Exploration Insights’ Joe Mazumdar on Recent Blockbuster Gold Mergers, Malfeasance in the Junior Resource Space, & How He’s Positioning Himself for 2019

January 15, 2019

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Gerardo Del Real: This is Gerardo Del Real with Resource Stock Digest. Joining me today is the co-editor of one of the best resource newsletters in the space - it's one of the few that I am a subscriber to - Exploration Insights, Mr. Joe Mazumdar. Joe, how are you?

Joe Mazumdar: Happy new year, Gerardo.

Gerardo Del Real: Happy new year to you as well. I could have gone on and said you're an analyst and an economic geologist, but I think people are pretty familiar with you so I'll skip the formalities. Big news this morning. Let's start with your take on the announcement that we will be seeing a merger between two behemoths, Newmont and Goldcorp. Immediate thoughts? The news just broke. What do you think?

Joe Mazumdar: I take this back to let's say the mid-‘90s when I just started with Newmont, and Barrick had just purchased Placer Dome. That was a big acquisition. Barrick had cash, had a good position. But it had no growth and it bought Placer. And in a growing price environment, that acquisition ended up making a lot of sense for them. Whereas at Newmont, we never bought anything that significant, so Barrick had the upper hand on us - or on Newmont - for several years because of that acquisition.

It seems this time, what we're seeing is that with the Randgold-Barrick merger and where they were going to go, which was on top of Newmont, that is something that Newmont doesn't want to wait or say, "We don't need to be there." And the reasons for that, I don't think it's growth. I don't think it's, "Oh I want to be at X million ounces by this year," which was actually Goldcorp's philosophy. So it's not a great one.

It was basically that we want to maintain a certain size of company that justifies a certain market cap liquidity that would attract these type of investors. And those type of investors are the generalists that would like to more invest in passive funds, which gives them solvency, which gives liquidity, a lot of options to trade. Those are the kind of places that the generalists are going to. And so if you're going to compete with the ETFs, you need to be bigger, potentially. And the two big ones are going to be this new Barrick and this, for lack of a better word, new Newmont.

At Goldcorp, we have talked about before in our letter and in some presentations, they were going in a different direction than the industry as a whole. They weren't about cashflow, they were buying a lot of marginal assets. They were doing something completely different. And we've stayed away from that company since, for a couple years. And basically they've had not great returns on equity. We did this piece before the end of the year last year where we looked at a push in the gold price, potentially in the first part of this year. Goldman Sachs, one of the advisors for Newmont, has gold going up to over $1,400 in 2019.

Gerardo Del Real: It's rare, Joe, that I find myself rooting for Goldman Sachs. But I hope they're right on this one.

Joe Mazumdar: Well, the thing is that we believe that the gold price is at a good spot. It's consolidating and ready for a leg up. If we get that geopolitical uncertainty with what's happening in the globe right now and any more issues with trade, which doesn't help us with the base metals and other commodities and obviously oil. But it does help us with gold in terms of the portfolio hedge. And so what we were proposing to our subs is maybe they'll go up-market now, because usually if the gold price goes up, the better place to be is in the more liquid, higher cap names, because those are the ones that tend to go up first.

That's a study we did last year. We made some purchases on the back of that. We didn't buy Goldcorp, there really was no reason to buy it anyway. If you really wanted to make money you would have had to buy it on the close on Friday to get the 16 or 17% return, otherwise holding that over the year, you would have lost more money.

Gerardo Del Real: It would have hurt. Absolutely, absolutely.

Joe Mazumdar: So these M&As are great for bankers, and potentially even better for bankers going forward because now, between the Newmont merger and the Barrick merger, there may be $2 to $3 billion dollars of assets within those combined portfolios that they’re promising their shareholders that they're going to divest of in the next few years. So that opens a Pandora's box for the bankers. You might have a couple hundred million dollars in fees wrapped up there. Where they're going to be selling this to mid-tiers, potentially, to the Australian companies that have those valuations and want more assets in, potentially, the Americas. Might be private equity. I don't see where we're going to see the accretion for equity shareholders. When we talk about M&A, we talk about finding a great asset, and that asset getting acquired. Now we're talking about the product actually being delivered by the major into the market, and then all you have access to is basically the acquirer.

