precious Minerals Fund, as well as the Sprott Hedge LP and LP II Funds.

Without further ado, a conversation with Maria Smirnova:

 

 

Brian: Lately, I’ve spent significant time debating the criteria I use and the level of risk I’m willing to take when evaluating jurisdiction. The topic is very interesting because ― although there are quantifiable aspects to jurisdiction ― I believe many of the general opinions about jurisdictional risk are based on qualitative observations or anecdotal themes that are proliferated through the mainstream media.

Broadly speaking, how do you approach investing in so-called “risky” jurisdictions? Secondly, are there any jurisdictions that you would not invest in, even if they presented a good price to value proposition? Please explain.

Maria:  In evaluating mining companies, we are constantly assessing jurisdictional risk. I break our findings into two broad categories; one group clearly has either good or bad investment attributes, and the other group is more characterized by shades of grey.

In the first category, a country’s attributes, such as its policies toward mining titles or its taxation regime, are easily examined and can be deemed to be either good or bad. Two of the best jurisdictions we invest in are Canada and Australia. Conversely, there are other jurisdictions, such as Russia or the Central African Republic, which we avoid. The biggest reason is that in either of these countries we cannot be confident that a mining title is secure. In other words, it might be possible that the government could intervene and nationalize the mining claim. We avoid situations with this level of uncertainty.

The second, “shades of grey,” category involves other issues surrounding a country’s mining investment attractiveness which are more complicated to assess. Mexico is a good example, even though the country is highly prospective and rich in gold, silver and other metals. Mexico is comprised of 31 separate administrative states, each with differing politics. Some Mexican states are much more conducive to mining investment than others and, therefore, it is critical to conduct your due diligence, and to meet with the management teams on the ground within those states.

Outside of doing a site visit ― which is the best approach to understanding the dynamics of a specific locale ― company representatives working in the field can provide key insights into what is happening at the local level. I was in Mexico a few months back, and it was incredibly informative. I visited three different Mexican states during my week-long visit, and this trip greatly enhanced my overall understanding of the country and its varying approaches to mining.

 

 

 

 

Brian: Personally, I have enjoyed the most success in the resources sector when I have been (correctly) contrarian to market sentiment. It’s one thing to understand the concept of being contrarian, and it’s another to put into practice, and be successful.

One of the biggest hurdles to being a successful contrarian is figuring out the best time to buy. For example, over the last 23 months, many precious metals companies have seen their share prices move downward or sideways.

Therefore, given the resistance to ‘catching a falling knife,’ is there a strategy you can share for taking a position in a company, in a falling market?

Maria: We take a longer-term view. The market has become very short-term focused, and we try to remain medium to long-term focused. Of course, the old saying goes, “Buy low, sell high.”  We’re at a pricing point right now where some mining companies represent incredible value from a cash flow perspective. Additionally, you can analyze other valuation metrics, such as price-to-cash flow or free cash flow, which also reveal that some mining names are very undervalued.

We track all this information daily and will buy strong, healthy companies which have sold off.  Now, there may be names that have been declining for a reason associated with a fundamental issue within the company or political risk within the jurisdiction, and in those cases, we stay away.

From a strict valuation point of view, now is a very good time to add to mining positions to investment portfolios. You don’t need to buy everything in one day; you dollar-cost average over time. Certainly, right now is a good time to buy given that both gold and silver have sold off significantly.

Sentiment is really at a low for miners right now. There has been significant cash flow out of the sector. Vanguard just announced that it is moving its mandate away from sub-advisor M&G Investment and renaming its precious metals and mining fund. This type of capitulation is not helping stock prices. But at the end of the day, it also means that even though the business has not changed, the company is selling for less ― a great opportunity for investors.

 

 

 

 

 

Brian: As you mention in your recently published Sprott Silver Report, the silver price has been range bound trading between $16 and $18 USD per ounce for the last 18 months.

In your opinion, what are the factors currently affecting the price of silver?

Maria: Silver is a fascinating subject. I am a big fan of silver and do like the fundamentals of the metal from an investment perspective. Right now, the price has come off, but I don’t think it’s the fundamentals are the reason.

Silver has been in fundamental deficit for the last three or four years and production has started to decline. Yet, silver’s uses are growing, many of which are exciting new industries such as electric vehicles and solar panels.

I believe that market forces have been pushing silver’s price down. Silver shorts on the COMEX are at record highs. You have to look back to the 1990s to find a time when the volume of short positions was this high.

