Thoughts from Two Conferences
From The Maven Letter: September 21, 2022
I went to the Beaver Creek conference because I decided it was time to re-engage. I’d kept up with the stocks in my portfolio but I hadn’t looked for new ideas, really, since the spring when markets turned down and I saw lots more downside ahead.
As you all know, I don’t think we’re done with the down. But I do think that tightening will have its desired effect – reducing liquidity in the system, which should pull stocks down right alongside inflation – in the next three to six months (hopefully on the shorter side).
If that’s right, then now is the time to think about what we want to own coming out the other side.
Of course, we already own lots of stocks that make sense. But owning some good stocks isn’t the goal; my goal is to find all the best stocks in the junior resource space. To do that, I have to engage with lots of companies.
I have to understand who they are, how they are structured, what they are doing, and how they are funded. There were over 250 resource companies at Beaver Creek…and they are just part of the several thousand that exist.
Needless to say, it’s impossible to keep up with them all. And it’s harder when I’ve spent several months dis-engaged! So my goal at Beaver Creek was to meet with companies that I knew were doing interesting work but where I needed to learn more to know whether they belonged on an investment contenders list.
I came away with some stocks that I think have very good potential. I will go through those over the next two months to subscribers, explaining the thesis even though I’m not yet ready to hit the Buy button, so they can all sift through my ideas and make their own lists ahead of the bottom.
But while specific stocks are the most actionable, they are not the only ideas I get from conferences. Here are a few other talking points that kept cropping up.
Capital Is Everything
The teams with money in the bank all stressed how important that capital, as it meant they could continue working despite the markets. The teams needing money all faced the same stress of finding investors (not impossible, but hard) and balancing the need for cash with not wanting to blow up their share structures.
Access to capital is always important in this space, but it become paramount when markets are tough. No cash means no work, which means no results, which means no momentum, which means investors have no reason to stay in your stock, especially because lack of momentum plus investor desertion plus weak markets will very likely depress your share price, so even investors who like the asset can sell and re-enter at a lower price.
I was interested to see someone at the Metals Investor Forum whose first focus was share structure. If a company had more than 100 million shares outstanding, he was not interested – and that’s without hearing anything else about the stock. Yes, tight share structures are nice because they amplify the upside on really good news (less stock available to buy means those who want in have to pay more). But it can cut both ways – when a stock is really tight, someone selling a few tens of thousands of shares can really hurt the price. And in the context of this discussion, I think what matters more than share structure is access to capital and enough capital markets awareness to put cash to work in the right ways when times are tough.
The two financings I sent out to Premium after the conference were good examples. If you’d like to hear more about the details of these two, consider a subscription today.
Access to capital is paramount at the moment. Those without cash – and who cannot raise it, likely because they lack a clear plan to use that cash to create new value – are dead in the water. Those with it aren’t exactly shining, but they will shine first and brightest when the market turns because that’s what momentum and engaged shareholders do.
It Is Different This Time: Metals Investors Like Base Metals More Than Gold
The Beaver Creek conference is put on by Precious Metals Summit Conferences. I left the event wondering when they will drop ‘precious’ from their name.
Then last week I saw someone post this shot of a Bank of Montreal note about the conference that happened a few days later, aimed more at larger companies, called the Denver Gold Show. The tweet noted the takeaway from the conference as well.
Beaver Creek was as short on gold bulls as it was brimming with base metal bulls. It stood out to me because, in my 15 years in this business, I’ve never seen this setup. Gold has always been the favourite: people would talk about it leading other metals, companies would explore for gold preferentially because it attracted more investor dollars, concepts like optionality (owning companies with lots of metal in the ground for the lift they would offer as metal prices rose), leverage (how, when a metal rises in rise, producers gain several times the rise because it’s largely gravy), and output growth in major miners were always applied to gold first.
That is no longer the case. Many are like me: neutral on gold. Open to the possibility that gold will perform well – gain first and most strongly – out of a recession or crash, but not expecting it. Gold has held its ground just fine over the last few years, since reversing its down trend in 2016, but it has not been the reliable hedge against uncertainty, inflation, money printing, and debt that it used to be. It has performed those roles in moments, to be sure (remember mid- 2020? Or mid 2021 leading into the Ukraine war?) but it has not sustained those moments. Importantly, in those moments gold equities have not offered anything like the leverage that they traditionally did. Producers gained but not dramatically, even though they were generally debt free, pumping out free cash, and far more efficient and less risky than in previous cycles. With most M&A action still focused on mergers of operators and with several projects having blown out their capital estimates, developers didn’t get much love either. And explorers also didn’t get the influx of speculative investor interest that happens in a real gold bull market, I think because there were so many easy speculative gains to be had elsewhere.
