Joe Mazumdar Provides Resource Sector Insights and Analysis

In this interview, Joe Mazumdar provides his commentary on the current state of the mining sector and where resource investors can find the best investment opportunities.  Joe reveals a quality copper company he just invested in as well as what has been his two best performing stocks in this year.  Also discussed are when and how much a company should drill their exploration and development projects.  Joe provides insights on a couple mining jurisdictions and talks about how the trade war is affecting the resource sector.

Joe Mazumdar is co-editor and analyst at Exploration Insights.  Joe has an extensive, multi-decade background in working for both mining companies and the financial institutions that cover and invest in mining equities.  He possesses an excellent understanding of geology, the process of exploration and development, and what it takes to run and finance a mining company.

0:05 Introduction

1:25 Resource sector overview

3:31 What type of copper or zinc stock to invest in now

7:09 Discussing Tinka Resources

10:52 Trade war’s effect on the resource sector

13:45 Interesting mining jurisdiction Joe recently visited

17:30 Two of Exploration Insights’ best investments recently

21:30 Discussing Mexico as a mining jurisdiction

23:33 Peak gold?

25:24 When should a company fund a geologist’s thesis?

31:40 How much drilling is too much?

33:38 Expectation for the remainder of 2019

TRANSCRIPT:

Bill: Joe, welcome back to the show. What’s your thoughts regarding the resource sector right now from the supply and demand perspective?

Joe: Thanks, Bill. Thanks for having me. We basically turned a corner for the good and the bad over the last month or so in this sector. I mean, the precious metals sector is looking pretty good with the rate cuts, and the potential for more rate cuts based on the issues with global trade and potentially the tariff issue between the two largest economies. That’s basically driving a lot of market uncertainty, having its impact on the equity markets, driving up the volatility index, and then basically moving investors into safe haven demand investments like bonds and also gold.

And interestingly, we’ve also seen a bit of a spike in silver and dropping the gold/silver ratio down a bit. So that’s helped the precious metals sector. Out of that, over the last three to four months, we’ve seen about, not quite a billion, $800 million-ish, of equity investments, private placements in predominantly precious metal companies. So the retail sector at least has been quite bullish on that going into the summer when most people are less active in the summer. But this summer has not been a normal summer with respect to activity.

But that same news flow has had the opposite impact on other commodities like, let’s say copper, like zinc, and commodities like that, though equities in that have turned the other cheek with respect to investors. They have basically looked negatively at those metals and positively on the precious metals.

Bill: When you’re looking at investing in, let’s say a copper or a zinc company right now, what would be some characteristic that a base metal play like that would have that would make you invest when with copper and zinc, we have seen a pullback in those metals?

Joe: Okay. So I just bought one a week or two ago, which was a good jurisdiction in Alaska. The big issues with infrastructure are potentially being resolved with the building of a road. And this is Trilogy Metals, TMQ on the Toronto, and TMQ on the New York market. And it actually trades more in the US than it does in Canada. So what attracted me to this was the valuation. It had lost about a third of its value over the last few months. And so I thought it was prime time to pick it up.

Why I liked it is because it already had a major diversified miner as a potential partner in South32, and South32’s situation is that they basically spun out of BHP Billiton with no copper assets and not a lot of assets in North America. South32 was the one that bought Arizona Mining for the Taylor zinc deposit in Arizona. So they’re not afraid to do a big acquisition. And again that one at a premium, and they paid cash for it. So I’m encouraged by that kind of corporate activity.

And the project, there is an opportunity with a bigger deposit called Bornite, but that would take a longer time to develop. And in the interim, they have a smaller deposit that’s 40-ish million tons of high grade copper, zinc, and precious metals called Arctic that’s going to have a feasibility study done at the latter part of the year. The big thing coming up for them is drilling, as well as the record of decision on the road, which probably come in early next year.

So that’s why I thought that was a good time to pick that stock because I thought I got it close to a bottom. We’ve had the issues with copper with respect to all the base metals with the tariff discussions, the tariff war, if you want to call it that. But I know on the supply side, there’s not a lot of good copper concentrates coming out. By good, I mean clean, and this looks like a decent copper concentrate that they can produce. It’s coming from a good jurisdiction, as well as we’ve seen what happened at Turquoise Hill with the delays there, a year and a half, a billion dollars more.

Then in China, they might get more restrictive on the deleterious elements that go into a copper concentrate. That might restrict more concentrate into China. So if you can pick a good copper concentrate play that produces clean concentrates, safe jurisdiction, good management team, undervalued, it still makes sense in the base metal sector, especially copper because, I mean, the future demand there is really driven by electric vehicles potentially on the edge. So it’s still a market where you could pick up some of those stocks, and so I’m still looking at the sector, and recently I acquired one in the copper sector.

