Streetwise Reports: Ralph, you manage the U.S. Global Investors Gold and Precious Metals Fund (USERX) and the World Precious Minerals Fund (UNWPX), and the Gold and Precious Metals Fund (USERX) just received a 5 Star Morningstar rating for the 10-year and Overall time periods. You must watch the macro trends quite closely. What trends do you see that would be of interest to our readers?
Ralph Aldis: The biggest trend that everybody has been talking about is inflation; that is a real concern. The Federal Reserve is talking about it being transitory. A lot of Street analysts are saying the same thing. Then we have people on the other side of the fence saying, no, it's not going to be that way. Labor's demand for higher wages is the issue and this is going to be a challenge for companies. It's a dynamic scenario and it will be difficult to know how all of that is going to play out, but I think that the key thing in this whole inflation argument is how well labor can make gains in cost-of-living adjustments. If wage gains persist, I think you will see inflation possibly continuing to move. But I do not see runaway inflation in the cards.
SWR: What kind of precious metals shares will outperform the others over, let's say, the next six months to a year—seniors, royalty companies, developers, juniors? Where do you expect the big moves?
RA: It could play out like how the prior year did in the sense that the market has lost all its momentum with 2021. The senior gold producers typically get the bid up first when this market starts to move. The royalty companies seem to do well early too but whenever gold faces headwinds they tend to be more stable.
I don't know if I would say we've had a real gold market yet. Last year was nice, but we saw what happened in the beginning of this year: some stocks gave up 60%, 70% of what they gained last year with the pull back in gold. It hasn't looked like a market until just recently where the inflation issue has been coming more to the forefront and getting the stocks lifted back up. But I think it's going to be similar to the prior year where the seniors moved first.
The exploration companies seem to be getting big bids right now on positive drill results. The one thing that has been missing in this whole group—seniors, royalties, developers and juniors—is the midtier ones have not really gotten much of a bid. Look at Roxgold Inc. that got taken out by Fortuna Silver Mines Inc. (FSM:NYSE; FVI:TSX; FVI:BVL; F4S:FSE). They're both mid-tiers, but it seemed like nobody really cared. That's where I think a lot of the opportunity is, companies can buy these midtier ones. Maybe it's a one- or two-mine producer or maybe it's an exploration and development company, but the seniors can buy them cheaper than they can probably create that same asset themselves.
I think consolidation is still going to be an opportunity as we go through this period. I think the seniors are going to move first and then the juniors, and then we'll have to see if this market becomes deep. Then we'll get full participation.
SWR: Do you anticipate mergers and acquisitions (M&A) heating up in the mining space? If so, what companies could be takeover targets?
RA: Yes. I do see corporate activity picking up, likely at a measured pace as management teams have shown more discipline. I don't necessarily own companies just as takeover targets, but, as I said, with a lot of these companies, you couldn't build them for the price that you could pay for them currently. That's how l feel the valuations are now. One company that probably will be in play is K92 Mining Inc. (KNT:TSX.V). I think it is on the cusp of a significant resource expansion and with its free cash flow it has marked impressive returns on invested capital. The mine is in Papua New Guinea, but Papua New Guinea is not a bad place if you're paying taxes. That's the issue. Barrick Gold Corp. (ABX:TSX; GOLD:NYSE) really wasn't, from what I understand with regards to Porgera; however under new stewardship Mark Bristow has now rectified the issue. I think K92 is doing the right thing socially to have the political support in the country. That's an easy one.
As for an exploration play, Chalice Mining Ltd. (CHN:ASX; CGMLF:OTCQB) has had a great discovery. Nobody knows how big this is going to be. I would say that that's one deposit that is in a nice location, 60 km or so outside of Perth in Australia. You have perhaps a world-class ore body there that is in a really nice location to be able to develop. I think that one is really positioned. It may take some time for more exploration, but I think it would have people certainly watching it.
