(Disclosure: The following represents my opinions only. I am not receiving any compensation for writing this article, nor does Hydra Capital have any business relationship with companies mentioned in this post. I am long AAV, PONY, AMC, ACU, AZM, CAD, CANX, CD, CS, MIN, NLC, and ORS.)
Three weeks into January and there’s no lack of things to look at in the market. Gold, oil, and copper are all hanging in just fine, but I’m keeping my eye on the DXY as usual. A lot of stocks have had great moves, and some not-so-great, but I definitely get a feel of optimism in the gold and resource sectors based on a broad cross-section of the market that I follow. Junior stories are moving, stocks are responding to drill results, and the market seems to be starting to think about upside more than downside; likely driven in part by calls from the mountain tops of market gurus and investment banks for increased exposure to the energy and materials sectors. I can’t vouch for the validity of macro calls like that, but I can watch the key charts and get a sense of what’s working and what’s not through continuous observation and reading. The TSX Venture index itself has come out of a multi-year low and is up about 12% from its November basement-like lows. Some junior copper stocks are getting attention (I’d feel a lot better if copper could get through $3), the shine has come off gas a little recently (but the value argument still holds water), oils are acting reasonably for a change, and it’s hit or miss with golds. Generally speaking, it feels like there’s money to be made out there as long as stories are delivering. Miss a step, or two, and the market has no qualms about leaving what was once hot on the side of the road in a heap and moving to the next name, as there’s no lack of opportunity out there. To that end, here are a few words on a few names that have had both good and bad starts to 2020.
Advantage Oil and Gas (AAV.TO, last at $2.34)
Painted Pony (PONY.TO, last at $0.69)
Arc Resources (ARX.TO, last at $7.73)
In staying true to my 2020 pledge of being more nimble, I was stopped out of half of my AAV and all of my ARX, but have kept my full PONY position because I want to see what the company’s 2019 reserves values look like and what the market does with that information. Western Canadian gas is a very boring thing to own, but once West Coast LNG is a reality, which is a multi-year view, it will make a big difference to a market that is currently subject to “end-of-pipe” restrictions. I will let the charts determine my staying power here. AAV is a very low cost producer with an improving liquids:gas ratio and balance sheet, so I remain a fan, but will respect the chart.
Arizona Metals (AMC.V, last at $0.55)
Drilling is underway on this “new to the market” copper-gold VMS deposit in, ummmm, Arizona. The company is currently raising an extra $2 million to ensure that they can keep rolling should they like what they see in terms of delineation and exploration drilling results. First results are expected “during Q1”. The company’s press release sums up the nature of the deposit, exploration targets, and the drilling plan quite well. This is a project that I think will really benefit if copper can get its groove back, so here’s hoping that higher copper prices coincide with drill results.
Aurora Solar (ACU.V, last at $0.12)
Another quarter, another big sale into a Chinese solar panel manufacturer; apparently “the largest solar cell manufacturer in the world”. This time it was for 14 DM measurement systems that will help increase efficiency in the customer’s solar cell manufacturing operations. I’m often tempted to sell the stock, given the nice move its had and the fact that market interest in microcap technology stories can be so fleeting, but ACU’s in-house expertise and experience with regards to optimizing solar cell production and manufacturing efficiency just seems so “on trend” with what’s going on in the world right now that I’m still long. ACU also discussed a new optimization service it is looking to roll-out called “Insight” in its last press release. The proposition is that by analyzing new and existing data within a solar cell manufacturing plant, ACU can point to precisely where cell quality or efficiency is being impacted during the manufacturing process. The product offering is about to start testing at its second trial site, so I will watch for further developments on this front, as this is a path to the holy grail of recurring revenue that tech companies, and investors, are always looking for…
Azimut Exploration (AZM.V, last at $1.48)
I missed the initial news on this stock because I was away from the screen the morning of the announcement, but I’ve followed AZM for years, as have many people. Known to be a highly competent technical team that is capable of both grassroots prospect generation and actually moving those projects forward to fruition (often via JVs to larger companies), AZM announced some eye-catching results from its Elmer Gold project last week. The holes showed multiple near-surface mineralized vein sets in drill core within a shear zone at the Patwon Prospect, one of several targets identified along a multi-kilometre trend that is deemed to be prospective. The actually area drilled was quite small, so size and continuity are big question marks here, but the general feeling out there is that the system is expected to have scale to it. Having been recently burned by discovery stories that I expected to have scale to them, I’m taking more of a wait-and-see approach this time by taking just a partial position given my relatively limited knowledge of the target. There is some additional IP survey work ongoing on the project right now (these sulphide-walled veins should show up well on IP) and I expect the company will want to raise money soon for an expanded drill program. I don’t think money will be a problem, as this team will likely have all of the backing it needs from people who are very serious about gold exploration. Time will tell, but I’m flagging it as something to take seriously given the reputation of the company and its statement suggesting the significance of the discovery as laid out in the press release. I’ve got a ticket on this ride, so I’ll see where it goes. Hopefully follow up drilling can live up to the high bar that’s been set.
