David Erfle | Gold and Junior Mining Sector Analysis

In this interview, professional mining investor David Erfle, The Junior Miner Junky, provides his outlook on the gold price and the junior mining sector.  David believes we are in a technically-confirmed gold bull market but we should expect a pullback soon.  He believes we could continue to see a decline in the copper price so it might be wise to wait a little longer before taking positions in copper equities.  David also comments on the USD and the ongoing USA and China trade war.  He shares general advice regarding investing in mining stocks as well as specifically discusses exit strategies.

0:05 Introduction

1:35 Commentary on the junior gold sector

4:33 Commentary on silver

6:29 Commentary on copper and copper stocks

8:16 USD and the trade war

12:34 Best mining stock “bang for your buck” right now

15:46 Discussing exit strategies for mining stocks

19:37 Final advice

TRANSCRIPT:

Bill: I am speaking with my friend David Erfle, the Junior Miner Junky. You can find him at juniorminerjunky.com. He’s here to share his thoughts on the junior gold sector. David, welcome to the show and what do you think about what’s going on?

David: Thanks for having me again, Bill. Always great to talk to you. Yeah, it’s nice to have watching charts and being involved with charts that are going from the lower left to the upper right for a change instead of the other way around, isn’t it?

We’ve waited for this bottom for so long and waiting for so long has been, has been fortuitous because if you’ve been constructing a junior portfolio for the past few years and you’ve been purchasing the best ones to hold onto for the long term, then you’re really happy right now. But, if you’re just coming into the sector right now, like a lot of these generalist investors are, you know, this sector’s been so ignored and unloved and silver’s been hated for so long that it’s been forgotten about.

So, now that people are coming back into it, they’re coming into a sector that has become extreme overbought in a very short period of time. So now is the time to have some caution. And it’s not time to, it’s not the time to chase things yet, but it’s time to be cautious because we’re about to have a correction here, a sustained correction. It’s going to happen any day now. But like I said, we’re now technically in a bull market. So the correction may be short and sharp. It may be two to four weeks. It may be a month. I don’t know, but it’ll just be a correction. It won’t be the ending to this, to what’s going on right now.

Bill: We broke through that $1,375 resistance pretty strongly. As we talk gold’s at $1,512. With that pullback, what do you think would be support for that pullback?

David: Well, $1,400 is really strong support. We had $1,400 tested two weeks ago and that test lasted only a few hours I think. I mean, it didn’t last very long at all. There was a lot of buyers waiting for $1,400 that missed the breakout. So I don’t see it going below $1,400 again anytime soon. But on the upside, $1,550 to $1,575 that is pretty strong resistance. I mean $1,550 was really strong support for a few years at the end of that last bull run. I remember it well, saying to myself that, you know, I’ve taken some profit, once the parabola ended at $1,900 and I’m still sitting with a lot of gains here and if gold loses $1,550 I’m going to be selling a lot more and that’s exactly what happened. As soon as gold lost $1,550, we ushered in of a very brutal bear market for the next three years.

Because that happened in early 2013 and it didn’t end until the early first quarter of 2016, and now that we’re getting towards that level, I think that is where we’re going to get a sustained correction in that $1,550, $1,575 level.

Bill: What are your expectations for the price of silver in the remainder of 2019?

David: Well, silver is looking very good here. You know, the silver sector was, like I said, it was hated for so long and despised and speculators just said, “You know what, I’m going into pot. I’m going into crypto. Silver’s never going to bottom.” And now we’ve had a monthly close above its 50-month moving average for the first time since silver broke down in early 2013 and now it’s trading above $17. So, once you see a monthly close above $17.50 then silver will technically join gold in a bull market. And the action of a lot of these silver equities are saying that it just may happen in August, which we’re in August right now. So at the end of this month, watch for a monthly close above $17.50 in silver.

Bill: We’re speaking today on Monday, August the 12th and I noticed a lot of the silver juniors, at least the ones I looked at, were doing quite well, performing quite well today.

David: Yes. I mean, what happened in 2001, past was prologue. It happened again during this bottom. The silver equities began to move up with the minors while gold was breaking out. So that was telling you that silver was about to follow soon and that’s exactly what happened.

Bill: Copper equities are, you know, it’s tough right now for them with the trade dispute and everything that’s going on geo-politically. What are your thoughts on the price of copper? We saw it get close to $3 earlier this year. Now it’s around $2.60. I read a analysis this morning that says in the next 6 to 12 months it’s going to go below $1.50, what are your thoughts here?

David: Well, I don’t know if I would predict $1.50 copper, but if you take a look at the chart, it’s doesn’t look very good. And Dr. Copper was basically giving his warning to the stock market also. So I think if the stock market is… The US equities are rolling over here and with what’s going on with the US and China, that doesn’t look like it’s going to be resolved anytime soon. And Copper was telling us that also. $2.50 copper is the level to watch. If we lose, if we get a close below $2.50 copper, there’s not a lot of support down to $2. So I’m not, as a speculator, I’m not touching anything, any junior with the word copper in it right now.

Bill: Until copper reaches about $2, then you might reconsider that?

