Dave Kranzler | Novo Resources…Bonanza or Bust?

Fund manager Dave Kranzler of Investment Research Dynamics returns to the show to discuss Novo Resources and their highly controversial Karratha region project. Novo has been the gold exploration story of the year with its market cap reaching over a billion dollars.

In this interview, Dave offers his opinion regarding Novo Resources and compares the market capitalization and assets of Novo to other gold mining companies both in Australia and elsewhere to asses if Novo is really a good value at its current share price. Dave also shares his thoughts regarding tax-loss selling, where he sees the price of gold headed based on the recent commitment of traders reports, and opportunities in the junior resource sector over the next months. Below is the transcript of the discussion regarding Novo Resources.

0:05 Introduction of Topic and Guest
2:26 John Kaiser clip re: Novo’s possible 20B oz Au discovery
3:22 Dave’s analysis of Novo Resources
4:53 Comparing Novo Resources to other Gold Companies
11:27 Would you invest in any $1B market cap pre-revenue company?
14:01 Thoughts on the tax-loss selling season
17:13 Where is gold headed based on recent COT reports?
24:47 Can gold break out above $1,500 in 2018?
26:03 Opportunities in the junior gold sector in next 6 months
32:04 Info regarding a free sample Mining Stock Journal report

Begin Transcript (edited for clarity and readability):

Bill: This is Bill Powers with MiningStockEducation.com and I am joined by returning guest, fund manager Dave Kranzler of Investment Research Dynamics. Dave is also the editor of the Mining Stock Journal and the Short Seller’s journal. I asked Dave to come on the program and share his thoughts regarding Novo Resources, the upcoming tax-loss selling season and where he sees the best opportunities in the next six months within the junior resource sector. So Dave, welcome back to show.

Dave: Hey Bill, how you doing? Thanks for having me back on. The pleasure is all mine.

Bill: I am doing very well and let’s start by discussing Novo Resources which has been the gold exploration story of the year. Its market cap has reached over a billion dollars. It went from US $.50/share to over US $7/share within the last six months. Today as we speak it is trading around $5.50/share.

For those that may not know, Novo Resources is a gold explorer and developer in Western Australia. And based on trenching and ground samples that they’ve done which has found gold at surface along with Novo’s geological theory, the market has gotten excited over the potential that the company may have discovered a gold deposit on the magnitude of the Witwatersrand basin in South Africa. The Witwatersrand basin has produced over 1.5 billion ounces of gold in its history and that represents about 50% of all the gold ever mined on earth.

The market in gold exploration usually gets excited over about a 2 million ounce discovery but I’ve heard as high as 20 billion ounces potentially over 100,000 square kilometers for Novo. And that estimate came from John Kaiser who is an analyst and newsletter writer. He recently said that at the Metals Investor Forum. That is quite the possibility. So Dave, with this high market capitalization and the potential that is being talked about with Novo Resources, what are your thoughts? And would you recommend a buy or should investors stay on the sidelines with this stock right now?

Dave: Wait! What did John Kaiser say that it may have?

Bill: He said at the November 2017 Metals Investor Forum that if the assumptions and his calculations doing visualized outcome based on the current geological theory are correct, it could potentially yield 20 billion ounces of gold over 100,000 square kilometers. Keeping in mind that Novo has claim only to about 7,000 of those square kilometers. And this, of course, is a theory they are hypothesizing.

Dave: (Laughter) I just think it is irresponsible for someone to put their name on an estimate like that. At this point they have not proved a resource, period. I’ve looked at it for my subscribers and I’ve spoken to some respected people in the mining industry who have developed junior mining companies. And one of the guys (and he is just referring to the market cap at this point, he is not referring to what may or may not be there), but I asked him about Novo and the market cap and what they have proved up and he said, “Well, there is a saying in our business, ‘There is wholesale, retail and fairy tale.’” And we are at the fairy tale stage. And 20 billion ounces that is a fairy tale. That is absurd. What’s considered to be a world-class deposit right now is under 10 million ounces and there is maybe a couple 30-40 million ounce deposits left in the world. Seabridge Gold is sitting on 40 million of reserve ounces and they can’t find someone to come in and put up the $5.5 billion to get the mine in place. So to take the leap of faith between some pumpkin seed-size gold nuggets, coarse nuggets, and 20 billion ounces, I have to put a fairy tale label on that.