Colonial Coal (CAD.V, last at $0.31)
There are 22 million CAD warrants with a 30 cent strike that expire on February 3, 2020, which is sure to keep a lid on the price until that date passes. After that, it’s up to powers much bigger than me. For those who want to know my thesis here, here are a handful of links that pretty much connect the dots as I see them.
First a bit on CAD’s new director:
And then some background on the landscape in India:
Canex Metals (CANX.V, last at $0.185)
Well the magnetic survey is in and the Gold Range property has been doubled in size to a little over 1000 hectares in order to cover more of what appears to be prospective ground. Sure enough, the magnetic survey shows mag lows corresponding the mapped trace of some of the mineralized zones at the Gold Range property, and now the results of a soil and surface sampling program are pending. It’s all building towards a maiden drill program that probably isn’t too far off, and I get the impression that the modest capital needs for initial drill testing won’t be hard to find in this market if the data keeps pointing towards there being a system of scale here.
Cantex Mine Development (CD.V, last at $0.66)
On January 6th, Cantex underwhelmed the market with its update on the winter drilling program at North Rackla; an update in which I think people really wanted to see some assays. Instead, they got to hear about just how nasty the weather is in the Yukon mountains in the winter, that geophysics wasn’t helping much in targeting, and were given a “watch this space” notice in the form of a map with three apparently noteworthy pads marked between 880 to 1000 metres ENE of the discovery pad (Pad 6). I don’t think the market is putting much stock in the claims that “these are the pads to watch”, but I guess time will tell. What’s clear is that 1) North Rackla has been more of a treasure hunt than I bargained for, and 2) they have a lot to learn about the structural elements and shape of the system that they are dealing with up there. To that end, expert consultants are being pulled into the fold, but that’s little consolation for a stock that’s down to 1/10th of what it was trading at last summer. In the mining business, you’re only as good as you’re last drill hole when it comes to the market, and at this stage Cantex is in need of some real results that show that the mineralization around Pad 6 was not a fluke. Hitting good grade and thickness around a kilometre away would likely do that, but I hope there’s a rush on those assays because market interest is waning fast, along with the hope of this being something big.
Cronos Group (CRON.TO, last at $11.27)
The stock is up nearly two dollars in as many weeks as some optimism returns to the weed sector. I might be overtrading it, but was stopped out of my CRON recently when it pulled back below $11. I will keep an eye on this one, especially if it starts making new highs.
Capstone Mining (CS.TO, last at $0.90)
Last week Capstone announced some drill results that show cause for optimism for the future of the company’s Cozamin mine in Mexico. Specifically, step-out drilling in new areas to the northwest are showing high grades, which bodes well for resource expansion in that direction. The stock continues to perform well, so I continue to be a happy owner. Generally speaking the copper/base metal group has been an okay place to be. The copper chart still looks constructive to me and as long as that’s the case, I’m happy to own a basket of base metals with relatively tight stops in place.
Excelsior Mining (MIN.TO, last at $1.13)
So far so good at the Gunnison project. Let’s see some numbers and continued operational updates as this ISR copper project ramps up. If Phase 1 goes well, the market will be more willing to give credit for the Phase 2 and Phase 3 expansions, which could bode well for MIN’s share price in light of the “full project” NPV.
Neo Lithium (NLC.V, last at $0.73)
Notable only in the sense that the stock has moved up nearly 50% in short order after some optimism returned to the lithium sector as Tesla continues its world domination and China looks to keep pushing the EV theme. This is the best brine project in the hands of a junior that I am aware of and NLC has always felt that the 3Q project would attract a partner. 2020 seems as good a year as any for that.