David: Yes. If copper, yes. It all depends on what’s happening at the time copper reaches $2. And I know who you’re talking about, Chris Vermeulen, what he says is absolutely possible. We could easily see $1.50 copper if the stock market crashes, which I don’t see. I see the 200 week moving average is being tested in the big board indexes, absolutely. That is a very real possibility. But I don’t see a crash.

Bill: Do you think Trump’s going to get a lower dollar? Like he said he wanted?

David: Well that’s what he’s doing with the trade war. Since Powell wasn’t doing what he was asking, you know, he escalated the trade war which did it for him. So, the US needs a weak currency. Every single country needs a weak currency. I mean, that’s what’s going on here now. Currency wars, and gold and silver are the beneficiary of these currency wars. So I don’t see this ending anytime soon, and I see yields staying really low, and I see what gold is now at its all time high in over 73 currencies around the world. It’s only about 4% from its all time high in the Euro and the dollar needs to catch up. You’ve watched gold pretty much ignore what the dollar’s been doing. The past few years, the dollar really hasn’t gone anywhere. You know, it’s pretty much gone sideways. Sure it’s gone sideways with an upward bias, but the gold price is a lot higher than it was the last time the dollar was around 97 a year or so ago.

So what’s happening right now is gold is becoming the world’s reserve currency. You know, it’s going up in all these currencies, so it’s the safe haven. The dollar is a safe haven and gold is a safe haven. And I believe the US stock market will continue to be a safe haven once this correction’s over.

Bill: Trump has tweeted that he believes China’s holding out for a possible democrat win in 2020 here in the US elections. But could you see a resolution with that prior to the election?

David: Oh geez. You know, I’m the wrong person to ask that.

Bill: The reason I ask is, because it plays directly on obviously the price of gold and these equities we invest in.

David: Right. It does it, it does have a lot to do with it. It does have… Absolutely, it’s the risk off. Money is going into gold because of this and it’s going into the dollar also, and it’s going… Like I said, it’s going to continue to go into the US stock market because, I mean, the US economy is still the best engineer driving the economy, which is about over 25% of the global economy and blue chip stocks that pay, you know, that pay a healthy dividend are a lot better than investing in something in the EU, which is collapsing right now. I mean, with what’s going on in the EU, it’s it’s going to affect the dollar and it’s going to affect the dollar on the upside. There’s nothing the US could do to keep the dollar from strengthening in the long run.

They can hit it here and there, but the Euro is what? I think 57% of the dollar index. So what’s going on in the EU is very serious and I’m really… What I am concerned about is base metal. You know, as far as juniors are concerned, base metal juniors and copper juniors. Those are the ones that you should avoid. You know, put a few on your watch list, absolutely, because they’re starting to get down to really, really good values. Long-term, copper, zinc, very good. Short to medium term, not so good.

Bill: We’ve been talking about a lot of the forces external to these companies we invest in, but from your perspective, David, what do you think a company can do, a junior mining company can do internally that the market will reward it for in terms of a rising share price?

David: Well, your best “bang for your buck”, I guess that’s kind of what you’re asking me right now?

Bill: Yes.

David: Would be an early stage exploration company that has a district scale land package, high-grade targets in a district scale land package with a tight share structure, with a management team that has access to capital, that is serially successful and they hit a bonanza grade hole. That is going to give you your biggest upside. You know, a company that has those attributes and not any warrants, or very many warrants that are going to be in the money to keep it from going higher.

Bill: What about for an advanced stage project? What would be something a company at this stage of the game, developmental timeline, what could they do that would produce, that the market would reward the most? Whether it be metallurgical studies, you know, infill holes. What do you see here?

David: Well, a lot of the attributes that I mentioned for the early stage company along with a management team that understands the importance of drilling to proof of concept as opposed to over-drilling a project and over-diluting shareholders on the way to a large resource contained in a district scale land package in a tier one jurisdiction. You know, by the time you get there you don’t want to have 300, 400 million shares outstanding. By the time you get there, you want to have less than 250, hopefully under 200, but less than 250 million shares out by the time you get to the feasibility stage.

Bill: That’s a good point. And as you say that, I was thinking back to Northern Empire from last year. I mean, they got bought out at an all time high, literally nobody that invested in that company lost money.

David: Yeah, right, right. Yes. I was a little disappointed that they sold so soon. I couldn’t really be upset because I did make money on it. But that’s a very good management team. That’s a very good, serially successful management team that… You want to follow those guys around and what they’re doing. When you have management teams like that, Oxygen Capital’s another one, is another really good management team. But, they’ve got a company, Pure Gold, which they’ve kind of blown out the share structure on where they’re building their mine now. So you just got to be careful on these things because, you know, you could have a junior that ticks all the boxes as far as management team, as far as jurisdiction, as far as cash in the bank, as far as a high grade deposit. You know, it’s got blue sky, it’s got everything going for it and then you look at the share structure and it’s got 400 or 500 million shares out and that’s something you want to stay away from because that’s going to limit your upside.

