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Mining Portfolio – Reshuffling the Deck (October 12, 2016)

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Well, as I always like to suggest to readers — I’m a pretty fluid investor who is more than ok with reshuffling the deck as market conditions change. Just last month, I was telling everyone how “overvalued” I thought many of the mid-tier gold/silver producers were, and how I was finding a lot more value in the early-stage junior exploration names…

Fast-forward just one short month later, and boy, what a massacre we’ve witnessed across the board in all mining stocks! If anything, those same “overvalued” mid-tier producers that I was previously dismissing have all come crashing back down to earth.

As such, I’ve had to take a close look at my portfolio and make certain changes…

To start-off, I added the following shares most recently:

  • 2,000 shares of First Majestic Silver (AG) @ $8.21/share
  • 5,000 shares of Alexco Resource (AXU) @ $1.51/share
  • 100,000 shares of Northern Shield Resources (NRN.V) @ C$0.16/share

Silver Sale

My thoughts on First Majestic Silver and Alexco Resource have already been discussed in greater detail, which can be found here and here. In short, I’m long-term very bullish on silver and right now these stocks appear to offer some excellent value, as the spot price of silver continues to sink lower with each passing day.

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In an upmarket, I’ve already seen first-hand the potent returns that can be offered to investors who own these stocks, so I kind of already learned this past summer the importance of allocating a good chunk of my mining portfolio to silver. Hoping not to repeat the same mistake twice, I beefed up my holdings with two of the more liquid silver names out there in AG and AXU.

A Dash of Speculation

Further, I decided to take a flyer and speculate on an early-stage exploration story in Northern Shield Resources. Yes, this move is definitely more risky, but as you guys well know, I like to look at things from the perspective of risk vs. reward.

In other words, if I’m going to put at risk my hard-earned capital, I need the potential payoff to be HUGE. As it pertains to mining stocks, I really only want to “gamble” on an early-stage exploration stock if the company is out chasing after elephants in Elephant Country. If readers will recall, most recently I initiated a position in Alicanto Minerals (AQI.AX), another start-up who has big aspirations of Finding Nemo Dumbo.

With Northern Shield Resources, I do believe that Finding Dumbo is indeed their main objective… This company is looking to make the next significant discovery in the nickel-copper-platinum group elements (Ni-Cu-PGE) space. Worth noting is that Northern Shield is searching for the goods in northern Quebec, whereas most of the world’s current PGE supply comes from riskier and less stable jurisdictions such as South Africa and Russia.

From Northern Shield Resources.

northern-shield-location

But just being in a safe jurisdiction isn’t a good enough reason alone for me to invest (although I can imagine a scenario in which the market is willing to pay a premium valuation for such a discovery located in the “safe neck of the woods”)… Like I mentioned above, the targets have to be BIG, or I’m not interested in taking on the risks…

With Northern Shield Resources, they themselves have openly stated that they are out hunting for “giant ore deposits”.

From Northern Shield Resources.

nrn-huckleberry

Of course, any junior can “talk the talk”, and in a basket of 1,000 companies, how many are really going to be offering investors something that is even remotely prospective?

I would guess not many… maybe only a handful of companies… which is why I typically need to see a joint-venture (JV) in place (first and foremost) between a junior and a mid-tier/senior producer, before you can even begin to pique my interest.

Here we have a JV with South32 (S32.AX; a BHP Billiton spinout company with a market cap north of A$13 billion) in place for the Huckleberry project.

From Northern Shield Resources.

nrn-jv

That’s a decent start… But it gets better… Northern Shield has more than just one prospective target in mind… In addition to Huckleberry, there’s Sequoi, which is 100% owned (there are no JVs in place) and it “could be even bigger”.

From Northern Shield Resources.

nrn-properties

To put this all into context, consider the fact that the Voisey’s Bay discovery made by Diamond Fields International in 1994 was one of the more significant finds made in the last few decades… Most everyone who is into mining stocks has heard about the great buckets of fortunes that were made with Voisey’s Bay…

From Visual Capitalist.

dfi-stock

From Visual Capitalist.

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From Visual Capitalist.

Finally on March 26th 1996, Inco announced a takeover bid of its own for $4.5 billion of Diamond Fields – the equivalent of $43.50 per share or $174 pre-split. Inco’s stock price dropped but it held on, making the total value of the deal closer to $4.3 billion. On April 3, the deal was officially signed by all parties.

dfi-stock3

So, seriously, who wouldn’t want to find the next Voisey’s Bay/Diamond Fields???

With Northern Shield, we have a junior explorer who is actually daring enough to reference Voisey’s Bay (and not just once) in their presentation slides…

From Northern Shield Resources.

nrn-comparison

From Northern Shield Resources.

