May 2019 - MiningFeeds

1. The fear trade for gold continues to gain fundamental strength. The technical picture is also solid. Please click here now. Double-click to enlarge. Gold is poised for significant upside action in the second half of this year.

2. A large bull wedge is in play as institutional investors become more concerned about the slowing global economy.

3. Please click here now. Double-click to enlarge. This Nasdaq ETF chart (QQQ-NYSE) looks particularly concerning. A break under the $177.50 price zone could be followed by a significant decline.

4. The recent peaks and troughs for the stock market are in sync with the peaks and troughs for the price of oil. If oil can’t rise with Iran being pounded by US government sanctions, something is wrong.

5. Oil could crash if there’s a softening of the sanctions and that could cause a stock market crash.

6. Please click here now. Double-click to enlarge this oil price chart. Low priced oil helps consumers, but it hurts stock market earnings. An ominous bear flag has appeared on the chart.

7. US frackers need $60 oil on a consistent basis. They help provide the stock market with the earnings growth it needs to satisfy institutional investors.

8. $60 oil on a sustained basis is just not happening right now, and I don’t expect it will happen without a major upturn in the global economy.

9. Please click here now. Institutional analysts are beginning to view the tariff taxes as a growth-inhibiting quagmire that won’t go away for a long time.

10. They are also beginning to talk about the inflationary implications of the tariffs. What happens if inflation picks up and Trump successfully pressures the Fed into leaving rates alone?

11. That could cause much greater concern about inflation amongst economists and money managers would likely turn to gold to protect their portfolios.

12. The second of half of 2019 is likely to see gold get significant investor interest… particularly if the stock market continues to weaken while inflationary pressures rise.

13. Both my short-term and medium-term stock market trade signals have moved to a “ sell ”. The long-term buy signal is still holding but it looks shaky.

14. Please click here now. Double-click to enlarge this dollar versus yen chart. The dollar looks terrible and a new leg lower seems imminent.

15. The dollar’s softness relates to lack of interest in US risk-on markets by investors. They are more interested in safety now than risk-related opportunity. That’s good news for gold!

16. The US government has referred to the tariff taxes issue as a war. In the short-term, it’s producing higher prices for US consumers and dragging down global GDP growth.

17. In the medium-term, China’s government could restrict rare earth exports to America. That would probably cause a stock market crash. If the US economy keeps softening as China begins to handle the tariffs issue more aggressively, US democrats could get elected.

18. In turn, that would put the dollar front and centre in the next economic downturn.

19. My big focus for the long-term asset allocation is the Indian stock market and gold. That’s because Indian GDP growth will almost certainly rise to 10%+ and stay there for decades.

20. This, while America probably grows at 3%-4% in a good year and averages 1%-2%. There’s only so much upside “ blood ” that the Fed can squeeze out of a QE “ stone ” for US stock market investors with that kind of growth. The demographics just aren’t there, and the entitlements are too big of a drag on the economy.

21. I’m vastly more focused on short-term trading for the US stock market now than long-term investment. I do that at www.guswinger.com where I also trade NUGT and DUST for gold stock trading enthusiasts.

22. Please click here now. Double-click to enlarge. I don’t expect much action from GDX and gold stocks until gold bursts out of the bull wedge formation and the US stock market begins another leg down.

23. That likely happens as institutional investors accept the tariff talks as an unresolvable quagmire and begin to wonder how the Fed will deal with emerging stagflation.

24. A Friday close of $23 for GDX, $14 for Barrick (GOLD-NYSE), $36 for Newmont (NEM-NYSE) and $46 for Agnico (AEM-NYSE) are the “ launchpad ” numbers for gold stock investors to focus on. When those numbers are hit, basis a Friday close, gold, silver, and the miners will be ready for a major bull run!

Special Offer For Website Readers: Please send me an Email to freereports4@gracelandupdates.com and I’ll send you my free “Gold Stock Fresh Buy & Sell Signals!” report. I highlight key signals for stocks like Kirkland Lake that offer lucrative profits for both traders and investors!

Cheers

Stewart Thomson

Graceland Updates

Written between 4am-7am. 5-6 issues per week. Emailed at approx 9am daily.

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Stewart Thomson is a retired Merrill Lynch broker. Stewart writes the Graceland Updates daily between 4am-7am. They are sent out around 8am-9am. The newsletter is attractively priced and the format is a unique numbered point form. Giving clarity of each point and saving valuable reading time.

Risks, Disclaimers, Legal

Stewart Thomson is no longer an investment advisor. The information provided by Stewart and Graceland Updates is for general information purposes only. Before taking any action on any investment, it is imperative that you consult with multiple properly licensed, experienced and qualified investment advisors and get numerous opinions before taking any action. Your minimum risk on any investment in the world is: 100% loss of all your money. You may be taking or preparing to take leveraged positions in investments and not know it, exposing yourself to unlimited risks. This is highly concerning if you are an investor in any derivatives products. There is an approx $700 trillion OTC Derivatives Iceberg with a tiny portion written off officially. The bottom line:

Are You Prepared?

On May 27, Portofino Resources (TSX-V: POR) announced initial sampling results at its Yergo lithium brine project that covers the entire Aparejos Salar in the Province of Catamarca, Argentina. Yergo is within 15 km of Neo Lithium’s high-grade, PFS-stage 3Q Project. Before getting to this important company news, a quick recap of Portofino.

The Company controls 3 projects in Catamarca, covering > 8,600 hectares, via low-cost, 4-yr. options. Through the end of 2020, total cash outlays are < $65K, for all 3 projects. There are no work commitments or royalties. Portofino’s most advanced (initial drilling this summer) asset is the 100%-controlled, 1,804-hectare Hombre Muerto West project. Close neighbors in the Hombre del Muerto Salar include– Livent Corp. (formerly FMC), POSCO, and Australian-listed Galaxy Resources. POSCO paid ~$375M to Galaxy for 17,500 hectares in Catamarca province, that’s ~$21,400/ha. If POSCO, Galaxy, Livent Corp., Lithium Americas, Albemarle, SQM, Ganfeng, Orocobre Ltd. or smaller players like Neo Lithium, Millennial Lithium, Argosy Minerals, Advantage Lithium and Galan Lithium, were to pay half of what POSCO paid (per hectare) for 1/3 of Portofino’s 1,804 hectares in Hombre Muerto; that would equate to 6x the Company’s current market cap of C$1M. As a reminder, of 18 surface samples taken at the Hombre Muerto West project last year, 2 were > 1,000 mg/L Li, averaging 1,026 mg/L Li, 4 were > 800 mg/L Li, averaging 935 mg/L Li and 6 were > 700 mg/L Li, averaging 871 mg/L.

A Second Project, Named Project II, Looks Promising as Well….

Portofino can acquire 85% of Project II, which is 3,950 hectares in size and located 10 km from the Chile border (see map above) and 65 km northeast of Neo Lithium’s 3Q project. Historical exploration work included near-surface brine samples that averaged 274 mg/L Li, with several in excess of 300 mg/L Li. Project II captures the whole salar, has relatively easy access, and has returned consistent surface / near-surface sampling results over a wide area. The Maricunga project (BFS completed) is located just across the Chile border. Maricunga is billed as the highest grade, undeveloped brine project in the Americas.

Last, but not Least, Yergo, Subject of the May 27th News

Portofino has the right to acquire a 100% Interest in the 2,932 hectare Yergo lithium brine project. The property covers the entire Aparejos salar {see map above}. Earlier this year, surface & near-surface brine sampling & geological mapping were done. Twenty-two locations were sampled, returning values up to 373 mg/L Li and up to 8,001 mg/L Potassium (“K“). The sample sites averaged 224 mg/L Li, 4,878 mg/L K and 184 mg/L Magnesium (“Mg“.) The average Mg:Li ratio of the 22 samples is a very low 0.8:1. Due to unusually high levels of water in the salar, 16 of the 22 samples were taken from the southeast portion of the salar. Those 16 samples averaged 278 mg/L Li, 6,091 mg/L K and 86 mg/L Mg. The average Mg:Li ratio of the 16 samples is extremely low at 0.4:1. Most projects in Argentina have Mg:Li ratios of 3.0 to 3.5 to 1.

According to the press release, one sample taken from the northwestern portion of the salar returned a value of 351 mg/L Li, indicating a potential area of elevated near-surface Li brines up to 3 km in length by 1-2 km in width. Additional sampling will be required to better test the central portions of the area. Management intends to complete additional sampling once surface waters have evaporated to allow for less-diluted brine samples. Due to the close proximity of the salars comprising Neo Lithium’s 3Q Project and Portofino’s Yergo project, geologists studying Yergo believe it’s likely that they have similar geological histories and are similarly enriched in Lithium & Potassium.

David Tafel, Portofino’s CEO stated:

“We are encouraged with these very good, initial lithium and potassium sample results combined with extremely low magnesium/lithium ratios. As soon as weather permits, our geological team will continue their exploration work to follow up on the potential surface extent of the mineralization.“

Conclusion

Although the main event is drilling in June/July at Hombre Muerto West, these surface sample results from the Yergo project are certainly promising. Portofino is slowly but surely, without burning too much cash, advancing multiple projects. In a better battery metals market or a better lithium juniors market, I believe that the optionality embedded in Portofino’s 3 projects would be valued higher. Perhaps a lot higher. A C$1M market cap is a cheap entry point to see a few drill holes in one of the best lithium enriched salars on the planet. A proven salar with long-term existing production and advanced-staged development projects underway.

The following chart is another look at relative valuation. I calculated each company’s Enterprise Value per hectare. Portofino is the 2nd cheapest by this measure. To be fair, this is not the best metric, because not all hectares are of equal quality, or equally far advanced. For instance, some of the companies below have Preliminary Economic Assessments (“PEAs“) on select projects. However, I believe that Portofino’s 3 projects have the potential to be Company-makers (it’s easy to be a Company-maker when your market cap is C$1M). By contrast, some of the companies below have projects and green field properties in provinces or salars that have shown poor or mediocre drill results. Mediocre doesn’t make the grade in this market!

To be clear, Portofino Resources (TSX-V: POR) is a very high risk investment opportunity, it has not drilled a single hole yet. But several of the companies listed above have properties in less attractive salars, have experienced drilling problems, reported unimpressive grades, narrow brine intervals or announced small resources. One company reported a resource of just 66,000 tonnes of Indicated & Inferred lithium carbonate! Portofino could end up with mediocre drill results, or run into problems, but with a market cap of just C$1M, it might be worth taking drilling risk for the possibility of good, or very good, drill results, and perhaps a better lithium junior market later this year.

May 29, 2019

Peter Epstein, Epstein Research

Disclosures: The content of this article is for information only. Readers fully understand and agree that nothing contained herein, written by Peter Epstein of Epstein Research [ER], (together, [ER]) about Portofino Resources, including but not limited to, commentary, opinions, views, assumptions, reported facts, calculations, etc. is not to be considered implicit or explicit investment advice. Nothing contained herein is a recommendation or solicitation to buy or sell any security. [ER] is not responsible under any circumstances for investment actions taken by the reader. [ER] has never been, and is not currently, a registered or licensed financial advisor or broker/dealer, investment advisor, stockbroker, trader, money manager, compliance or legal officer, and does not perform market making activities. [ER] is not directly employed by any company, group, organization, party or person. The shares of Portofino Resources are highly speculative, not suitable for all investors. Readers understand and agree that investments in small cap stocks can result in a 100% loss of invested funds. It is assumed and agreed upon by readers that they will consult with their own licensed or registered financial advisors before making any investment decisions.

At the time this article was posted, Peter Epstein owned shares of Portofino Resources and Portofino was an advertiser on [ER].

Readers understand and agree that they must conduct their own due diligence above and beyond reading this article. While the author believes he’s diligent in screening out companies that, for any reasons whatsoever, are unattractive investment opportunities, he cannot guarantee that his efforts will (or have been) successful. [ER] is not responsible for any perceived, or actual, errors including, but not limited to, commentary, opinions, views, assumptions, reported facts & financial calculations, or for the completeness of this article or future content. [ER] is not expected or required to subsequently follow or cover events & news, or write about any particular company or topic. [ER] is not an expert in any company, industry sector or investment topic.

The mid-tier gold miners’ stocks in the sweet spot for price-appreciation potential have been struggling in recent months, grinding lower with gold. Their strong early-year momentum has been sapped by recent stock-market euphoria. But gold-mining stocks are more important than ever for prudently diversifying portfolios. The mid-tiers’ recently-reported Q1’19 results reveal their fundamentals remain sound and bullish.

The wild market action in Q4’18 emphasized why investors shouldn’t overlook gold stocks. All portfolios need a 10% allocation in gold and its miners’ stocks! As the flagship S&P 500 broad-market stock index plunged 9.2% in December alone, nearly entering a new bear market, the leading mid-tier gold-stock ETF surged 13.7% higher that month. That was a warning shot across the bow that these markets are changing.

Four times a year publicly-traded companies release treasure troves of valuable information in the form of quarterly reports. Required by the U.S. Securities and Exchange Commission, these 10-Qs and 10-Ks contain the best fundamental data available to traders. They dispel all the sentiment distortions inevitably surrounding prevailing stock-price levels, revealing corporations’ underlying hard fundamental realities.

The global nature of the gold-mining industry complicates efforts to gather this important data. Many mid-tier gold miners trade in Australia, Canada, South Africa, the United Kingdom, and other countries with quite-different reporting requirements. These include half-year reporting rather than quarterly, long 90-day filing deadlines after year-ends, and very-dissimilar presentations of operating and financial results.

The definitive list of mid-tier gold miners to analyze comes from the GDXJ VanEck Vectors Junior Gold Miners ETF. Despite its misleading name, GDXJ is largely dominated by mid-tier gold miners and not juniors. GDXJ is the world’s second-largest gold-stock ETF, with $3.6b of net assets this week. That is only behind its big-brother GDX VanEck Vectors Gold Miners ETF that includes the major gold miners.

Major gold miners are those that produce over 1m ounces of gold annually. The mid-tier gold miners are smaller, producing between 300k to 1m ounces each year. Below 300k is the junior realm. Translated into quarterly terms, majors mine 250k+ ounces, mid-tiers 75k to 250k, and juniors less than 75k. GDXJ was originally launched as a real junior-gold-stock ETF as its name implies, but it was forced to change its mission.

Gold stocks soared in price and popularity in the first half of 2016, ignited by a new bull market in gold. The metal itself awoke from deep secular lows and surged 29.9% higher in just 6.7 months. GDXJ and GDX skyrocketed 202.5% and 151.2% higher in roughly that same span, greatly leveraging gold’s gains. As capital flooded into GDXJ to own junior miners, this ETF risked running afoul of Canadian securities laws.

Canada is the center of the junior-gold universe, where most juniors trade. Once any investor including an ETF buys up a 20%+ stake in a Canadian stock, it is legally deemed a takeover offer. This may have been relevant to a single corporate buyer amassing 20%+, but GDXJ’s legions of investors certainly weren’t trying to take over small gold miners. GDXJ diversified away from juniors to comply with that archaic rule.

Smaller juniors by market capitalization were abandoned entirely, cutting them off from the sizable flows of ETF capital. Larger juniors were kept, but with their weightings within GDXJ greatly demoted. Most of its ranks were filled with mid-tier gold miners, as well as a handful of smaller majors. That was frustrating, but ultimately beneficial. Mid-tier gold miners are in the sweet spot for stock-price-appreciation potential!

For years major gold miners have struggled with declining production, they can’t find or buy enough new gold to offset their depletion. And the stock-price inertia from their large market capitalizations is hard to overcome. The mid-tiers can and are boosting their gold output, which fuels growth in operating cash flows and profitability. With much-lower market caps, capital inflows drive their stock prices higher much faster.

Every quarter I dive into the latest results from the top 34 GDXJ components. That’s simply an arbitrary number that fits neatly into the tables below, but a commanding sample. These companies represented 82.7% of GDXJ’s total weighting this week, even though it contained a whopping 72 stocks! 3 of the top 34 were majors mining 250k+ ounces, 21 mid-tiers at 75k to 250k, 7 “juniors” under 75k, and 3 explorers with zero.

These majors accounted for 13.0% of GDXJ’s total weighting, and really have no place in a “Junior Gold Miners ETF” when they could instead be exclusively in GDX. These mid-tiers weighed in at 57.6% of GDXJ. The “juniors” among the top 34 represented just 8.9% of GDXJ’s total. But only 4 of them at a mere 4.4% of GDXJ are true juniors, meaning they derive over half their revenues from actually mining gold.

The rest include a primary silver miner, gold-royalty company, and gold streamer. GDXJ has become a full-on mid-tier gold miners ETF, with modest major and tiny junior exposure. Traders need to realize it is not a junior-gold investment vehicle as advertised. GDXJ also has major overlap with GDX. Fully 29 of these top 34 GDXJ gold miners are included in GDX too, with 23 of them also among GDX’s top 34 stocks.

The GDXJ top 34 accounting for 82.7% of its total weighting also represent 37.4% of GDX’s own total weighting! The GDXJ top 34 mostly clustered between the 10th- to 40th-highest weightings in GDX. Thus over 3/4ths of GDXJ is made up by almost 3/8ths of GDX. But GDXJ is far superior, excluding the large gold majors struggling with production growth. GDXJ gives much-higher weightings to better mid-tier miners.

The average Q1’19 gold production among GDXJ’s top 34 was 149k ounces, a bit over half as big as the GDX top 34’s 267k average. Despite these two ETFs’ extensive common holdings, GDXJ is increasingly outperforming GDX. GDXJ holds many of the world’s best mid-tier gold miners with big upside potential as gold’s own bull resumes powering higher. Thus it is important to analyze GDXJ miners’ latest results.

So after every quarterly earnings season I wade through all available operational and financial results and dump key data into a big spreadsheet for analysis. Some highlights make it into these tables. Any blank fields mean a company hadn’t reported that data as of this Wednesday. The first couple columns show each GDXJ component’s symbol and weighting within this ETF as of this week. Not all are US symbols.

18 of the GDXJ top 34 primarily trade in the U.S., 5 in Australia, 8 in Canada, and 3 in the U.K. So some symbols are listings from companies’ main foreign stock exchanges. That’s followed by each gold miner’s Q1’19 production in ounces, which is mostly in pure-gold terms excluding byproducts often found in gold ore like silver and base metals. Then production’s absolute year-over-year change from Q1’18 is shown.