Bill: You and I have talked before how 90% of your gains in these stocks can occur in that parabolic, last 10% of the move. How do you play your exit strategies with these high risk stocks?

David: Well now that we’re technically in a bull market, the first thing you want to do is never ever sell your core position. Not until we’ve reached the end of this cycle, which I don’t think is going to be for at least a few more years. So absolutely take profits along the way. It all depends on what type of junior you’re talking about as far as an exit strategy is concerned. As far as an early stage exploration play is concerned, it’s usually a pretty good idea if you’re fortunate enough to be into an early stage exploration play and they hit something and the share price really takes off, like doubles or triples, then you want to get your investment capital off the table and you just want to hold the rest on house money and see what happens. But also, keep following it and make sure management are doing the right things that I talked about earlier on the project. So that’s for an early stage company.

Now, for a developer, it all depends on what stage you get into the junior. If you’re fortunate enough to get in early on a developer explorer that has already proved up a nice size project and the share price really hasn’t taken off yet, you might want to wait a while until you take your money off the table. I mean your investment capital off the table. You might want to wait for a triple, so you get your investment capital off the table. Plus, as far as the size of the particular junior you’re considering to take profits in, my rule is if a junior becomes more than… If one junior becomes more than 10% of my entire portfolio, I’m going to take some profit because you never want to have…

I don’t care how good the junior is. I don’t care how good the company is, the management is or anything. I mean, you just, these things are risky. Bottom line, they’re all risky. You know, there’s levels of risks. There’s low risk, there’s medium risk, there’s high risk, but they’re all risky. So you want to make sure because anything can happen to a miner. You know, force majeure, government, whatever. So you want to make sure that you have your investment capital off the table if you have a large position and also you want to keep taking some profit on the way up and never let it get more than 10% because if something bad happens to it, it can really hurt your portfolio.

Bill: What about the gold producers? Is there like some standard metric that you keep in mind, you know, a price to earning metric that is kind of like a sell signal for you?

David: Well, it all depends on… Well it’s not just price to earnings because the-

Bill: Amount of reserves and things like that factor in.

David: Right, the producers that I invest in, I only invest in growth oriented producers, small cap growth oriented producers. I don’t invest in mid tiers. I don’t invest in majors. So, you know, it all depends. If it’s a growth oriented producer that’s not producing very much at this time and their upside is in their growth, I don’t really care about their valuation metrics. As long as they’re not losing tons of money, as long as their all in sustaining costs is still around a thousand or below. But if their upside is in their growth, it doesn’t matter to me.

Bill: Being in a gold bull market, you have mentioned to me before that there can be a lot of shysters in this sector that we need to look out for. I’m holding in my hand a book that I bought in the last two weeks, I haven’t read it yet. It’s called, “Fleecing The Lamb, The Inside Story Of The Vancouver Stock Exchange”. In conclusion, what would be your final words of warning to my listeners?

David: I’m going to have to borrow that one from you when you’re done with it. I haven’t read that one yet. But yeah, you got to really be careful with anybody pumping any stock because it’s really difficult to value something once either a newsletter gets a hold of it or some website with a large following, or whatever it is. If someone has a large following and they’re touting a stock, it’s going to get bought and it’s going to start to go parabolic. You want to be careful on chasing anything. I don’t care what stage of the bull market you’re in and you want to be careful to chase in any of these and you want to make darn sure why the stock has gone up as much as it has before you buy it. I don’t chase it, I don’t chase anything. I try to do as much due diligence as I can, as much research as I can to try to find the companies that I believe are going to go up before I have to chase them.

So yeah, you just got to be very careful of things that have huge moves because they’re always going to correct. They’re always going to correct. I mean, the rule is buy fishing lines and sell rhino horns. It’s difficult to do, but that’s the only way you’re… That the best way you’re going to make money in this sector. I don’t care what stage of the bull market you’re in, you know, there’s always going to be a company that has a really good project and it ticks all the boxes, that something short-term happens to them that is bad news and the retail’s going to sell it. That’s your opportunity to buy it. I’d rather buy something that has a proven deposit, that has a proven management team. They know what they’re doing, and then something short-term bad news happens to the stock and I’ll pounce on that fishing line.

That’s why you want to make sure you have a watch list. I have a watch list of 20 companies that I have. See, I have a portfolio of 25 or so companies and then I have a watch list of 20 more that I have already vetted to replace a company that maybe isn’t performing up to snuff, or the company’s not doing what I expected them to do in the first place when I bought the stock. So, once I decide to sell something, I already have an idea of what I’m going to buy to replace it. That’s why it’s always good to have a watch list and you want to make sure that you always have an exit strategy before you buy something.

Bill: Excellent advice from the Junior Miner Junky. To learn more about the Junior Miner Junky on newsletter subscription, and how you’re able to get a glance over David’s shoulder as he buys and sells, navigates this market, go to juniorminerjunky.com. As always, David, I appreciate your insights. I look forward to seeing you in a month at the Beaver Creek Precious Metals Summit and I’ll make sure to touch base with you there.

David: Looking forward to Bill. Always my favorite conference and always great to talk to you and see you. Thanks a lot.