David Erfle | Gold & Junior Gold Equities Summer 2018 Outlook

Professional mining investor and newsletter writer David Erfle returns to the show to discuss his outlook on gold and junior gold equities heading into summer 2018.  Specific companies we discuss are Anaconda Mining, Maritime Resources Corporation, US Gold Corp and Northern Empire.  David’s website is www.juniorminerjunky.com

0:05 Introduction of Topic and Guest

0:22 Summer 2018 Outlook for Gold & Junior Gold Equities

3:40 Comments on Anaconda Mining’s attempted hostile takeover of Maritime Resource Corporation

9:43 Discussing the uniqueness of US Gold Corp and why the share price action in this gold explorer is dramatically different than a similar micro-cap gold explorer traded on a smaller exchange

13:45 David shares regarding his recent site visit to Northern Empire’s Nevada property

BEGIN TRANSCRIPT:

Bill: Welcome back ladies and gentlemen to another Mining Stock Education expert interview. I’m speaking with professional mining stock investor and newsletter writer, David Erfle, about gold and gold equities today. You can learn more about David and his newsletter at juniorminerjunky.com. David, thanks for coming on the program.

David: Thanks for having me again, Bill, always nice to talk to you.

Bill: I’d like to begin by getting your outlook for gold in the junior gold equities now that it’s in May. The saying is, “Sell in May and go away.” And sometimes the expectation is the summer doldrums. So, what is your outlook for these next three months? I listened to Gwen Preston recently in a video and she said she’s expecting gold to be sideways strong, was the term, the phrase, that she used. What’s your perspective?

David: I’d love sideways strong as opposed to just sideways boring and lower, which is what’s been happening with a lot of these juniors. You notice the GDX and the GDXJ have done rather well since, I believe, they both bottomed on that February 9th spike low we had. When we had the global equity panic back toward the end of January and into the first few weeks of February, everything bottomed on the same day. You had the Dow, the S&P, and the GDX, and the GDXJ, they all spiked in reverse on that day. And the GDX did it in the last half hour of trade. You had a huge volumes reversal on the last half hour of trade in February 9th.

So, I believe that was the low in the ETF. And since that low, you’ve had the GDX and the GDXJ, both, have been carving out the bottom and they’ve been making higher lows. But, you have a lot of these highly speculative junior resource stocks, which have been trending lower and haven’t been getting many bids and I think the reason for that is the crypto space has perked up again, and the marijuana space has perked up again, and a lot of the capital that would normally come into these highly speculative resource juniors are going into those sectors instead.

So, I think it’s been a boredom bottom. I’ve been calling it the boredom bottom going on in the GDX and the GDXJ. But, like I said, the highly speculative juniors, they just haven’t been getting any bids. So, if you do your due diligence and you get in and you get into these companies that have plenty of cash, really good properties, really good management, you just buy them when they’re being sold down like this on valuation fundamentals and just be very patient.

Bill: There’s one micro-cap junior developer that has a significant resource in South America that I’m invested in. And I spent about a half-hour on the phone with the IR person this week because I’ve been quite frustrated with the lack of interest, and it is a pre-revenue company. So, they don’t have that much cash, even though they have verified gold in the ground. Man, the share price just keeps going lower and lower. So, even if gold goes sideways because they don’t have much cash, the share price is just getting hit and hit and it’s quite frustrating.

David: Yeah, if you wanna take advantage of this situation you got to make sure that they have plenty of cash, they’re gonna have some news flow, they have a really good management team, they have a tight share structure, and they’re fundamentally cheap.

Bill: One of the most interesting things that has happened in the last week or so in the junior mining sector is Anaconda Mining’s attempted hostile takeover of Maritime Resources Corporation. And Anaconda is offering a premium takeover bid to acquire all the issued and outstanding common shares of Maritime in exchange for consideration of 0.39 of a common share of Anaconda for each Maritime share. And the Anaconda management, in their press releases, the YouTube video that they released, they are really pounding Maritime’s management and accusing them, essentially of…

David: And shareholders.

Bill: And shareholders, yeah. So, I shared with you before we hit record, that this has been quite amusing to me, what’s your take on this situation?