Next comes gold miners’ most-important fundamental data for investors, cash costs and all-in sustaining costs per ounce mined. The latter directly drives profitability which ultimately determines stock prices. These key costs are also followed by YoY changes. Last but not least the annual changes are shown in operating cash flows generated, hard GAAP earnings, revenues, and cash on hand with a couple exceptions.

Percentage changes aren’t relevant or meaningful if data shifted from positive to negative or vice versa, or if derived from two negative numbers. So in those cases I included raw underlying data rather than weird or misleading percentage changes. In cases where foreign GDXJ components only released half-year data, I used that and split it in half where appropriate. That offers a decent approximation of Q1’19 results.

Symbols highlighted in light blue newly climbed into the ranks of GDXJ’s top 34 over this past year. And symbols highlighted in yellow show the rare GDXJ-top-34 components that aren’t also in GDX. If both conditions are true blue-yellow checkerboarding is used. Production bold-faced in blue shows the handful of junior gold miners in GDXJ’s higher ranks, under 75k ounces quarterly with over half of sales from gold.

This whole dataset together compared with past quarters offers a fantastic high-level read on how mid-tier gold miners as an industry are faring fundamentally. While slightly-lower gold prices made Q1 somewhat challenging, the GDXJ miners generally fared quite well. They mostly kept costs in check, paving the way for profits to soar and really amplify gold’s overdue-to-resume bull market. That’s very bullish for their stocks.

GDXJ’s managers have continued to fine-tune its ranks over this past year, making some good changes. For some inexplicable reason, one of the world’s largest gold miners AngloGold Ashanti was one of this ETF’s top holdings as discussed in Q3’18. AU was finally kicked out and replaced with a smaller major gold miner Kinross and a mid-tier Buenaventura. Together they now account for 12.3% of GDXJ’s weighting.

Reshuffling at the top makes year-over-year changes less comparable, particularly given KGC’s larger size relative to most of the rest of GDXJ’s stocks. 4 other smaller stocks also climbed into this ETF’s top-34 ranks. As GDXJ is largely market-cap weighted, it is normal for companies to rise into and fall out of the top 34’s lower end. All these year-over-year comparisons are across somewhat-different top-34 stocks.

Production has always been the lifeblood of the gold-mining industry. Gold miners have no control over prevailing gold prices, their product sells for whatever the markets offer. Thus growing production is the only manageable way to boost revenues, leading to amplified gains in operating cash flows and profits. Higher production generates more capital to invest in expanding existing mines and building or buying new ones.

Gold-stock investors have long prized production growth above everything else, as it is inexorably linked to company growth and thus stock-price-appreciation potential. The top 34 GDXJ gold miners excelled in that department, growing their aggregate Q1 output by a big 15.6% YoY to 4.6m ounces! That’s impressive, trouncing both the major gold miners dominating GDX as well as the entire world’s gold-mining industry.

Last week I analyzed the GDX majors’ Q1’19 results, showing they are still struggling to replace depleting production. The GDX top 34’s total output plunged a sharp 6.3% YoY to 8.8m ounces, but if adjusted for a recent in-process mega-merger that decline moderates to 0.2% YoY. That’s still much worse than the world gold-mining industry as a whole, as reflected in the World Gold Council’s comprehensive quarterly data.

Total global gold production in Q1’19 climbed 1.1% YoY to 27.4m ounces, which the majors still fell well short of. The GDXJ mid-tiers were able to enjoy very-strong growth because this ETF isn’t burdened by the struggling majors. Again GDXJ’s components start at the 10th-highest weighting in GDX. The 9 above that averaged huge Q1 production of 537k ounces, which is fully 3.6x bigger than the GDXJ-top-34 average!

The more gold miners produce, the harder it is to even keep up with relentless depletion let alone grow their output consistently. Large economically-viable gold deposits are getting increasingly difficult to find and ever-more-expensive to develop, with low-hanging fruit long since exploited. But with much-smaller production bases, mine expansions and new mine builds generate big output growth for mid-tier golds.

Their awesome Q1 production surge wasn’t just from the new components climbing into the ranks of the top 34 over this past year. The average growth rate of all these companies producing weighed in at 16.1% YoY, right in line with the 15.6% total growth. The law-of-large-numbers growth limitations also apply to gold miners’ market capitalizations. The GDXJ top 34 averaged just $1.7b in the middle of this week.

Last week the GDX top 34 sported a far-higher average of $5.2b. With the mid-tiers generally less than a third as big as the majors, their stock prices have much-less inertia. Capital inflows as gold stocks return to favor on gold rallying propel mid-tier stocks to much-higher levels faster than majors. They truly are the sweet spot of the gold-stock realm, not bogged down like the majors with way less risk than the juniors.

Also interesting on the GDXJ production front last quarter was silver. This “Junior Gold Miners ETF” also includes major silver miners, both primary and byproduct ones. The GDXJ top 34’s silver mined surged 13.8% higher YoY to 26.5m ounces! For comparison the GDX top 34’s total reported silver output of 27.3m actually plunged 25.2% YoY. Even mega-merger-adjusted their silver production still fell 8.0% YoY.

The mid-tier gold miners continue to prove all-important production growth is achievable off smaller bases. With a handful of mines or less to operate, mid-tiers can focus on expanding them or building a new mine to boost their output beyond depletion. But the majors are increasingly failing to do this from the already-high production bases they operate at. As long as majors are struggling, it is prudent to avoid them.

GDXJ investors would be better served if this ETF contained no major gold miners producing over 250k ounces a quarter on average. They still command over 1/8th of its weighting, which could be far better reallocated in mid-tiers and juniors. If VanEck kept the major gold miners in GDX where they belong, it would give GDXJ much-better upside potential. That would make this ETF more popular and successful.

In gold mining, production and costs are generally inversely related. Gold-mining costs are largely fixed quarter after quarter, with actual mining requiring about the same levels of infrastructure, equipment, and employees. So the higher production, the more ounces to spread mining’s big fixed costs across. Thus with sharply-higher YoY production in Q1’19, the GDXJ top 34 should’ve seen proportionally-lower costs.

There are two major ways to measure gold-mining costs, classic cash costs per ounce and the superior all-in sustaining costs per ounce. Both are useful metrics. Cash costs are the acid test of gold-miner survivability in lower-gold-price environments, revealing the worst-case gold levels necessary to keep the mines running. All-in sustaining costs show where gold needs to trade to maintain current mining tempos indefinitely.

Cash costs naturally encompass all cash expenses necessary to produce each ounce of gold, including all direct production costs, mine-level administration, smelting, refining, transport, regulatory, royalty, and tax expenses. In Q1’19 these top-34-GDXJ-component gold miners that reported cash costs averaged $730 per ounce. That was up a sizable 5.4% YoY, and much worse than the GDX top 34’s $616 average.

These were the highest average mid-tier cash costs seen in the 12 quarters I’ve been doing this research, which was potentially concerning. Thankfully that was heavily skewed by some extreme outliers relative to this sector and their own history. Peru’s Buenaventura saw cash costs soar 33% YoY to $1049! That was a one-off anomaly driven by the company halting one of its key mines in January to centralize operations.

Two major South African miners saw really-high cash costs too, Sibanye’s eye-popping $1956 per ounce and Harmony’s $1017. South Africa’s former gold juggernaut has been struggling for years, facing endless government corruption and very-deep and expensive mines. Sibanye in particular really needs to get kicked out of GDXJ, as it is now a primary platinum-group-metals miner at well over 5/8ths of Q1 revenues.

Finally Hecla’s cash costs skyrocketed 54% YoY to $1277 in Q1, mainly due to ongoing problems at its Nevada operations. It actually suspended 2019 production and cost guidance on these, which certainly isn’t a good sign! None of these 4 gold miners represent mid-tiers as a whole. Excluding them, the rest of the GDXJ top 34 averaged excellent cash costs of just $622 last quarter. That’s on the low end of the range.

Way more important than cash costs are the far-superior all-in sustaining costs. They were introduced by the World Gold Council in June 2013 to give investors a much-better understanding of what it really costs to maintain gold mines as ongoing concerns. AISCs include all direct cash costs, but then add on everything else that is necessary to maintain and replenish operations at current gold-production levels.

These additional expenses include exploration for new gold to mine to replace depleting deposits, mine-development and construction expenses, remediation, and mine reclamation. They also include the corporate-level administration expenses necessary to oversee gold mines. All-in sustaining costs are the most-important gold-mining cost metric by far for investors, revealing gold miners’ true operating profitability.

The GDXJ-top-34 AISC picture in Q1’19 looked much like the cash-cost one. Average AISCs defied much-higher production to surge 6.0% higher YoY to $1002 per ounce! While still far below Q1’s average gold price of $1303, those were the highest AISCs seen by far since at least Q2’16 when I started this thread of research. But again that was heavily skewed by those same 4 gold miners struggling with sky-high costs.

Excluding BVN’s $1382, SBGL’s insane $2030, HMY’s $1286, and HL’s extreme $1760, the rest of the GDXJ top 34 averaged a far-better $891 per ounce. That was 5.8% lower than Q1’18’s average, indeed reflecting fast-growing output. It was also right in line with the 2017-and-2018 quarterly average of $903, as well as the top 34 GDX majors’ Q1’19 average of $893. Most mid-tier golds are keeping costs under control.

Interestingly gold-mining costs tend to peak in Q1s before drifting lower in subsequent quarters. That’s because gold miners often make capital improvements and sequence mining in such a way that Q1s see the lowest ore grades and thus lowest production. I discussed this in some depth last week in my GDX Q1’19 essay. Odds are the GDXJ mid-tiers’ costs will decline significantly in coming quarters as output ramps.

Yet even at that distorted artificially-high Q1 average AISC of $1002, the elite GDXJ gold miners have great potential to enjoy surging profits and hence stock prices as gold recovers. The average gold price in Q1’19 drifted 1.9% lower YoY to $1303. That implies the mid-tier miners were averaging profits around $301 per ounce. Gold is due to head far higher as these bubble-valued stock markets face an overdue bear.

That will rekindle gold investment demand like usual, those new capital inflows fueling a major gold upleg. A mere 7.7% advance from $1300 would carry gold to $1400, and just 15.4% would hit $1500. Those are modest and easily-achievable gains by past-gold-upleg standards. During essentially the first half of 2016 after major stock-market selloffs, gold blasted 29.9% higher in 6.7 months! Gold can rapidly return to favor.

At $1300 and Q1’s $1002 average AISCs, the major gold miners are still earning a very-healthy $298 per ounce. But at $1400 and $1500 gold, those profits soar to $398 and $498. That’s 33.6% and 67.1% higher on relatively-small 7.7% and 15.4% gold uplegs from here! And if the mid-tiers’ average AISCs retreat back near $900 without the outliers, that profits growth rockets to 67.8% at $1400 and 101.3% at $1500!

The gold miners’ awesome inherent profits leverage to gold is why this beaten-down forsaken sector is so darned attractive. The major gold stocks of GDX tend to amplify gold uplegs by 2x to 3x, and the mid-tier miners of GDXJ usually do much better. As gold rallies on renewed investment demand as stock markets weaken, better mid-tier gold stocks soar dramatically multiplying investors’ wealth. This is a must-own sector.

While investors continue to harbor serious apathy for gold stocks, the mid-tier miners’ costs remain well-positioned to fuel monster profits growth in a higher-gold-price environment. This is a stark contrast to the rest of the markets, where rising earnings are looking to be scarce. Investors love higher profits, and few if any sectors will rival the gold miners’ earnings growth. It was already underway in Q1 on higher production.

In terms of hard accounting numbers, the GDXJ top 34’s total sales grew 5.0% YoY to $4.9b in Q1’19. That was the result of 15.6%-higher gold output easily offsetting the 1.9%-lower average gold price last quarter. Again the mid-tiers just trounced the majors, with the GDX top 34’s sales dropping a sharp 5.2% YoY when adjusted for the in-progress mega-merger between elite gold majors Newmont and Goldcorp.

The higher sales among the top 34 GDXJ stocks also drove impressive 22.2% YoY GAAP profits growth to a total of $197m in Q1! That again reveals the rising-cost problems are isolated in a handful of GDXJ components, not mid-tier miners as a whole. The majors of GDX again fared much worse last quarter, seeing earnings fall 7.2% YoY when accounting for that mega-merger. Mid-tiers are really outperforming.

The one blemish on the accounting front was operating cash flows generated, which fell 17.7% YoY in total among the GDXJ-top-34-component stocks to $1.1b. There were no individual-company disasters which stood out, just weaker cash flows across the board. Still the mid-tier miners were producing healthy amounts of cash as the big profits gap between their AISCs and prevailing gold prices last quarter implied.

The GDXJ top 34’s overall cash treasuries fell a similar 20.4% YoY in Q1 to $5.1b, reflecting lower OCFs. But less cash isn’t necessarily negative, as gold miners tap their cash hoards when they are building or buying expansions or mines. So declining cash balances suggest more investment to grow production in future quarters, which is always good news in this sector. The mid-tier golds’ Q1’19 results were bullish.

GDXJ’s mostly-mid-tier component list of great gold miners is really faring well, especially compared to the struggling large gold miners. Investors looking to ride this gold-stock bull should avoid the world’s biggest gold producers and instead deploy their capital in the mid-tier realm. The best gains will be won in individual smaller gold miners with superior fundamentals, plenty of which are included within GDXJ.

Despite being the world’s leading gold-stock ETF, GDX needs to be avoided. The major gold miners that dominate its weightings are struggling too much fundamentally, unable to grow their production. Capital will instead flow into the mid-tiers, juniors, and maybe a few smaller majors still able to boost their output and thus earnings going forward. None of this is new, but the major and mid-tier disconnect continues to worsen.

Again back in essentially the first half of 2016, GDXJ skyrocketed 202.5% higher on a 29.9% gold upleg in roughly the same span! While GDX somewhat kept pace then at +151.2%, it is lagging GDXJ more and more as its weightings are more concentrated in stagnant gold mega-miners. The recent big mergers are going to worsen that investor-hostile trend. Investors should buy better individual gold stocks, or GDXJ.

One of my core missions at Zeal is relentlessly studying the gold-stock world to uncover the stocks with superior fundamentals and upside potential. The trading books in both our popular weekly and monthly newsletters are currently full of these better gold and silver miners. Mostly added in recent months as gold stocks recovered from deep lows, their prices remain relatively low with big upside potential as gold rallies!

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The bottom line is the mid-tier gold miners are thriving fundamentally. They are still rapidly growing their production while majors suffer chronic output declines. Most mid-tiers are holding the line on costs, which portends strong leveraged profits growth as gold continues grinding higher on balance. The performance gap between the smaller mid-tier and junior gold miners and larger major ones is big and still mounting.

Investors and speculators really need to pay attention to this intra-sector disconnect. Gold and its miners’ stocks should power far higher in coming years as the lofty general stock markets roll over. But the vast majority of the gains will be concentrated in growing gold miners, not shrinking ones. This means the mid-tier and junior gold miners will far outperform the majors as gold powers higher on weaker stock markets.

Adam Hamilton, CPA

May 27, 2019

This is big, really big. I can’t say that it’s a surprise that Glencore might want to partner with First Cobalt Corp. (TSX-V: FCC) / (QTCQX: FTSSF), but it would be by far the best possible outcome for management’s strategic review of its 100%-owned refinery in Ontario. Shareholders & prospective investors were understandably growing nervous about First Cobalt’s ability to deliver the restart funding with little or no additional equity issuance. Not because of management, because the battery metals sector is a complete disaster. Everyone knows that the Cobalt price is down a lot, did you know that Vanadium is down 73.5% in 6 months? This news alone, if this agreement is consummated, could mark a turning point for select Cobalt juniors. {See full press release here}

Glencore adds tremendous credibility to First Cobalt’s Refinery

In addition to the potential for significant revenue (C$100M+ at US$20/lb. Cobalt) and good, very good or great EBITDA margins (depending on the Cobalt price), this would open A LOT of doors for the company. They would instantly become the premier pure-play, North American Cobalt junior, not that there are many left to choose from. First Cobalt could solidify its leading position by acquiring other companies & assets. Might eCobalt Solutions (TSX: ECS) be first on the list !?! eCobalt might now prefer the embrace of First Cobalt over a takeover by Australian-listed Jervois Mining. I have no insight on this, I’m just reflecting on the recent acquisition of ECS shares.

At the risk of getting ahead of myself, this is a MOU not a signed, sealed & delivered deal, I continue with the benefits of an agreement between First Cobalt & Glencore. Glencore adds increased credibility to First Cobalt, the management team and the refinery. It would be a supreme vote of confidence. Outside of North America, First Cobalt might not be a very well-known name. That would change overnight, in fact it might be changing as I write this sentence…. First Cobalt would attract additional world-class executives. The company could pay a dividend! My quick math suggests that a 5% dividend yield would be possible from 50% of the cash flow on 2,000-2,500 tonnes of production at US$20/lb. Cobalt.

Glencore would greatly de-risk Refinery restart & attract attention to FCC.v

It’s amazing what Glencore would bring to the table that no one else possibly could. It appears from the press release that Glencore might provide a loan for up to US$30M, all of the capital needed, to restart the refinery. In addition, Glencore would provide technical assistance in bringing the refinery back into production, for instance they would, “collaborate on final flow sheet design.” Glencore would source up to 100% of the feedstock. The refinery is a hydro-metallurgical Cobalt facility in the Canadian Cobalt Camp of Ontario. It has the potential to produce either a Cobalt Sulfate for lithium-ion batteries, or Cobalt metal for the North American Aerospace industry and other industrial & military applications.

Taking this news a step further, if the restart were to be a success, guess who would be there to help (if feasible) ramp up operations from 2,000-2,500 to perhaps 4,000-5,000 tonnes/yr.? Glencore is to Cobalt what Albemarle and SQM are to Lithium. Yes, closing on this agreement would be really, really good for shareholders.

Assuming that Glencore is on board, the refinery would likely be up and running sooner than otherwise would be the case. And, once the world realized that a Cobalt Refinery was coming online in Canada in 2021, and that produced Cobalt would to be ethically sourced from mine to finished product, end-users would be very interested in speaking with First Cobalt. First on the list of visitors to see CEO Trent Mell would likely be execs from the automakers. The company has already signed NDAs with a number of them. Next to visit? Li-ion battery makers. Both automakers and battery companies need ethically sourced Cobalt for genuine moral considerations, for public relations and for security of supply.

