(Disclosure: The following represents my opinions only. I am not receiving any compensation for writing this article, nor does Hydra Capital have any business relationship with companies mentioned in this post. I am long AAV, PONY, AMC, ACU, AZM, CAD, CANX, CD, CS, MIN, NLC, and ORS.)
Three weeks into January and there’s no lack of things to look at in the market. Gold, oil, and copper are all holding firm, but I continue to monitor the DXY (U.S. Dollar Index).
While some stocks have made great moves and others haven't, I definitely sense optimism in the gold and resource sectors. Junior stories are advancing, stocks are reacting positively to drill results, and the market appears to be focusing more on upside potential than downside risk. This sentiment is likely fueled, in part, by market gurus and investment banks calling for increased exposure to energy and materials.
- TSX Venture Index: The index has climbed out of a multi-year low and is up about 12% from its November lows.
- Copper: Junior copper stocks are gaining attention, though I'd prefer to see copper break through $3.00/lb.
- Gas: The shine has dimmed slightly, but the long-term value argument remains valid.
- Oil: Acting reasonably for a change.
- Gold: Hit or miss, but overall, there's money to be made as long as companies deliver results.
The market has little patience for missteps, quickly moving on to the next opportunity. Here are a few words on names that have experienced both good and bad starts to 2020.
Energy Producers: Navigating Volatility
CompanyTicker (Last Price)Key CommentaryAdvantage Oil and GasAAV.TO ($2.34)Stopped out of half the position due to chart movement, remaining a fan due to low cost production, improving liquids:gas ratio, and a cleaner balance sheet.Painted PonyPONY.TO ($0.69)Maintaining a full position to await the 2019 reserve values and subsequent market reaction. Western Canadian gas remains a multi-year view dependent on West Coast LNG development.Arc ResourcesARX.TO ($7.73)Stopped out of the entire position, respecting the chart trend.
Mining & Exploration: The Latest Updates
Copper, Gold, and VMS
- Arizona Metals (AMC.V, last at $0.55)
- Drilling is underway on this new copper-gold VMS deposit.
- The company is raising an extra $2 million to support expanded delineation and exploration.
- First results are expected "during Q1." Higher copper prices coinciding with drill results would be a major catalyst.
- Azimut Exploration (AZM.V, last at $1.48)
- Announced eye-catching results from the Patwon Prospect at its Elmer Gold project (multiple near-surface mineralized vein sets).
- AZM has a reputation as a highly competent technical team.
- The general feeling is that the system will have scale, though size and continuity remain question marks.
- Taking a partial position; additional IP survey work is ongoing, and a financing for an expanded drill program is expected soon.
- Cantex Mine Development (CD.V, last at $0.66)
- Underwhelmed the market with its January 6th winter drilling update (no assays).
- The project has become a treasure hunt; they need to learn more about the system's structure.
- Stock is down significantly; requires real results that confirm mineralization beyond Pad 6 (e.g., hitting good grade/thickness around a kilometer away). Market interest is waning fast.
- Capstone Mining (CS.TO, last at $0.90)
- Announced optimistic drill results at its Cozamin mine (Mexico).
- Step-out drilling to the northwest shows high grades, suggesting resource expansion potential.
- The stock continues to perform well; a happy owner as long as the copper chart remains constructive.
- Excelsior Mining (MIN.TO, last at $1.13)
- Gunnison ISR project is performing well so far.
- Need continued operational updates and production numbers. Successful Phase 1 ramp-up will increase market credit for the larger Phase 2 and Phase 3 expansions, which is key to the "full project" NPV.
- Orestone Mining (ORS.V, last at $0.11)
- Growing interest in the Resguardo copper-gold target in Chile.
- The company is encouraged by exploration validating their target model: a large manto or porphyry system.
- A large chargeability IP anomaly (1400m strike length, 200m depth) is directly below surface alteration caused by fluid leakage.
- With a tiny $3 million market cap and a strong geological/geophysical target, the cost of entry is attractive. Expecting a small financing to fund a proper drill test.
Niche Metals and Coal
- Colonial Coal (CAD.V, last at $0.31)
- Price is capped by 22 million warrants expiring February 3, 2020 (30-cent strike).
- The thesis revolves around potential acquisition interest related to the recent director addition (Partha S. Bhattacharyya, formerly of Coal India) and India's growing need for imported metallurgical coal.
- Neo Lithium (NLC.V, last at $0.73)
- Stock up nearly 50% in short order due to renewed optimism in the lithium sector (driven by Tesla/EV theme).
- 3Q project is considered the best brine asset in junior hands.
- Management expects the project to attract a partner, and 2020 seems like a prime year for that.
Grassroots & Advanced Exploration
- Canex Metals (CANX.V, last at $0.185)
- Gold Range property has been doubled in size following a magnetic survey.
- Mag lows correspond to mapped mineralized zones.
- Building towards a maiden drill program soon; capital needs should be modest and achievable.
- Sun Metals (SUNM.V, last at $0.115)
- Stock price is back below the starting point; the market cap is around $15 million.
- Disappointment that the "winter drill program" was curtailed, putting the project in near-term limbo.
- Initial excitement from Hole #421 has not been replicated, and investors are losing confidence. Timing is critical, and a 5-6 month wait for a new plan is unpalatable when other opportunities abound.
Microcap Technology
- Aurora Solar (ACU.V, last at $0.12)
- Announced another large sale (14 DM measurement systems) to a major Chinese solar panel manufacturer.
- Expertise in optimizing solar cell production is "on trend."
- Long due to the company's core competence in manufacturing efficiency.
- Watching for developments on their new "Insight" optimization service, which aims to provide recurring revenue through manufacturing process analysis.
Cannabis (Weed)
- Cronos Group (CRON.TO, last at $11.27)
- Stock is up as optimism returns to the sector.
- Recently stopped out of the position when it pulled back below $11, but keeping an eye on it for new highs.
Final Thoughts: The Need for Diversification
The volatility in junior resource stocks can be gut-wrenching or euphoria-inducing. The two keys to maintaining sanity and long-term success in this sector are:
- Always being able to live to fight another day (Risk Management/Position Sizing).
- Continuing to generate and evaluate new ideas (Diversification).
Working to evaluate new ideas in the context of existing ones and past experiences leads to a more coherent view of the broader market, a process that is "every bit as much of the prize in the long term."
Happy hunting.
Malcolm Shaw