None of these factors have changed. The gold bulls out there still draw lines on charts pointing to $3000 per oz. or whatever, and they still use charts of global debt and money supply and inflation as reasons to believe gold will soon get a flood of interest…but since that hasn’t happened in a large or sustainable way in the last few years, such arguments are less convincing.
Which brings me to the tweet below. Twitter was really capturing some of my thoughts last week. I don’t know if I believe in the comment but the Wall Street Journal certainly told a story I’ve been touting for a while.
The arguments for base metals, by contrast, are solid. There is nowhere near enough copper, silver, nickel, uranium, or lithium being produced to meet demand in the next few years. Demand is rising because of basics – economic and population growth – but it’s ballooning because of the green energy transition. Whether you like it or not, the green transition is happening…but sky-high prices for the metals upon which it relies are one of its biggest challenges.
Well, a challenge is almost always also an opportunity, which is certainly the case for metals investors. The need to produce more metals will attract attention, dollars, and political will to the space. That will create a very significant investment opportunity.
That’s been my thinking for some time but other metals investors would often poo-poo the idea of investing in base metal juniors because it’s always been gold equities that have doled out the reliable leverage in past markets.
The difference I noted at this Beaver Creek: that preference was gone. Reversed, even. Metals investors want to own base metals. They are interested in gold too but not in a dominant way, and mostly only in projects with standout potential (scale, grade, cost, location).
The tide has turned within the metals space, based on the idea that generalist investors – who just don’t seem interested in gold – will get interested in base metals once we’re through this tightening-induced recession. Here’s hoping the generalists play along!
Uranium Is Ever Contentious
If you want a range of opinions, ask a group of investors about uranium.
Even resource investors. They’ll likely all agree that nuclear is the baseload energy of the future…but they will argue through the night about whether there’s enough stockpiled uranium to feed those plants.
Warren Irwin, head of Rousseau Asset Management, was a big uranium bull in the 2000s. He was an early backer of NexGen Energy and still holds a big position in that Athabasca developer. And he was on a site visit with me, so I had to ask his opinion on uranium last week.
Long story short: he plans to sell into whatever rise happens over the next year because he thinks there’s more than enough above-ground uranium to meet demand.
Uranium stockpiles are very hard to estimate. The declared ones are easy but it’s hard to know how much uranium is sitting in various warehouses around the world, and in particular in Japan. That this shadow inventory leaks into the spot market is why uranium struggled to established upward momentum from 2017 to 2021 – the producers of the world had cut back production dramatically and demand was rising, but supply remained abundant in the spot market because of all these shadow stockpiles.
The price spiked in 2021 because a huge player came into the market and started buying up all the uranium on offer. The Sprott Physical Uranium Trust became the buyer of shadow supply.
The question is: how much more is there?
Irwin thinks Japan alone has enough uranium stockpiled to erase the supply gap for years. Others I’ve talked to disagree, positing that Japanese utilities have already done lots of selling and that lots of their uranium is already formulated into fuel rods specific to their operations.
When data is unavailable, it’s hard to know what to believe. There is no data on shadow uranium stockpiles. The people likely to have a good sense of those stockpiles are generally people who want uranium to run, so their answers should perhaps come with a grain of salt.
Irwin’s approach hints at a larger question in the uranium space: what is Sprott’s bigger vision? The cynics out there say the team at Sprott are creating a uranium bull run for their own benefit, because it’s a small enough market to do so, but that the plan doesn’t make sense in the long run. Aren’t they going to want to sell their stockpiled uranium if the price truly spikes?
Sprott says it does not ever plan to sell. They believe that (1) uranium is worth much more than its price currently suggests and (2) as a key source of energy, uranium should be trade- able like oil and gas and other energy sources can be traded. They formed SPUT to give investors (and themselves, of course) exposure to the price gains they foresee and to help those gains happen. They also formed it so that uranium can take its place in the energy trade world. Both of those goals require it to hold its stockpile indefinitely.
I’ve spent a lot of time trying to understand uranium. I think the fundamentals are real – that there is not enough shadow supply to meet demand. That said, I expect supplies will respond if we do get a price spike. There are tens of millions of pounds in known stockpiles that could get sold into a price spike. Think of the public companies, the uranium producers, with stockpiles; it’s their responsibility to take advantage of a financial opportunity like that, for their shareholders.
Bottom line: uranium is ever contentious. While acknowledging the counter arguments, I remain strongly bullish. I think political will is coming onside, I think social opposition is easing dramatically, I think there’s not enough uranium to meet demand in the coming years, and I know that equities run like made when investors turn their attention to uranium because there are so few stocks to buy.
All that said, I will be cautious as any uranium bull market unfolds because I do expect dramatic price spikes to be short lived. So…while I disagree with Irwin on the fundamentals, I might act along similar lines in the moment!
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