Portfolio Update: Reshuffling the Deck (September 08, 2017)

by FI Fighter on September 9, 2017

in Copper, Copper Update, Lithium, Lithium Updates, Precious Metals, Precious Metals Updates

Yes, I know, I’ve got a lot of issues… A lot more trades this week!

Here’s what we got for the week ending on September 08, 2017.

  • Sold 130,000 shares of Alicanto Minerals (AQI.AX) @ A$0.135/share
  • Bought 315,000 shares of MOD Resources (MOD.AX) @ A$0.065/share
  • Sold 3,036 shares of Teranga Gold (TGZ.TO) @ C$3.52/share
  • Bought 10,000 shares of Marathon Gold (MOZ.TO) @ C$1.05/share 
  • Sold 4,000 shares of Teranga Gold (TGZ.TO) @ C$3.30/share
  • Bought 10,000 shares of Pure Gold Mining (PGM.V) @ C$0.60/share 
  • Bought 8,000 shares of Marathon Gold (MOZ.TO) @ C$1.00/share 
  • Sold 550 shares of Klondex Mines (KLDX) @ $3.60/share 
  • Sold 3,264 shares of Teranga Gold (TGCDF) @ $2.70/share
  • Sold 9,000 shares of Critical Elements (CRECF) @ $1.20/share 
  • Bought 9,000 shares of Marathon Gold (MGDPF) @ $0.8347/share 
  • Bought 15,000 shares of Pure Gold Mining (LRTNF) @ $0.49/share 
  • Bought 10,500 shares of Northern Empire Resources (PSPGF) @ $0.59/share 

Alicanto Minerals

This time last year, I called Alicanto Minerals (AQI.AX) “one of my best ideas.” In hindsight, no, Alicanto wasn’t one of my better ideas, and if anything, I was more guilty of chasing up than anything else. In the end, I sold AQI.AX for a HUGE loss of -$16,168.13.

OUCH!

Well, you win some and sometimes you get punched in the face and lose big time…

To add insult to injury, of course shares of AQI.AX started a nice rally basically just a few days after I closed out my position.

In the Game of Rocks, you simply can’t win them all… and you don’t need to in order to succeed.

Despite the short-term rise in the share price of AQI.AX, I have zero regrets with selling. I think a far too common mistake investors/speculators in the mining space make is they tend to hold onto their losers for far too long, or Hold On for Dear Life (HODL)…

The human psyche, for whatever reason, always feels the stupid need to have to break even before we can sever ties with investment ideas (even if they are total dogs).

As it pertains to Alicanto Minerals, sure, I still like their gold projects and I think the company could still return 5-10x gains in the future if they finally crank up their exploration programs and start hitting some massive elephants. To date, that hasn’t happened yet, and quite frankly, this company just moves way too slow… There just hasn’t been enough progress made over the last year to convince me to keep sticking it out.

Ultimately, my patience just wore out…

Here’s a question I like to ask myself when it comes to deciding whether to sell or not:

If I was starting with a clean slate and fresh capital today, knowing what I know now, would I still buy shares of this company?

With AQI.AX, you could ask me 100 times and 100/100 I would answer:

No!

Instead, I would use any fresh capital that I had today to invest/speculate in the following idea, instead…

MOD Resources

MOD Resources (MOD.AX) is a copper exploration/development company that operates out in the safe jurisdiction of Botswana (yes, that’s right I said safe! Not all of Africa is scary, contrary to popular belief).

According to the Fraser Institute, Botswana ranks just behind Ontario in terms of being an attractive destination for mining investments.

From Northern Empire Resources.

That’s pretty damn good, if you ask me…

Anyway, here’s the recent press release from MOD Resources that really got me eager to purchase up shares now rather than later.

From MOD Resources.

MOD Resources will be doubling their exploration budget to A$10 million in an aggressive attempt to make new discoveries on their prospective land package than expands >11,700km2 (which is enormous).

From MOD Resources.

Best part of all, even if MOD Resources fails to make another significant discovery (as unlikely as that may be), the company is backstopped in a way by their T3 project (discovered in early 2016 with joint venture partner Metal Tiger; MTR.L, who controls a 30% interest in T3 while MOD owns 70%) which is already advancing towards a Preliminary Feasibility Study (PFS).

A base case 2 Mtpa production scenario was outlined by the initial Scoping Study, which shows very robust economics across various different copper prices.

From MOD Resources.

At today’s copper price of $3.00/lb, the Scoping Study for T3 features a pre-tax NPV (10% discount rate) of $279 million, with a pre-tax IRR of 42%. I generally like to see economics presented on an after-tax basis, but at least the company used a 10% discount rate. Anyway, these numbers are all so preliminary I wouldn’t place much merit on them at this time…

Again, the current defined resource for T3 simply backstops the company (and thus share price) in my eyes, and although I’m sure there are lots of investors who are invested in the MOD Resource story for T3 alone, I’ll admit that I’m mostly here for the blue sky exploration potential.

