Nice article re Yukon, including rec for Taku...
If you just want to see the section on Taku, scroll down to the enlarged and italicized section...jt
Junior Mining Update: September 2012
Gold: $1,737.60
Silver: $33.68
GDXJ: 23.47
TSX Venture Exchange: 1,276.71
Commentary:
This past five weeks marks the first August-September period since 2003 that the planetary alignment for the mining stocks has responded in a unanimously bullish pattern.
As many clients and followers know, my experience with the precious metals goes back the the late 70's which marked the last time we had a bonafide mania-phase in the precious metals. Over the past thirty-five years, I have grown to look for certain patterns in the behaviour of the physical metals (first) and the mining stocks (second) during the months of August and September, the nature of which tells me whether or not the juniors are going to have their usual August-May advance.
The last time we had an optimum pattern was in 2003 and it led to a four-year boom in the juniors that allowed many investors to capitalize on gold, silver, rare earths and selected base metals plays that created a great deal of wealth. Unfortunately, that pattern was non-existent in 2008 (Sub-Prime Meltdown/Crash) and in 2011 (Eurozone Meltdown and Crash) with 2009 and 2010 allowing for a feeble recovery in the juniors but nothing close to what one might have expected given the advance in the prices of gold and silver and to a larger degree crude oil.
Notwithstanding the fact that I have been calling a bottom in the junior mining sector since 2009 with the TSX Venture Exchange at 875 (April 2009 Junior Mining Report), it has been an extremely frustrating fifteen months since the interim top in March 2011 at around 2,400. I advised being overweight the Yukon juniors in May of that year and just as the results from the summer drilling were expected to drive the Yukon juniors higher, we all got hit with the European Meltdown and a correction in gold and silver which completely torpedoed the Yukon resulting in many of the players packing up and leaving the Yukon completely. The ones that remain are extremely attractive opportunities at this time but as for performance thus far in 2012, the biggest disappointment has been Kaminak Gold (KAM.V)(C$2.00) trading at less than 50% of the mid-2011 high. As Kaminak is the leader in the White Gold District, it has been a tough grind for many of the more junior "wannabe's" to catch a bid or secure funding for projects, many of which are actually very highly prospective. I will comment on that later.
What is really quite astounding is the level if abject revulsion that is being shown toward the mining stocks as a group. I was in conversation with a well-known newsletter advisor that is simply not recommending anything but physical gold and silver after watching just how AWFUL the Seniors have performed. Barrick Gold at eight-times-earnings and Newmont with a 3.5% dividend yield is symptomatic of a market filled with dour sentiment. In fact, as Frank Giustra said in a recent interview, he has never seen the junior mining market worse in thirty-four years as a participant in these markets (but adds that he is buying selected juniors NOW).
https://ceo.ca/frank-giustra-long-form-interview
No better illustration of this is observed by one of my favourite charts and that is the ratio of gold to the TSXV:
As is stated above, the juniors, as represented by the TSX Venture Exchange, the junior exploration companies are completely "unloved". The number of hours I have spent reading my old notes from the past thirty-five years trying to understand why juniors have been thrown so far "under the bus" is considerable. However, what is noteworthy is that there are two things that stand out when you compare this period with the 1990's. One: the Seniors have performed dreadfully from an operational/earnngs point of view and relative to the massive increase in gold bullion. When the Jim Cramer's and Dennis Gartman's of the world tell us every chance they get to "Avoid the Miners", it is because the miners haven't executed anywhere close to what the metals have. If the Seniors can't get out of their own way because they are run like hedge funds instead of proxies for the price of gold and silver, how on earth would one expect to have even the slightest chance of making any money in the juniors? Two: Many junior mining companies have been run like personal piggy-banks for the clowns running them. Be it funnelling working capital through private "management companies" or through highly-conflcted "arrangements" with drilling companies or local contractors, it is no wonder that of the hundreds of millions of dollars raised since 2001, there have been very few discoveries and the M&A activity that one might have expected in such a metal-friendly period has been sparse.
