The Gold Report: With the patience of a good contrarian, Mercenary Geologist Mickey Fulp has spent the last couple of months watching for buying opportunities among fundamentally strong micro caps that have drifted down during the summer doldrums—and pouncing on a select few. Noting that precious metals have been on an almost unprecedented run, in this exclusive Gold Report interview, Mickey said that he expects a lot of the patient money sitting on the sidelines to get itchy soon, resulting in a rebound in junior resource equities that he hopes will mimic the sector’s post Labor Day rally last year.
The Gold Report: In the midst of a number of record three-digit swings in the Dow of late, the market’s just pounded some otherwise healthy precious metals stocks to a fraction of their logical commodity value. You pointed out in a July Musing that TSX junior resource valuations were down 20% from their March highs. Is this a good time to take a look at micro caps, Mickey?
Mickey Fulp: I think late summer is always a good time to take a look at our junior resource sector because of disinterest during the doldrums. At some point during the summer, stocks oftentimes drift down to their yearly lows or at least a trough.
If you looked at a chart of the Toronto Venture, you’d probably see summer troughs almost every year. Sometimes they last for a couple of months and at other times as little as a week. This year’s summer doldrums, caused by lack of liquidity and lack of buying interest, has been going on for a couple of months now and the Venture Exchange continues to drift lower. The TSX index is down 35% from its highs in early March, right before the Prospectors and Developers Association of Canada (PDAC) conference.
So, yes, I think this is a buying opportunity for some of the fundamentally strong micro caps.
TGR: Are the troughs and the opportunities more extreme this year?
MF: I think so. A couple of other things are going on as well, including the global economic unrest with European sovereign debt issues and U.S. politicos doing shenanigans with the debt ceiling. At the same time we had this nearly exponential rise in the price of gold (NYSE:GLD). The gold producers with record cost margins are catching up somewhat with the gold price, but the advanced explorers continue to lag.
TGR: Have any in particular caught your eye?
MF: I’m still bullish on the same stocks, and bear in mind I’m talking my own book here. One is Avrupa Minerals Ltd. (AVU:TSX.V), which has projects of significant merit in Portugal, joint venturing with Antofagasta plc (LSE:ANTO). Another one would be Estrella Gold Corp. (EST:TSX.V), a prospect generator in Peru. Both Avrupa and Estrella are trading at or below their latest private placements, which were taken down by a group of strategic investors with plans for making these better, more boisterous and viable companies.
TGR: That leads into something you often talk about—the importance of evaluating share structure, people, projects and whether a company is undervalued. In a recent Musing, you put a newly listed company, Brazil Resources Inc. (BRI:TSX.V), to that test. The company you dubbed “the new kid on the block in Brazil” seemed to score well on the first three but at the current price of $1.11, do you consider it a good value vis-à-vis its peers?
MF: Brazil Resources is a purely speculative play in which I participated in a couple of private placements before it went public. This speculation is based mainly on the people who have formed and are running this company, including the management of Uranium Energy Corp (UEC:NYSE.A) and some Brazilian money brokers. It has a very tight share structure. Something on the order of 60% is controlled by either insiders or institutions, apart from family and friends such as me.
Brazil Resources is cash-rich with $7 million and it has a corporate plan to build a mid-tier gold producer in Brazil. As I said, it is a speculative play, but adding all that up, I was comfortable writing it up at $1.20. With the current market malaise, it is back to the $1.20 range, but it’s been as high as $1.45.
TGR: Brazil Resources investors may have to ride this stock for some period of time, because with 60% of the shares held by insiders and institutions, it sounds as if there isn’t much liquidity in that stock.
MF: You’re exactly right in that liquidity is a problem with any tightly held company. And on top of that, as we were discussing earlier, liquidity has been extremely low over the summer.
If you look at Brazil Resources’ chart, you see lots of liquidity for about a week after it went public in mid-May, then a liquidity event in mid-June, and it’s traded very low volumes ever since. So this is not what I would call a quick turnaround stock. Still, I’m convinced its corporate plan will allow me to achieve my goal of a double in 12 months or less from when I wrote it up at $1.20.
TGR: You mentioned Estrella earlier, a prospect generator in Peru, one of your favorite countries. How does Estrella measure up against your criteria?
MF: Very well. It has a tight share structure. In the last few months, it did a $4M financing at $0.65, about where it’s trading right now, and put strategic investors into the stock. I have confidence in Keith Laskowski, the president, both in his geologic ability and his ability to attract worthy JV partners. So far, Estrella has only one joint venture, but it’s with an up-and-coming, aggressive major, Cliffs Natural Resources (NYSE:CLF). We used to know it as Cleveland Cliffs, a stodgy steel producer. It has since transformed into a very aggressive, diversified mining and smelting company.
TGR: Could Estrella be a double in 12 months or less?