As per the press release,

“With no cobalt sulfate production in North America today, the First Cobalt Refinery has the potential to become the first such producer for the American electric vehicle market. The Company has signed confidentiality agreements with several automotive companies interested in securing cobalt for the North American market.”

I have to remind myself that this is a MOU, not a done deal, but I think the chances of it getting done are pretty high. First Cobalt & Glencore have likely been talking about the refinery for months now, if not longer. And, although I’ve outlined the many benefits for First Cobalt shareholders, Glencore benefits as well. Over time, if the refinery could produce 5,000 tonnes of Cobalt products, and Glencore controls that off-take, that’s a meaningful amount, probably > 10% of the battery-grade Cobalt processed / refined & sold outside of Africa & China.

Speaking of China, recent news shows that geopolitical risks are alive and well with China hinting at restricting the free trade of rare earth metals from China to the U.S. It doesn’t matter who’s to blame, how the U.S. and China got here, all that matters are the potential consequences. Today it’s rare earth metals, will China threaten to stop exporting lithium & cobalt next? I doubt that China would sell to Canada or Mexico if there was an embargo against the U.S. for rare earth metals, lithium, cobalt, vanadium, graphite, etc.

But now I’ve veered off course, this isn’t about China… The news today is about Glencore signing a MOU with First Cobalt Corp. (TSX-V: FCC) / (OTCQX: FTSSF) to help design, re-engineer, refurbish & commission the company’s Cobalt refinery in Ontario. Glencore could deliver up 100% of the feedstock needed to produce 2,000-2,500 tonnes of finished Cobalt. And, Glencore is considering paying the entire US$30M cost (in the form of a loan to First Cobalt Corp.) to get it up and running again. This is the biggest news of the year for the Company. This is important news for the Cobalt sector. Let’s see if this marks a change in sentiment for Cobalt juniors.

May 24, 2019

Peter Epstein

Disclosures: The content of this article is for information only. Readers fully understand and agree that nothing contained herein, written by Peter Epstein of Epstein Research [ER], (together, [ER]) about First Cobalt Corp., including but not limited to, commentary, opinions, views, assumptions, reported facts, calculations, etc. is not to be considered implicit or explicit investment advice. Nothing contained herein is a recommendation or solicitation to buy or sell any security. [ER] is not responsible under any circumstances for investment actions taken by the reader. [ER] has never been, and is not currently, a registered or licensed financial advisor or broker/dealer, investment advisor, stockbroker, trader, money manager, compliance or legal officer, and does not perform market making activities. [ER] is not directly employed by any company, group, organization, party or person. The shares of First Cobalt Corp. are highly speculative, not suitable for all investors. Readers understand and agree that investments in small cap stocks can result in a 100% loss of invested funds. It is assumed and agreed upon by readers that they will consult with their own licensed or registered financial advisors before making any investment decisions.

At the time this article was posted, Peter Epstein owned shares of First Cobalt Corp. and the Company was an advertiser on Epstein Research [ER].

Readers should consider me biased in favor of the Company and understand & agree that they must conduct their own due diligence above and beyond reading this article. While the author believes he’s diligent in screening out companies that, for any reasons whatsoever, are unattractive investment opportunities, he cannot guarantee that his efforts will (or have been) successful. [ER] is not responsible for any perceived, or actual, errors including, but not limited to, commentary, opinions, views, assumptions, reported facts & financial calculations, or for the completeness of this article or future content. [ER] is not expected or required to subsequently follow or cover events & news, or write about any particular company or topic. [ER] is not an expert in any company, industry sector or investment topic.

1. “Buy in July to watch your gold stocks fly!” That’s a time-tested mantra from “Goldlion”, who picks the junior mining stocks for my Graceland Juniors newsletter.
2. Sadly, this is not July. It’s the month of May, and May is part of the soft demand season for gold. The strong demand season typically runs from August to February.
3. A lot of gold stock investors want gold stocks to roar higher now, but nothing happens before its time. Interestingly, gold’s strong season begins just as stock market crash season begins.
4. Crash season for the US stock market typically runs from August to October. As the business cycle matures, stock market crash season becomes more dangerous and the strong demand season for gold offers more potential reward.
5. Please click here now. Double-click to enlarge. The soft price action is seasonally expected and there’s short term technical weakness, but there’s nothing overly negative, let alone bearish, on this daily gold chart.
6. Please click here now. Double-click to enlarge this magnificent weekly gold chart. Like Ray Dalio, I’ve suggested the next crisis will be a US dollar crisis more than an economic growth crisis.
7. That’s mainly because Trump administration is pro-growth and pro-business, but it’s also continued to grow both the government debt and the overall size of the government, all in the name of “making citizens great”.
8. This approach to running the government has greatly strengthened the private sector economy while greatly weakening the ability of the government to fund its insane debt and size growth in even a mild economic downturn.
9. In the next downturn, I expect the American private sector to weather the storm reasonably well while the government is forced to print money to fund itself. The bottom line:
10. In the last downturn, QE was used to promote growth and it was deflationary. In the next downturn, QE will be used to make up for lacklustre demand for government bonds, and it will be extremely inflationary.
11. Please click here now. Like America’s Warren Buffett, India’s Rakesh “RJ” Jhunjhunwala likes to heap praise on his government leaders instead of calling them out as extortionists and bullies.
12. Having said that, RJ has the same outlook for the private sector of India that I do in the medium and long-term; a move back towards 8%-9% GDP growth, and then a long-term stay in the double-digits range.
13. This gargantuan growth will increase gold demand quite substantially, and it’s likely to happen as the US government begins devaluing the dollar to manage its outrageous spending and debt. That will trigger fresh fear trade buying in America.
14. Please click here now. Double-click to enlarge this spectacular bitcoin chart. I expect a flag pattern will form, and then bitcoin should roar to the $20,000 area highs.
15. Most investors try to make money by buying what is hot, and they tend to get emotional about it. Bitcoin is not hot. It’s warm.
16. I focus on asset classes more than market timing, although I do that too. Investors build the most wealth, and stay sane doing it, by reducing their focus on what is hot, and instead focusing on making sure they own a piece of the asset class action.
17. The US stock market is part of the global stock markets asset class. So are Chindian stock markets. So, I own some US, Indian, and Chinese stock markets asset class action and I recommend that all investors own some too. It’s that simple.
18. Bitcoin and related crypto currencies are the newest asset class. There’s a lot of silly debate about whether gold is better than bitcoin, or vice-versa. I take the stand that it doesn’t matter which is better. What matters is that both are asset classes and investors need to get involved if they want to get richer. Period.
19. Some analysts claim that bitcoin is already more widely used as a payment mechanism than Paypal. That may or may not be true. Regardless, in time I think crypto will become as widely used as most government fiat, and governments will eagerly tax it with an electronic money transaction tax.
20. My prediction is that bitcoin isn’t going away but governments will ultimately make the most money from it. Investors who want to make money with it, albeit less than the government “people helpers” will make, can check out my crypto/blockchain newsletter at www.gublockchain.com.
21. Please click here now. Double-click to enlarge. I’ll make another prediction, which is that in the current pullback, gold stocks will bottom before bullion does.
22. So far in this month of May, GDX is already showing solid strength relative to gold.
23. Note the dramatic decline in volume from February. Declining volume that accompanies a price decline is a sign of a very healthy market.
24. My Graceland “traffic lights” proprietary technical system indicates that a Friday close over $23 would see a lot of gold stocks begin a major rally. I’ll be watching gold stocks closely for signs of a bullish non-confirmation with bullion… to jump-start that rally!

Special Offer For Website Readers: Please send me an Email to freereports4@gracelandupdates.com and I’ll send you my free “Golden Mid Caps!” report. I highlight gold producers that are not too big and not too small that are trading in the $2 to $10 price range with significant upside price action possible!

Thanks!!

Stewart Thomson
Graceland Updates

https://gracelandjuniors.com
www.guswinger.com

Email:
stewart@gracelandupdates.com
stewart@gracelandjuniors.com
stewart@guswinger.com

Risks, Disclaimers, Legal
Stewart Thomson is no longer an investment advisor. The information provided by Stewart and Graceland Updates is for general information purposes only. Before taking any action on any investment, it is imperative that you consult with multiple properly licensed, experienced and qualified investment advisors and get numerous opinions before taking any action. Your minimum risk on any investment in the world is: 100% loss of all your money. You may be taking or preparing to take leveraged positions in investments and not know it, exposing yourself to unlimited risks. This is highly concerning if you are an investor in any derivatives products. There is an approx $700 trillion OTC Derivatives Iceberg with a tiny portion written off officially. The bottom line:
Are You Prepared?

The major gold miners’ stocks are drifting sideways with gold, their early-year momentum sapped by the recent stock-market euphoria. But they are more important than ever for prudently diversifying portfolios, a rare sector that surges when stock markets weaken. Their just-reported Q1’19 results reveal how gold miners are faring as a sector, and their current fundamentals are way better than bearish psychology implies.

The wild market action in Q4’18 again emphasized why investors shouldn’t overlook gold stocks. Every portfolio needs a 10% allocation in gold and its miners’ stocks. As the flagship S&P 500 broad-market stock index plunged 19.8% largely in that quarter to nearly enter a bear market, the leading gold-stock ETF rallied 11.4% higher in that span. That was a warning shot across the bow that these markets are changing.

Four times a year publicly-traded companies release treasure troves of valuable information in the form of quarterly reports. Required by the US Securities and Exchange Commission, these 10-Qs and 10-Ks contain the best fundamental data available to traders. They dispel all the sentiment distortions inevitably surrounding prevailing stock-price levels, revealing corporations’ underlying hard fundamental realities.

The definitive list of major gold-mining stocks to analyze comes from the world’s most-popular gold-stock investment vehicle, the GDX VanEck Vectors Gold Miners ETF. Launched way back in May 2006, it has an insurmountable first-mover lead. GDX’s net assets running $9.0b this week were a staggering 46.6x larger than the next-biggest 1x-long major-gold-miners ETF! GDX is effectively this sector’s blue-chip index.

It currently includes 46 component stocks, which are weighted in proportion to their market capitalizations. This list is dominated by the world’s largest gold miners, and their collective importance to this industry cannot be overstated. Every quarter I dive into the latest operating and financial results from GDX’s top 34 companies. That’s simply an arbitrary number that fits neatly into the tables below, but a commanding sample.

As of this week these elite gold miners accounted for fully 94.3% of GDX’s total weighting. Last quarter they combined to mine 274.4 metric tons of gold. That was 32.2% of the aggregate world total in Q1’19 according to the World Gold Council, which publishes comprehensive global gold supply-and-demand data quarterly. So for anyone deploying capital in gold or its miners’ stocks, watching GDX miners is imperative.

The largest primary gold miners dominating GDX’s ranks are scattered around the world. 20 of the top 34 mainly trade in US stock markets, 6 in Australia, 5 in Canada, 2 in China, and 1 in the United Kingdom. GDX’s geopolitical diversity is excellent for investors, but makes it more difficult to analyze and compare the biggest gold miners’ results. Financial-reporting requirements vary considerably from country to country.

In Australia, South Africa, and the UK, companies report in half-year increments instead of quarterly. The big gold miners often publish quarterly updates, but their data is limited. In cases where half-year data is all that was made available, I split it in half for a Q1 approximation. While Canada has quarterly reporting, the deadlines are looser than in the States. Some Canadian gold miners drag their feet in getting results out.

While it is challenging bringing all the quarterly data together for the diverse GDX-top-34 gold miners, analyzing it in the aggregate is essential to see how they are doing. So each quarter I wade through all available operational and financial reports and dump the data into a big spreadsheet for analysis. The highlights make it into these tables. Blank fields mean a company hadn’t reported that data as of this Wednesday.

The first couple columns of these tables show each GDX component’s symbol and weighting within this ETF as of this week. While most of these stocks trade on US exchanges, some symbols are listings from companies’ primary foreign stock exchanges. That’s followed by each gold miner’s Q1’19 production in ounces, which is mostly in pure-gold terms. That excludes byproduct metals often present in gold ore.

Those are usually silver and base metals like copper, which are valuable. They are sold to offset some of the considerable expenses of gold mining, lowering per-ounce costs and thus raising overall profitability. In cases where companies didn’t separate out gold and lumped all production into gold-equivalent ounces, those GEOs are included instead. Then production’s absolute year-over-year change from Q1’18 is shown.

Percentage changes aren’t relevant or meaningful if data shifted from positive to negative or vice versa, or if derived from two negative numbers. So in those cases I included raw underlying data rather than weird or misleading percentage changes. Companies with symbols highlighted in light-blue have newly climbed into the elite ranks of GDX’s top 34 over this past year. This entire dataset together is quite valuable.

It offers a fantastic high-level read on how the major gold miners are faring fundamentally as an industry and individually. While the endless challenge of growing production continues to vex plenty of the world’s larger gold miners, they generally performed much better in Q1’19 than today’s low gold-stock prices reflect. Last quarter was also a big transition one as the recent gold-stock mega-mergers continued to settle out.

Production has always been the lifeblood of the gold-mining industry. Gold miners have no control over prevailing gold prices, their product sells for whatever the markets offer. Thus growing production is the only manageable way to boost revenues, leading to amplified gains in operating cash flows and profits. Higher output generates more capital to invest in expanding existing mines and building or buying new ones.

Gold-stock investors have long prized production growth above everything else, as it is inexorably linked to company growth and thus stock-price-appreciation potential. But for several years now the major gold miners have been struggling to grow production. Large economically-viable gold deposits are getting increasingly harder to find and more expensive to exploit, with the low-hanging fruit long since picked.

Gold miners’ exploration budgets have cratered since gold collapsed in Q2’13, plummeting 22.8%! That was the yellow metal’s worst quarter in an astounding 93 years, which devastated sentiment and scared investors away from this sector. Much less capital to explore shrank the pipeline of new finds to replace relentless depletion at existing mines. That left major gold miners just one viable option to grow their output.

They either have to buy existing mines and/or deposits from other companies, or acquire those outright. That’s unleashed a merger-and-acquisition wave that culminated in recent quarters. In September 2018 gold giant Barrick Gold announced it was merging with Randgold. Not to be outdone, in January 2019 the other gold behemoth Newmont Mining declared it was acquiring Goldcorp in another colossal mega-deal.

I wrote a whole essay analyzing these mega-mergers in mid-February, and believe they are bad for this sector for a variety of reasons. For our purposes today, Q1’19 was the first quarter fully reflecting the new Barrick including Randgold. But Newmont’s acquisition of Goldcorp wasn’t finalized until April 2019, so that isn’t included in NEM’s Q1’19 results. And unfortunately Goldcorp’s weren’t published separately either.

That makes analyzing the GDX top 34’s gold production last quarter more complicated than usual. As far as I can tell, Newmont released nothing on Goldcorp’s Q1 operations. As usual when one company buys out another, the acquired company’s website is quickly effectively deleted. It is replaced with a tiny new website largely devoid of useful information, that redirects to the new combined company’s main website.

So Goldcorp’s Q1 results were apparently cast into a black hole, never to be seen by investors. Across last year’s four quarters, Goldcorp ranked as the 5th-to-7th-largest GDX component. So excluding it from this leading gold-stock ETF skews all kinds of Q1 numbers. This discontinuity will resolve itself over the next couple quarters as Newmont and Goldcorp are fully integrated into the new, wait for it, “Newmont Goldcorp”.

In Q1’19 these top 34 GDX gold miners produced 8.8m ounces of gold, which was down a sharp 6.3% from Q1’18’s levels. But Goldcorp averaged 574k ounces of quarterly production in 2018. If that is added in, Q1’19’s climbs to 9.4m ounces which is only off a slight 0.2% YoY. Stable gold output is a victory for the major gold miners, as there have been plenty of recent quarters where their production has declined.

But depletion is still a huge challenge for them, as they are losing market share to smaller gold miners that aren’t so unwieldy to manage. The World Gold Council publishes the best global gold fundamental supply-and-demand data quarterly. According to its latest Q1’19 Gold Demand Trends report, total world mine production actually climbed 1.1% YoY in Q1. So the larger gold miners continue to underperform.

On a quarter-over-quarter basis since Q4’18, the GDX top 34’s gold production plunged 8.8%! But again that is overstated by Goldcorp’s missing-in-action Q1 output. Add in that 2018 quarterly approximation, and that decline moderates to 2.8% QoQ. The quarter-to-quarter output dynamics among the major gold miners are somewhat surprising. Gold is not produced at a steady pace year-round as logically assumed.

Going back to 2010, the world gold mine production per the WGC has averaged sharp 7.2% QoQ drops from Q4s to Q1s! For many if not most major gold miners, calendar years’ first quarters mark the low ebb in their annual output. The gold miners attribute this Q1 lull to new capital spending that slows production as mine infrastructure is upgraded. That weaker output in Q1s is regained with big jumps in following quarters.

In that same decade-long WGC dataset, Q2s saw world mine production average big 5.4% QoQ surges from Q1s! That sharp acceleration trend continued in Q3s, which averaged additional 5.3% QoQ growth from Q2s. Then that petered out on average in Q4s, which were only 0.5% better than Q3s. So it is normal for gold miners’ production to fall sharply in years’ Q1s before rebounding strongly in Q2s and Q3s.

There’s more to this intra-year seasonality than capital spending though. Mine managers play a big role in how they plan their ore sequencing. Individual gold deposits are not homogenous, but have varying richness throughout their orebodies. Mine managers have to decide which ore to mine in any quarter, which is fed through their fixed-capacity mills for crushing and gold recovery. Ore grade determines output.

The more gold per ton of ore dug and hauled in any quarter, the more gold produced. Mine managers choose to process more lower-grade ores in Q1s, then move to higher-grade ore mixes in Q2s and Q3s. That helps maximize their incentive bonuses. Q3 results are reported in early-to-mid Novembers soon before year-ends. Higher production boosts stock prices heading into that year-end bonus-calculation time!

Realize that Q1 results reported from early-to-mid Mays generally show a year’s weakest gold output. It is surprising to see investors sell gold stocks hard when Q1’s production declines from Q4’s, as this is par for the course in this industry. The bright side is excitement later builds throughout the year as Q2’s and Q3’s production grows fast. The gold miners look better fundamentally later in years than earlier in them!

With year-over-year gold production among the GDX top 34 effectively flat in Q1’19 with Goldcorp’s likely output added back in, odds argued against much of a change in gold-mining costs. They are largely fixed quarter after quarter, with actual mining requiring the same levels of infrastructure, equipment, and employees. These big fixed costs are spread across production, making unit costs inversely proportional to it.