Bill: I should say Trilogy Metals is a sponsor of this podcast and I had no idea that Joe was going to share that. A zinc company, Tinka Resources, one that you covered in your letter previously, I was looking at this. This has seen a steep sell-off. What’s your analysis of a company like this now where it’s been sold off, and one could argue that this could be a value play from here on out or at least right now?

Joe: Okay, so Tinka Resources is a company we owned in Exploration Insights, good management teams geologically. Had a few hiccups with the capital markets in terms of raising money to fund their Ayawilca project. We did well on that originally. Unfortunately, I didn’t sell when I should have, but we easily made more than a double on that because they actually had an exploration find in south Ayawilca. So they are finding higher grade than was in the original resource, and they put that together, and it was looking really good.

The problem was, the zinc market started declining. It looked like there was more production coming on, and so the need for new development projects was falling down in terms of demand. And usually what you want is for one of these development projects, or exploration projects, is to get taken out because the management teams of these kind of companies aren’t the ones that are going to fund, develop, and build and operate one of these zinc mines, and you want somebody else to come in.

So the potential for our exit strategy, which would’ve been an acquisition, was diminishing because of the overall zinc market. Then when they put up the scoping study, people got to realize that zinc projects do not produce zinc cathode. So even though we like to look at the zinc price, the real issue is their ultimate product is a zinc concentrate. Their zinc concentrate had a lot of iron in it. And when you look at the iron, you could say, “Oh that’s whatever, $7.50, maybe a dry metric ton in a penalty.” Just plop that onto the cashflow, and there you go.

But the problem is that when you have too much concentrate in the market, those kind of concentrates, they don’t want in that kind of volume because they don’t want the kind of iron. So it limits where it can go. And they found that they couldn’t process everything in Peru, which would have been the cheaper alternative. And then they had to send stuff to China in terms of the scope of the study level. That cost a lot more in transportation and drove the prices up.

So if you do have a project in the zinc market, or the copper market, or any market that’s unloved and it’s a development project, you want to just make sure that, that project when it comes out, that’s going to be a lower quartile project that anybody who’s producing must have because it would be better than what they currently hold. And that project in terms of where it was looking in terms of a cash cost, was not falling down like a falling into the lower quartile in terms of being an exceptional deposit at that point.

Bill: But it could potentially be a good optionality play with a rising zinc price?

Joe: Absolutely, absolutely. Like if we have a turnaround in the zinc market, that’s definitely zinc pounds in the ground. But what we would need to see as well is, less concentrated supply. So we need to see those treatment charges come down and smelter is sort of saying that they’re demanding more concentrates such that they would take these iron rich zinc cons.

Bill: What’s your thoughts on the trade war, Joe, here with between the US and China? And how is that escalating trade war affecting how you’re positioning your resource stock portfolio?

Joe: Well impacting it greatly. I mean the thing is that before that, precious metals weren’t looking all that great. I mean they were looking okay with respect to the rate cuts, but some of the rate cuts were hard to justify based on the low historic unemployment rates. The inflation being below the Fed’s target. So it was really touch and go whether the Fed would actually leave rates untouched, but the US president wanted to keep pushing for lower rates, as well as there was this idea, and continues to be, that because of the global trade tensions that, that would create some more uncertainty globally that could impact the US economy, such that it might be better to keep rates the same or lower them.

So the more that we have with respect to trade tensions, issues with , and other issues globally that could impact the US economy. The idea is that one of the solutions, good or bad, is to lower the rates. That helped gold in terms of weakening the US dollar and making that rise. But the trade wars boosted the idea that there might be more rate cuts to come because the global uncertainty increased, but it lowered the base metals and other commodities because the trade war went between one of the largest demand centers for commodities, China. So if you slow the growth there, you slow growth in demand for metals. So that actually had a negative impact on part of our portfolio, had a positive impact on the other part,

Bill: When I email you, you’re often in different locales and you were, when I asked for this interview last week, you were on a site visit. Perhaps you go to more site visits than any other newsletter writer. Since we last talked to five months ago, are there any jurisdictions that you’ve encountered firsthand that have really caught your attention?

Joe: Well, I mean I’m not sure if I talked to you before I went to Japan, because Japan was a jurisdiction I went to … I’m not sure if it was April, May. All the months sort of …

Bill: I think we talked in March if I recall.