David: Yeah, I’ve been following it as well and I’ve been kind of laughing along with it also. I really think…I’m on Anaconda’s side here. I think it does make sense for them to take it over and I do think eventually that will probably happen. So, this is setting up a good arbitrage trade here, if you want to take a chance on buying some Maritime here. I know they just did a highly dilutive finance, but the share price is trading less than what the offer is but, you know, the Anaconda share price has been trending down as well. And I think a big reason for the Anaconda share price trending down is because that big pop you had to $0.54 area at the beginning of the year, was a combination of the sector, and a combination of some newsletter writers, I know Bob Moriarty did a big piece on it and some other newsletter writers got on to it. And there’s a lot of retail in this stock because 87% of it is retail investors, which is a big reason why I have yet to take the plunge and buy some shares. I would like to see more institutional investors in this stock. I’d like to see more strong hands in the stock before I buy it. I like everything else about it. They did the share rollback at just the right time. That needed to happen, but they’re gonna be diluted again, you know, when they take over if they’re successful in taking over Maritime. But if I wanted to buy it, I would buy the Maritime shares here because I think that takeover will eventually happen.

Bill: If we look at this isolated takeover attempt, the microcosm of it, is there anything we can extrapolate out in saying it speaks to broader, what’s going on in the sector?

David: Yeah, I mean, it was announced on the same day that a few other mergers or few other acquisitions were announced. I did a story on it when it happened, I called it a Minor-Merger Monday because it happened on a Monday. And we had Alio taking over Rye Patch and then the other one was Hecla taking over Klondex. And all three of those were announced on the same day. And we started to see some merger news this week again also with Lundin and Euro Sun trying to takeover Nevsun, and then Nevsun immediately rejecting it. And looking at the Nevsun share price here again today, it’s come off a bit now. But I know there was some scuttle but then maybe this might spark up a bidding war for Nevsun even though it’s not officially for sale. That remains to be seen. I know Lundin has been trying to get to hold that Serbian deposit for a long time now. So, it’ll be interesting to see how this shakes out.

But I’ve just been waiting for that one big high-profile merger to happen in the sector to kick off another merger and acquisition spree here in the sector because we all know what’s gonna happen, we just don’t know when.

Bill: Regarding hostile takeover attempts in your 16 plus years of observing the mining sector, do you see them occurring more at, like, this bounce-off-the-bottom trending sideways? Where do they most frequently occur in the cycle?

David: Yeah, they most frequently occur when you have extreme undervaluation here. You know, and that’s what we have. You know, I mean, let’s face it, this is the last deep value sector left in the marketplace, I mean, besides maybe [Inaudible 00:08:25]. But, I mean, everything else has taken off except for the mining sector. And we know that all these majors they need to replace their high-grade ounces.

They’ve got plenty of uneconomic ounces on the books from their last foray into trying to add ounces by buying low-grade bulk tonnage deposits back in 2010. So, a lot of those deposits are still on the books. And they need economic ounces right now. And we know this is gonna happen like I said, we just don’t know when.

And the extreme undervaluation here continues. I mean, if you take a look at the XAU in relation to the gold price for the past 23 years, the miners had been in a bear market in relation to the gold price. It’s amazing. They’ve just continued to go lower and lower and lower, and part of that is due to the majors, you know, diluting their stock to buy these crappy deposits. And it’s just something that continues and it’s something that will turn around, we just don’t know when.

Bill: Moving on to a company that you and I both own shares in, U.S. Gold Corp, they have the Copper King Wyoming copper-gold development property and then exploration properties in Nevada. I wanted you to share with listeners the dynamics of owning this. Now it’s about a $20 million market cap, it’s a pre-revenue development exploration gold company, but it’s traded on a major exchange, the Nasdaq, with a very tight share structure of less than 15 million shares. This is a complete…and it’s not traded in Canada. So, this is a completely different beast. And mid-December we were at $1.25 a share, a month later we were over $3 a share, a month later we were back to close to $1.25, again. So, it’s been a roller coaster, could you comment on that, please?

David: Sure. I mean, I rode that whole roller coaster, you know, I was fortunate enough to buy it in December at the lows and then watched it run up. And I know some of that run up was pump, was paid-for promotion. And then I watched it go right back down again. I mean, this is a very unusual situation. I mean, first of all, it’s very unusual to have a gold company on the Nasdaq. Second of all, it’s very unusual to have a gold company on a major exchange without having a Canadian listing. So, what you have happen here is the short interest in this stock is well over 7%. You have shorts pressuring the stock at a time when the sector is being pressured and also what we spoke about earlier in this interview about lack of interest in highly speculative juniors with no cash flow.