Now, as far as other companies that are potential takeouts, Arizona Metals Corp. (AMC:TSX.V; AZMCF:OTCQX) has a copper-zinc-gold deposit in Arizona. Exxon Mobil Corp. (XOM:NYSE) was evaluating the deposit in the early 1970s. Along with the drilling program, Exxon completed significant underground workings and calculated an internal resource. But the issue when Exxon was looking at it was there was a lot of zinc there and they couldn't process the zinc metallurgically, so Exxon walked away. Now you can separate that gold from that zinc metallurgically. The value of the resource that Exxon had calculated—again it's not NI 43-101 compliant—showed substantial opportunity. If you look at some of the other exploration work Arizona Metals has done outside the resource area, there's probably a lot more that can be unearthed in terms of opportunities for the company. Being that it is in Arizona, in the U.S., it might be something that people want to look a little bit closer at. Copper is certainly in demand for clean energy. It has a small footprint, too, so it could be good.
Additionally, E79 Resources Corp. (ESNR:CSE; ESVNF:OTCQB) recently put out its drill results that hit some very good holes. This is similar to the Fosterville mine in Australia. E79's stock went from $0.37 to $1.26, a 240% move, in one day. That shows you the market does have an appetite to pay for good exploration results, and the market is not waiting.
What I find interesting is you can have good exploration results that are game-changing for the company such that I and other people are ready to buy it, but the seniors seem to be more cautious about how they're going to use their balance sheet. That's been my disappointment when I look at this whole M&A sector, that the seniors shut the window for a year or so, shed assets and made some investments in some of the exploration companies, but we just really haven't seen the consolidation that I think needs to play out. It may take a couple more years. We may need a real gold market for that to sort out.
SWR: Do you have specific companies that you would recommend investors take a look at?
RA: There's one that is one of my biggest holdings; it's in the battery space, but it's somewhat unique. It's Nano One Materials Corp. (NANO:TSX). It has patented proprietary technology for cathodes for batteries. What's unique about the company is it has created a cathode that has an internal crystalline structure, versus amorphous, which accounts for their performance margin. The biggest thing, in simple terms, is it can generate a higher voltage, about 25% higher than your typical cell. That is a huge advantage for either distance or being able to pack more power into a smaller space with these batteries.
Nano One has agreements in Europe and has agreements with battery players in Asia that it is working with. It's all in the development and testing stage right now. It also has an agreement with a major international North American car manufacturer—it's either Ford, GM or Chrysler—that's evaluating one of its cathodes right now. If any of those companies decides to use Nano One's technology for the batteries, that will be a big deal for the company. It has a C$417 million market cap, but what happens to a company like that when a big major says, hey, we like your technology?
A couple of weeks ago Nano One announced an agreement with Johnson Matthey Plc (JMAT:GBX; JMPLF:OTCMKTS). That gets it in the door with all the European supply chains for manufacturing on the batteries. Johnson Matthey is almost a 200-year-old company and is very well known in material sciences. Nano One is in the same room with all the top players. I think it's a possibility that it will get a commercial license out of this technology, and that will be a game-changer for it. I would say it might be my biggest opportunity at the moment.
If I was going to go down the list, the next one would probably be K92 as far as potential for something to happen there in the coming year. That's where I think we could certainly have some good things happen.
Silver Viper Minerals Corp. (VIPR:TSX.V; VIPRF:OTCQB) is a silver-gold exploration company operating in Mexico. In March it released some impressive drill intercepts within the El Rubi structure of the La Virginia project. They cut 252 g/t Au and 3,917 g/t Ag over 1 meter, while their discovery hole was 13.3 meters at 3.16 g/t gold and 228 g/t silver.
Another company I have devoted significant resources to is Ivanhoe Mines Ltd. CL A (IVN:TSX; IVPAF:OTCQX), which has mines it is developing in the DRC and South Africa. The copper assets in the DRC are currently going through their initial startup of mineral processing. The company is selling at a very discounted valuation relative to its peers. Yes, there is political risk, but with the mineral endowment and the grades of the copper ores at Kamoa-Kakula, the zinc at Kipushi and the platinum group metals in South Africa, the stock is too cheap to ignore.