We have also experienced a significant drop off in silver coin sales, which began in late 2016 shortly after the Trump election in the U.S.  When that marginal coin buyer is not there, it definitely hurts the silver market. Much of the market’s attention has been drawn or focused on marijuana stocks and crypto-currencies. I believe that when that marginal buyer returns, silver is likely to have a significant run.

 

Brian: Strong demand mixed with constrained supply can be the perfect storm for metal price appreciation. In my opinion, one source of demand which will have a profound effect on the metals markets, on a whole, is the adoption of electric vehicles.

While lithium, cobalt and nickel have garnered much of the press surrounding the EV revolution, can you tell us why silver is set to play a critical role in the EV revolution in the years ahead?

 Maria: That’s a great question; I’ve written about the importance of silver in electric vehicles. It is a topic that is not getting much attention. People generally don’t think of silver as being used in electric vehicles, because the amounts used are small; rather they focus on the the cobalt and lithium used in EV batteries because the quantities are more significant.

Silver has high electric conductivity and, therefore, is often used in electrical based machines. Cars are a perfect example. Silver is already used in many automotive components, such as air conditioners and mirrors. Basically, for anything electric, silver can be used, but typically in small amounts, so it gets little attention.

In saying this, however, electric vehicles will use more silver than older gas- or diesel-fueled cars. Autonomous vehicles will use more silver than electric vehicles and so on.  By the way, the main reason for an increase in silver usage in autonomous vehicles is the need for multiple redundant or backup systems in case of failure.

We’re excited to see the growth of both electric and autonomous vehicles, and it is only a matter of how fast these new technologies get adopted. It is the way of our future and silver will play a very significant role.

 

 

 

Concluding Remarks

There’s a lot of actionable information that can be gleaned from this interview with Smirnova. For those of you looking to hear more from Smirnova and the rest of the world-class investment professionals and subject matter experts at Sprott, I suggest subscribing to Sprott’s Insights, where their views on precious metals and real assets can be delivered right to your inbox.

Conferences are a fantastic way to meet like-minded investors, as well as the people who run the companies in which you’re investing. In my opinion, this year’s Sprott Natural Resource Symposium was the best yet, as it had a roster of All-Star speakers and some of the best companies in the junior resource sector. The Symposium continues to be one of my favourite conferences, and I highly suggest that you attend. I hope to see you there!

Additionally, for those who couldn’t make the 2018 edition of the Symposium, Sprott is currently offering a discount on the MP3 Recording Package, which includes all of the power point presentations  from the Symposium.

 

Don’t want to miss a new investment idea, interview or financial product review? Become a Junior Stock Review VIP now – it’s FREE!

 

Until next time,

 

Brian Leni  P.Eng

Founder – Junior Stock Review

 

 

Disclaimer – The following is not an investment recommendation. I am not a certified investment professional, nor do I know you and your individual investment needs. Please perform your own due diligence.

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Anaconda Mining – Takeover Candidate Criteria, Goldboro Update and Point Rousse Exploration

Anaconda Mining

I have been keenly watching the progress of Anaconda Mining over the last 6 months; they have made some significant strides toward growing the company organically and through acquisition, as they were very close to executing a takeover of Maritime Resources. In my opinion, the merger would have been a terrific deal for both sets of shareholders and the people who live in and around Baie Verte, Newfoundland & Labrador.

With two drill programs set to commence in the 2nd half of 2018, I was eager to catch up with Dustin Angelo, CEO of Anaconda Mining, to review the Goldboro Gold Project, how or if the withdrawal of their Maritime Resources takeover offer has affected their growth strategy, some of the criteria for future takeover targets, and finally, an update and overview of the Point Rousse Project – production changes and exploration targets.

Let’s take a look at what Angelo had to say.

Enjoy!

 

 

Brian: Recently, you released some great drill results from your Goldboro Project in Nova Scotia. Could you give us an overview of some of the highlights and where you are headed with the Project over the final 5 months of the year?

Dustin: The Goldboro results are the final results of roughly a 12,000-meter program that we’ve been doing since we acquired the project back last year. Overall, it was a highly successful program. We demonstrated the fact that the deposit does continue down plunge, along strike, and down the dip of the limbs of the fold structure. We had some very good intersections, and then some of the top intersections were 151 grams over 2.6 meters. Some wide intersections like 21 grams over 11.5 meters; 4 grams over 20 meters; 17 grams over 7.5 meters. We were very successful in finding some new target areas within the deposit. We had 130 new visible gold occurrences.

We’re extending the Boston Richardson system down plunge and East Goldbrook, as well. We found new mineralized zones. Everything was what you would expect. It was pretty typical for the Goldboro deposit so we were pretty pleased with that. We worked on in-filling the areas where the inferred resources were a part of our PEA. We think that we will be increasing the confidence level of some of those, moving them into measured and indicated. Overall, the program was highly successful.

