From Marin Katusa who is heading to Vancouver Resource Investment Conference this weekend , Could he be having NAK on his mind?
Dear Investor,
Marin Katusa here.
Over the past few days, I’ve shared a lot of valuable resources with you that I believe will make anyone a smarter, richer investor. I’ve shared hard-won, timeless wisdom I’ve picked up from 15 years in the “trenches” of natural resources.
During that time, I’ve made my share of mistakes and I’ve enjoyed my share of big wins. Thankfully, the money I’ve made from the big wins is far, far greater than the money lost from mistakes.
Today, I want to do something different, but just as valuable. I want to share with you two natural resource sectors I’m very interested in now.
My hope is that by sharing these specific sectors, I’ll help you focus your time and energy on the absolute biggest opportunities at this conference. My aim is to provide you advice on where to find huge upside, but limited downside.
With that out of the way, here are the two resource sectors I see the best opportunities in. I’m either actively deploying capital in these areas or “stalking” them… looking for the perfect time to strike in the next 6 – 12 months.
***COPPER
As you read this, a historic economic change is beginning to shape… something that will radically change the way work and live.
This big change will “re-order” global economy in a way that advancements like air travel and the Internet did. A small group of people will make enormous amounts of money as a result. I plan on helping everyone I can become a member of this fortunate group.
I’m talking about the biggest change to the automotive industry in a century… the mass adoption of emission-free, electric vehicles (EVs).
I believe the widespread adoption in Electric Vehicles (EVs) will create a very long and very large bull market in copper and copper stocks. As you may know, EVs require 3 – 4 times more copper than conventional vehicles.
Driven by surging demand from EVs, I believe annual copper demand could grow at 4.5% per year for the next 25 years. While that may not sound like much, it’s nearly a tripling of demand. However, the world won’t get all the copper it wants at current prices around $3 per pound.
That’s because the world’s largest, most important copper mines – the ones that set the global copper price – are in decline. They have been in operation for decades, and their richest parts have been tapped. To use an analogy, most of the world’s big copper mines are like former all-star ball-players in their late 30s and early 40s. They were great in their prime, but their ability to produce is steadily decreasing.
Existing mines still have plenty of copper ore, but it is less plentiful and it’s of lower quality (lower grade). In other words, it will cost more to mine each pound of copper mined in the future.
The chart below shows the average annual reserve grade of the world’s global copper producers. This group is made up of large miners you’ve likely heard of. Companies like BHP Billiton, Freeport-McMoRan, Antofagasta and First Quantum. As you can see, the average grade has declined 60% over the last 14 years. It’s an irreversible trend.
In addition to falling grades and rising costs, the copper industry simply isn’t finding as many large new deposits as it used to. Mankind has been digging into the earth in search of copper for thousands of years. We’ve found most of the really good stuff.
The chart below shows how large copper discoveries have declined over the past 25 years.
There are also some large undeveloped copper deposits in the world that can and will be put into production, but the shovels won’t start digging unless copper is substantially higher than current levels.
Surging demand. Limited supply. It’s a recipe for much higher prices. Since mining stocks are highly leveraged to the price of metals, their share prices could soar at least 500% from current levels.
Very few people are talking about the coming copper bull market. You don’t see ads on websites or social media talking about how big and profitable it will be. That means the crowd hasn’t caught onto this idea – yet. It means you can still get a major edge over other investors and buy now at bargain prices.
To make the largest possible gains with the lowest amount of risk, you need to be armed with the best possible information. That’s why I’m spending a lot of time and energy at the conference on the copper sector. I encourage you to do the same.
***DEVELOPMENT STAGE GOLD ASSETS ARE GETTING VERY CHEAP
If you follow the gold market at all, you that gold stocks went through a horrible bear market from 2011 to 2016.
You can see the sector’s bloodbath below. It’s a chart of the gold stock index during the bear market.
During that time, many gold stocks fell over 75% from their highs. Many went bankrupt.
If you’ve been in the markets for a while, you know a crisis like this creates enormous opportunities to buy valuable assets for dimes on the dollar.
I believe this bear market has made gold companies with development-stage projects very cheap. “Development-stage” gold companies have proven assets in the ground and are in the process of building mines. They aren’t drill hole plays and they aren’t yet producing gold.
When the market isn’t interested in funding gold projects, development-stage companies are among the hardest-hit stocks in the sector. After all, they typically don’t have good stories.
You see, when bankers and mining stock promotors plan their deals in oak-paneled meeting rooms, they place a lot of focus on a company’s “story.” Is it exciting enough to capture the public’s interest? Is it something sexy that will earn us big money by selling it to the public?
Bankers, mining promoters, and retail investors alike love “story stocks.”
For example, junior exploration firms are often good stories. Their backers position them as poised to hit the “big one” and make shareholders rich.
Producing gold mines are often good stories. Their backers can say, “We’re already pouring gold… invest in real production!”
And then, you have development-stage firms… which don’t have don’t have the “lottery ticket” allure of explorers… and don’t have production to boast about. A story of building roads, power lines, buildings, and processing facilities simply isn’t very exciting.
This lack of “sex appeal” has helped suppress the stock prices of development-stage firms. Plus, gold mine developers haven’t done themselves any favors in recent years…
Missteps in the Gold Industry
Over the last decade, a large majority of the development stage companies have disappointed their investors with cost overruns, production delays, production problems (higher cost of production and lower production levels), and too much debt. Their business performance has been close to pathetic.