So, yeah, it’s pretty cool anytime you can find companies that are a hybrid developer/explorer… It’s still very much early days in the MOD Resources story, which is super exciting.

And that’s why I made the switch from AQI.AX to MOD.AX.

With Alicanto Minerals, we’re talking about potentially finding a ton of gold in elephant country… but at this stage of the game, nobody knows for sure if they will be able to prove up an economical deposit… MOD Resources, on the other hand, already has a defined project (and resource) that most likely will work at even a more “depressed” $2.50/lb copper environment.

Here is the revised T3 resource.

From MOD Resources.

Oh yeah, With T3, investors are also getting a small amount of silver exposure (through byproduct credits) too!

If you want to learn more about MOD Resources, please check out this excellent video that my friend MiningBookGuy released a few months back.

Perhaps the biggest knock on MOD Resources?

There’s close to 2 billion shares out on the registry…

At some point, a share rollback (perhaps 10:1) will certainly be needed…

Teranga Gold

I closed out my position in Teranga Gold (TGZ.TO/TGCDF) this week. Intuition told me to start trimming down ahead of the Banfora Definitive Feasibility Study (DFS) being released, and as readers may recall, I sold a bunch of shares last week…

Well, the company finally did release the DFS this past week, and let’s just say the results were less than awe-inspiring…

From Teranga Gold.

At $1,300/oz gold we are looking at an after-tax NPV (5% discount rate) of $122 million with an after-tax IRR of only 18%.

Until proven otherwise, Banfora is currently just a very mediocre gold project…

Suffice to say, I was expecting a bit better than that, and after a year of working on refinements, I really thought that Teranga would be able to get Banfora’s IRR up into the 20% range.

Well, after the news hit, I liquidated out of the remainder of my Teranga position.

No, I don’t think shares are expensive at all… Especially with gold trading near $1,350/oz, I think Teranga Gold is attractively priced at these levels and there is a lot of value to be had here…

But it’s just too bad Banfora is so marginal, otherwise I would have been inclined to hold onto my shares…

And with so many other names in the sector that are still weak, or “cheap”, I elected to move my investment dollars elsewhere.

Pure Gold Mining and Marathon Gold

Speaking of transferring capital to a new home, the bulk of my Teranga proceeds went into adding more shares of Pure Gold Mining (PGM.V/LRTNF) and Marathon Gold (MOZ.V/MGDPF).

I covered both companies in some detail last week, and right now these are two gold developers that I am liking a lot in the space. I think shares are undervalued for the assets that these companies own, and I really like how aggressive each one is with their current drilling programs (similar to MOD Resources).

Lots of resource upgrades made in recent months, and investors have lots more drilling results to look forward to.

Further, Pure Gold will be revising their PEA later this year, and Marathon should have their initial PEA published by year’s end.

Continuous news flow is expected, and you’ve gotta like that.

Critical Elements

Critical Elements (CRE.V/CRECF) has long been one of my favorite ideas, especially in the lithium space.

After waiting for over a year, the company FINALLY released their DFS for the Rose Lithium-Tantalum Project this past week… and I gotta say, I was pretty disappointed with the results.

From Critical Elements.

Sure, a pre-tax NPV (8% discount rate) of C$1.257 billion and a pre-tax IRR of 48.2% look good on paper (I still don’t know why companies quote pre-tax numbers, sigh), but dive deeper into the details…

More specifically:

In 2017, off take agreements for spodumene CG with a Lithium oxide content between 5.0 and 6.0% have been executed, whereby 120,000t of 5.5% spodumene concentrate has been contracted at US$830/t FOB. Every additional 0.1% of Li2O content will garner a premium of US$15/t, enabling prices between 750 US$/mt and 905 US$/mt for spodumene CG 5.0 and 6.0. Also, suppliers who are able to provide a higher quality spodumene CG yielding lower conversion cost will also be able to achieve higher prices.

The market for spodumene TG is a specialty chemicals market, which addresses the specific needs for customers in the glass and ceramic industry. Historically, prices have been reflecting the higher value of iron free spodumene like in Lithium carbonate and specific properties of the crystalline material.

Therefore, pricing for spodumene TG is directly linked to the Lithium oxide content in Lithium carbonate.

Please note: The above numbers only make sense to me if strategic partner Helm AG (or someone else) has agreed to or will agree to signing a Binding Offtake Agreement (BOA) to take delivery of all products to be sold at the prices listed above (or higher) over the life of mine…

Otherwise, my first thoughts are as follows…

WTF is this?

$750/t for 5% chemical grade spodumene concentrate!?! $905/t for 6%?