We’re now embarking on our second major program, which we just announced, and is a 10,000-meter program that we’ll be doing through the fall. That one will be very similar in that we will be looking at areas for expansion. We will still be looking at areas for in-fill related to the PEA. The one new area that we are going to be going to is the West Goldbrook system. We focused on Boston Richardson and East Goldbrook in the first 12,000 meters. Now, we’re going to open up and go over to the West Goldbrook area. We’re anticipating continuing to find more mineralization, continuing to extend the deposit down plunge and along strike. I’m confident we will have similar or better results than what we’ve had in the past.

 

Brian: Over the last 3 months, I received many questions from readers pertaining to Anaconda’s takeover bid of Maritime Resources. For those who are unaware, Anaconda formally commenced a takeover bid for Maritime in April of this year, but withdrew the offer on July 12th and are pursuing other opportunities in Atlantic Canada.

How has the outcome of this takeover bid changed Anaconda’s plans for growth in the future?

 

Dustin: It hasn’t changed our plans. We are still focused on growing by acquisition. Maritime doesn’t discourage us from doing that. However, any acquisitions we look at down the road will hopefully be friendly deals.

That’s what we were looking for with Maritime, but, unfortunately, we weren’t able to achieve that. There just wasn’t much of a response from the board and management going back to January/February. That’s why we had to take the bid to shareholders. In spite of the end result, the acquisition strategy continues on. There are other opportunities within Atlantic Canada and we’ll pursue those instead. Maybe, Maritime will come back at some point down the road, in which case we’d be interested in trying to get a transaction done under the right circumstances.

As we said from the beginning, bringing together the two asset bases on the Baie Verte Peninsula makes a lot of sense. We’ve got the operating infrastructure. We’ve got a very profitable operation. Our second quarter results just came out and it shows that we continue to make money and that the operation is pretty steady. If we can add higher grade ore, it can only make it better. We’ve got all the infrastructure, the workforce, the tailings capacity, and our own ore feed. They’ve got an underground resource and it makes sense to put the two together, because each side can benefit from what the other side has. Eventually, they might come back around.

We’ll continue on our two-pronged approach which includes organic growth through exploration of our current properties as well as acquisitions. On the exploration side, we are kicking off again, using the $4.5 million that we recently raised in a flow-through financing. We will continue the organic path and grow through more exploration at Goldboro and Point Rousse. We see many opportunities to grow our mineral resources at these projects. Furthermore, we have now started our bulk sample at Goldboro and we filed the environmental assessment document so that we can begin the environmental review process. We are moving the project along from a development standpoint as well as an exploration standpoint, with the goal of production by 2020 / 2021. We believe we can extend the production life at Point Rousse while bringing Goldboro into production, ultimately reaching about 50,000 to 60,000 ounces per year of gold.

 

Brian: Secondly, if Anaconda will continue to pursue takeovers as a source of growth in the future, can you give us an idea of what you are looking for in a potential takeover target?

 

Dustin: What we’re looking for, primarily, are assets that have 43-101 resources already established on them. When you’re talking about Atlantic Canada, the only two gold producers, really, that are in commercial production are ourselves and Atlantic Gold, so all the other projects in the region are essentially pre-production. We would be looking at projects that we can put into production in the near term; properties that are ready to transition from an exploration asset or an idle asset into a development asset because it comes underneath our infrastructure, our management and our ability to raise capital. We’re looking for projects that would have anywhere from a couple hundred thousand ounces of gold to up to a million ounces, and you can find those types of projects in Atlantic Canada. It would be ideal if we can utilize some of our existing infrastructure with a project, but we’ll also evaluate it on a standalone basis.

 

Brian: As I confirmed during my site visit last fall, the Point Rousse Project will play a critical role in Anaconda’s future as you transition from the Pine Cove Open Pit Mine to the Stog’er Tight Open Pit Mine.

Stog'er Tight Deposit

Stog’er Tight Deposit Area – Taken Fall 2017 During My Site Visit

Can you give us an update on the transition?

Dustin: We were in development on Stog’er Tight during the spring and we made the official transition into commercial production in May. In May/June, we produced almost 30,000 tons of ore from Stog’er Tight. We’ve still been processing ore from Pine Cove, ore that’s been stockpiled, and the transition has been smooth. You’re talking about another open pit mine. We have all the necessary infrastructure in place. We’re just trucking ore back to the mill. We’ve got the tailings capacity there. We’re using the same contract miners, so we’re just moving equipment over.