A critical step in getting a gold project into production is something called a Bankable Feasibility Study (BFS). A BFS should be a comprehensive study of a project’s potential economics. It takes into account aspects like geology, metallurgy, infrastructure, and environmental impact. Bankable Feasibility Studies are required for miners to get financing from banks.
In many cases, the Bankable Feasibility Studies (BFS) gold developers touted over the past decade turned out to be nothing more than “Bankable-Fiction Stories” (or BFS with too much BS) used to finance the projects that ultimately disappointed shareholders and destroyed shareholder value.
I believe this situation has created some large potential opportunities. Thanks to all the reasons I just explained, some of the world’s best-undeveloped gold deposits are selling for incredible discounts to what I believe is their real value. I believe some of these stocks could double and still be cheap.
Don’t think large miners haven’t noticed what is happening. After all, they badly need to buy high-quality gold projects…
Gold Miners Are Running Out of Gold. Here’s Why That’s Good for You
What’s bad for large gold miners could be very good for gold stock investors for the next few years.
Put simply, large gold miners are running out of gold. Rather than look for more in jungles or frozen tundra, gold miners will do the smart thing. They’ll search for gold in the stock market… and go on a buyout binge of small and mid-cap companies with proven gold reserves.
Most mining investors don’t stop to think about it, but when a gold company sells an ounce of gold, it erases a little bit of its balance sheet value. This stands in contrast to companies that make candy, soda, or beer. These businesses don’t deplete their balance sheets in the normal course of producing revenue. Gold companies do. And this is why they must constantly replenish their reserves or they’ll mine themselves out of existence.
As you read this, large gold miners are finding it difficult to replace the reserves they dig out of the ground and sell. There are several reasons this is happening.
For starters, most of the world is “picked over” when it comes to gold deposits. After centuries of digging and drilling for gold, we’ve found most of the large deposits. The chart below shows how annual gold discoveries have plunged in the past 10 years (2015’s level is 85% below 2006’s level).
You also have falling gold prices. In 2011, gold reached a high of $1,900. Since then, investors have preferred stocks and bonds to gold, and gold has dropped to $1,252. This large decline means gold companies can’t mine some of their reserves economically, which means they can’t claim as many ounces in reserves as they could in 2011. The chart below shows how gold major’s reserves have declined dramatically since 2011. They are now below 2004 levels.
Gold’s decline also means less revenue for gold companies, which means they have less money to spend on project development and exploration. The chart below shows how gold miners have slashed capital expenditures (called capex) by 69% from 2012 levels.
This all means major gold companies need to beef up their reserves by purchasing the best projects owned by smaller gold companies. They have to show their shareholders growth, or the shareholders will begin to jump ship. We’ve seen some big ones take place over the last year. Gold major Goldcorp took out small cap Exeter Resources at over a 50% premium. Goldcorp’s CEO David Garofalo has openly stated that Goldcorp is aggressively looking to take advantage of the current downturn by picking up assets.
Royalty companies such as Sandstorm are even getting into the buyout mix with its recent purchase of Mariana Resources. I think Sandstorm made a smart move. Mariana’s Hot Maden project in Turkey is high grade, simple to put into production, and it will get a lot bigger.
I think the sweet spot of buyout targets will be mid-tiers and juniors that have large, district-scale projects that can move the needle for a major. I personally believe that there is going to be consolidation in the mid-tiers (defined as having between 100,000-1,000,000 ounces of annual production).
I’m not alone in this view. My friend Rob McEwen, the founder of Goldcorp and a living legend in the gold industry, recently said to me:
“The mid-tiers’ production curve is going up. The seniors’ production curve is going down. So the performance is going to be in the mid-tiers and the juniors. But the mid-tiers need to get size as the market has become increasingly dominated by passive investment through ETFs, rather than active investment managers.”
Rob went on to describe how the proliferation of ETFs will influence the thinking of gold executives:
“The number of the indices that the company is in is going to increasingly determine the volume and market liquidity of a company’s shares. Therefore, some mid-tiers are probably going to be looking for stocks that are ignored by the indices and ETFs. So if you have a good project that’s got room to grow and you’re not in a lot of indices, you might want to be looking over your shoulder or people should look at you to buy before the bigger guy steps in.
I believe all the data points to a lot of buyout deals taking place over the next 24 months. Gold investors are smart to become familiar with what kind of assets the majors want to buy… along with the world’s 10 or 20 best, most attractive projects that large miners will see as critical to their survival and growth.
And with consolidation comes takeouts at premium prices. Once a few takeouts happen, the other gold developers will start trading higher because the market will realize what the new trend in the gold space is, and you will make a fortune.
Why take on the 1 to 3,000 odds you get with an exploration firm, when the companies that have already defeated those odds are trading at valuations lower than their high-risk peers? This is a unique opportunity I’m personally betting big on.
The good news is, there are less than 15 large, high-quality development-stage gold projects out there that are located in safe countries. We don’t have to sift through hundreds of projects to find exceptional opportunities.
I have a large, very expensive database that contains every relevant detail on every one of these world-class deposits.
I’ve spent more than 300 hours and a great deal of money gathering and analyzing the data… performing site visits… talking to expert geologists… and creating my own estimates of value for these gold projects.
After crunching the numbers every which way, I believe this sector represents a huge opportunity in 2018 and beyond. I recommend you spend some time learning about it.
In Summary
By no means is this an exhaustive list of everything I’m monitoring and researching right now. In the interest of not taking up a ton of your time, I kept this market report relatively brief. But if you plan to deploy capital in the junior resource market in 2018, I encourage you to investigate the areas I described above.
See you at the conference,
Marin Katusa