Cash costs naturally encompass all cash expenses necessary to produce each ounce of gold, including all direct production costs, mine-level administration, smelting, refining, transport, regulatory, royalty, and tax expenses. In Q1’19 these top-34-GDX-component gold miners that reported cash costs averaged $616 per ounce. That actually fell a sharp 7.7% YoY, down on the low side of recent years’ cash-cost range.

Investor sentiment in gold-stock land has been really poor, as recent months’ extreme stock euphoria has really stunted interest in gold. If stock markets seemingly do nothing but rally indefinitely, then why bother prudently diversifying stock-heavy portfolios with counter-moving gold? There’s been increasing chatter lately about the gold-mining industry’s viability, which isn’t unusual when psychology waxes quite bearish.

Those worries are ridiculous with the major gold miners’ cash costs averaging in the low $600s even in Q1’s low-quarterly-output ebb. As long as gold remains well above $616, this neglected sector faces no existential threat. And Q1’s top-34-GDX-average cash costs are even skewed higher by one struggling gold miner, Peru’s Buenaventura. In Q1’19 it suffered a sharp 22.2% YoY plunge in gold production.

That was primarily due to the company stopping extraction operations at one of its key mines in January to rejigger and centralize it. That lower output to spread mining’s big fixed costs across was enough to catapult BVN’s Q1 cash costs 33.1% higher YoY to an extreme $1049 per ounce. Those are expected to mean revert much lower in coming quarters. Ex-BVN the rest of the GDX top 34 averaged merely $600.

The GDX-top-34 gold miners reported average AISCs of $893 per ounce in Q1’19, up merely 1.0% YoY. These flat AISCs are right in line with flat production when Goldcorp’s likely output is added back in. The big operational challenges at Buenaventura also rocketed its AISCs an incredible 82.3% higher YoY to an anomalous $1382 per ounce. Excluding BVN, the rest of the GDX top 34 averaged $874 AISCs in Q1.

That’s right in line with the past couple calendar years’ quarterly average of $872. The major gold miners, despite still struggling to grow their production enough to exceed depletion, are still holding the line on all-important costs. Those stable costs regardless of prevailing gold prices are what make the gold stocks so attractive. They have massive upside potential as their profits amplify the higher gold prices still coming.

The gold price averaged $1303 in Q1’19. Subtracting the major gold miners’ average $893 AISCs from that yields strong profits of $410 per ounce. While recent years’ universal stock-market euphoria has capped gold at $1350 resistance, it has still been grinding higher on balance carving higher lows. Gold is getting wound tighter and tighter towards a major upside breakout to new bull highs well above $1350.

Like usual gold investment demand will be rekindled when the stock markets inevitably roll over materially again, propelling gold higher. A mere 7.7% upleg from $1300 would carry gold to $1400, and just 15.4% would hit $1500. Those are modest and easily-achievable gains by past-gold-upleg standards. During essentially the first half of 2016 after major stock-market selloffs, gold blasted 29.9% higher in 6.7 months!

At $1300 and Q1’s $893 average AISCs, the major gold miners are earning $407 per ounce. But at $1400 and $1500 gold, those profits soar to $507 and $607. That’s 24.6% and 49.1% higher on relatively-small 7.7% and 15.4% gold uplegs from here! This inherent profits leverage to gold is why the major gold stocks of GDX tend to amplify gold uplegs by 2x to 3x or so. Investors enjoy large gains as gold rallies.

Despite investors’ serious apathy for this sector, the gold miners’ costs remain well-positioned to fuel big profits growth in a higher-gold-price environment. Investors love rising earnings, which are looking to be scarce in the general stock markets this year. The better gold miners’ stocks are likely to see big capital inflows as gold continues climbing on balance, which will drive them and to a lesser extent GDX much higher.

The GDX top 34’s accounting results weren’t as impressive as their flat production and costs in Q1. The lack of Goldcorp’s operations being accounted for last quarter again distorted normal annual comparisons. So all these Q1’19 numbers are compared to Q1’18’s excluding Goldcorp. Last quarter’s average gold price being 1.9% lower than Q1’18’s average also played a role in weaker year-over-year performance.

The GDX top 34’s total revenues fell 5.2% YoY ex-Goldcorp to $9.2b in Q1’19. That’s reasonable given the slightly-lower production and gold prices. Lower byproduct silver output also contributed, as a half-dozen of these elite major gold miners also produce sizable amounts of silver. Again without Goldcorp, the total silver output among the GDX top 34 fell 8.0% YoY to 27.3m ounces in Q1 weighing on total sales.

Their overall cash flows generated from operations mirrored this weakening trend, down 9.1% YoY to $2.8b last quarter. Still the GDX-top-34 gold miners were producing lots of cash as the big profits gap between their AISCs and prevailing gold prices implied. Only two of these major gold miners suffered significant negative OCFs, and one of those was naturally Buenaventura with all its production struggles.

These elite gold miners remained flush with cash at the end of Q1, reporting $11.1b on their books. That is 11.3% lower YoY without Goldcorp. The gold miners tap into their cash hoards when they are building or buying mines, so declines in overall cash balances suggest more investment in growing future output. Investors fretting about the gold-mining industry today aren’t following their strong operating cash flows.

Last but not least are the GDX top 34’s hard accounting profits under Generally Accepted Accounting Principles. These are the actual quarterly earnings reported to the SEC and other regulators. Overall profits excluding Goldcorp only declined 7.2% YoY to $731m in Q1’19. That’s really impressive in light of the 5.2%-lower revenues. Prior quarters’ big mine-impairment charges on lower gold prices also dried up.

So the major gold miners included in this sector’s leading ETF are doing a lot better than investors are giving them credit for. There’s no fundamental reason for this critical portfolio-diversifying contrarian sector to be shunned. Gold stocks’ only problem is the lack of upside action in gold, which will quickly change once the stock markets decisively roll over again. December 2018 proved these relationships still work.

As the S&P 500 plunged 9.2% that month, investors remembered the timeless wisdom of keeping some gold and gold miners’ stocks in their portfolios. So they started shifting capital back in, driving gold 4.9% higher that month which GDX leveraged to a big 10.5% gain! Gold and its miners’ stocks act like portfolio insurance when stock markets sell off. Everyone really needs a 10% allocation in gold and gold stocks!

That being said, GDX isn’t the best way to do it. This ETF’s potential upside is retarded by the large gold miners struggling to grow their production. Investment capital will seek out the smaller mid-tier and junior gold miners actually able to increase their output. It’s far better to invest in these great individual miners with superior fundamentals. While plenty are included in GDX, their relatively-low weightings dilute their gains.

GDX’s little-brother ETF GDXJ is another option. While advertised as a “Junior Gold Miners ETF”, it is really a mid-tier gold miners ETF. It includes most of the better GDX components, with higher weightings since the largest gold majors are excluded. I wrote an entire essay in mid-January explaining why GDXJ is superior to GDX, and my next essay a week from now will delve into the GDXJ gold miners’ Q1’19 results.

Back in essentially the first half of 2016, GDXJ rocketed 202.5% higher on a 29.9% gold upleg in roughly the same span! While GDX somewhat kept pace then at +151.2%, it is lagging GDXJ more and more as its weightings are more concentrated in stagnant gold super-majors. The recent mega-mergers are going to worsen that investor-hostile trend. Investors should buy better individual gold stocks, or GDXJ, instead of GDX.

The bottom line is the major gold miners performed pretty well last quarter. Their production held steady despite lower prevailing gold prices and inexorable depletion. That led to flat costs right in line with prior years’ average levels. That leaves gold-mining earnings positioned to soar higher in future quarters as gold continues slowly grinding higher on balance. Another major stock-market selloff will accelerate that trend.

Stock investors are making a serious mistake ignoring gold and its miners’ stocks. The bearish sentiment plaguing this sector today is irrational given miners’ solid fundamentals. Diversifying is best done before it is necessary, buying low with gold-stock prices so beaten-down. This is the only sector likely to rally fast amplifying gold’s upside when stock markets inevitably swoon again. Don’t overlook the great opportunity here!

Adam Hamilton, CPA

May 21, 2019

The junior resource sector is a people business. In my view, making money consistently in a sector which is fraught with risk and failure, without a doubt, is inextricably linked to the quality of the people who are running the companies with which I am investing.

This statement, and statements like it, are very likely the most common answers you will hear from many pundits throughout the industry. While this should now be common knowledge, however, I still hear from investors who invest and lose money with “butchers, bakers and candlestick makers.”

So, why does this still happen? I’m not totally sure. Maybe it’s the potential for a quick buck or simply investors caught up in a narrative. Whatever the answer may be, I’m sure it will continue in the future, and that’s too bad. While it makes a select few rich, overall, the promotion of mediocrity is really bad for the sector.

In saying this, today I have for you a conversation with one of the sector’s ‘greats;’ a man and a group in which it’s worth investing.
This person is Dr. Mark O’Dea, Chairman and Founder of Oxygen Capital.
Oxygen Capital has a great track record of success within the sector, as they have provided a ton of value for their shareholders through the sale of many of their projects, such as Fronteer Gold, Aurora Energy and True Gold.

In our conversation, I asked O’Dea about the secret behind Oxygen Capital’s success, lessons he’s learned while working in the sector, his view of jurisdictional risk and more. There’s a lot to glean from O’Dea’s answers – Enjoy!

Brian: In my opinion, one of the biggest issues facing most people is their lack of self-awareness. Whether it be in their investments or their personal lives, many people either have no idea or are prone to lying to themselves about where they are strong and where they are weak and, thus, typically fall short of their goals and aspirations. Oxygen Capital and its managing partners definitely don’t have this issue, as their track record for success within the resource sector is among the best I have seen. What has and continues to make Oxygen Capital successful within the resource sector?

Mark: When you start working on a project, you know reasonably soon, whether it has the potential to be an economic deposit or not, and if it doesn’t, there’s really no point in faking it. It’s a waste of time, it destroys the trust of shareholders, and it builds the wrong type of working culture. So, you’re much better off focusing your efforts on finding the right project. We have lived by the philosophy of “good projects and good places” for 20 years now and it has worked out really, really well.

Over that period, I’ve been CEO and/or Executive Chairman of a number of public companies that have been acquired, because they were underpinned by projects that were either operating mines, or advanced projects that could ultimately become mines.

For example, Fronteer Gold, among other things, had the high grade Long Canyon deposit that ultimately became a mine built by Newmont, after they acquired Fronteer in 2011. It is now one of their lowest cost mines in the USA. Aurora Energy defined and advanced one of the largest uranium deposits in Canada back in 2009, and it was ultimately acquired by Paladin in 2011. Its Michelin deposit needs higher Uranium prices, but it’s got all the attributes of a long life mine. And most recently, at True Gold, we built an open-pit, heap leach gold mine in West Africa, and shortly after we poured our first gold bar in 2016, we were acquired by Endeavour Mining. So, all of our big successes have been underpinned by high quality projects that were either mines or had the potential to become mines.

Today, we’ve got four companies at Oxygen – Pure Gold, Liberty Gold, Sun Metals and Discovery Metals. We’ve created, in my view, one of the best exploration and development pipelines in the business. And all of our companies continue to be underpinned by good projects, in good places. At Pure Gold, we have the large Madsen Gold Deposit in Red Lake Ontario, which is currently the highest grade gold development project in Canada today. We just finished a bankable feasibility study that’s underpinned by a two million ounce indicated resource, at almost nine grams per ton, with another half million ounces of inferred gold. It’s going through the final permitting process and ultimately the goal is to become the next Canadian producer.

Liberty is rapidly advancing three big open pit gold projects in the Great Basin of the United States. They’re excellent projects in a Tier 1 jurisdiction. We recently put out a PEA on Gold Strike and it shows that it’s got the makings of an excellent low cost mine. It’s very appealing. And we’re about to start drilling Black Pine, which is another big Carlin-style gold system that has exciting size potential.
Finally, Sun Metals, we just made a highly disruptive discovery in BC, which was frankly, one of the best high grade copper-gold intercepts in Canada in 2018. We’re about to get back in there this summer and continue drilling to build continuity and size. We are all very excited. So, all of our businesses are underpinned by real projects and that’s been the key to our success.

Brian: Over the course of my life, I have learned that a large portion of what it takes to be successful is not being afraid of failure. The caveat being that it doesn’t pay to be irrationally courageous, either. Firstly, do you agree? Secondly, can you give an example, in terms of your personal resource sector career, of how you used this philosophy to overcome adversity and be successful?

Mark: I would agree with both points, this business is like a treasure hunt, and you know you’re going to make a lot of wrong turns, and hit a lot of dead ends along the way. But when you persevere and ultimately get to the prize, the reward can be spectacular for everyone, and it’s worth it.

We look at dozens and dozens of projects every year, and the key is to know, A, what makes a good project, and those are things like grade, size, strip ratio, metallurgy, all those kinds of things. The second is knowing when to keep going and when to stop.

In my opinion, it is perfectly fine and, in fact, preferable to cut your losses and move on, if your project isn’t shaping up into something meaningful. So, maybe the metallurgy is fatal, or the strip ratio is too high, or the grade is too low, or maybe you just got the geology all wrong. Whatever the reason, failure is part of this business and winning teams in my opinion need to be able to try and fail and quickly move on to a better project. That’s what investors expect of you.

Brian: For me, jurisdictional risk is an interesting subject because everyone has their own criteria for what constitutes risk. For most, jurisdictional risk is most closely tied to the politics of the country in question, or the politics of a neighbouring country.
Over the course of your career, you have worked in and run mining companies in a variety of different countries around the world. These countries range from premier jurisdictions, like Canada and the United States, to some of the more difficult places, like Burkina Faso and Turkey. How have these experiences shaped the way you view jurisdictional risk?

Mark: In my view, risk comes in many forms and I put risk in two categories. One is subterranean risk. Everything below the ground, and the other is above ground risk. And so, 50 years ago in our sector, all the risk associated with mining was subterranean and related to the deposit itself. Did it have the grade and the size or not? And today, all those subterranean risks are still there, to the exact same extent, but layered on top of it all are the above ground risks. Which are, in many ways, far more challenging, because they’re difficult to manage and they can take a lot of time.

I’m talking about things like regulatory, permitting, social, and geo political risk, and mining is under increased scrutiny today. Regardless of the jurisdiction you’re in these days, each jurisdiction has its challenges, whether it’s from local communities or an environmental group.

From day one, your project needs to be positioned in a way that benefits the local community, regardless of where you are. And that means employment, a better way of life and environmental protection, and if you get these three correct right out of the gate, then you are at least increasing your chances of success down the road.

Brian: At the moment, bearish sentiment within the resource sector appears to be very prevalent. As a consequence, many of the junior companies that I have spoken to are finding it very hard to raise cash to further develop their projects. Oxygen Capital companies have a great reputation when it comes to their ability to raise cash. First, how is it that Oxygen companies are able to raise cash in difficult markets and, second, in your opinion, why is the junior resource sector on a whole, seemingly, having a hard time attracting investment capital?

Mark: Since 2013, we’ve been in a bear market; gold spiked at US$1890 /oz in 2012, and then we’ve been bumping along in the US$1200s to US$1300 range for about six years now. And, during this period, there have been some pretty massive structural changes, with traditional funding having exited the space and dried up. ETF flows have stolen liquidity, and passive money is taken over from active money. During this period, we’ve been able to stick to our knitting and we’ve been focused on buying, exploring and advancing great projects in great places, and building our pipeline. Our businesses have been able to grow in this bear market because we’ve been able to attract some of the best investors and name brand backers in the sector, and I’m extremely thankful for their support in backing our companies. Since 2012, we’ve raised about $500 million dollars in 30 finances. And that includes the CapEx to build the Karma open-pit mine in Burkina Faso.

The biggest challenge to raising new capital today is the decimation of actively managed resource funds. These funds kept the ecosystem going for decades and most of that capital has now migrated into passively managed ETFs, which don’t participate in financings. It has also shifted into other speculative industries, which hasn’t helped. But I do fundamentally believe, that the relevance and approval of the sector is going to have a renaissance as the demand for green technologies puts a bigger and bigger focus on the need for metals in our modern lives.

Brian: Having attended many resource sector focused investment conferences over the years, it’s clear, to me at least, that the majority of investors in the sector are in their, so-to-speak, ‘golden years.’ The younger generations, mainly the millennials, on mass, are virtually absent, with their attention seemingly more focused on cannabis and crypto. The question that comes to my mind is, why? Is it a matter of relatability? In your opinion, why has the resource sector failed to attract the millennial generation’s investment dollars, thus far?

Mark: I think that is an important question, but I’m not sure we’re getting the answer right. The broader market has been booming, other sectors have been on fire and generating great returns, in sectors that are more topical and, frankly, cooler. In contrast, you look at the mining space and the equities have been going down for eight years, so there hasn’t been an opportunity for them to make any money. So, they’ve been staying away and that’s one answer.

The other answer, I think there’s a cognitive dissonance between understanding the role of mining in propelling a greener, more sustainable society. That vision requires metals. And, ultimately, I think a connection needs to be made by people, who are embracing electric vehicles, wind turbines, solar panels, and recognize that they all require metals. Lots of metal, which can be extracted without destroying the environment.

As an example, Tesla just published an article today saying there’s not going to be enough metal to supply the electric vehicle demand that’s anticipated. And that’s all copper, cobalt, nickel, etc. What end consumers and investors need to realize is that, mining and environmentalism are all part of the same continuum. We’re all on the same team. And people can feel good about extracting metals from the ground, to build a sustainable greener future, while still protecting the environment. It all needs to be able to coexist as part of the same ecosystem.

Brian: Within Oxygen, you tend to focus on de-risked projects as part of your ethos. A great example of an advanced de-risked project would be the Madsen Red Lake Gold Mine, which is owned by Pure Gold, in Red Lake, Ontario. Red Lake is a prolific district. What are your reasons for focusing on gold right now and what do you see as a future for Red Lake?

Mark: Almost all of our success as a group comes from projects that have been worked on in the past and we have effectively “rediscovered” them. We can include the Michelin Project that Aurora had, Goldstrike and Black Pine at Liberty Gold, Karma at True Gold, Long Canyon at Fronteer Gold and Madsen at Pure Gold. These were all past producing mines or previous exploration projects that were forgotten and put away for various reasons including low metal prices or changes to corporate direction.