Joe: Okay. I can’t remember if I talked about, but that’s a jurisdiction that’s opening up. It’s taken two or three years for people like Japan Gold and Urban Resources to get in there and start accumulating land packages. Japan Gold recently raised money. They’re still in one of these note and broker financing. They’re raising money to expand their land package in in Japan. Urban Resources got that injection of capital from a Newmont Goldcorp to help it from drilling at their gold project there.

It’s not a big Island, but what strikes me is when you go to Japan or you think about Japan, you think of a country with a very high density with respect to people everywhere, but outside of the central part of the Island of Honshu or Tokyo is, you go into the islands in Hokkaido or Kyushu where I went. There’s not that very many people, and there’s not a lot of work.

So I think the government there is thinking, “How can we get people to populate these areas? How can we maintain industry?” And one of the solutions, potential solutions, is mining. I don’t think there’s going to be a lot of big open pit mining there, but hydrate underground like they’re already doing at Hishikari. And these are what’s termed low sulphidation epithermal veins that have very low tonnage ,but very high grade. So that’s the sort of thing that people are looking for in Japan.

So that’s an interesting jurisdiction. First world country, the potential for a good precious metals deposits, just like the ones that already exist, and previously were mind back before the end of world war II. So that was an interesting jurisdiction that we basically added to our portfolio.

Bill: I’m meeting with the management of Japan Gold Corp at Beaver Creek, so I’ll be interested to learn more about their story. I don’t know much about Japan as a mining jurisdiction. When it comes to gold mining in Japan, do you know off hand how many million ounces they produce a year as a country?

Joe: They don’t produce a lot. I think Hishikari is the only mine that’s producing, and it may be producing a couple of hundred thousand ounces a year, but that’s a couple of hundred thousand ounces that are grading almost an ounce per ton. So these kind of small high grade deposits, small in tonnage, but still big with respect to ounces, are what people are looking for there. And these are close to surface. They’re not ridiculously deep. These are young systems. Like geologically, Hishikari, an area that’s close to the volcanics is only a million years old, which is quite young for these types of deposits.

Bill: When you look over your performance this year in your portfolio, would you mind sharing with us your biggest winner, or one of your biggest winners?

Joe: I mean, one of our biggest winners is actually an Australian play called Gold Road, in Gold Road has got a joint venture with Gold Fields on a project that they found, in the deposit they found five years ago. So it’s quite a fascinating story of somebody that’s gone from soup to nuts basically into their first porphyry in only five years, and have managed all the management changes, the structure, the change of focus, incredibly well. There’s not a lot of companies that can do this, but they went from the discovering five years ago, to taking it to a feasibility study, finding a partner for it, Gold Fields. That’s basically operating in.

So they de-risked all that execution risk by bringing on their own people and trying to develop themselves by bringing in a partner that’s already built mines in Western Australia. So they’ve got that 50/50 joint venture with a known operator. They continue to explore on their own ground, but really what was driving that increase in valuation was because of the weakening of the Australian dollar and the increase in the local Australian dollar gold price, which is now, it’s almost historic levels. It’s well over $2,000 per ounce Australian.

And what’s good about that as well, is because these other commodities are suffering a bit. We’re not seeing the same kind of boom we’ve seen before in other mining sectors, or even in the oil and gas, or the LNG sector such that there’s not a lot of push on cost inflation for labor; which is great because they can manage their margins better. When the gold price goes up, they can keep a lot of that increase in margin.

So that stock has done very well. A combination of the weakening Australian dollar, plus great execution on basically getting this thing into production from a discovery five years ago, and a great jurisdiction in Western Australia. So that combination has generated a very decent return.

Bill: Yeah, and as you said to me a pre-recording, it’s been the perfect storm for gold in Australia. So that perfect storm external to this stock surely helped it.

Joe: Oh yeah. I mean that has been very good. And the other issue, another stock that’s done very well is discovery related, which would be Radius Gold, which intersected a high grade gold/silver intersection in Mexico. This area of Mexico is part of the Sierra Madre belt. They did a joint venture, which wasn’t probably the greatest joint venture with respect to terms, but it was a time in the market where there was not a lot of equity financings available. So a lot of companies had to do with, they had to do.

So they did a deal with Pan American Silver. Their operating joint venture, they drove a great hole, and that stock has performed well on the back of that. So discovery, in any part of the cycle drives a lot of shareholder value and that radius did it for us. What’s interesting in this area, is the Sierra Madre belt, the gold/silver belt in Mexico, is quite … It’s got a lot of mines on it. There’s an area there where there’s not a lot of mining there, and that’s an area that has had security issues historically because of the opium trade.