SWR: Which companies have been the top performers in your funds?
RA: Year to date, Arizona Metals is up close to 400% so far this year. It's been a great win, but it does seem like there is some more to go, perhaps. That's been one of our best performers year to date.
Gossan Resources Ltd. (GSS:TSX.V; GSR:FSE), a very small company with only a $14 million market cap, is up around 200% for the year. There are a number of smaller companies that are above 100% in terms of gains this year, largely on exploration results. These are in the World Precious Minerals Fund, where we have more of the exploration names.
But if I look at the Gold and Precious Metals Fund, where we have mainly producers, there's only one stock in that group with greater than a 100% gain. That's Aya Gold and Silver Inc. (AYA:TSX; MYAGF:OTCMKTS). Benoit La Salle, the person who originally was one of the original founders of SEMAFO, is heading up Aya Gold. It has mainly silver in Morocco. I think he has a great opportunity that he has been able to surface there, and I think he's the right man to develop it with his francophone experience working in West Africa. The point I would make is in this midtier universe I only see one stock that's up greater than 100% and that is Aya at +170%. The next highest performer plateaus at 32%. You're not seeing the big gains in the midtier space. That's what I'm hoping will change. If we start to see some consolidation at the midtier level, that will probably be a signal that we're in a real market.
SWR: Any parting thoughts for our readers?
RA: I don't think we're in a full-fledged gold market yet, but it certainly could be coming. If you look at the macro picture and where we seem to be going in the world, there's a significant chance we're going to be going higher on the gold price in the coming years here.
SWR: Thanks for your insights, Ralph.
Ralph Aldis, CFA, portfolio manager of U.S. Global Investors, is responsible for analyzing gold and precious metals stocks for the World Precious Minerals Fund (UNWPX) & the Gold and Precious Metals Fund (USERX) and for managing the Global Resources Fund (PSPFX). Aldis serves as co-portfolio manager for the rest of U.S. Global Investors’ mutual funds and two ETFs. In 2016, he was named Best Americas-Based Fund Manager by the Mining Journal. In 2011, 2015, 2018 and most recently in 2020, Aldis was named a U.S. Metals and Mining "TopGun" by Brendan Wood International. Aldis received a master's degree in energy and mineral resources from the University of Texas at Austin in 1988 and a Bachelor of Science in Geology, cum laude, in 1981, from Stephen F. Austin University. Aldis is a member of the CFA Society of San Antonio.
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Disclosure:
1) Patrice Fusillo conducted this interview for Streetwise Reports LLC and provides services to Streetwise Reports as an employee. She owns, or members of her immediate household or family own, shares of the following companies mentioned in this article: None. She is, or members of her immediate household or family are, paid by the following companies mentioned in this article: None.
2) The following companies mentioned in this interview are billboard sponsors of Streetwise Reports: Silver Viper Minerals. Click here for important disclosures about sponsor fees. The information provided above is for informational purposes only and is not a recommendation to buy or sell any security.
3) Ralph Aldis: I, or members of my immediate household or family, own shares of the following companies mentioned in this article: N/A. I, or members of my immediate household or family, are paid by the following companies mentioned in this article: N/A. My company has a financial relationship with the following companies mentioned in this interview: N/A. Funds controlled by U.S. Global Investors hold securities of the following companies mentioned in this article: Fortuna Silver Mines, Roxgold, K92 Mining, Barrick Gold, Chalice Mining Ltd., Arizona Metals Corp, Nano One Materials, Johnson Matthew Plc, Silver Viper Minerals Corp., Ivanhoe Mines Ltd, Gossan Resources Ltd., Aya Gold and Silver. I determined which companies would be included in this article based on my research and understanding of the sector. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.
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