Madsen is a perfect example to highlight. This was a past producing mine for 38 years, it produced 2.5 million ounces of gold and effectively lay dormant for 20 years, owned by the predecessor company Claude Resources, who worked on it intermittently, but never advanced it to the stage of developing a new geological understanding and getting it back into production.

Pure Gold picked it up in 2014, and consolidated the property for a net cost of $8.7 million dollars and the team has focused on re-interpreting, compiling, integrating, every bit of data they could for two years on this project. We came up with a new geological model and the Company is now sitting on the highest grade development gold project in Canada, with a million ounces of reserves, drilled off at six-and-half meter centers, and sitting within a 2.1 million ounce indicated resource with another half million ounces of inferred resource. It’s an extraordinary accomplishment and these are all new ounces. This is not a remnant project that we’re going to go in and salvage. These are brand new ounces sitting outside of historical development. So, that’s a pretty important fact to include in there.

Madsen, even though it’s evolved from a historical legacy project, it is actually a big part of the future of Red Lake. It’s a sunrise asset today. We’re about to move through the final permitting process and into production with a high grade gold reserve of one million ounces, with the potential to provide decades of production in Red Lake. Meanwhile, the Red Lake mine complex itself is a sunset asset and it’s starting to wane. So, I think Madsen is going to be a very, very important component of the whole consolidated Red Lake package.

Brian: In my opinion, distinguishing if management teams are owners or if they are solely employees is integral to understanding the motivation the team has to succeed. Not only is it integral to understand how much of the company insiders own, but at what price.
How important do you think it is that management own shares in their own companies?

Mark: I think it’s vital, I think it’s one of the most important things that a shareholder should look at, when they invest in a company. How much skin in the game does the management have? There’s a massive difference between being an employee and being an owner. Being an owner of your company, through owning a significant portion of shares, is a really strong testament to your dedication and your focus on making it a successful venture. For example, at Pure Gold, we recently had five year options that were about to expire last month and everybody in the group, all the board and senior management, exercised those options and held the stock, adding three million shares of insider ownership to the books.

One of the things I have learned over the years is that when you have a project that you truly believe in, own as much of it as possible. I’m one of the largest shareholders in each of the oxygen companies, and have been regularly adding to my position at Pure Gold and Liberty Gold.

Brian: Mark, it has been a pleasure. Thank you very much for sharing your thoughts on the resource sector and, most importantly, educating us on the Oxygen Capital group of companies. Before we end, do you have any final thoughts or advice for resource sector investors in 2019 and beyond?

Mark: I will leave you with a quote from Miles Davis, who knew what he was talking about when it came to jazz when he said, “Time is not the main thing. It’s the only thing.” He wasn’t talking about mining, obviously, he was talking about music. But I think it is equally applicable to the mining sectors.

In this business or any cyclical business, if you get the timing right, the results can be spectacular, beautiful. And to me, it feels very much like the timing is right for the resource stocks to resurface and breakout from this bear market in the very near term.

Don’t want to miss a new investment idea, interview or financial product review? Become a Junior Stock Review VIP now – it’s FREE!

Until next time,

Brian Leni P.Eng
Founder – Junior Stock Review

Disclaimer: The following is not an investment recommendation, it is an investment idea. I am not a certified investment professional, nor do I know you and your individual investment needs. Please perform your own due diligence to decide whether this is a company and sector that is best suited for your personal investment criteria. I do NOT own shares in any of the companies discussed in the interview. I have NO business relationship with Oxygen Capital or any of its associated companies.

1. The short seasonal rally for gold that typically follows India’s Akha Teej holiday (May 7 this year) is in play but this time it is being “juiced” by a major U.S. stock market meltdown!
2. In a game with nine innings, the U.S. business cycle is probably in the eighth or ninth inning.
3. Stock market welfare programs provided by central banks (QE and intense rate cuts) have extended the bull market in stocks. QE is a vile form of corporate socialism. Horrifically, QE is maniacally embraced by governments around the world.
4. Extreme interest rate cuts are a tool to attack elderly savers and make small business loans unprofitable, while promoting stock market buybacks that enrich the elite. These rate cuts and QE also promote government debt worship.
5. The debt worship, which is particularly prevalent in America, has exponentially increased the danger of a 1929-style global stock markets crash. Ominously, it’s happening as the business cycle peaks and a wave of de-dollarization is racing across the globe.
6. U.S. oil company profits have played a big role in overall stock market earnings, and oil suddenly looks quite shaky.
7. The tech-weighted Nasdaq has done better than the Dow in recent years, but the latest tariff tax tantrums thrown by U.S. and Chinese governments could become big nails in the overall earnings growth coffin.
8. Please click here now. Mike Wilson is one of America’s most influential stock market analysts. He suggests that America is headed for recession if more tariffs are coming. I’ve predicted more tariffs are on the way, and here to stay!
9. The tariffs are here for the long-term because the decline of America as lead empire is long-term. Some major bank economists and analysts are also beginning to adopt this view.
10. My www.guswinger.com swing trade service caught all the latest downside action in the Nasdaq as well as the stunning rally in the dollar against the yuan in the FOREX market. These swing trades are mechanical. They are not influenced by U.S. government “world growth leader” propaganda and debt worship.
11. Please click here now. Double-click to enlarge. The Dow has gone nowhere since the tariff taxes were launched. I predict it will continue to go nowhere.
12. Horrifically, at this stage of the business cycle a meltdown is as likely as sideways action. The only people making any money in this stock market are short-term traders and dividend investors.
13. Please click here now. Double-click to enlarge this superb gold chart. The bull wedge breakout is impressive but until the dollar collapses against the yen I would not get overly excited about gold’s immediate prospects for substantially higher prices.
14. On that note, please click here now. Double-click to enlarge. I warned investors about the importance of the 109.50 price zone on this USD vs yen chart.
15. A sustained decline below 109.50 would likely see gold challenge the $1350 area highs and the U.S. stock market could enter an “incineration” phase.
16. The influence of Chinese citizens on the gold price should not be underestimated. The tariff taxes are creating a wave of nationalism but also concern about the stock market.
17. When risks rise, bank FOREX traders buy the yen, sell the dollar, and China goes for the gold!
18. I don’t expect the Chinese government to aggressively sell US T-bonds right now, but more U.S. tariffs are likely and then I expect significant T-bond selling to get underway.
19. That will create concerning inflation in America as the U.S. government is forced to either print money or raise rates to peddle its debt to cautious domestic buyers. Hedge fund “supremo” Ray Dalio has predicted America’s future is an inflationary depression. Going forward, all roads lead to gold.
20. Please click here now. Double-click to enlarge this GDX chart. There’s nothing negative about the price action in most gold stocks right now. It’s all positive. Note the burst of volume during yesterday’s spectacular GDX rally….
21. A rally that occurred while the Dow tumbled 600 points!
22. In the big picture, it’s quite rare for gold stocks to fall while the stock market falls. It happened in 2008 due to system risk but that’s the exception to the gold stocks versus stock market rule.
23. Volume has generally softened since the February strong demand season peak after generally rising during the September-February rally. Note my 14,7,7 Stochastics series buy signal that is just occurring now. A Friday close above $23 is my “launchpad” number.
24. What would be the main feature of an inflationary depression? It would probably be extreme money printing conducted by the U.S. government. GDX has a realistic chance of hitting the $30 area in the second half of this year, and then going even higher in 2020. The good news for gold stock investors is that tariffs are not likely to go away until stock markets incinerate, inflation skyrockets, and the price of gold begins to go parabolic!

Special Offer For Website Readers: Please send me an Email to freereports4@gracelandupdates.com and I’ll send you my free “Make Gold Stock Profits Now!” report. I highlight key gold stock breakouts and include investor tactics to make money and limit risk. I also highlight the stunning action in bitcoin that is occurring during the stock market meltdown!

Stewart Thomson
Graceland Updates

https://gracelandjuniors.com
www.guswinger.com

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The U.S. stock markets sure feel inflectiony, at a major juncture. After achieving new all-time record highs, sentiment was euphoric heading into this week. But those latest heights could be a massive triple top that formed over 15 months. Then heavy selling erupted in recent days as the U.S.-China trade war suddenly went hostile. The big U.S. stocks just-reported Q1’19 fundamentals will help determine where markets go next.

The deadline for filing 10-Qs for “large accelerated filers” is 40 days after fiscal quarter-ends. The SEC defines this as companies with market capitalizations over $700m. That currently includes every stock in the flagship S&P 500 stock index (SPX), which contains the biggest and best American companies. The middle of this week marked 38 days since the end of Q1, so almost all the big U.S. stocks have reported.

The SPX is the world’s most-important stock index by far, with its components commanding a staggering collective market cap of $24.9t at the end of Q1! The vast majority of investors own the big U.S. stocks of the SPX, as some combination of them are usually the top holdings of nearly every investment fund. That includes retirement capital, so the fortunes of the big U.S. stocks are crucial for Americans’ overall wealth.

The major ETFs that track the S&P 500 dominate the increasingly-popular passive-investment strategies as well. The SPY SPDR S&P 500 ETF, IVV iShares Core S&P 500 ETF, and VOO Vanguard S&P 500 ETF are among the largest in the world. This week they reported colossal net assets running $271.9b, $175.1b, and $111.5b respectively! The big SPX companies overwhelmingly drive the entire stock markets.

Q1’19 proved extraordinary, the SPX soaring 13.1% higher in a massive rebound rally after suffering a severe correction largely in Q4. That pummeled this key benchmark stock index 19.8% lower in jU.S.t 3.1 months, right on the verge of entering a new bear market at -20%. By the end of Q1, fully 5/6ths of those deep losses had been reversed. Did the big U.S. stocks’ fundamental performances support such huge gains?

Corporate-earnings growth was expected to slow dramatically in Q1, stalling out after soaring 20.5% last year. 2018’s four quarters straddled the Tax Cuts and Jobs Act, which became law right when that year dawned. Its centerpiece was slashing the U.S. corporate tax rate from 35% to 21%, which naturally greatly boosted profits from pre-TCJA levels. Q1’19 would be the first quarter with post-TCJA year-over-year comparisons.

Big U.S. stocks’ valuations, where their stock prices are trading relative to their underlying earnings, offer critical clues on what is likely coming next. By late April the epic stock-market bull as measured by the SPX extended to huge 335.4% gains over 10.1 years! That clocked in as the second-largest and first-longest bull in U.S. stock-market history. With the inevitable subsequent bear overdue, valuations really matter.

Every quarter I analyze the top 34 SPX/SPY component stocks ranked by market cap. This is just an arbitrary number that fits neatly into the tables below, but a dominant sample of the SPX. As Q1 waned, these American giants alone commanded fully 43.7% of the SPX’s total weighting! Their $10.9t collective market cap exceeded that of the bottom 437 SPX companies. Big U.S. stocks’ importance cannot be overstated.

I wade through the 10-Q or 10-K SEC filings of these top SPX companies for a ton of fundamental data I feed into a spreadsheet for analysis. The highlights make it into these tables below. They start with each company’s symbol, weighting in the SPX and SPY, and market cap as of the final trading day of Q1’19. That’s followed by the year-over-year change in each company’s market capitalization, an important metric.

Major U.S. corporations have been engaged in a wildly-unprecedented stock-buyback binge ever since the Fed forced interest rates to deep artificial lows during 2008’s stock panic. Thus, the appreciation in their share prices also reflects shrinking shares outstanding. Looking at market-cap changes instead of just underlying share-price changes effectively normalizes out stock buybacks, offering purer views of value.

That’s followed by quarterly sales along with their YoY change. Top-line revenues are one of the best indicators of businesses’ health. While profits can be easily manipulated quarter to quarter by playing with all kinds of accounting estimates, sales are tougher to artificially inflate. Ultimately sales growth is necessary for companies to expand, as bottom-line profits growth driven by cost-cutting is inherently limited.

Operating cash flows are also important, showing how much capital companies’ businesses are actually generating. Companies must be cash-flow-positive to survive and thrive, using their existing capital to make more cash. Unfortunately many companies now obscure quarterly OCFs by reporting them in year-to-date terms, lumping multiple quarters together. So if necessary to get Q1’s OCFs, I subtracted prior quarters’.

Next are the actual hard quarterly earnings that must be reported to the SEC under Generally Accepted Accounting Principles. Lamentably companies now tend to use fake pro-forma earnings to downplay real GAAP results. These are derided as EBS profits, Everything but the Bad Stuff! Certain expenses are simply ignored on a pro-forma basis to artificially inflate reported corporate profits, often misleading traders.

While we’re also collecting the earnings-per-share data Wall Street loves, it’s more important to consider total profits. Stock buybacks are executed to manipulate EPS higher, because the shares-outstanding denominator of its calculation shrinks as shares are repurchased. Raw profits are a cleaner measure, again effectively neutralizing the impacts of stock buybacks. They better reflect underlying business performance.

Finally the trailing-twelve-month price-to-earnings ratios as of the end of Q1’19 are noted. TTM P/Es look at the last four reported quarters of actual GAAP profits compared to prevailing stock prices. They are the gold-standard metric for valuations. Wall Street often intentionally conceals these real P/Es by using the fictional forward P/Es instead, which are literally mere guesses about future profits that often prove far too optimistic.

These are mostly calendar-Q1 results, but some big U.S. stocks use fiscal quarters offset from normal ones. Walmart, Home Depot, and Cisco have lagging quarters ending one month after calendar ones, so their results here are current to the end of January instead of March. Oracle uses quarters that end one month before calendar ones, so its results are as of the end of February. Offset reporting ought to be banned.

Reporting on offset quarters renders companies’ results way less comparable with the vast majority that report on calendar quarters. We traders all naturally think in calendar-quarter terms too. Decades ago there were valid business reasons to run on offset fiscal quarters. But today’s sophisticated accounting systems that are largely automated running in real-time eliminate all excuses for not reporting normally.

Stocks with symbols highlighted in blue have newly climbed into the ranks of the SPX’s top 34 companies over the past year, as investors bid up their stock prices and thU.S. market caps relative to their peers. Overall the big U.S. stocks’ Q1’19 results looked pretty mixed, with slight sales growth and strong earnings growth. But these growth rates are really slowing, and valuations remain extreme relative to underlying profits.

From the ends of Q1’18 to Q1’19, the S&P 500 rallied 7.3% higher. While solid, that’s not much relative to the extreme euphoria and complacency during this latest earnings season. These stock markets could really be in a massive-triple-top scenario after this record bull run, a menacing bearish omen. The SPX initially peaked at 2872.9 in late January 2018, mere weeks after those record corporate tax cuts went into effect.

Then it quickly plunged 10.2% in 0.4 months, a sharp-yet-shallow-and-short correction. But with overall SPX earnings growth exceeding 20% YoY comparing post-tax-cut quarters to pre-tax-cut ones, this key benchmark clawed back higher and hit 2930.8 in late September 2018. That was merely a 2.0% marginal gain over 7.8 months which saw some of the strongest corporate-profits surges ever from already-high levels.

From there the SPX plummeted 19.8% in 3.1 months in that severe near-bear correction largely in Q4. This trend of slightly-better record highs followed by far-worse selloffs is troubling. By late April 2019 the SPX had stretched to 2945.8, jU.S.t 2.5% above its initial peak 15.1 months earlier. Such paltry gains in a span with record corporate tax cuts and resulting torrid earnings growth should really give traders pause.

Technically these three major record highs look like a massive triple top. The big U.S. stocks’ Q1 results are critical to supporting or refuting this bearish technical picture. The SPX/SPY top 34 did enjoy superior market-cap appreciation from the ends of Q1’18 to Q1’19, averaging 12.8% gains which ran 1.7x those of the entire SPX. That exacerbated the concentration of capital in the largest SPX stocks, the mega-cap techs.

As Q1 ended, 5 of the 6 largest SPX stocks were Microsoft, Apple, Amazon, Alphabet, and Facebook. Together they accounted for a staggering 15.8% of this flagship index’s entire market cap, closing in on 1/6th! These companies are universally adored by investors, owned by the vast majority of all funds and constantly extolled in glowing terms in the financial media. Investors think mega-cap techs can do no wrong.

Last summer these incredible businesses were viewed as recession-proof, effectively impregnable. But even if there’s some truth to that, it doesn’t guarantee mega-cap-tech stock prices will weather a stock-market selloff. During that 19.8% SPX correction mostly in Q4, these 5 dominant SPX stocks and another SPX-top-34 tech darling Netflix averaged ugly 33.3% selloffs! They amplified the SPX’s decline by 1.7x.

No matter how amazing the sales growth among the mega-cap techs, they aren’t only not immune to SPX selloffs but their lofty stock prices make them more vulnerable. Overall the SPX/SPY top 34 companies reported Q1’19 revenues of $969.3b, which was 0.9% YoY higher than the top 34’s in Q1’18. That’s not great performance considering how universally-loved and -owned these companies are among nearly all funds.

Those 6 mega-cap tech stocks did far better, enjoying order-of-magnitude-better revenues growth of 9.9% YoY! Excluding them the rest of the SPX top 34 actually saw total sales slump 1.8% lower YoY, which sure doesn’t sound like a strong economy. If this trend of stalling or slowing revenue growth continues, profits growth will have to start falling sharply in future quarters. Earnings ultimately amplify sales trends.

Even more bearish, Wall Street analysts headed into Q1’19’s earnings season expecting all 500 SPX companies to enjoy 4.7% total revenues growth. But the top 34 that dominate the U.S. stock markets did much worse at 0.9% even with mega-cap techs included. That was definitely a sharp slowdown too, as the SPX top 34 saw 4.2% YoY sales growth in Q4’18. Slowing revenue growth is a real threat to the stock markets.

Remember the SPX surged dramatically in Q1, fueling quite-euphoric sentiment leading into quarter-end. At the same time traders mostly believed that a U.S.-China trade deal would soon be signed, removing the trade-war risks. High tariffs are a serious problem for the gigantic multinational companies leading the SPX, potentially heavily impacting sales. Yet revenue growth was already slowing even before this week!

Trump had twice delayed hiking U.S. tariffs on Chinese imports from 10% to 25%, a good-faith sign giving time for real trade-deal negotiations. But his patience ran out this past Sunday after China backtracked on key previoU.S. commitments. So Trump tweeted the current 10% U.S. tariffs on $200b of annual Chinese imports would surge to 25% today, and warned that 25% tariffs were coming “shortly” on another $325b!