And this area was one of the centers for opiod production, but since opium prices have collapsed due to synthetic opioids coming from, Asia and other places into the United States, there is not much opium, no opium production basically in these areas because it doesn’t make any money. So that’s opened up the opportunity for companies to actually come in and do that exploration that they’ve never had the opportunity to do because of the high security risks. And Radius is one of those ones that have come in early into that area.

So that’s a bit of a dynamic change in that part of Mexico, but saying that, Mexico has got other issues in terms of … I’ve heard this from a few companies, is in terms of permitting or getting more ground because the local government is pushing back saying, “You’ve got enough ground, spend money on that ground. And don’t ask for more claims because you guys are basically just holding claims.” That’s their opinion. So right now, most people that are exploring there already have ground or are making deals with local property owners rather than seeking new prospects. So that might have some impact on exploration in Mexico going forward. So even though we have exposure to Mexico, I’m not going out of my way to increase that right now.

Bill: That’s interesting. So you’re saying that the resistance, politically, is coming more from the local level rather than the more leftist government at the federal level in Mexico?

Joe: No, I would say it’s coming more from the federal level that they’re saying that you’ve got enough ground and stuff like that. So the companies have had to say, okay, the people that already hold the ground, but hold it privately, those are the ones they negotiate with.

Bill: Okay.

Joe: Because they’ve already got the claim and they’d got the standing and stuff like that, as opposed to staking new ground. It’s getting harder.

Bill: I read an article earlier this week. It was quite a long article and it talked about the idea of peak gold, which you know about this topic, declining reserves, declining grades. We’ve seen this over the last 20 years. Do you think that this idea that we could reach peak gold production is legitimate?

Joe: No. So the issue becomes … When reserves were actually going up as gold prices were going up, is because we were lowering the grade. As we increase the reserve prices, we could take more marginal ounces and call them economic. Let’s say we raise our reserve prices to $1,500, suddenly there’s a lot of marginal ounces that are uneconomic at $1,250, suddenly become economic. And we know that over the last three years, as miners became more concerned about free cash flow than production, we saw them write off a lot of ounces. Those ounces could theoretically come back into the market, into their fold if the gold price goes up, and they feel justified in raising their reserve prices.

So the ounces are there right now, they’re just not economic. When they become economic because of a increase in gold price, then those ounces come back on their books. So I don’t buy that argument because there’s a lot of ounces that haven’t been “undiscovered,” but are uneconomic that are out there. Some of them already exist within the portfolios of big companies that we’ve seen, and they’ve written off. Those, they could be tens of millions of ounces that are already sitting there waiting to be actually put back on the balance sheet.

Bill: This question has to do with harnessing and releasing the creativity and the concepts that geologists have. I was at the Sprott Conference recently, and on one of the panels, Robert Friedland was speaking as a mining entrepreneur. And he was talking about how the geologist’s idea need to be funded. They need to have some freedom and financing to go test these theses. And I gave you the gist of the idea. I’m not quoting him exactly. Then I was recently talking in the last few days to a Vancouver broker who has been at this for many decades, and he was saying to me, basically you have to be very careful with your geos when you’re an early stage exploration company to make sure that they don’t drill you out of business. What’s your thoughts on this? What is the balance when it comes to this?

Joe: Well, the thing is that with with some companies, with major companies, they have bigger budgets for exploration. And granted, some of these budgets have been decreasing, hence a lot of their private placements into juniors to basically be a proxy for their own exploration programs. But those budgets are basically dictated by, “Okay, I’ve got this theory. This is how I want to test it. This is how much money I need to test it.” The biggest savings in any exploration program is trying to get to know quicker and not making the project a sort of lifestyle.

So you’re talking about the same project for about 10 years with the same company drilling the same holes. That’s not exploration, that’s just basically funding a lifestyle. That’s the kind of thing your broker friend is probably complaining about. The other issue is that in terms of thinking outside the box and being able to do things that some people won’t fund, that’s probably the issue Mr. Friedland was talking about because there are geologists and big companies that want to test ideas, like maybe with a deep hole, maybe in an area that no one’s been before.

Just a conceptual deposit that, “Hey, this could be a Carlin, or this could be a porphyry deposit, something like that, whereas the company doesn’t want to fund it because it’s too risky. And maybe even the market doesn’t want to fund it. So somebody who’s got the capital to realize the risk/reward, knowing that geologists, knowing the work they do, knowing how much knowledge they have of the systems, and what they look like, and the science behind it. Then you put your faith in that and say, “Yeah, I’ll fund it.” There’s less and less of that happening because we’re very short term on the retail side and as well as on the industry side. What’s that drill hole say? Okay, it’s dead, let’s go.