It’s our second pit and we have a tremendous amount of experience from Pine Cove, which we operated for about eight years. A lot of the knowledge base and the experience we gained there, the use of blast movement monitoring, GPS on the shovels, all the technology, the new processes and procedures that we implemented at the Pine Cove pit. We transitioned those over to Stog’er Tight. I think it’s been a fairly smooth transition, because of the experience.

 

Brian: Continuing with the Point Rousse Project, you have announced a 5,000 metre drill program.

What are you targeting with this drill program and what’s the timeline for its completion?

Dustin: The 5,000-meter drill program at Point Rousse has three main targets. It has Argyle, which is our new deposit. We’re looking to expand that deposit, essentially going north east of the known mineral resource. The other area that we’re looking at is a discovery called Anoroc. It’s roughly 600 meters southwest of the Pine Cove pit. We’re going to target the entire area between the southwest part of that pit all the way down to the discovery. So, along that 600-meter strike length, we’re going to be poking holes in there.

At the northern end of our property package, there’s an area we call Deer Cove. We did some drilling a while ago at Deer Cove, but in a really concentrated area where there is an old adit and a vein system that was discovered prior to Anaconda’s involvement in the area. Our program was very narrowly focused, but the Deer Cove area is situated just north of a thrust fault, similar to Pine Cove. We’re going to more broadly explore along the thrust fault and look for another Pine Cove. Those are the three main exploration areas for Point Rousse.

Right now, we are doing some ground IP and soil sampling around the areas that we’re going to drill, ultimately, at Argyle. We’re waiting on a permit at Anoroc, and then we’ll finish up at Deer Cove. It’ll take us most of the fall.

Scrape Trend

Scrape Trend – Target #1 in the Image above is Anoroc

 

 

 

Concluding Remarks

From an organic growth perspective, Anaconda appears to be set to add ounces to its production profile in the coming years. As Angelo outlines in the interview, Goldboro is showing tremendous progress toward its development, and with a new 10,000-meter drill program initiated and a planned / permitted bulk sample in the 2nd half of 2018, we should see a lot of news flow.

Additionally, the progress in production out of the new Stog’er Tight Open Pit Mine, the development of the Argyle Deposit and the further exploration of the Scrape and Deer Cove Trends, Anaconda’s organic growth plans look to be very healthy.

In terms of valuation, with Anaconda’s MCAP roughly sitting at $36 million, I personally see tremendous value in buying Anaconda shares at this price point. Consider these 3 thoughts:

  • First, the updated PEA on the Goldboro Gold Project, released just a couple of months ago, presents a low case scenario of gold at $1450 CAD/oz (roughly $1160 USD/oz), which gives the Project an estimated after-tax NPV at a 7% discount rate of $44 million CAD.  Not only do I believe the gold price will be higher than $1450 CAD/oz in the future, I believe this deposit is going to get bigger, which could mean better project economics and, thus, a higher NPV.
  • Second, Anaconda has a two-pronged approach to growing the business; first, through the organic growth of existing assets and, second, through acquisition. With the steps taken over the last year, it is clear to me that the Anaconda management team is putting their money where their mouth is, so to speak.
  • Third, with Anaconda’s current MCAP (at the time of writing) at roughly $36 million CAD, which I believe only roughly values the assets found within the Point Rousse Project with its in-situ ounces (Stog’er Tight Deposit and Argyle Deposit) and infrastructure (Pine Cove Mill, Port and Tailings Facilities).  In my opinion, no value is given to the Goldboro Gold Project and its estimated after-tax NPV, which is cited above. Additionally, I don’t see any value given to The Great Northern Project (Rattling Brook and Viking) which contain ~600,000 ounces of combined Inferred and Indicated gold resources.

 

Good management teams are what make companies successful in the junior resource sector, and in saying this, I believe the Anaconda team is one of those good teams that will execute on their plans to create value for their shareholders.

I’m a buyer of Anaconda Mining and look forward to plenty of news flow the rest of the summer and into the fall.

 

Don’t want to miss a new investment idea, interview or financial product review? Become a Junior Stock Review VIP now – it’s FREE!

 

Until next time,

 

Brian Leni   P.Eng

Founder – Junior Stock Review

 

Disclaimer: The following is not an investment recommendation, it is an investment idea. I am not a certified investment professional, nor do I know you and your individual investment needs. Please perform your own due diligence to decide whether this is a company(s) and sector that is best suited for your personal investment criteria. Junior Stock Review does not guarantee the accuracy of any of the analytics used in this report. I do own Anaconda Mining Inc. shares. Anaconda Mining Inc. is a Sponsor of Junior Stock Review.