China will retaliate as long as high U.S. tariffs remain in effect. That will really retard U.S. sales from top-34 SPX companies in that country. Beloved market-darling Apple is a great example. This second-biggest stock in the S&P 500 did $10.2b or 17.6% of its Q1’19 sales in China! The U.S.-China trade war heating up in a serious way portends even-weaker revenues going forward for the big U.S. stocks dominating the SPX.

The total operating cash flows generated by the top 34 SPX/SPY companies looked like a disaster in Q1, plummeting 64.4% YoY to $67.8b. Thankfully that is heavily skewed by a couple of the major U.S. banks. JPMorgan Chase and Citigroup reported staggering negative OCFs of $80.9b and $37.6b in Q1, due to colossal $123.1b and $30.4b negative changes in trading assets! This seems really confusing to me.

Mega-bank financials are fantastically-complex, and no one can hope to understand them unless deeply immersed in that world. I’ve been a certified public accountant for decades now, spending vast amounts of time buried in 10-Qs and 10-Ks to fuel my stock trading. Yet even with my background and experience I can’t interpret mega-bank results. It seems weird trading assets plummeted in Q1 as the SPX surged sharply.

But rather than getting bogged down in mega-bank arcania that may be impossible to comprehend by outsiders, we can just exclude the four SPX-top-34 mega-banks from our OCF analysis. They include JPMorgan Chase, Bank of America, Wells Fargo, and Citigroup. Without them, the rest of the SPX top 34 reported total OCFs of $163.2b in Q1’19. That was dead-flat ex-banks, up just 0.3% YoY from Q1’18’s OCFs.

So the big U.S. stocks’ operating-cash-flow generation really slowed too in Q1, stalling out compared to hefty 11.5% YoY growth in Q4’18. That’s another sign that the U.S. economy must be slowing despite the red-hot stock markets. That’s ominous and bearish considering the coming headwinds if the trade wars continue and if the stock markets roll over decisively. Future quarters’ business environments won’t be as good.

Earnings were a different story entirely last quarter, soaring dramatically among the SPX/SPY top 34. They totaled $149.8b, surging an enormous 36.1% YoY! But that was skewed way higher by Warren Buffett’s famous Berkshire Hathaway, the biggest SPX stock after the mega-cap techs. BRK reported a monster Q1 profit of $21.7b, compared to a $1.1b loss a year earlier. That accounted for 1/7th of the top 34’s total.

But Berkshire’s epic profits are due to the sharp stock-market rebound rally, not underlying operations. A new accounting rule that Warren Buffett hates and rails against at every opportunity requires unrealized capital gains and losses to be flushed through quarterly profits. Thus when the SPX plunged in Q4’18, BRK reported a colossal $25.4b GAAP loss. That was largely reversed in Q1’19 with its gigantic $21.7b gain.

Excluding the $16.1b of BRK’s Q1 profits that were mark-to-market stock-price gains, the SPX top 34’s total profits grew 21.5% YoY to $133.6b in Q1. That’s still impressive, but it masks some big problems on the corporate-earnings front. Those 6 elite mega-cap tech companies dominating the SPX actually saw their collective Q1 GAAP profits plunge 11.2% YoY! Apple, Alphabet, and Facebook suffered sharp declines.

Usually mega-cap tech stocks are the profits engine driving the entire SPX higher. If these market-darling companies that are universally-loved and -held struggled with earnings growth in Q1, what does that say about profits going forward? And again profits can be manipulated quarter-to-quarter by playing with all kinds of accounting estimates. So if anything corporate profits are overstated instead of understated.

One of Wall Street’s great farces is the game of comparing quarterly results to expectations instead of what they were in the comparable quarter a year earlier. Mighty Apple is a great example, reporting after the close on April 30th. Its Q1 earnings per share and sales of $2.47 and $58.0b came in ahead of Wall Street expectations of $2.37 and $57.5b. So Apple’s stock surged 4.9% the next day on those “great results”.

But that expectations bar had been lowered dramatically, which is the only reason Apple beat. On an absolute year-over-year basis compared to Q1’18, Q1’19 saw sales drop 5.1%, OCFs plummet 26.3%, and earnings plunge 16.4% YoY! That was quite weak, and couldn’t be considered good by any honest measure. In this recent Q1 earnings season, the fake expectations game obscured plenty of real weakness.

Yet overall SPX-top-34 profits growth still remained strong, with companies suffering drops offset by other companies seeing big jumps. But earnings can’t be considered in isolation, they are only relevant relative to underlying stock prices. Imagine you own a rental house and someone offers you $1000 a month to move in. The reasonableness of that earnings stream is totally dependent on the value of your property.

If your house is worth $100k, $1k a month looks great. But if it’s worth $1m, $1k a month is terrible. The profits anything generates are only measurable relative to the capital invested in that asset. The classic trailing-twelve-month price-to-earnings ratios show how expensive stock prices are relative to underlying corporate profits. Big SPX-top-34 earnings growth isn’t bullish if overall profits are low compared to stock prices.

At the end of Q1’19 proper before these Q1 results were reported, the SPX/SPY top 34 component stocks averaged TTM P/Es of 30.4x. That is definitely improving compared to the prior four quarters’ trend of 46.0x, 53.4x, 49.0x, and 39.7x. But 30.4x is still dangerously high absolutely. Over the past century-and-a-quarter or so, fair value for the U.S. stock markets was 14x. Double that at 28x is where bubble territory begins.

So the big U.S. stocks were literally trading at bubble valuations exiting Q1! Their stock prices were far too high relative to their underlying earnings production compared to almost all of U.S. stock-market history. And this wasn’t just a mega-cap-tech-stock thing, with these elite companies often being bid to really-high valuations compared to other sectors. The 6 mega-cap techs we’ve discussed indeed averaged a crazy 52.0x.

But the other 28 top-34-SPX companies remained very expensive near bubble territory even excluding the tech giants, averaging 25.8x! Even the strong Q1’19 earnings growth didn’t help much. At the end of April as those Q1 results started to work into TTM P/E calculations, the SPX top 34 averaged a slightly-higher P/E of 31.0x. Literal bubble valuations with stock markets trading near all-time record highs are ominous.

Just last Friday when the SPX closed right at its highest levels in history, I wrote a contrarian essay on these “Dangerous Stock Markets”. It explained how high valuations kill bull markets, summoning bears that are necessary to maul stock prices sideways to lower long enough for profits to catch up with lofty stock prices. These fearsome beasts are nothing to be trifled with, yet complacent traders mock them.

The SPX’s last couple bears that awoke and ravaged due to high valuations pummeled the SPX 49.1% lower in 2.6 years leading into October 2002, and 56.8% lower over 1.4 years leading into March 2009! Seeing big U.S. stocks’ prices cut in half or worse is common and expected in major bear markets. And there’s a decent chance the current bubble valuations in U.S. stock markets will soon look even more extreme.

Over the past several calendar years, earnings growth among all 500 SPX companies ran 9.3%, 16.2%, and 20.5%. This year even Wall Street analysts expect it to be flat at best. And if corporate revenues actually start shrinking due to mounting trade wars or rolling-over stock markets damaging confidence and spending, profits will amplify that downside. Declining SPX profits will proportionally boost valuations.

If the big U.S. stocks’ fundamentals deteriorate, the overdue bear reckoning after this monster bull is even more certain. Cash is king in bear markets, since its buying power grows. Investors who hold cash during a 50% bear market can double their holdings at the bottom by buying back their stocks at half-price. But cash doesn’t appreciate in value like gold, which actually grows wealth during major stock-market bears.

Gold investment demand surges as stock markets weaken, as we got a taste of in December. While the SPX plunged 9.2%, gold rallied 4.9% as investors flocked back. The gold miners’ stocks which leverage gold’s gains fared even better, with their leading index surging 10.7% higher. The last time a major SPX selloff awakened gold in the first half of 2016, it soared 30% higher fueling a massive 182% gold-stock upleg!

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The bottom line is the big U.S. stocks’ Q1’19 results were pretty mixed despite the surging stock markets. Revenues and operating cash flows only grew slightly, which were sharp slowdowns from big surges in previous quarters. While earnings somehow defied sales to soar dramatically again, that disconnect can’t persist. A slowdown looked to be underway even before the U.S.-China trade war flared much hotter this week.

Even the surging corporate profits weren’t enough to rescue super-expensive stock markets from extreme bubble valuations. They are what spawn major bear markets, which are necessary to maul stock prices long enough for valuations to mean revert lower. Make no mistake, these overvalued stock markets are still an accident waiting to happen. Stock investors should diversify, adding substantial gold allocations.

Adam Hamilton, CPA

May 15, 2019

Brian Paes-Braga is a Vancouver financier and entrepreneur, known for his notable work in founding and developing the lithium resource company, Lithium X. The company raised roughly $50 million and just two years after going public was sold to NextView New Energy Lion Hong Kong Limited for $265 million in March 2018.

Today, Brian Paes-Braga serves as Principal, Head of Merchant Banking at SAF Group, a leading structured credit and merchant banking group which builds, invests, finances and advises high growth companies. He is also on the board of directors at Thunderbird Entertainment Group and DeepGreen Metals and an Advisory Council member of the International Crisis Group, as well as supports a range of charitable organizations through his Quiet Cove Foundation.

You’ve been a successful entrepreneur for a number of years and have worked in several industries outside of the resource sector. From your experience , what are the ingredients to successfully financing and building strong companies like Lithium X?

Brian Paes-Braga: I think it starts with people and who you hire and whether there is synergy among your team members. I know we had that at Lithium X. It’s also important to respect the share structure of the company, and that means being honest with your shareholders while you continue to raise capital. Luck plays a part and we certainly were lucky in terms of timing and lithium prices when the company went public.

On the subject of Lithium X, the company was sold just two years after going public and you managed to maximize shareholder return. Was that always the plan for Lithium X or did a buyer appear at the right time?

Brian Paes-Braga: I established this company based on the belief that we need to wean the world off fossil fuels. That was the mission of Lithium X. We were confident that the buyer, NextView New Energy, shared the same commitment to developing the lithium sector. True, the $50 million we raised to secure lithium-development projects paid off when we sold the company but that wasn’t our main objective.

You pitched business mentor and renowned Vancouver mining financier Frank Giustra on the idea of building a lithium company and you also attracted another top mining figure, Paul Matysek, who had previously served as CEO of Potash One and Lithium One. How did you manage to convince Giustra and Matysek to join the project?

Brian Paes-Braga: My background as an investment banker helping resource companies raise money for projects led me to believe that lithium had the right supply/demand outlook for getting into business. I did my research on the lithium sector and the demand for lithium-based batteries in China. I think that both Giustra and Matysek saw the potential in the lithium market and were equally excited about the project. Mentors have always been very important to me. Frank Giustra was someone I had looked up to from a very young age and I’ve learned a lot from him.

You are a believer in giving back to the community through your work with various charities and your private foundation, the Quiet Cove Foundation. Can you talk about why charitable giving is important to you?

Brian Paes-Braga: At the center of my work in the business world is the desire to remain philanthropically conscious. I have now travelled the world on various mission trips close to my heart, including working with Syrian refugees in Greece and building schools in Peru. I wanted to devote more time to philanthropy and projects I cared deeply for and that was the reason we created the Quiet Cove Foundation. It focuses on supporting innovative solutions for large scale social issues. We encourage charities to think big, take risks, and disrupt the status quo.

Rockridge Resources (TSX-V: ROCK) is a fairly new mineral exploration company focused on the acquisition, exploration & development of mineral resource properties in Canada. Its focus is copper & base metals. More specifically, base, green energy & battery metals, of which copper is all three! Not just any place in Canada, world-class mining jurisdictions such as Saskatchewan. And, not just good jurisdictions, but in mining camps with significant past exploration, development or production, in close proximity to key mining infrastructure.

The company’s flagship project Knife Lake is in Saskatchewan, Canada, (ranked 3rd best mining jurisdiction in the world) in the Fraser Institute Mining Company Survey. The Project hosts the Knife Lake deposit, a near-surface, (high-grade copper) VMS copper-cobalt-gold-silver-zinc deposit open along strike and at depth. Management believes there’s strong discovery potential in and around the deposit area, and at additional targets on ~85,000 hectares of contiguous claims.

On May 7, Rockridge reported additional results from its Winter diamond drill program at its flagship Knife Lake project in Saskatchewan. Hot on the heels of last week’s press release (April 30th) of 2 holes, comes 3 more. I was planning on writing an article on those excellent results, but Equity.Guru beat me to the punch, putting out this well done piece. Readers following along may recall that the key takeaway was that holes KF19001 & KF19002 largely confirmed historical grades, intercept widths & geological conditions. Fast forward to May 7th, and management’s interpretation of drill holes KF19003, KF19004 & KF19005 was announced. Results on the remaining 7 holes will be released over the next 20-30 days. As a reminder, Rockridge has an option agreement with Eagle Plains Resources to acquire a 100% Interest in the majority of the Knife Lake Cu-Zn-Ag-Au-Co VMS deposit.

Earlier this year, Rockridge drilled 12 holes for a total of 1,053 meters. Importantly, this represents the first work on the property since 2001. Readers may recall from reading past articles & interviews on Epstein Research and Equity.Guru and viewing videos of CEO Trimble, that the company’s primary goal is to explore districts that have been under-explored, never explored, or not recently explored. Management’s highly skilled and experienced technical team & advisors deploy the latest exploration technologies & methods. A lot has changed in 18 years; a simple example would be the use of drones to fly various surveys.

Whatever management is doing seems to be working, as evidenced by 2 of the first 5 holes returning very strong results, and the third hole, KF19003 a true blockbuster.

Hole KF19003 was even better than the first 2 holes. In fact, significantly better, with a grade (Cu Eq.) x thickness (in meters) value of 91, compared to 41 & 49. Make no mistake, KF19001 / 19002 were great, they averaged 1.21 Cu Eq. over an average 38.5m. But, KF19003, WAS something to write home about…. [if under the age of 30, Google the idiom, “nothing to write home about“]. Near-surface like the first 2 holes, the 37.6m interval assayed 2% Cu, 0.2 g/t Au, 9.9 g/t Ag, 0.36% Zn & 0.01% Co, for an estimated 2.42% Cu Eq. grade. 2% Cu over 37.6 meters is a tremendous showing at under 41 meters downhole.

Holes KF19004 & KF19005 were mineralized, but had narrower intercept widths of interest. Still, there were attractive Cu Eq. grades (1.25% & 1.20%, respectively). Interestingly, Gallium (up to 25.6 ppm) & Indium (up to 15.2 ppm) values were found in the mineralized zones of all 3 holes. Those 2 Rare Earth Metals trade at an average of about US$300/kg. Each 10 ppm = 1kg/tonne. KF19004 & KF19005 confirmed mineralization up-dip of historically drilled high grade mineralization. So, those 2 holes were like KF19001 & KF19002, important in building the potential resource size. All activities are advancing the Project toward a NI 43-101 compliant mineral resource estimate later this year.

Perhaps best of all, drill hole KF19003 confirmed high-grade mineralization up-dip of KF19002 in an area where no historical drilling is known to have been done. Therefore, this assay, and perhaps nearby assays to follow, will increase the size & grade of the upcoming mineral resource estimate. There were also encouraging zinc values, incl. 4m (from the 37.6m) of 1.32% Zn, nearly C$50/tonne rock. Gold values up to 0.63 g/t are interesting, but like the zinc, I’m referring to only the best grades, from smaller intercepts. That 4m interval I mentioned also had 7.54% Cu. This is clearly a COPPER deposit, Knife Lake is a near-surface, high-grade Cu project. See drill hole results from KF19001 – KF19005 below. Holes KF19001 & KF19002 were released on April 30, and KF19003-KF19005 on May 7.

Rockridge’s President & CEO, Jordan Trimble commented: “The results from drill hole KF19003, specifically 2.42% Cu Eq. over 37.6m, far exceeded our expectations and represents one of the best holes ever drilled on the project. It is important to note that this drill hole was collared in an area where no historical drilling has been reported. As such these drill results are expected to have a positive impact on the historical resource. Final results from the remaining 7 drill holes are pending and will provide steady news flow over the near term.”

Drill indicated intercepts (core length) are reported as drilled widths and true thickness is undetermined. {details about calculation of Cu Eq. grade can be found in the press release}.{details about calculation of Cu Eq. grade can be found in the press release}.

From the press release, “The Knife Lake area saw extensive exploration from the late 1960s to the 1990s with the last documented work program completed in 2001. Between 1996 & 1998, Leader Mining completed 315 diamond drill holes, outlining a broad zone of mineralization occurring at a depth of less than 100 m. Late in 1998, Leader published an historical estimate, reporting a, “drill-indicated” resource of 20.3 M tonnes, grading 0.6% Cu, 0.1 g/t Au, 3 g/t Ag, 0.06% Co & 0.11% Zn. Within the historical estimate there is a higher grade zone containing 11.0 M tonnes of 0.75% Cu, plus other metals.”

NOTE: These mineral resource estimates are not supported by a compliant NI 43-101 technical report. A qualified person has not done the work to classify these estimates as current mineral resources in accordance with NI 43-101 standards. Furthermore, the categories used for these historical resource estimates are described as, “drill-indicated”. This is not a NI 43-101 resource category, but based on the methodologies & drill hole spacing, management believes it would likely be classified as Inferred.

The Project is within the word famous Flin Flon-Snow Lake mining district that contains a prolific VMS base metals belt. Management paid < half a penny/lb. of copper and they believe there’s tremendous exploration upside. The goal? High-grade discoveries in a mineralized belt that could host multiple deposits, as VMS-style zones often contain clusters of mineralized zones. Of course, the trick is finding them. No modern exploration, drilling or technology has been deployed at Knife Lake. It was discovered 50 years ago and last explored in the 1990s. Airborne geophysics, regional mapping & geochemistry was done. Management believes that modern geophysics; high resolution, deep penetrating EM & drone mag surveys to cover large areas in detail, could make a big difference.

The deposit remains open at depth. Additional discoveries are very possible as the property is > 85,000 hectares in size. The winter drill program marks the end of the beginning of this highly prospective project. Importantly, the program gives the company’s technical team valuable information about geology, alteration & mineralization that will be applied to regional exploration targets. According to the press release, most of the historical work was shallow drilling in and around the deposit area. Very little regional or district work has been documented. In fact, there wasn’t even much drilling done below the deposit. That’s why management is optimistic about discovery potential both at depth and regionally. I’m excited to see what the next 7 assays add to the Rockridge Resources (TSX-V: ROCK) story!