I made the decision in late-summer of 2011, after realizing that the Yukon was going to get vaporized, to reduce the number of recommendations down to essentially one company. I looked at the management of every junior on my radar screen and determined that they had to pass the litmus test as follows:
1. Seasoned, competent management
2. Established resources (43101-compliant ounces)
3. Minimal salaries/G&A "Burn"
4. Adequate working capital position AND the ability to raise additional capital (without crippling dilution)
and,
5. Significant "blue-sky" potential
It is point #4 that is the real danger-zone for the juniors. This bear market has forced many prices down to levels where, even if they could secure financing, the capital structure would become egregiously bloated. With a bloated structure, even great drill results, successful feasibility studies, or even production start-up would be blunted when a per-share evaluation is calculated. In this manner, point #5 becomes seriously hampered due to a point #3 failure.
Current Strategy
After agonizing over the failure of the Yukon stocks to maintain interest despite tremendous drilling results from both Kaminak and Atac, it became apparent that the institutions were going to be persistent sellers of those names irrespective of fundamentals. The decision was made to move the bulk of our assets to a company that has 1. seasoned, competent management, 2. 20.3mm ounces of silver plus a massive sulphide (zinc) discovery, 3. a lean G&A profile/"burn", 4. $2.6mm in working capital versus a 2012 budget of $2.2mm, and 5. significant potential to build value through in-fill drilling (silver zone) and through exploration success on the sulphides. That company, Tinka Resources Ltd. (TK.V)(C$.55) (https://www.tinkaresources.com/files/Tinkas Brochure PDAC 2012.pdf) (Corporate Summary via the link) whose Colquipulcro property resides in the lower Andes of northern Peru, has produced one ore body and a second massive sulphide discovery and qualifies in all five categories noted above.
Clarifying Peru
The Bay Street community has been avoiding Peru largely due to some unfavourable rulings regarding permits and ownership. Everyone thinks that the government is anti-mining but the reality is that the local indigenous communities are the source of the confusion and the problem. It is not that the local communities are anti-mining but rather that they are anti-government when it comes to getting their fair share of the benefits of the mining revenue. Local mining companies are paying large royalties to Lima but those revenues are not finding their way back to the local communities in the form of infrastructure, education, and jobs so when Lima fails to look after the locals, the locals fight back for their fair share by protesting against the mining operations as a way of leveraging their local demands. By example, Tinka secured permits from Lima to drill the Ayawilca massive sulphide back in July but were advised that waving the permits in the locals' faces was like waving red flags in front of a herd of bulls. Taking a different tack thanks to their local Peruvian managers, they patiently negotiated with the locals over the past two months and after explaining how juniors raise the money that allows them to employ the villagers and build schoolhouses and soccer fields, the locals signed the much-required petition and went from adversaries to advocates in what I believe was a watershed event in the Peruvian mining landscape.
Taking a patient, conciliatory approach has now been heralded as a major success for Tinka and one that will undoubtedly raise a few eyebrows amongst other miners attempting to navigate within one of the richest geological regions on the planet. As a result, Tinka begins drilling in September to define the extent and dimensions of the ultra-high-grade zinc intercepts contained in the Ayawilca massive sulphides reported in early 2012.
Tinka has been a stellar performer as measured against the TSXV and this can be observed below.
The Yukon
There are some very attractive players with big discoveries in the Yukon whose share prices have been trashed. The Yukon leaders from 2009-2011 were Kaminak and Atac. The performance of those two companies triggered one of the biggest staking rushes seen in Canada 's north since the Diamond Rush of 1991 in the Northwest Territories . There was also a huge correction in 1994 in the NWT that brought about all kinds of pundit claims that "It's over..." only to see record highs and billions in revenue five years later when Ekati and Diavik finally went into production. The White Gold Golden Saddle and Coffee discoveries by Underworld (taken over by Kinross) and Kaminak will evolve into multi-million-ounce producers over the next few years and with new discoveries due to be revealed by Comstock Metals (CSL.V)(C$.435) as well as others in the next eighteen months, the Yukon is far from "over".