So, when this happens, you have the shorts taking control and they’re unable to get any help from up North because Canadians can’t buy it on their exchanges because it’s not listed. So, then you just have extreme undervaluation, I mean, the company is solid financially and you add on top of that no news flow. The company has had no news flow.

So they’ve got, I think they’ve got $7.8 million in cash, the PEA on Copper King alone, you know, the NAV on that is…what…five, six times the share price right now?

Bill: Yeah.

David: So, this is something that you buy and you stick it in your drawer and you don’t think about it because, you know, they have enough cash definitely for the rest of the year, probably well into 2019. If you believe the sector is going to break out, like I do, at some point between now and the middle of 2019, this stock will fly eventually because it’s got the name U.S. in it, it’s got the name gold in it, and it’s on a major exchange with a tight share structure.

So…excuse me. U.S. investors are gonna be looking for gold companies to invest and they’re gonna see this and they’re gonna say, “Wow, I’m gonna buy this.” And since there’s only 14 million shares it won’t take long for it to get over $4 a share. And once it gets over $4 a share, the U.S. funds can invest in it because it has a big board listing and there’s very few big board listing junior gold companies to choose from for funds. So, when we finally get the retail market back into this sector in a much bigger way, these funds are gonna be looking for gold investments in the junior space to invest in and there’s just not that many with a big board listing.

Bill: David, I listened to an interview recently and within the last week post, your site visit to Northern Empires property, a gold explorer in Nevada, and I shared with you that was the most excited I’ve ever heard you speaking in an interview about a company. And can you share with us what you observed there? And also my follow up questions would be, as a private investor, have you ever gone on a site visit and then sold the stock you owned in the company or decided not to buy after you went on the site visit? And what can you learn as a private investor by going on this site visits?

David: Well, I guess I’ll answer the last one first. The site visits, I really pick and choose on-site visits I go on because I already go to at least four conventions every year traveling. And I have a five-year-old and I don’t like to be away for that long. So, I really pick and choose the site visits I go on. So, I guess my answer would be, no, I’ve never been on a site that I said, “Oh, wow, this just isn’t gonna work for me. I’m gonna sell my shares,” or, “I’m not gonna invest in this company.” Because I really do my due diligence and make sure that it’s a site visit that…I don’t want to be wasting my time, basically.
So, I only do a few a year, but this one, Doug Kersten, the Executive Chairman, the guy that put the company together, I’ve known him for a while, he made me money in International Royalty, he made me money in Newmarket Gold. I mean, he used to be a mining analyst. I love picking his brain when I’m on a chance to talk to him. And I was able to pick his brain for, like, four or five hours during this site visit. And it was fantastic. I just love speaking with highly intelligent people in the mining sector that really know what they’re doing, and he’s one of them.

Newmarket Gold, I was a crocodile gold shareholder, and Newmarket bought it and then Kirkland Lake took over Newmarket for $1 billion. And that was his last venture. And he spent months poring over thousands of projects, looking for the right one. And once I went out to the site visit I understood right away why he picked this one. I mean, this one ticks all the boxes, you know, it’s in Nevada, it’s 141 square kilometer land package, and Barrick Gold has built an airstrip right next to the project for their projects to fly in executives, they control all the water rights on the property, there’s no grazing rights on the property, the Stirling Mine, even if they wanted to put it in production now, which obviously, of course, they don’t because they want their company builders, you know, they wanna prove up a property, get a major interested, and sell it. But even if they wanted to start up the Stirling Mine right now it’s profitable at $1,000 an ounce gold. And there’s already with 300,000 or so ounces there. And this is something that…they’ve basically taken the risk out of the gold price. Let’s say the gold price does shoot down to $1000, like some people think it will, they would be able to basically say, “You know what, we’re gonna stop drilling for anything more right now. And we’re just gonna go ahead and mine this thing and make a bit of money and just wait for the gold price to come back up to find more ounces.” They have that option. You know, that’s rare.

And what really was amazing to me, it still is amazing to me, is the fact that Corvus Gold, which I’m sure your listeners are familiar with, has control of the Mother Lode pit which is basically surrounded by Northern Empire’s land claims. It’s a little pit on there in the middle of their huge property. And Corvus has been pulling up some nice grades, they’ve got some nice hits. And the Corvus market cap is now well over $300 million. And the Northern Empire market cap is less than $100 million. And it’s really fascinating to me on paper, but when you get out there and you see it, you just shake your head and you go, “Wow.” Really. I mean, Northern Empire already has 700,000 ounces proven up at Crown block of deposits in that area. And one of them is right next to the Mother Lode pit. As a matter of fact, 10% of the Mother Lode pit is on Northern Empire’s claims. So, it’s really gonna be interesting how this is gonna play out in the future because it is my belief that eventually a major like Barrick or Neumont or somebody is gonna come in and buy that entire district. But first, Northern Empire’s obviously are gonna have to prove that there’s at least 2 million ounces there, which is highly likely with all the targets they have and with what’s already there.