Peter Epstein

May 9, 2019

Disclosures: The content of this article is for information only. Readers fully understand and agree that nothing contained herein, written by Peter Epstein about Rockridge Resources, including but not limited to, commentary, opinions, views, assumptions, reported facts, calculations, etc. is to be considered implicit or explicit investment advice. Nothing contained herein is a recommendation or solicitation to buy or sell any security. [ER] is not responsible under any circumstances for investment actions taken by the reader. [ER] has never been, and is not currently, a registered or licensed financial advisor or broker/dealer, investment advisor, stockbroker, trader, money manager, compliance or legal officer, and does not perform market making activities. [ER] is not directly employed by any company, group, organization, party or person. The shares of Rockridge Resources are highly speculative, not suitable for all investors. Readers understand and agree that investments in small cap stocks can result in a 100% loss of invested funds. It is assumed and agreed upon by readers that they will consult with their own licensed or registered financial advisors before making any investment decisions.

At the time this article was posted, Peter Epstein owned stock in Rockridge Resources and the Company was an advertiser on [ER]. Readers understand and agree that they must conduct their own due diligence above and beyond reading this article. While the author believes he’s diligent in screening out companies that, for any reasons whatsoever, are unattractive investment opportunities, he cannot guarantee that his efforts will (or have been) successful. [ER] is not responsible for any perceived, or actual, errors including, but not limited to, commentary, opinions, views, assumptions, reported facts & financial calculations, or for the completeness of this article or future content. [ER] is not expected or required to subsequently follow or cover events & news, or write about any particular company or topic. [ER] is not an expert in any company, industry sector or investment topic.

There has been an uptick in market risk over the past couple of weeks, and that’s being reflected in dollar-yen and dollar-gold.
Please click here now. Double-click to enlarge this dollar versus yen chart.
The 109.50 area on this chart is quite important for gold investors. If the dollar falls under that price zone, gold is likely to surge to above $1300.
Please click here now. Double-click to enlarge. Gold looks technically solid here in the middle of the soft demand season. There’s a bull wedge in play, a Stochastics buy signal, and a small double bottom at about $1268.
The U.S. stock market is entering its soft season (May-October) but gold’s strong season really doesn’t get underway until August. Investors should exercise patience but there’s little cause for gold market concern.
Gold stocks were slightly higher earlier this week with the Dow Jones down about 500 points on negative trade negotiation news. That’s positive action for these stocks!
The U.S. and Chinese governments are close to announcing a trade deal, but it comes late in the U.S. business cycle and at the start of the stock market soft season.
A trade deal would likely benefit the Chinese stock market. That’s good news for gold and gold stocks. Chinese investors are in a “so-so” mood right now. A trade deal would put them in a great mood, and when they are in a great mood they celebrate by buying lots of gold.
U.S. growth stocks would likely benefit as well. In the big picture, the Chinese stock market gets badly hurt by tariffs and the U.S. stock market gets badly hurt by QT and rate hikes.
I’m adamant that even the most diehard gold bug should have some capital in the U.S. stock market, bonds, and real estate. Even if it’s just 10% of a gold bug’s portfolio, it’s important for all investors to hedge their bets.
For mainstream investors, gold is the hedge. For gold investors, stock markets, government bonds, and real estate are the hedge.
Investors who put all their eggs in one asset class tend to be driven by emotion. If the stock market soars, they curse gold and chase the stock market. If the stock market falls and gold soars, they sell their stocks and buy gold. That’s not going to build sustained wealth in any asset class. It’s destructive action.
Whether there is a trade deal or not, gold-oriented China is going to keep growing at twice the GDP growth rate of America for a long time, and gold-obsessed India could grow at three times the U.S. growth rate for even longer.
What this means for gold is an evolution of the asset class, from a simple U.S.-based fear trade hedge to a more sophisticated globally-endorsed asset that rises against all fiat in good times and bad, and swoons rather than crashes during setbacks.
The evolution is real, but are investors aware?
Please click here now. Double-click to enlarge this TLT-NYSE bond ETF chart. It has my Graceland Updates proprietary buy and sell signals annotated on the chart.
Gold is the ultimate risk-off asset class, but T-bonds are a very good indicator of stock market risk. I have a buy signal in play for bonds as the stock market weak season begins.
Please click here now. Renowned economist Joe Stiglitz notes that while U.S. corporate capital expenditures did rise substantially after the Trump tax cuts, stock market buybacks were about 20% higher than those expenditures.
Stiglitz appears overly-critical of Trump, but he is correct that the huge buybacks versus expenditures spread is concerning.
The U.S. economy is reasonably solid, but a lot of the stock market gains are more related to these buybacks, manipulated interest rates, and QE rather than to corporate earnings and overall economic growth.
In a nutshell, there is risk in the market that needs to be respected, especially as the stock market’s soft season begins.
Please click here now. Double-click to enlarge this GDX daily chart. There’s a fresh bear flag in play, but there’s also a large bull wedge pattern appearing.
With Stochastics the most oversold since September, any pullback this week is likely to be contained by the bull wedge formation. GDX could be making a seasonal low, here in the $19-$20 price zone.
The bottom line for gold, silver, and the miners is that the market has already evolved to the point that soft season price declines are of no concern. My suggestion is to focus on short term trading in the soft demand season and core position capital gain in the strong season!

Special Offer For Website Readers: Please send me an Email to freereports4@gracelandupdates.com and I’ll send you my free “Senior Producer Buy & Sell Tactics” report. I highlight key prices and indicators for six top senior gold producers, with tactics for short-term traders and long-term home run hitters!

Stewart Thomson

Graceland Updates

https://gracelandjuniors.com

www.guswinger.com

Email:

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Stewart Thomson is a retired Merrill Lynch broker. Stewart writes the Graceland Updates daily between 4am-7am. They are sent out around 8am-9am. The newsletter is attractively priced and the format is a unique numbered point form giving clarity of each point and saving valuable reading time.

Risks, Disclaimers, Legal

Are You Prepared?

Several weeks ago we wrote about the downside risk in the gold stocks.

After the various gold stock indices formed distribution-type tops, the subsequent selling has been swift. Miners have plunged through moving averages and short-term breadth indicators quickly reached oversold extremes.

While the gold stocks are oversold, it could be a little while before we can expect a sustained rebound.

We plot GDX below along with the percentage of HUI stocks that closed above the 50-day moving average and 200-day moving average. (The HUI is essentially GDX sans royalty companies).

The breakdown from the rounding top projects down to $19.50 but strong support is unlikely to be found until $17 or the low $18s. Should GDX trade below $19.50 then the percentage of the HUI above the 200-day moving average (currently at 50%) will decrease materially.

GDXJ, which closed the week at $28.41 has formed a larger distribution top that projects to a measured downside target of $26.50-$27.00. There is a confluence of strong support around $26.00.

Only 33% of GDXJ stocks are trading above the 200-day moving average. GDXJ could be closer to its low than GDX.

If GDX and GDXJ successfully retest their 2018 lows then their performance in relative terms could inform us on the sustainability of that rebound.

Below we plot Gold, GDX and GDXJ all against the stock market. These charts also have a chance to form double bottoms.

The gold stocks have broken down and have more downside potential until testing strong support levels. We don’t want to fight that breakdown until the market tests strong support amid an extreme oversold condition. That could entail GDX and GDXJ testing their 2018 lows with less than 10%-15% of the stocks trading above their 200-day moving average.

Sentiment indicators for Gold and Silver are trending in the right direction but more selling and lower prices are likely needed before those indicators reach extremes.

As far as fundamentals, there could be some potential bullish developments waiting in the background. If these things come to pass then the gold stocks could be in position to rocket higher after forming a double bottom.

The weeks and months ahead could be an opportune, low risk time to position yourself. We are looking for deep values with catalysts and anything we missed in recent months than can be bought at a discount. To learn what stocks we own and intend to buy that have 3x to 5x potential, consider learning more about our premium service.

By Jordan Roy-Byrne CMT, MFTA

May 7, 2019

These record U.S. stock-market levels are very dangerous, riddled with extreme levels of euphoria and complacency. Largely thanks to the Fed, traders are convinced stocks can rally indefinitely. But stock prices are very expensive relative to underlying corporate earnings, with valuations back up near bubble levels. These are classic topping signs, with profits growth stalling and the Fed out of easy dovish ammunition.

Stock markets are forever cyclical, meandering in an endless series of bulls and bears. The latter phase of these cycles is inevitable, like winter following summer. Traders grow too excited in bull markets, and bid up stock prices far higher than their fundamentals support. Subsequent bear markets are necessary to eradicate unsustainable valuation excesses, forcing stock prices sideways to lower until profits catch up.

This latest bull market grew into a raging monster largely fueled by extreme Fed easing. At its latest all-time record peak hit just this week, the flagship US S&P 500 broad-market stock index (SPX) has soared 335.4% higher over 10.1 years! That makes for the second-biggest and first-longest bull in US history, only possible because it gorged on $3625b of quantitative-easing money printing by the Fed over 6.7 years.

That epic 5.3x mushrooming of the Fed’s balance sheet peaked in February 2015, when the SPX was just clawing over 2100. It soon coasted to a 2130.8 topping in May 2015, before trading sideways to lower for 13.7 months without Fed QE. Modest new highs weren’t seen until July 2016, after the U.K.’s Brexit-vote surprise kindled hopes for more central-bank easing. Another surprise event drove the final third of this bull.

The November 2016 elections were a Republican sweep, with Trump winning the presidency while his party controlled both chambers of Congress. So the SPX started surging to new record highs, initially on hopes for big tax cuts soon and later on record corporate tax cuts becoming law. That ultimately propelled the SPX to 2872.9 in late January 2018 and 2930.8 in late September 2018, lofty new all-time record highs.

But paraphrasing an ancient Biblical passage from Job, the Fed gave then the Fed took away. Right after the SPX peaked, the Fed ramped its year-old quantitative-tightening campaign to full speed in Q4’18. QT was supposed to unwind a large fraction of that $3625b of QE-conjured money, shrinking the Fed’s crazy-bloated balance sheet. $50b per month of QT monetary destruction had to be this QE-fueled bull’s death knell!

Indeed the stock markets crumbled under that Fed-tightening onslaught, plunging 19.8% over the next 3.1 months into late December 2018. That severe correction was right on the verge of crossing the -20% threshold into new-bear territory. Over a third of those serious losses happened in just 4 trading days after the Fed chairman declared full-speed QT was “on automatic pilot”. By that time the SPX was very oversold.

Stock-market extremes never last long, with big and sharp mean-reversion bounces following major selloffs. The SPX reversed hard and soared into early 2019, already 12.3% higher by late January. Then the Fed’s first policy decision after that stock-crushing QT-autopilot one saw this central bank completely cave to the stock markets. It removed references to further rate hikes and declared it was ready to adjust QT.

That dovishness unleashed more waves of momentum buying. By the eve of the Fed’s next meeting in mid-March, the SPX had rocketed 20.5% above its severe-correction near-bear low. But that wasn’t good enough for the Fed, which slashed its future-rate-hike outlook while declaring it would essentially stop QT by September 2019. That is very premature, implying less than 23% of the Fed’s total QE will be unwound!

That goosed the stock markets again, helping push the SPX to an enormous 25.3% rebound-rally gain by this week. At 2945.8, it had edged 0.5% above late September’s then-record peak. With stock markets more than regaining their big losses, euphoria and complacency exploded again. These herd emotions have proven dangerous in market history, marking major toppings including terminal bulls rolling over to bears.

Euphoria is simply “a strong feeling of happiness, confidence, or well-being”. It is always accompanied by complacency, which is “a feeling of contentment or self-satisfaction, especially when coupled with an unawareness of danger or trouble”. This perfectly describes the stock markets’ sentiment-scape in recent months. Speculators and investors just love these lofty stock prices, with virtually no fear of material selloffs.

While euphoria and complacency are ethereal and unmeasurable, they can be inferred. The classic VIX fear gauge is the most-popular way. It quantifies the implied volatility options traders expect in the SPX over the next month, as expressed through their collective trades. While a high VIX reveals fear, a low one shows the direct opposite which is complacency. In mid-April the VIX revisited ominous bull-slaying levels.

This chart superimposes the SPX over its VIX sentiment indicator over the past several years or so. This monster Fed-QE-fueled stock bull sure looks to be carving a massive triple top in its terminal phase. At best in late April, the SPX had merely clawed back 2.5% over its initial peak of late January 2018. That’s terrible progress across 15.1 months where the biggest corporate tax cuts in US history greatly boosted profits.

While the first two-thirds of this monster bull were directly driven by the Fed’s extreme QE, the final third was corporate-tax-cut driven. Starting with that November 2016 Republican sweep, there was enormous anticipation of what eventually became the Tax Cuts and Jobs Act. Signed into law in December 2017, it went into effect as 2018 dawned. Its centerpiece was slashing the US corporate tax rate from 35% to 21%.

The SPX surged 19.4% in 2017 in the thrall of taxphoria hopes, driving 62 new record-high closes out of 251 trading days! The first 18 trading days of 2018 saw another 14 more, catapulting both euphoria and complacency off the charts. The VIX slumped into the 9s early that peaking month, proving that fear was nonexistent. Virtually no one expected a selloff when the SPX peaked at 2872.9, when the VIX closed at 11.1.

But just when traders were convinced stock markets could rally indefinitely with no material selloffs, the SPX suddenly nosed over into its first correction in 2.0 years. While sharp yet shallow and short at a 10.2% loss in just 0.4 months, it was a warning shot. Even with elite SPX companies’ corporate profits expected to soar 20%+ that year due to those big tax cuts, stock markets were already too high to rally much.

After that minor flash correction, the SPX started marching higher again throughout 2018. It wasn’t able to eclipse January’s maiden peak until late August, and ultimately crested merely 2.0% above it in late September. Such meager gains again suggested the corporate tax cuts were nearly fully priced in during 2017, leaving little room for additional gains. The day the SPX peaked at 2930.8, the VIX closed at 11.8.

Once again traders’ euphoria and complacency were extreme. The pressure on contrarians to capitulate was immense. But given the extreme stock-market technicals, sentiment, and valuations, I stuck to my guns warning how dangerous the stock markets were. Just a week after that all-time record high in the SPX, I published an essay warning “Fed QT is Bull’s Death Knell” one trading day before QT hit terminal velocity.

Indeed the stock markets fell hard, plunging 19.8% over 3.1 months into late December! That correction was much larger and more menacing than early 2018’s, on the edge of formal bear-market territory. And it happened despite SPX companies’ earnings actually blasting 20.5% higher year-over-year in 2018. Two corrections, including a serious one, in one of the best corporate-profits years on record should give pause.

The stock markets were due for a sharp mean-reversion rebound higher after such a steep drop. But the Fed waxing hyper-dovish and killing both its rate-hike cycle and QT really artificially extended it. Just over half the total rebound rally came after the Fed utterly surrendered to stock traders starting in late January. Many larger SPX-rally days clustered around dovish Fed announcements, they really amplified this rally.

It looked and felt exactly like a bear-market rally, the biggest and fastest ever witnessed in stock markets. The SPX soared in a symmetrical V-bounce out of late December’s deep lows. Those gains were front-loaded, fast initially but fading in recent months despite the Fed’s super-dovish jawboning. That severe near-bear correction that spawned this rally also fit the definition of a waterfall decline, an ominous omen.

They are 15%+ SPX selloffs without any interrupting countertrend rallies exceeding 5%. Since 1946 this had happened only 19 previous times. After every single past selloff, 100% of the time, the SPX retested its waterfall-decline lows! All 19 happened in bear markets. After these retests, fully 15 of the 19 were followed by new lower lows as those bears deepened. Only 4 of the 19 waterfall retests climaxed their bears.

So market history is crystal-clear in warning that the wild stock-market action of the past 7.3 months is exceedingly dangerous technically. Yet euphoria and complacency still exploded again in March and April as the SPX kept stretching skywards. By mid-April as the SPX clawed back up to 2907.4, the VIX fell back under 12.0 on close. Those were the lowest levels of fear seen since October 3rd, a bearish portent.

While that was a couple weeks after the SPX’s late-September then-record peak, this leading stock index was still just 0.2% lower. The selling that would grow into the severe near-bear correction began the very next day, and snowballed from there. Right when traders again delude themselves into believing stock markets can rally indefinitely, the hard reality of market cycles slams them like a sledgehammer to the skull.

Extreme levels of euphoria and complacency are always very dangerous, presaging major stock-market selloffs. Low VIX levels following record or near-record stock-market highs should not be trifled with, but considered a dire warning of serious downside risks. Very-high technicals breed very-lopsided sentiment, blinding traders to markets’ perpetual cyclicality. Today’s risks are compounded by near-bubble valuations.

For a century-and-a-quarter or so before the Fed’s insane QE experiment starting in late 2008, the US stock markets had averaged trailing-twelve-month price-to-earnings ratios around 14x earnings. That is considered fair-value, which makes sense. The reciprocal of 14x is 7.1%, which is a fair rate for both investors to earn to let companies use their saved capital and for companies to pay to use those same funds.

But valuations oscillate well above and below fair value in great waves that correspond with bull and bear markets. In bulls stocks are enthusiastically bid to high valuations not justified by their underlying profits. Valuation extremes start at twice fair value, 28x trailing earnings which is formally bubble territory. That necessitates bears to maul stock prices long enough for earnings to catch up, but stocks usually overshoot.

While major bull markets end above 28x, major bear markets often end between 7x to 10x. That’s the time investors should throw all their capital at the stock markets, when stocks are dirt-cheap and deeply out of favor. But instead they foolishly buy high near bull-market tops, which often leads to selling low later at catastrophic losses. The SPX valuations during this 15-month triple-top span have been scary-high.

This next chart shows the actual SPX in red, superimposed over the average trailing-twelve-month price-to-earnings ratios of its 500 elite companies. Their simple average at the end of every month is shown in light blue, and is what I’m using in this essay. The dark-blue line instead weights SPX-component P/Es by their companies’ market capitalizations. The white line shows where the SPX would be at 14x fair-value.

Remember the final third of this monster bull erupted on taxphoria after Trump won the presidency. But following trillions of dollars of QE before that, the SPX wasn’t cheap heading into November 2016. These elite stocks averaged TTM P/Es of 26.3x, just shy of 28x bubble territory. Interestingly that was about the same valuation as the 25.9x when QE ended in February 2015. Stocks had long been very expensive.