Bill: But don’t you think it takes a mining entrepreneur, like a Friedland, who’s had success and has a resources? It might be easier for him to say something like that, then you know the the team that’s on their first or maybe second discovery only?

Joe: Well if you even has one discovery, that’s a good thing and the market may fund you again. The problem would be more those people that have never had one to give them money to find that first one. They might have a little bit more trouble, and they might need somebody like a Friedland, or an Eric Sprott, or someone to put in the money to help them. The companies have become less risk takers on exploration because most of their budgets, especially in the gold sector, has been about brownfields about conversion, about being close to the plant and less about grassroots.

Bill: And hasn’t more drilling been spent on developmental projects of recent than even exploration projects?

Joe: Absolutely, and that’s what I’m saying is that they look at the risk/reward ratio and say, “Well that drilling is going to convert into a resource that’ll convert into reserve, which will feed this plant. I would rather the money went into that than looking for something that doesn’t have a plant, that’s in the middle of nowhere.” But realizing that, the reason that a lot of those mines that those guys are talking about already, that they’re spending the brownfield money on, were actually grassroots discoveries.

It’s not like they were mines for a million years or anything like that. Somebody actually found it. So I remember like when I was working for it being gold company, it amazed me that 20 years ago, they actually found these deposits but they were against funding exploration. So well, that doesn’t make sense. If you’re actually making money off of the shoulders of these people that found the deposits and now going forward you don’t want to fund them anymore.

So you have to fund exploration, but you also have to fund it to a point where you keep the exploration budget constant. It doesn’t have to be big, it doesn’t have to be small, it just has to be a constant number. That way everybody knows what that number is and there’s a discipline in how you spend the capital in that exploration budget.

Because the idea is to prioritize and to say, “Which is the best target?” And that target that’s the best should always get the money. And the ability of an expiration geo is to basically say at one point, “We’re good. I don’t tested my theory there. There nothing there. Let’s put that money into something else.” And consider that project be a lifestyle project in the sense like, “This is my project. I want to drill it to the nth degree.” Maybe it’s time to just let go.

Bill: And what’s your thoughts on proof of concept drilling? You get these development projects that are development projects for two decades, and nobody funds them. What’s that balance between a management team saying, “We’ve drilled enough, now we got to find a buyer for this project.”

Joe: The thing is that what we’ve got happening with respect to that issue is that you get into an issue where you’re drilling it, and you’re not drilling to delineate the resource anymore. You’re drilling it to categorize it from inferred, maybe to indicated, to measured to build it up. You’re de-risking it, and the retail market doesn’t really pay for that. Funding that kind of de-risking infill drilling is not something that moves a junior miner. What moves a junior miner is finding that new area doing a big step out hole. That’s really what moves it.

Bill: But that infill drilling and metallurgical tests are necessary to prove to the potential buyer that yes, this could be economic in the future.

Joe: Yes, absolutely. For a takeout, in the end, that’s exactly what you want to do. And if the market isn’t there, you want to address the potential suitor, which is the person that’s going to buy your project, or the person that’s going to do a strategic financing. You want to answer their questions. And three months when there was no financing, you want to be looking and talking to those people. But, if the market turns and the money is now coming from the retail sector, suddenly you’re answering their questions. They’re saying, “Okay, I guess we’re gonna do more step out holes and we’re going to do this. I’m not going to spend money on metallurgy right now.” That sort of thing. It all depends who you’re getting the money from. What kind of catalysts are going to drive your share price up because we tend to be a little bit short term.

Bill: There’s about four and a half months left in 2019. Joe, as we conclude, what final advice would you like to share with my listeners, and what’s your outlook for the remaining four and a half months?

Joe: Well, I would say basically no a matter of what happens with respect to the base metal sector, the precious metal sector, with a trade war, currency war, global tensions, what have you, 24/7 market is that exploration, what’s still in any commodity, commodity agnostic would still drive shareholder value. So that’s still a big part of what we do, but saying that, with the precious metal sector, if you do think that this is a really good time to be in it, which we do, then your early returns would come from more liquid producers in the sector.

The silver edition will be something to look for them because it looks like silver is now becoming more of a metal that people are attracted to. So that’s something else that’s happening, but I would continually watch the other commodities. If you can find something that’s lower quartile that’s sitting there and it’s undervalued, and you could sit on it for a couple of years, that might be worth doing.

Bill: You’ve been listening to Joe Mazumdar, lead analyst, along with Brent Cook over at Exploration Insights. To learn more about Joe’s service, go to explorationinsights.com. As always, Joe, I appreciate your insights. Thanks for coming on Mining Stock Education. 

Joe: Thanks Bill.