The Gold Report: Your firm, MJG Capital, invests exclusively in natural resources. What is your view of the precious metals market?
Matt Geiger: We are still in a three- to five-year hard asset bull market that began in January 2016. I believe this due to the severity of the bear market we went through between 2011 and 2015. It was unrelenting. It was deep. We saw companies go out of business, turn the lights out. Management teams scuttled off into the marijuana or tech space. Only the credible players survived the four- to five-year culling period.
As Rick Rule famously says, bear markets are the authors of bull markets and vice versa. The length and the severity of what we just underwent gives me the confidence that the upside over this next three- to five-year period is going to be quite spectacular.
After a flying start to this year, the sharp pullback we've seen since mid-March should be viewed as a test of faith for long-term resource investors. These sharp pullbacks always happen in bull markets; those with the right temperament understand not to panic and instead to gravitate toward quality projects with quality operators. The high-quality names are much cheaper than they were even 60 days ago.
I think precious metals are going to surprise to the upside through the rest of this year. These next two years in particular should be very special for owners of precious metal equities.
During the downturn, particularly in the precious metal and base metal space, majors offloaded marginal assets. And some had to force sell quality assets as well due to debt concerns. Now that the market is on the upswing, these very same companies are looking at their reserve base and they're getting worried that they won't be able to maintain current levels of production into the future. That's why we're seeing the best late-stage development projects getting taken out at pretty substantial premiums.
Two recent examples are Eldorado Gold Corp.'s (ELD:TSX; EGO:NYSE) acquisition of Integra Gold Corp. (ICG:TSX.V; ICGQF:OTCQX) and Sandstorm Gold Ltd.'s (SSL:TSX; SAND:NYSE.MKT) acquisition of Mariana Resources Ltd. (MARL:TSX.V; MARL:AIM). Once all these high-quality later-stage development projects are taken out, we're going to see companies move further upstream to the exploration companies and the early-stage discoveries. That's where I am focusing; I think that's where the greatest wealth creation will occur.
In the precious metals space, I'm biased toward silver given that 50–60% of demand is industrial. With silver being the most conductive metal in the world, the future looks very bright for clean-tech demand (namely photovoltaic solar panels) and other high-tech, 21st-century applications.
TGR: How do you feel about uranium?
MG: From a long-term supply/demand perspective, uranium is one of my favorite commodities. While precious metals have led the way so far in this mining bull market, uranium will outperform later in the cycle. . .think 2019/2020. For the patient investor, now is an excellent time to load up on uranium equities, particularly given the sharp pullback we've seen after a very hot start to the year. We won't see a major spike in uranium prices until the offline Japanese reactors start coming online en masse. For me personally, whether this happens later this year or in 2018 is not particularly worrisome. The upside when it does occur will be too big to ignore.
The demand picture for uranium, from my perspective, looks phenomenal. Nuclear is the only form of baseload, 24/7 power that has no dirty emissions and no carbon dioxide (CO2) emissions. There's no form of electricity generation that competes with nuclear on this front.
And while we don't yet feel this in the United States, clean electricity that doesn't emit CO2 or dirty emissions is becoming a political necessity in the emerging world, China being the foremost example. There are 460 reactors operating globally with hundreds more to come on-line over the next decade.
On the supply side, the uranium producers have been absolutely slaughtered. Generally, when I look at a commodity or a certain industry, any time 50% of the global production is underwater or losing money at current prices, that gets me excited. That to me looks unsustainable.
Very recently, we saw uranium prices dip below $22 per pound. At these prices, 100% of global production was losing money on an all-in basis. We're not far above this level, with uranium prices currently hovering around $23.
To me, the only answer is for the U308 price to rise. It might not happen in these next 12 months, but by the end of this bull market it certainly will. The main catalyst in the near term will be the Japanese turning on their idle reactors. This could happen in H2/17, more likely 2018. I'm not too worried either way. The inherent upside when it does happen is going to be so enormous for investors already positioned in uranium that the extra wait, whether it's an extra 12 or 18 months, will not make a difference.
TGR: What other commodities are you watching closely?
MG: The "battery metals" also look attractive at this point. This includes copper, cobalt, manganese, nickel, lithium, and vanadium. Investors need to be extremely careful, however, as these metals will be prone to speculative manias over the coming years. Additionally, the management quality of many juniors pursuing these metals is suspect. Focus only on serially successful management teams with significant skin in the game. Forget the rest.
Tesla Motors Inc. (TSLA:NASDAQ) just made an adjustment in its battery chemistry, which will have major implications. Until recently, Tesla was using nickel-cobalt-aluminum (NCA) lithium ion batteries for its vehicles. For its stationary energy storage products, however, the company was using nickel-manganese-cobalt (NMC). Now, based on studies done internally within Tesla, it's looking as if the company is going to move all of its batteries to NMC chemistry. That gets me quite excited for both manganese and cobalt. I'd say both of those stand out among the battery metals, as well as copper. You can't go wrong with copper.
TGR: What companies do you have your eyes on?
MG: I'm excited about the following three companies in particular:
Dataram Corp. (DRAM:NASDAQ) (soon to be named U.S. Gold). I know it sounds like a tech company, but it is doing a reverse takeover (RTO) with U.S. Gold, a privately held company.