MF: That’s why I pick stocks. If I don’t see a double in 12 months or less, it’s not a company I’m going to pick as a sponsor of my website and put my reputation on the line. We’re 16 of 17 since publicly launching this business model in the fall of 2008.
TGR: What could spark Estrella’s double?
MF: Additional joint ventures may be the answer. One of the company’s projects with potential, located near Yanacocha and Newmont Mining Corp.’s (NYSE:NEM) mines, was recently drilled. It has a small resource, but that should increase substantially with new results. A bevy of other properties, mainly in southern Peru, is available for joint venture right now. So, another JV with a major would certainly be a catalyst.
MF: Both. Again, these are two prospect generators. Almaden Minerals is arguably the flagship prospect generator operating out of Canada. The Poliquin family, which runs Almaden, has a track record of finding good projects and venturing them to other juniors. Both these companies have tight share structures. Almaden is cash-rich. But geologists and prospectors still must perform. That’s the key to a good prospect generator. They need to find meritorious prospects, and then the management must find legitimate and worthy joint venture partners.
TGR: Do you see any good joint ventures on the horizon for Almaden?
MF: Well, Almaden has significant JVs going right now, including Caballo Blanco with Goldgroup Mining Inc. (GGA:TSX.) What’s really moved its price over the last year is a discovery in Mexico called Ixtaca. It looks as if this could turn out to be a major new epithermal gold-silver district. I picked Almaden at $0.90 in July 2010 and it’s been as high as $5.46. It’s trading in the under $3 range now.
Tarsis is a very early-on prospect generator. Almaden has been in existence since 1986. Tarsis is essentially a spin-off of Almaden’s Yukon prospects and one Mexican property with some common management. Duane and Morgan Poliquin are involved in both companies.
TGR: How are prospects looking for Tarsis?
MF: Tarsis has Prospector Mountain in the Yukon, being drilled by Silver Quest Resources Ltd. (SQI:TSX.V). The company recently announced a significant gold intercept in the first hole at Ericka in southwest Mexico. It has been out there prospecting, evaluating, mapping and sampling Yukon properties this summer. Once results come in over the winter, Tarsis will find out which ones have merit and can be offered for joint venture.
TGR: Getting back to your point about expecting everything you invest in to double in no more than 12 months. . .An average investor may look at Almaden and figure that if Mickey says it can double in 12 months, that makes sense because Almaden has a 25-year track record. But with Tarsis being a newcomer with barely any history, the investor might see a lot more risk.
MF: I picked Tarsis in early January at $0.45, and it went as high as $0.95 in mid-February. So, there’s your double. When it spiked to $0.95 readers that follow my Power of Two investing philosophy took all initial money off the table by selling half. Now it’s dropped back to the price that I picked it at, but it’s already been a double and a winner. The same with Almaden. I picked Almaden at $0.90 about 13 months ago. It has gone as high as $5.46. If you didn’t take the amount of your initial investment off the table with Almaden, you’re not playing the game under the same philosophy that I write about. The play has already been successfully executed on Almaden. Now it’s a free ride. Then it graduates into the idea that you put open orders to sell tranches on the uptick so you’re continuing to take profits.
It’s up to people to trade. I give them a methodology to have free trading shares, and over a course of three years, I’ve hit on 16 of 17 that have been held at least 12 months.
TGR: Can’t argue with that track record.
MF: Let’s look at one that hasn’t doubled yet, Estrella. I first mentioned it as an idea at $0.95 in early January, its all-time high was something like $1.24 a few days later, and we formally picked it at $0.70 on June 28. We haven’t achieved our goal yet, but we have 10 months for this to become a $1.40 stock. If it does, even if for only an intraday trade, and you have an open order to sell half your position at $1.40, there’s your free ride. You’re now playing with someone else’s money. Then it’s a matter of continuing to take profits.
If I sold half at $1.40, I might sell another 5% or 10% at $1.60, and maybe another 5% at $2, depending on what I think the stock’s upside is. If there is positive news and it ramps up quickly, I’m a multi-trade seller. That’s how occasionally I will have the high trade on a stock because I have many open orders to sell that get automatically renewed every month.
You also set “profit stops” for on the way down in a bear market. For instance, if you get your double at $1.40 on Estrella and take back your investment money, you might set a stop and sell another small tranche at $1.20. Then you’re still taking money off the table with a zero-cost basis and continuing to make money even in a down market. There are no paper wins or losses in the stock market. You must execute a trade to generate a profit or a loss on the balance sheet.
So this is a programmed and very conservative way to trade a high-risk speculative market and continually generate profit. Since every junior will have a double from its low to high in any given 52-week period, the key is picking the right stock at the right time when it is undervalued.
TGR: As regards the micro-stocks, have you taken particular interest in any certain regions or sizes or types of companies over the summer?