Declines such as the ones in Kaminak and Atac are not terribly different than the ones experiences by Aber and Diamet during their ten-year runs to incredible prices. These area plays can take many years to develop, just like the Timmins camp and the Kirkland Lake camp and the Red Lake camp that today are the hosts for enormous gold and base metals deposits and mines. The Yukon is no different than any of these camps geologically but due to the harshness and length of the winter season, they become news-starved and investors lose patience just as happened in the NWT during the diamond rush.
We are adding two names to the recommended list at this time - one is a new name and one is an old name.
The first is Comstock Metals (CSL.V)(C$.435) whose QV property is located just across the Yukon River to the west of Kinross' Golden Saddle discovery. Recently-reported gold-in-soil and trench results are comparable to the early Golden Saddle results in 2007-2008. The QV is a Shawn Ryan prospect and has been worked by Ryan's Groundtruth Explorations. The second is a name familiar to many in that we financed it in 2010 (twice to the tune of $10.7mm) and that is Taku Gold Corp (TAK.V)(C$.075), whose Rosebute property is due north of Golden Saddle, a Shawn Ryan prospect from 2007), currently being worked by Groundtruth and has confirmed the existence of a large (2 X 4 kms.) gold-in-soil anomaly on the southern portion of the claim. I spoke to Shawn last week and garnered some valuable insights on both CSL and TAK which now constitute the basis for these recommendations being added to the list.
Taku (TAK.V) reported 5 m of 6.17 g/t Ag in trench results at Rosebute which is definitely comparable to the July 25th numbers from Comstock.
Summary and Overview
The action in the first week of September has been very encouraging for the metals and for the mining stocks as a group, but most importantly, in surveying the blogs, clients, newsletter writers, and Bay Street analysts, nobody trusts this rally - and what we all learned when the 1980-2000 bear market ended and the new bull market in gold/silver commenced, no one trusted that advance off the lows either. The "pundits" can give me a thousand reasons why these junior markets are going to crash and that is precisely why they won't. In fact, the skeptics that have missed the last $150 up move in gold and the $6 per ounce blast-off in silver in August and September are continuing to trade "yesterday's market" - just as the Wall Street pundits are slamming the recent move in the Dow and S&P to multi-year highs. To coin a phrase, one should NEVER underestimate the replacement power of equities (stocks) in a reflationary spiral.
Looking at the behaviour of the policy-makers, they are hell-bent upon solving these horrific public and private debt overloads by doing the only thing they know - PRINT MONEY - known as "counterfeiting" in the non-financial world. If the past is indeed prologue to the future, and if failing to heed the past condemns men to repeat the same mistakes in the future, we have very little choice other than to implement an investment strategy hinged upon the eventuality of inflation and the ownership of hard assets including gold and silver. Since 2008, the right "trade" was to stay 100% with the physical metals and to have avoided shares. I maintain that the mining stocks - particularly the junior mining stocks - are poised to deliver above-average returns if they comply with the five-point checklist laid out earlier in this message. Because they are so dramatically oversold, they stand to enjoy the greatest percentage "bounce-back" in the short term and, should this be the beginning of an advance such as we had in August-September 2003, they are ready for a dramatic revaluation in terms of market cap per ounce, price to earnings, price to book, and historical market cap as measured by the inflation rate.
As for the ETF’s and other bank-instrument derivative vehicles, I am completely avoiding them and that includes the GLD and SLV. I believe that the junior miners are now carrying valuations synonymous with $400 gold and $9 silver and therefore represent minimal historical downside risk. Finally I leave you all with one chart that sums it all up and since a picture is worth a thousand words…
Note: (In the very short-term, stocks as an asset class are technically extremely overbought – I would set limit prices for additional purchases and buy only half-positions in the two new names at current levels. Additionally, I would purchase insurance by way of the SJF.N (U.S.$20.89)) inverse ETF on the Russell 2000 index to the tune of 5% of investible capital. Given that the months of September and October have been prone to violent selloffs, it makes sense to exercise some caution.)
Michael J. Ballanger B.Sc., B.A.
1300-151 Yonge St.
Toronto, Ont. M5C 2W7
Tel: 416.775.5119 | Mobile: 416.786.5055
Toll Free: 1.888.298.7405
Email: mjballanger@union-securities.com
Web: www.union-securities.com