Orestone Mining (ORS.V, last at $0.11)
I get more intrigued by ORS the more I look at it, so I should probably stop looking at it. I’ve yet to meet management, but ORS put out a press release the other day that went into a little more detail on its Resguardo copper-gold target in Chile. I’ll simply quote from the press release, which I think covers the bases well:
“Two low angle regional extensional faults, the Fraga and Huella del Guanco, have been mapped across the IP anomaly area (see maps here). Where these faults intersect northwest trending fracture-fault zones, moderate to strong silica- kaolin-sericite alteration and minor copper oxides are present. Additional faulting, alteration and minor copper oxides are also mapped along the east west trending, shallow dipping sediment-volcanic contact parallel to the Fraga fault zone. The Fraga fault has also emplaced younger Tertiary age intrusive over the altered sediments.
The presence of moderate to strong silica-kaolin-sericite hydrothermal alteration and minor copper oxides at the contact between the regional extensional Fraga fault and northwest trending fracture zones is thought to be related to a buried copper – gold manto or porphyry system which may be related to an IP anomaly at a depth of 200 m below surface.
“At Resguardo we are very encouraged that exploration continues to validate our target model – a large manto or porphyry system. I cannot overemphasize the importance of fluid leakage to surface causing the alteration at the fault intersections above and in close proximity to the IP anomaly. The chargeability anomaly has been outlined over a strike length of 1400 metres, a width of 500-800 metres, at a depth of 200 metres. There is a central core of greater than 20 mv/V over a strike length of 1100 metres and width of 300-600 metres. This exploration program moves the Company one step closer to drilling this very large, exciting target”, stated David Hottman, CEO of Orestone Mining Corp.”
Translation: This is a big prospect, in a good location with known shallow past production, and geological and geophysical data pointing towards a very valid drill target underneath. With a $3 million market cap, I like the cost of entry very much, but as always, it’s a roll of the dice with exploration targets. ORS will probably need to do a small financing to make sure it can fund Resguardo through to a proper drill test, but the program isn’t expected to cost a lot and it should be easy for them to get money given the target that’s in play.
Sun Metals (SUNM, last at $0.115)
SUNM is now back to less than where it all began in terms of price, but its higher share count means that the market cap is in the $15 million range, which is fair for a “slightly used good exploration target”, which about sums up the market view here. The company put out an update this morning on the balance of its 2019 drilling program and informed investors that the “winter drill program” was over and would be picked up later in the year. That’s not what people signed up for, myself included, so folks are hitting the exits. I’d expected drilling all winter at Stardust after all of the winter camp discussions, but it would seem to be that SUNM has some thinking to do about where to go next with the drill, which kind of puts things in a near-term limbo. Limbo is not a good place to be when your market cap depends on the market’s confidence in the program and geological model. My initial thesis on SUNM was that there was no way that they drilled their best hole on their first hole (Hole #421) into this new zone, but so far, that’s exactly what it looks like. The results today extended the 421 Zone further to the south and suggest that it may be open in that direction, but there’s no sign of the “guts” of anything just yet. It’s been disappointing to say the least, and the most frustrating part is that the system itself has all the right ingredients. The ingredient that is most relevant right now however is “time” and right now, waiting around for 5-6 months to see what plan and follow-up drilling SUNM comes back with isn’t palatable to a lot of people in a market that is presenting so many opportunities. As with Cantex, when the cards change, so does the market’s willingness to bet on them.
That’s a lot of words for just a handful of short blurbs, but there’s a lot of information out there and no lack of ideas as the market moves forward. Time and time again, the one thing that I stress to friends is the need for diversification when it comes to this sector. In junior resource stocks, the volatility of success or failure can be either euphoria-inducing or gut-wrenching, but two keys to maintaining sanity are 1) always being able to live to fight another day, and 2) continuing to generate and evaluate new ideas. Working on being able to compare and evaluate those new ideas in the context of existing ideas and past experiences eventually leads to a more coherent view of a much bigger market picture… and that’s a process that doesn’t stop with any given drill result from any given company; and it is every bit as much of the prize in the long term.