So, and again, I want to preface my comments by saying there may very well be something very substantial there. But on the other hand, if you don’t own it, are you going to buy into it at a $1.3 billion market cap when they have not proved a mineralization system yet. My fund is invested in a company, Eurasian Minerals, and they have a property in Australia called Koonenberry. And when I first met Eurasian Minerals they brought nuggets—coarse-grain nuggets from this property. And they have a big land package there. They had lots of pictures of these coarse, small nuggets like the ones that Novo has. And eventually, because they are kind of a project generator—they go and buy up claims to land and then they do some initial work and then try to find a joint-venture partner—and it took them a long time to find a joint-venture partner. This was in 2008 when I first met them so that just gives you an idea at how long it can actually take for something to even begin to be developed. With Koonenberry they have not even begun to develop it.

Again, there may well be something on Novo but I think it is crazy to pay a $1.3 billion dollar market cap for something like this. What they are calling drilling is really trenching and they released some drill holes a few weeks ago and there was no visible gold. And I think that was kind of expected so now they are going back and they are using a drill that creates a wide hole. That may or may not yield something. But as it turns out, because I did some research on coarse gold formation, the fact they are sitting on top of coarse gold that actually can make it harder to find a mineralization system if it even exists. To just give you an example, one of the guys I spoke to who is a geologist said, “These nugget deposit are very difficult to model and they drive mining engineers absolutely nuts.” And then they he gave the example: this is what happened at Pretivm’s first shot at the published resource at the Brucejack project. That is not really a comparable but it is an example of these coarse nugget deposits, if there is even a deposit there. That is kind of my thinking on Novo.

When you watch Novo trade, it reminds me of the dotcom stocks in the late 1990’s. One out of ten thousand actually turned into something. If you watch the stock, it trades with just incredible volatility. And to me the fact that it ran up from a minimal market cap to $1.3 billion so quickly is just evidence of all the liquidity sloshing around. And I don’t want to call Novo a bubble because again, there may very well be something there. But even if there is something there it is going to take years and years to develop it. So if people think they are going to buy it—I think I saw it at US $5.50 today on the five letter symbol (NSRPF)—and all of the sudden it is going to turn into a $20 stock, well that’s not going to happen anytime soon. To give you an example just to reference back to Seabridge, Seabridge has 40 million ounce of reserve gold. That means—just to throw a number on it—they are ninety percent confident that they’ll be able to mine it and get recovery of 40 million ounces of gold once they eventually get the mine in there. And their market cap, speaking from memory, I think is around $600 million dollars. And this is a company that has spent millions and millions and millions of dollars to develop this project and they’ve got something that is essentially shovel-ready but it got a high upfront cost and that is kind of the hold up right now. When the price of gold moves higher, someone is going to go in there and jump on that project. Because a large mining company can shoulder the burden of the upfront construction costs. So Seabridge has a $637 million market cap right now. If you are a logical mining stock investor, do you want to buy into Seabridge at $637 million with a proved resource of 40 million ounces or are you going to buy into Novo? You are buying into pure faith. That’s my thoughts on Novo. And, again, if it were to sell off down to maybe $2/share, I would probably take a serious look at maybe buying some. But not at this market cap level—no way.

Bill: What are your thoughts about investing in any pre-revenue company—not just within the mining sector—with such a large market cap? What would you want to see in a pre-revenue company with a billion dollar market cap that would cause you to invest?

Dave: I would have to see a proven product and a market for that proven product. We know there is a proven market for gold but they don’t have a proven product they can sell into that market. Again, you are talking about, when you have a pre-revenue junior mining stock, it is essentially a venture capital company. And you have to invest in it that way and you don’t buy into a venture capital company at full expected value or even half of the expected value or even a third of the expected value. You want to buy into a pre-revenue venture capital company at maybe 1/20th or 1/50th of your expected value. So even if you wanted to say, “They have five million ounces here”, again the expected value there might be a couple billion at today’s gold price. And again, I am just throwing these numbers out loosely but I am just thinking about other companies that have a 3-4 million ounce gold mine. So that would mean that I would want to buy into this at well under $100 million. I would not want to buy into it at $1.3 billion.

I have several stocks that I cover in my Mining Stock Journal that actually have done drilling and they’ve got mineralization, some of them even have a 43-101 resource, and they are trading for under $50 million. In my latest Mining Stock Journal I’ve got a company with about a $20 million market cap and they are sitting on land in a very prolific gold mining district in Nevada. I am thinking on the low side, there is potential here for 1-2 million ounces. Well, 1-2 million ounce mining company that produces a couple hundred thousand ounces per year is going to get a market cap of $300-400 million. You are buying into this one at $20 million. And that is the type of investments that I look for when I am looking at junior mining stocks.