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For a junior company to be bold enough to compare their yet-to-be-drilled projects to the likes of Voisey’s Bay (let alone Noril’sk-Talnakh), you have to be pretty damn confident in your research/modeling/groundwork… or outright delusional…

From Visual Capitalist.

voisey-bay

From Wikipedia.

The nickel deposits of Norilsk-Talnakh are the largest known nickel-copper-palladium deposits in the world. The deposit was formed 250 million years ago during the eruption of the Siberian Traps igneous province (STIP). The STIP erupted over one million cubic kilometers of lava, a large portion of it through a series of flat-lying lava conduits below Norilsk and the Talnakh Mountains.

The ore was formed when the erupting magma became saturated in sulfur, forming globules of pentlandite, chalcopyrite, and other sulfides. These sulfides were then “washed” by the continuing torrent of erupting magma, and upgraded their tenor with nickel, copper, platinum and palladium.

The current resource known for these mineralized intrusion exceeds 1.8 billion tons. MMC Norilsk Nickel, headquartered in Moscow, is the principal mining operator in Norilsk-Talnakh. The ore is mined underground via several shafts, and a decline. The ore deposits are currently being extracted at more than 1,200 m (3,900 ft) below ground and drilled from the surface. Nickel production for 2008 amounted to 299.7 thousand metric tonnes. Copper production for 2008 amounted to 419 thousand metric tonnes.

So, I won’t deny that I’m intrigued…

Look, I’m not going to pretend to be some kind of geologist… I most assuredly am not one… I’ll be the first to admit that I know absolutely jack shit about dem rocks… and I don’t know squat about what a VTEM (Versatile Time Domain Electromagnetic) System is, but as usual, I’m simply going to defer the details to the experts… Straight up, I’m just a retail investor and I know my own limitations! With that said, I do realize that all this hype could be nothing more than fluff, which is again why I place such a heavy emphasis on focusing on early-stage exploration juniors that do have a legit JV agreement in place with a proven mid-tier/senior producer… I’m relying on experts far smarter than me to do the necessary due diligence on the project(s)… If the experts think it’s prospective enough to take a punt…

Buy anyway, back to risk vs. reward. Here we’ve got a junior explorer trading at a market cap of ~C$35 million and they’ve got aspirations of finding something much bigger than Voisey’s Bay…

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Shares of NRN.V have come off quite a bit in recent months, down from a peak of C$0.30/share to the current level of C$0.15/share… which only make the risks more palatable… In this case, at least I’m NOT chasing a stock while it’s soaring up, up, and away… eclipsing new record highs on the daily!

To Northern Shield’s credit, they’ve got a JV with a reputable partner, in South32, and right now they’ve got four prospective targets in mind:

  • Huckleberry (JV with South32)
  • Sequoi (no visible outcropping but they think the potential here for a major discovery might even surpass Huckleberry)
  • Se2
  • Idefix

Yes, this latest speculation of mine is more or less “buying lottery tickets”. But again, if I’m going to go ahead and pull the trigger, I’ve got to make sure that I really like my odds for success. At a ~C$35 million market cap (more or less my own personal upper threshold limit for early-stage exploration plays), I would argue that the downside is pretty moderate (outside of a full blown market crash event), and the upside could be substantial (even if the company only manages to find something like 1/5 the size of Voisey’s Bay, the stock would get re-rated significantly well above the current market cap)… Bottom line, with the JV in place to reduce the burn rate and future plans to drill out four prospective targets (more than just a single lottery ticket!), I simply couldn’t resist…

So, lots of press releases to look forward to in the near-term!

 

Please note: Early-stage exploration is some highly speculative and risky stuff. Please do your own due diligence and research before putting any of your own investment capital as risk!

 

Ultimately, I was comfortable enough to take a leap of faith…

 

Learn more about Northern Shield Resources here.

Portfolio Strategy

With my overall mining portfolio, I’m trying to strike the right balance between upside potential and risk management… Readers may think that I’m totally nuts and crazy for investing in these type of early-stage exploration stories, but in my defense, you’ll probably also notice that everytime I take on one of these speculative gambles, I also make sure to re-inforce the portfolio with some more “solid” and “proven” producers, such as in this case with First Majestic Silver.

Look, you win some and you lose some… I don’t expect all my speculation plays to work out, and I accept that upfront…

But again, it’s a matter of risk vs. reward

Moving along… I don’t usually choreograph my next moves, but in this case I’ll let you in on the next step I’m looking to take — I’m going to try and liquidate out of my entire position in Perseus Mining (PMNXF) sometime this week… I initially got interested in the story because I wanted to snatch up some juicy warrants (which I still plan on holding), but given the mass sell-off in many of the other “less risky” mid-tier gold/silver names in the sector (e.g. KLG.TO, AG, AXU, etc.), right now, I think it would be prudent for me to de-risk my portfolio and move out of Perseus Mining and into something else.