And like I said, these guys are professional mine builders. They’ve done it before. The share structure is super tight, management owns I think 11%, and they have plenty of cash, they’ve got $16 million. They’ve got their drill program right now that’s ongoing. They’ve completed two-thirds of the current program. They’ve reported one-third of those results and they have another third in the lab. And the asset turn around there is just two to four weeks and the…

Bill: Oh, that’s quick.

David: Yeah, it’s nothing. And their drilling cost is $125 a meter, all in. So, once this drill program is completed they’ll have about $6 million left in the Treasury. Then they’re gonna release an updated resource from what they’ve drilled already. Remember, they’ve already got almost a million ounces, when you combine Sterling and Crown block. So, once they’ve announced that resource they’ll raise another 20 to 25 million more and announce another 50,000-meter drill program.

And like I said, these guys have done this before, they’re not gonna over drill, you know, they’re not gonna do something like Gold Standard Venturers did, you know, which is dilute the heck out of shareholders, over drill the property and now they’ve got a blown out share structure. What these guys are gonna do is they’re gonna drill to proof of concept, right? That way you just drill enough to prove what’s there. And then once they get two million ounces they’re gonna have some major interest, you know, majors are gonna be interest in this thing.

Bill: Do you see a bidding war? As you’re talking I’m just thinking, if everything goes well for them this could end up with a bidding war for the property and the project?

David: Well, who knows? I mean, who knows? It all depends. You know, because if you look at when this might happen, which might in a year or two down the road, and where’s the gold price gonna be a year or two down the road? Where’s the sector gonna be a year or two down the road? You know, where market cap is gonna be a year or two down the road as far as what some of these juniors are doing with what they’ve got? So, who knows? I can’t speculate on that. All I can speculate on is, they have the right team, they have the right ownership, they have the right share structure, they have the right property in the right jurisdiction. So, this is why I was sounding so excited, I mean, there’s very few projects out there that tick all the boxes. And this is one of them, as far as I’m concerned.

Bill: David before you go, do you have any parting advice in light of what we’ve spoken about today?

David: Oh, geez, just, you know, just risk management is job number one, it should be your job number one if you’re playing in this sector. You know, just manager your risk because, you know, with what’s going on, like I said, in the pot and the crypto space taking a lot of the money away from these things, you know, you can’t get frustrated. If you understand what’s happening and you have an idea of where you think the gold price is gonna be. You just gotta remain patient and you got to do your due diligence. And you’ve got to manage your risk.

Bill: I urge all listeners to go to juniorminerjunky.com. There you can sign up. David has a free e-mail where he’ll send you his weekly Kitco editorial directly to your inbox. And then also you can learn more about his paid-for subscription newsletter for those looking for companies to invest in and basically just to learn from a professional how to invest in the junior mining sector. David gives you his play-by-play, what he’s doing with his money and his overall commentary on the market. And you do get commentary that’s not made public via Kitco when you do subscribe to David’s paid newsletter.
And, David, is that newsletter almost filled? Because I know at [Inaudible 00:23:08] you were almost taking on no new subscribers.

David: Yeah, it’s getting close. But lately, new subscribers have been covered with some cancellations so it’s still about 90%, 95% full. It’s funny the sector started to get a little weak and people started to lose a little interest right when I got near that 200 cap, which is a good thing, I think because people can still get in.

And I think I have a really good subscriber base, I have a lot of really intelligent subscribers and it’s kinda like a family. You know, I tell them exactly how I feel about all of my positions at all times and how I feel about the sector. And I try to keep them on top of what’s going on in the sector at all times and also, if a company comes out with a resource update or some drill results that are very good or something that they should be made aware of right away, I send out an alert right away and let them know about it.

So, my subscribers are like family to me and I try to do my best to keep them informed at all times.

Bill: David, thank you for taking the time to chat with me today.

David: Oh, thanks a lot for having me, Bill. Always nice to talk to you.