I was able to make a site visit to U.S. Gold's Keystone Project outside of Elko, Nevada, last fall. The story is attractive to me for the following reasons:
1. Management. Dave Mathewson is head of exploration. He's a founding member of Gold Standard Ventures Corp. (GSV:TSX.V; GSV:NYSE), which has gone from zero to $400 million in market capitalization over the past eight years. Dave is the right guy at the right project.
2. Long runway. Dataram has just under $10 million in the treasury ready to be put into the ground. The company has no need to come back to market for financing this year, unless the terms are too good to refuse.
3. Imminent news flow. U.S. Gold has spent the past nine months completing an RTO. This has inhibited the company from issuing market updates, despite the fact that significant work has been done at Keystone over the period (including an 8–12 hole drill program). The RTO looks like it will be completed this week, which means a slew of press releases should be expected over the coming months. The drill assays from Keystone may prove to be a significant catalyst for the stock.
On the uranium front, I like UEX Corp. (UEX:TSX) right now. We participated in its recent placement alongside Rick Rule's group at Sprott. The Athabasca-based company is 15% owned by Cameco, a major stamp of approval for both CEO Roger Lemaitre and the company's two main projects, Christie Lake and Hidden Bay. The company has announced some pretty remarkable results at Christie Lake, most recently 8.5 meters of 20% U308 at the project's Orora Zone. The news flow will be continuous over the coming months, with additional drill results expected at both Christie Lake and Hidden Bay, as well as a Maiden Resource at Christie Lake.
Due to UEX's proximity to existing uranium mills and its partners in the basin, the company can get to first cash flow much quicker than the Western Athabasca Basin projects like Fission Uranium Corp.'s (FCU:TSX; FCUUF:OTCQX; 2FU:FSE) Triple R and NexGen Energy Ltd.'s (NXE:TSX; NXE:NYSE.MKT) Arrow deposit. This shorter time frame to first production is a key advantage.
Another company is Nevsun Resources Ltd. (NSU:TSX; NSU:NYSE.MKT). Right now, the shares are too attractive to ignore and we're actively buying. Taking into account the company's $167 million in cash and no debt, Nevsun has an enterprise value of only ~US$475 million.
Nevsun's Timok project is located in Serbia. It's one of the top three copper discoveries of the past decade, the other two being Kamoa, which is a Congo-based project being worked on by Robert Friedland's Ivanhoe Mines Ltd. (IVN:TSX), and Cascabel, a more recent discovery in Ecuador that is being worked on by SolGold Plc (SOLG:AIM), with Cornerstone Capital as a minority partner.
The economics outlined in Timok's April 2016 preliminary economic assessment (PEA) are absurd. Depending on the underlying assumptions, the project has an internal rate of return of 90%, if not above 100%. That's wildly economic. I think Nevsun shares are undervalued based on this PEA alone, which only applies to Timok's Upper Zone.
However, at current share prices, you also get Timok's Lower Zone, of which Nevsun owns 46%, for free. Freeport-McMoRan Inc. (FCX:NYSE) owns the rest. The Lower Zone won't be in production for quite some time, but it will be a massive underground operation with a multi-decade mine life.
Additionally, Nevsun is generating substantial free cash flow from its Bisha mine in Eritrea, producing zinc, which is obviously a hot metal right now. You also get Bisha for free, as well as any exploration upside around the mine. So, to me, this is a really attractive company that is one of the strongest buys out there.
TGR: Thanks for your insights, Matt.
Matt Geiger is the managing partner at MJG Capital, a limited partnership focused on long-term capital appreciation through investments in natural resources.
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1) Patrice Fusillo conducted this interview for Streetwise Reports LLC and provides services to Streetwise Reports as an employee. She owns, or members of her immediate household or family own, shares of the following companies mentioned in this article: None. She is, or members of her immediate household or family are, paid by the following companies mentioned in this article: None.
2) The following companies mentioned in this interview are sponsors of Streetwise Reports: Integra Gold and NexGen Energy. The following companies mentioned in this interview are billboard sponsors of Streetwise Reports: Gold Standard Ventures and Fission Uranium Corp. Streetwise Reports does not accept stock in exchange for its services. Click here for important disclosures about sponsor fees. The information provided above is for informational purposes only and is not a recommendation to buy or sell any security.
3) Matt Geiger: I, or members of my immediate household or family, own shares of the following companies mentioned in this article: Dataram, UEX Corp, and Nevsun Resources. I, or members of my immediate household or family, are paid by the following companies mentioned in this article: None. My company has a financial relationship with the following companies mentioned in this interview: None. Funds controlled by MJG Capital hold shares of the following companies mentioned in this article: Dataram, UEX Corp., and Nevsun Resources. I determined which companies would be included in this article based on my research and understanding of the sector. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.
5) From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles and interviews on the site, may have a long or short position in securities mentioned. Directors, officers, employees or members of their immediate families are prohibited from making purchases and/or sales of those securities in the open market or otherwise from the time of the interview or the decision to write an article, until one week after the publication of the interview or article. As of the date of this article, officers and/or employees of Streetwise Reports LLC (including members of their household) own shares of Dataram and Sandstorm Gold, companies mentioned in this article.