SPX corporate earnings did rise nicely in 2017, up about 16%. Republicans streamlining regulations was a factor, but more important was the widespread optimism from stock markets surging to endless new record highs. But the problem was stocks were already so overvalued that higher profits barely made a dent. At best that year the fair-value SPX at 14x hit 1296.0, a staggering 52% below the SPX’s 2017 high!

The SPX first crossed that 28x bubble threshold in late November 2016 after stocks surged higher on that Republican sweep. Valuations hung around 28x until July 2017 when they started climbing even higher. By late January 2018 just after the SPX’s initial peak, its elite companies were averaging TTM P/Es way up at 31.8x! While bubble valuations can persist while euphoria lasts, they are very dangerous for stocks.

SPX corporate-earnings growth in 2018 was amazing, exceeding 20% year-over-year thanks to those record corporate tax cuts. The four quarters of 2018 were the only ones comparing post-tax-cut and pre-tax-cut profits, an enormous one-off discontinuity. Yet damningly the valuations still didn’t retreat, in late September just after the SPX’s record peak its components were still averaging extreme 31.4x TTM P/Es.

That severe near-bear correction largely in Q4 last year certainly helped, dragging valuations back down out of bubble territory. But even at the end of December just after the lows, the SPX was still sporting a 26.1x valuation. That was near bubble territory, right around the levels just before Trump was elected. No bear market would end its predations and start hibernating while valuations remained so darned high!

In recent months many Wall Street apologists have claimed that severe correction was effectively a very-short-lived bear market since it was so close to 20% on a closing basis. They argue that means a new bull is underway that can run for years more. But bears don’t give up their ghosts after a single selloff with price-to-earnings ratios still near bubble levels. Bears ravage until valuations are mauled back under 14x.

Interestingly valuations haven’t soared back up with the massive rebound rally so far this year. By the end of April, the SPX components’ average P/E had only returned to 27.5x. That’s not greatly above the late-December levels. This was due to blowout Q4’18 earnings from SPX companies, the last quarter with profits compared across the Tax Cuts and Jobs Act. Q4’17 also rolled off, which the TCJA heavily distorted.

But 27.5x is still just under bubble territory, dangerously-expensive levels for stocks achieving record highs again. If the inevitable bear following the past decade’s enormous Fed-inflated monster bull just pushed stocks back down to 14x fair value, the SPX would have to plunge way back near 1400. That’s a heck of a long ways down from here, a 52% drop. Cutting stocks in half is right in line with bear-market precedent.

The SPX’s last bear market ran from October 2007 to March 2009, and pummeled this leading American stock index a gut-wrenching 56.8% lower in 1.4 years. That bear-market bottom birthed this current bull, when the SPX traded down to 12.6x earnings. Before that the SPX suffered another bear from March 2000 to October 2002, a 49.1% drop over 2.6 years. So 50%ish SPX losses are par for the course in bears!

Several factors could make this long-overdue next bear even worse. In 2016, 2017, and 2018, the elite SPX companies’ profits grew 9.3%, 16.2%, and 20.5% YoY. This year even Wall Street is forecasting earnings to be flat at best. There’s a real possibility they will even contract in 2019, the first year comparing post-tax-cut quarters. Stalling or shrinking corporate profits make near-bubble valuations even more extreme.

Lower profits actually push valuations even higher, increasing the valuation pressure for a major bear market. And with average month-end SPX TTM P/Es running 30.5x in 2018 at 20% profits growth, there’s no way similar high valuations will fly this year with zero profits growth. The more quarterly earnings fail to climb, the more worried traders will get over high stock prices and the more likely they will start selling.

And after the second-largest and first-longest bull market in US stock-market history, mostly driven by extreme Fed easing no less, the subsequent bear should be proportionally massive. There’s a fairly-high chance this bear won’t stop brutalizing stocks until the average SPX P/E falls near half fair-value around 7x earnings. That’s where the biggest bears in the past have ended, valuations overshot way under 14x.

Finally the Fed is going to have a hard time riding to the rescue again since it has expended all its easy dovish ammunition. It really only has three options left for another dovish surprise, and the latter two are very serious decisions. Top Fed officials’ outlook for rates in their collective dot-plot forecast can still be lowered to show cuts coming. But since these guys downplay the dot plot, that won’t mollify traders for long.

That leaves actually cutting rates or birthing QE4, which are huge course changes that the Fed can’t take lightly or revoke without panicking stock markets! With the Fed just about out of dovish rabbits to pull out of its hat, it doesn’t have many options to slow the selling when stock markets inevitably turn south again. Cutting rates or restarting QE may even exacerbate any selloff, worrying traders about what so scared the Fed.

The overdue bear market is still coming, make no mistake. Extreme technicals, sentiment, and valuations assure it. Investors really need to lighten up on their stock-heavy portfolios, and protect themselves with cash and gold. Holding cash through a 50% bear market allows investors to buy back their stocks at half-price, doubling their holdings. But unlike cash gold actually appreciates in value during bears, growing weath.

Absolutely essential in bear markets is cultivating excellent contrarian intelligence sources. That’s our specialty at Zeal. After decades studying the markets and trading, we really walk the contrarian walk. We buy low when few others will, so we can later sell high when few others can. While Wall Street will deny this coming stock-market bear all the way down, we will help you both understand it and prosper during it.

The bottom line is these stock markets are very dangerous. A monster bull has been topping over the past year-and-quarter, leading to extreme technicals, sentiment, and valuations. Traders’ euphoria and complacency have been running at bull-slaying levels, while valuations remain way up near perilous bubble territory. All this is happening as corporate profits flatline after surging dramatically on the corporate tax cuts.

Like after every past waterfall decline, the stock markets are due to roll over and retest their deep late-December lows. Odds are they will fail, confirming a major new bear market. And the Fed doesn’t have much dovish ammunition left to retard the heavy selling. Gold investment demand will surge as stocks finally face their reckoning after this artificially-amplified bull. That will push gold and its miners’ stocks far higher.

Adam Hamilton, CPA

May 6, 2019

In February, Blue Sky Uranium (TSX-V: BSK; OTC: BKUCF) delivered a very positive Preliminary Economic Assessment (“PEA“) on the Ivana uranium-vanadium deposit at the Company’s 100%-owned Amarillo Grande project in Argentina. The after-tax IRR & NPV is 29.3% & $135M. The upfront cap-ex is estimated at $128M. Importantly, the all-in sustaining cost is estimated to be in the lowest quartile of the global cost curve, at $18.27/lb. The resource contains nearly 23M pounds uranium, plus 12M pounds vanadium. These indicative economics are based on just a 13-yr. mine life. The metrics are strong, but they could get even better. CEO Niko Cacos has stated in recent interviews that the next C$2-$3M capital raise (probably in May) will fund them into the 4th quarter, and pay for well over 100 shallow drill holes that could potentially double the resource size.

The Company is well on its way to a larger resource. On April 29, Blue Sky Uranium reported,

“additional high-grade uranium & vanadium results from pit sampling carried out in the area immediately west of the Ivana Uranium-Vanadium deposit, at the Company’s wholly-owned Amarillo Grande Project in Rio Negro, Argentina. This newly-identified near-surface mineralization is open to expansion, as indicated on Figure 1, (https://bit. ly/2IZknLO) but drilling is required for further testing as the target zone is interpreted to be at greater depth in adjacent areas.”

Doubling the resource would provide a strong foundation for a blockbuster Pre-Feasibility Study (“PFS“) next year. Ultimately, management believes there’s potential for > 100 M pounds uranium, which might include > 50 M pounds vanadium. That would take longer to drill out, so I’m assuming a doubling in the next 9 months and a PFS completed in about a year from now. In my opinion, all else equal, a PFS could show an after-tax IRR > 35% and all-in sustaining costs of $16-$17/lb. The mine life could be extended to 20+ years, or annual production of uranium + vanadium in the initial 10 years could be significantly increased.

Therefore, if management is correct in their belief that a doubling of the resource is possible by 1H 2020, then the current market cap of C$20M = US$15M could be an attractive entry point. If over a longer time frame the Company could triple, quadruple or quintuple the current resource, then instead of bottom quartile costs, they could be looking at a project in the bottom decile. However, they don’t need to spend the time & money this year or next to get anywhere near 100 M pounds of uranium on the books. They have to deliver a strong PFS and then assess the uranium market at that time. If the market has improved, I think that Blue Sky could start production by 2022.

Uranium & vanadium prices over the past 6 months have had a negative impact on company share prices. Uranium bottomed at about $17.5/lb. in 2016, but rebounded to a bit over $29/lb. in Q4 of last year. Sentiment started to shift, momentum seemed to be gaining, but the spot price stalled. It now sits at close to $26/lb. Likewise, vanadium had a tremendous run, from about $3/lb. 3 years ago to just shy of $34/lb. in early November, 2018. Since then vanadium pentoxide (China price) has fallen to ~$12/lb., down 65%. As an aside, cobalt is off about 62% from its 52-week high.

Most analysts & industry pundits believe that both vanadium & uranium prices are headed higher by year-end and higher again in 2020. For vanadium, a price between $10-$20/lb. could be the new normal. Blue Sky doesn’t need a high vanadium price, it’s just icing on the cake. At $10/lb., it doesn’t help project economics all that much. At $20/lb. it has a moderately favourable impact. The PEA uses a $15/lb. price assumption.

Everyone talks about the spot price when they discuss uranium. The spot price is ~$26/lb., but the long-term contract price is quoted at $32/lb. {See Cameco’s pricing page}. Notice that the spread between contract & spot prices over the past 4.25 years ranged from 7% to 89% and averaged 37%. Currently the spread is about 23%. All Blue Sky needs to start production early next decade is $10/lb. more in the spot price, which would likely translate to a contract price in the mid $40’s/lb. The Company doesn’t need that price this year, or even next year. Early 2021 would be perfect timing.

According to the PEA, Blue Sky’s Project has a 20% IRR at $40/lb., and that will likely improve in the upcoming PFS.

It’s not rocket science to understand why prices should rise…. Utilities have been on the sidelines for years, buying in the spot market, letting uranium inventories shrink, because they are not worried about re-supplying. All of that will change beginning next year, and more in 2021-2022. In fact, in 2021-25 global utilities are most exposed to a potential spike in prices (they’re increasingly un-contracted). Blue Sky could time the market perfectly by commencing production in 2022. Of the 60-80 uranium juniors, how many could possibly be in production as soon as 2022? I’m thinking less than 6. Why so few? Most are at exploration stage in jurisdictions where it routinely takes 5 to 15 years to reach production, (if ever). Many can’t raise capital, so their projects are dead in the water.

And, for those who are more advanced, if they require a minimum of $50+/lb. to get off the ground, they could be stalled as well. Once the market realizes that a) uranium prices are headed higher, (but not necessarily to $50+/lb. anytime soon), b) an ideal time to enter production would be in the first half of next decade, and c) sustainable low cost & security of supply will be critically important — there could be a tsunami of capital pouring into just a handful of uranium juniors. Blue Sky Uranium would likely be one of the first to benefit. And, with a market cap of just US$15M, it could become an attractive takeover target.

I mention security of supply, the Section 232 Petition in the U.S. makes it clear that uranium imports into North America & Europe, are increasingly from State-owned or controlled enterprises in adversarial countries like Russia and its allies, or countries heavily influenced by China. Energy Fuels states in a recent press release that, “greater than 60% of newly mined uranium now comes from State-owned enterprises that unfriendly nations own or control.”

If or when the U.S., the largest consumer of uranium in the world, faces a challenge in obtaining uranium, even if it starts to look like there might be a problem…. utilities will be anxious to source uranium from safe havens. Argentina certainly qualifies as a safe haven. Management has been operating natural resource companies in Argentina for well over 20 years, they have extensive contacts and vast experience in the country. They believe that first production could be in 2021, I’m saying 2022 to be conservative. Whether it’s 2021, 2022 or 2023, that’s still near-term production compared to the vast majority of uranium peers, most of whom need $50+/lb. uranium or are in jurisdictions known to take a long time to advance projects into production.

Fewer than 6. That’s right, I said fewer than 6 uranium juniors could reach production by 2022, if the long-term contract price remains below $50/lb. Think about that for a moment. By contrast, there are over 300 cannabis-hemp related companies listed in Canada and/or the U.S. A lot of those companies will be viable or will be acquired. It’s really hard to pick the best cannabis plays, but if one wants to place a bet on uranium, Blue Sky Uranium deserves to be high on the list of names to consider.

Peter Epstein

May 3, 2019

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As we know, Gold and the US Dollar have an inverse relationship. Gold is priced in US Dollars and the drivers of each are similar (from an inverse point of view). Over long-term periods both trend in the same direction but the magnitude of the moves can vary and be quite different.

The standard inverse relationship has not been a perfect one in recent months or years.

In the chart below we plot Gold, gold stocks and the US Dollar.

We highlight (with vertical lines) the points at which Gold tested the wall of resistance. As you can see, the relationship with the dollar hasn’t been uniform.

In particular, note what transpired in 2017. The dollar declined sharply and penetrated its 2016 low to the downside yet Gold didn’t make a new high and gold stocks didn’t even come close to their 2016 high.

Recently, the reverse has transpired. The US Dollar has or is breaking out to a new high yet Gold is much closer to its 52-week high rather than its 52-week low.

Gold bulls hope the breakout will reverse course and lead to a big decline. Surely, a big decline would push Gold to a massive breakout. Or would it?

Recall 2017. Gold did not breakout and gold stocks performed even worse. Gold’s fundamentals were not bullish because real interest rates increased throughout 2017. Dollar weakness simply prevented Gold and gold stocks from faring worse.

If the dollar declines again and for similar reasons as in 2017 (global recovery and global risks averted) then we should not expect Gold to breakout. If strength in US stocks and global stocks continues then Gold is not going to breakout regardless of what happens to the US dollar.

If the US Dollar were to continue rising throughout 2019 then it would eventually cause a myriad of problems that would lead to softer policy and Fed rate cuts. Gold may not breakout initially but eventually it would.

The best scenario for Gold would be a dollar decline coupled with a decrease in real interest rates, which would be driven by Fed rate cuts or a consistent rise in inflation as the Fed stands pat.

Keep an eye on the US Dollar over the weeks ahead as its fate could give us a sense of where things are going for the balance of 2019 and then we could assess how Gold may react.

The weeks or months ahead should continue to be an opportune time to position yourself in the Gold sector. We are looking for deep values and anything we missed in recent months that gives us a second chance opportunity. To learn what stocks we own and intend to buy that have 3x to 5x potential, consider learning more about our premium service.

Jordan Roy-Byrne

May 2, 2019

Gold stocks tend to become extraordinarily volatile during weeks that feature multiple key fear trade events.
As the month of May begins, gold stocks are faced with a FOMC meeting and the US jobs report.
Please click here now. Double-click to enlarge this daily gold chart.
Gold itself is quite stable ahead of these key events, in part because of steady physical market demand for India’s Akha Teej prosperity festival.
All gold market investors should consider owning at least some physical gold bullion, even if it’s a token amount. A gold bug should view bullion the way a fiat bug views their dollars.
Gold is money!
A solid bull wedge is in play on the gold chart and my 14,7,7 Stochastics series oscillator is flashing a buy signal.
Support is at $1268 and resistance is at $1288. If gold can close above $1290 on Friday after the jobs report… a significant rally is likely to occur.
Having said that, the current burst of physical market demand is likely temporary because the soft demand season really doesn’t end until August.
The bottom line is that gold might be making a final low for 2019 in the $1268 area, but the big upside action is unlikely to happen until the strong physical demand season begins later in the summer.
Please click here now. US stock markets are entering a big resistance zone as the weak month of May begins, and the dollar is beginning to decline against the yen.
This is gold-supportive.
The stock market needs strong oil company earnings and Trump just finished a fresh oil price bashing rant. If oil is peaking here, S&P500 earnings are likely to also be peaking.
Please click here now. The Fed is floating a new scheme to put QE in the hands of commercial banks. This may be partly to accommodate the US government’s voracious appetite for debt and it’s positive for gold.
It’s unclear exactly how the scheme would work since it’s still in the planning stages, but if this “commercial bank QE” program moves reserves back into the commercial banking system it could help boost loans growth.
That would boost money velocity and inflation.
Please click here now. Double-click to enlarge this GDX daily chart.
While gold is quite stable this week, gold stocks are volatile and struggling. On the positive side, GDX volume has softened since the strong demand season peak in mid-February, Stochastics is oversold, and the price is at trendline and Fibonacci support.
Please click here now. Double-click to enlarge. On the negative side, there’s a potential bear flag pattern in play.
It’s not a textbook pattern; the flagpole is not vertical and the flag itself is rough, but gold stocks have an ominous history of staging dramatic sell-offs around and during FOMC meet days.
Traders may want to reduce size or go to the sidelines because even the best trading systems will produce a lot of whipsaw action at times like this.
I personally keep trading through these situations because when the trend finally asserts itself, I want to be in for the big move! Also, my trade size is reasonable. Trading accounts should only be one component of an investor’s total precious metals portfolio.
Please click here now. Double-click to enlarge this weekly CDNX “traffic lights” chart. Junior mining stock enthusiasts need to be patient. It’s likely going to take a sustained gold price of $1370 or higher to generate a long-term buy signal for these miners. They will rally nicely before that happens but it may take until later in the summer to generate the “major league” buy signal that will produce gains of hundreds of percent per share for most of the stocks.
It’s hard to see the Fed doing anything tomorrow other than holding rates where they are now. A strong jobs report could be viewed as inflationary because the Fed seems reluctant to take on Trump and hike rates. There’s a lot of pension money in the stock market and rate hikes can really hurt that money. A May stock market swoon? Yes. A crash? No. A Friday close above $1290 for gold likely ends the current price correction and that should put gold stock investors in a great state of mind!

Special Offer For Website Readers: Please send me an Email to freereports4@gracelandupdates.com and I’ll send you my free “Prepare For Blast Off!” report. I highlight eight key miners with entry points for gold stock enthusiasts who want to prepare now for the gold price surge above $1290!

Stewart Thomson

Graceland Updates

https://gracelandjuniors.com

www.guswinger.com

Email:

stewart@gracelandupdates.com

stewart@gracelandjuniors.com

stewart@guswinger.com

Stewart Thomson is a retired Merrill Lynch broker. Stewart writes the Graceland Updates daily between 4am-7am. They are sent out around 8am-9am.

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