MF: I haven’t taken an interest in very much this summer other than watching companies that continue to get beaten up. They become buying opportunities at some point, when the potential reward meets the risk that’s involved in highly speculative micro-cap stocks. That’s the purpose of stink bids, to find fundamentally strong stocks, and buy them when they’re down on their luck or the markets aren’t particularly friendly.
Area plays don’t really interest me that much. I have strong ideas about the kind of projects I’m interested in. I don’t really concentrate on areas as much as I look at individual companies.
TGR: Have any of your stink bids paid off?
MF: No, they’re stink bids and we’re in a down market right now. I’m just accumulating some stocks that I already have positions in and I see opportunities to lower my cost basis and wait for a better market. You know a contrarian view requires patience.
TGR: How many companies do you typically have in your personal portfolio, Mickey?
MF: It isn’t typical but right now I have between 35 and 40.
TGR: So you’re pretty focused.
MF: Well, that is as many as I can handle. Historically I’ve held 20 or 25, but over the course of the last year or so I’ve just found many stories that I wanted to participate in. Still, I’ve never covered more than 10 at a time. I may mention other companies in interviews but I only write about those 10.
TGR: How do you select the 10? What makes them rise to the top?
MF: Those are the best of the best. It comes down to the old criteria. Every company I put money into has the requisite share structure, people and projects. If they’re severely undervalued, I hope that is when I’m going to choose them.
TGR: The general media commentary seems to be that the money going into gold is going into physical gold. For example, we’re seeing ETF prices rise increasingly, but at the expense of juniors. Money that was expected to go into explorers is going into the ETFs instead. People are going more into the commodity than the equity.
MF: Absolutely. The gold explorers (NYSE:GDX) are down because money is going into gold ETFs versus the junior resource sector. The ETFs have given people another way to participate in the gold market. If you wanted to buy gold 10 years ago, you either bought bullion or played high-risk juniors. Now you can buy the gold ETF (NYSE:GLD).
TGR: If the price of gold continues to go up, will it continue to dampen share prices in the junior sector?
MF: I think the fact that we’re in a time of economic turmoil worldwide is what’s dampening the share price of the juniors, because people are looking for safe haven investments and choosing gold as a safe haven. A junior resource company is 180 degrees diametrically opposed to the idea of a safe haven. So you’ll see money come back to the juniors when the markets get better overall―when we have a stronger market.
TGR: Any idea when that will be?
MF: I personally expect a stronger market after Labor Day. I think we’ll see a post-Labor Day rally like last year. If you remember, that’s when the juniors really started taking off. From Labor Day until the PDAC, we had one of the strongest bull markets for juniors in memory. Will we see that sort of rise again? I hope so, but I wouldn’t go to the bank on it.
That said, I do see similar trends. Despite the recent correction in gold, precious metals have been on a run that’s almost unprecedented. We have very strong prices for industrial metals, too. Despite economic unrest, we’re still seeing strong demand, and copper is hanging in at $4 per pound.
Much like in 2010, we’ve had these periodic short-lived panics and weeklong sell-offs in the market and, as we do every summer, low liquidity. Because of that we have little interest in buying—or selling—in the juniors.
What I see is many dollars on the sidelines. All I’ve been doing is using some of the dollars I have on the sidelines to pick away with stink bids and select private placements, but, in general, I’ve been extremely inactive in the open market this entire summer. The question becomes, “When does that patient money sitting on the sidelines get itchy?” Last year, that was right after Labor Day. We had record private placements last fall and winter.
TGR: So things could be looking up for the juniors this fall.
MF: Yes, I think and certainly hope so.
Michael S. “Mickey” Fulp is author of The Mercenary Geologist. He is a certified professional geologist with degrees in earth sciences (B.Sc. with honors from the University of Tulsa) and geology (M.Sc. from the University of New Mexico). Mickey has more than 30 years’ experience as an exploration geologist searching for economic deposits of base and precious metals, industrial minerals, coal, uranium, oil and gas, and water in the Americas, Europe and Asia. Mickey has worked for junior explorers, major mining companies, private companies and investors as a consulting economic geologist for the past 24 years, specializing in geological mapping, property evaluation and business development.
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1) Karen Roche and JT Long of The Gold Report conducted this interview. They personally and/or their families own shares of the following companies mentioned in this interview: Newmont Mining Corp.
2) The following companies mentioned in the interview are sponsors of The Gold Report: Estrella Gold Corp.
3) Mickey Fulp: I personally own shares of the following companies mentioned in this interview: Almaden Minerals Ltd., Avrupa Minerals Ltd., Brazil Resources Inc., Estrella Gold Corp., Goldgroup Mining Inc. and Uranium Energy Corp.; Almaden Minerals, Brazil Resources and Estrella Gold are sponsors of my website.