I look at Perseus as more an “optionality play” on a rising gold price, anyway, since their main deposit, Edikan, is not really economical at today’s prices…

The fact that Perseus has held up far better than some of my preferred names not only comes as a surprise, but it just makes my decision to sell all that much easier… A no-brainer at this point in time, if you will…

ag_pru-to_klg-to_chart

I’m still not sure what I will use my PMNXF proceeds on… But I’m guessing I’ll probably load up on more shares of AG and KLG.TO… or hold cash. I do have another development-stage idea in mind, but I’m going to refrain from disclosing that stock just right now…

We’ll see what happens…

Mining stocks are so dynamic, and things can change on a dime… First Majestic Silver was sitting pretty at over $19/share not that long ago, and now it’s trading at a shade below $8/share… I’m guessing not many people saw the most recent sell-off coming… which is why I like to emphasize the point of not being closed-minded and shutting off possibilities altogether…

 

Because you just never know what’s going to happen tomorrow…

 

Happy Hunting and Fight On!

 

Photo Credit: First Majestic Silver

{ 9 comments… add one }
  • HristoNo Gravatar October 12, 2016, 12:54 am

    Hi Jay,

    Honestly I am a bit surprised of your silver purchases but anyway, hope they will prove to be successful in the end.

    I was watching First Majestic for some time. On the one hand, I like the management a lot. there not not many mining CEOs as skillful and experienced as Keith Neumeyer. But my calculations shows that are current situation, the company is traded at P/E 28. On the other hand, I have read the report you referred to in your last article. As per the DCF analysis there, the estimation of the fair value was approximately 2.8 USD if I am correct. So really wonder what are the reasons to pull the trigger now.

    Regards,
    Hristo

    • FI FighterNo Gravatar October 13, 2016, 6:49 pm

      Hristo,

      Thanks for the feedback. In terms of valuation, I’m not so focused on earnings and P/E ratios because those are greatly influenced by things like the spot price of gold/silver/lead/zinc/copper/etc. and until earlier this year, metal prices were extremely depressed… Practically zero companies were churning out free cash flow…

      What I’m focused on is leverage to a rising price… If silver gets to $25/oz, for instance, then the P/E ratio and earnings will all look spectacular relative to where we are now… Buying up mining stocks, you have to be forward looking and bullish on the underlying commodity appreciating in value, or it will be a lost cause.

      For producers, I like the companies that have lots of ounces in the ground and good growth prospects to ramp up production to capitalize on the rising metal prices… That’s why I like stocks like First Majestic (AG), B2Gold (BTG), and even optionality plays like Bear Creek (BCM.V) who have hundreds of millions of ounces in the ground with a project that is basically construction ready as soon as prices recover a tad bit more…

      All the best!

  • FinanzrNo Gravatar October 13, 2016, 5:48 am

    Hey!

    An interesting correction to continue building positions!
    What do you think about Defiance and Teranga at these levels?

    Cheers,
    Finanzr

    • FI FighterNo Gravatar October 13, 2016, 6:44 pm

      Finanzr,

      Both Teranga (TGZ.TO) and Defiance Silver (DEF.V) look like tremendous value to me at this time; I really like both stocks. In fact, I was planning on purchasing up a large tranche in DEF.V last night, but held back when I saw the stock pop 11%… I still like DEF.V at the current price, but I’ll try and be patient and see where the markets head next. As for TGZ.TO, it’s one of the best valued mid-tier gold producers out there.

      Cheers!

  • SGNo Gravatar October 14, 2016, 8:54 am

    Loaded up AG @7.85/share

    • FI FighterNo Gravatar October 14, 2016, 6:32 pm

      SG,

      Congrats, that’s a great price you got in at!

      Cheers!

  • JamesNo Gravatar November 6, 2016, 8:27 pm

    Funny, I bailed on Perseus too ( kept the warrants) after writing management for weeks and finally getting an email back from their pr gal who was a little flippant/dismissive/short and left me with a poor impression of company… frankly the pe on teranga is more compelling… in light of hrc potentially winning, I think lithium one might be a play as they will get a green light from the EPA for Clayton valley as repayment for loyalty to campaign and donations… thoughts?

  • JoshuaNo Gravatar December 29, 2016, 12:40 pm

    What are your plans on Northern Shield Resources with the recent price decline? You going to buy more shares?

    I had them on my watch list, but with the decline it might be a decent play even if the results may not be as “Big” at Sequoi as everyone was hoping. They still have Huckleberry.

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