That is way, way, way too aggressive a sales price to be using in a DFS!!!

For anyone who’s paying attention…

From Mineral Resources.

For 2017, 6% spodumene concentrate is being contracted around $800/t. The above deal settled at $841/t.

But as everyone knows, commodity prices fluctuate like crazy, so who really knows where prices will be next year? 5 years? 10 years? Life of mine?

That’s why companies should err on the side of conservative…

$905/t for 6% chemical grade spodumene concentrate is NOT conservative within a country mile! In the gold space, for instance, the highest quality projects will cite a conservative long-term gold price of $1,100/oz or $1,200/oz… Anyone can have a “robust” project using $1,400/oz or $1,500/oz… That doesn’t make it a realistic or reasonable price to use!

Do you want to see what conservative looks like?

Check out Pilbara Minerals (PLS.AX/PILBF) and their DFS:

The Pilgangoora Feasibility outcomes are based on life-of-mine average spodumene price of US$537/tonne CFR, which is well below the current spot price of approximately US$650/tonne FOB (SC6.0 basis). The Company’s DFS pricing deck has been derived from a basket of independent economic and bank/broker forecasters including: Roskill, Deutsche Bank, Canaccord and Benchmark Minerals to create a ‘consensus’ price forecast for both Battery Grade Lithium Carbonate and spodumene concentrate pricing.

From Pilbara Minerals.

Pilbara Minerals’ Pilgangoora project has an after-tax NPV (10% discount rate) of A$709 million with an after-tax IRR of 38.1% using a sales price for 6% spodumene concentrate of only $537/t!

Can you imagine what the economics for Pilgangoora would look like at $905/t sales price? They would be (even more) mind numbingly good!

Worth noting, because life of mine cash costs for Pilgangoora are so low at $207/t, Pilbara is able to be a lot more conservative (realistic) with their approach.

Critical Elements on the other hand?

Average operating costs of $66.56 per tonne milled, $458 (US$344) per tonne of concentrate (all concentrate production combined)

No wonder the company had to use a much more aggressive sales price in their DFS…

Otherwise the economics for Rose would look… pretty dismal in comparison to Pilgangoora.

Further, initial CAPEX for Pilbara Minerals is only A$214 million, whereas it’s much more costly for Critical Elements at C$341 million.

Here’s a conversion calculator for you… C$341 million is ~A$348 million

Look, I own shares of Critical Elements and zero shares of Pilbara Minerals… but that doesn’t mean I have to be a total homer and swear allegiance to a story… I have no problem bashing the companies that I own, if it’s justified.

It’s always important to look at things objectively…

Everybody knows to never fall in love with an investment, but please… I see people do it all the time!

Straight up…

Pilbara Minerals has a far superior lithium project in terms of economics; that’s the bottom line here.

When anyone speaks of a “robust” project, you had better check the numbers they are assuming!

Anyway, these are just my initial thoughts after going over the DFS produced by Critical Elements. I think the company still has a decent project, but they really need the vertically integrated chemical plant to produce lithium carbonate in order to improve/boost economics… As a stand-alone spodumene concentrate producer, I’d much rather own shares of Pilbara Minerals at this point in time.

And I’m almost certain that Birimian Limited (BGS.AX/EEYF) and their PFS (scheduled for release this month) economics will look a lot better too.

Klondex Mines

I added a very small stake to Klondex Mines (KLDX) last week, but quickly flipped those shares this week on a nice “pop”.

Nothing fancy here, but I wanted to combine the proceeds here with some other sales to purchase shares of the following company, which also owns gold assets in Nevada.

Northern Empire Resources

This week, I added a new position. I purchased my first tranche of Northern Empire Resources (NM.V/PSPGF).

I really didn’t need to add another gold company, but the more research I did, the more I liked what I found. I’ll share thoughts in a future update… for very obvious reasons!

Conclusion

Man, I’m going loco these days and making far too many moves… It’s a lot to digest, but overall I think I am moving in the right direction with my portfolio. First off, I was happy with my decision to get out of Alicanto Minerals and into MOD Resources. Next, I was probably just as thrilled to exit out of Teranga Gold after the poor results of the Banfora DFS and into even more shares of Canadian developers Pure Gold Mining and Marathon Gold. Lastly, I trimmed some Critical Elements and Klondex Mines and initiated a new position with Northern Empire Resources.

Here’s what we’ve got…

Until next time…

 

Fight On!

{ 2 comments… read them below or add one }

1 AnkitNo Gravatar September 25, 2017 at 8:50 pm

Jay,

You said you covered Marathon Gold (MGDPF) last week’s post but i can’t find that post, can you post the link or more information about Marathon Gold (MGDPF) please?

Thanks

Reply

2 FI FighterNo Gravatar September 25, 2017 at 9:14 pm

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