Gerardo Del Real: Right, right. So let me ask you this. Are there any implications for the juniors? One of my big frustrations in 2018 was exploration companies that continued to raise money near market lows, near 52-week lows, and not doing anything with it but writing themselves checks, and justifying that with the bear market. I agree with you that the gold space - and we'll talk about this here in a second - that 2019 is setting up to be a much better year. I think for those of us that hopefully were smart enough to buy near bottoms in 2018, I think we’ll be rewarded.

But what do the juniors have to do to succeed in this new environment? Because we talked a bit off air, the only people who are going to absorb the projects that are going to be spun off or sold by the majors, are going to be the mid-tiers. So if the juniors aren't making discoveries or developing quality assets, do they go away? Is this the year where people get tired of continuing to write checks while companies just sit idly by and not do anything?

Joe Mazumdar: I would hope so, but that never seem to be the case. I think that the saying that, "There's one born every minute" rings true of it, because there's a lot of companies that I see raising money that I have no idea who is actually giving them the money. We talked this weekend about a company that raised money for an asset in Mexico, and blatantly in the news release about potentially a $6.5 million raise, they basically said that $5.5 million of that, I think 80 to 85% of those funds, would be directed to corporate development. And this is a junior company with a single asset. Corporate development, but more importantly, advertising, IR marketing. Marketing like a junior company, that right now has a market cap of $4 to $5 million. IR, advertising, marketing. $5.5 million?

I mean, give me a break. They still got money. So I don't know, it's hard for me to compete with the logic of some of these people that gave them the money. The stock is down 85 to 90%, based on the share price 12 months ago.

Gerardo Del Real: It's been halted, right?

Joe Mazumdar: Yeah, if we're talking about the same company, the board has changed, and I know that they added a board member in the latter part of last year. Just three or four days later the guy resigned. They changed CFOs, there's a cease-trade order, all of this and this is just one example. Then you get companies like Pretium. They have the issue with their production reconciliation. And then the day before, actually the only trading day before they actually released, the stock was down.

Gerardo Del Real: Yeah.

Joe Mazumdar: On no news, on a day when gold was up.

Gerardo Del Real: And heavy volume.

Joe Mazumdar: Exactly. Somebody knew something.

Gerardo Del Real: Somebody said something.

Joe Mazumdar: Because there was nothing else going on.

Gerardo Del Real: Yeah, not only did they know, but they said it. And then that's the part, right? Somebody always knows something, but the fact that it was acted on in such a nasty way, there's not a better word for it. It makes you feel, if you're a shareholder, you're disgusted.

Joe Mazumdar: Look at the M&A between these two companies, Newmont and Goldcorp. We didn't see a big jump in the price of Goldcorp on Friday, or a big reduction in Newmont. And these are huge companies, with a lot of people that they've got to talk to.

Gerardo Del Real: Right.

Joe Mazumdar: And a lot of people that would've been in the know. And I worked for corporate development for Newmont. These guys are like, "Okay, we're blacked out, we're not going to do anything, don't talk to anybody."

Gerardo Del Real: Yup.

Joe Mazumdar: Because it'll all come back to bite you. What's Pretium doing? They're doing an internal investigation. That investigation should be conducted by the BC Securities Commission.

Gerardo Del Real: Agreed.

Joe Mazumdar: I mean, it shouldn't be conducted by Pretium.

Gerardo Del Real: Let me ask you this, Joe, why isn't it? Why do we believe, us in this space, that speculate in this space, it's a risky enough space, we provide research and ideas for people to write checks on the back of, and it's risky enough without nefarious dealings. Why is the Commission not investigating it? Why should it be just an internal investigation? Why does nobody else pick it up?

Joe Mazumdar: Maybe they're underfunded? They don't see it, they need somebody to point it out to them? You know, I have no idea. There's, what, about over a thousand companies listed in Canada directly related to mining on the TSX Venture and the main board. This issue about self-regulation is just not working. We've got to be better at this in Canada, because in the end the Canadian exchanges generate a lot of money and fund not only Canadian projects, but globally they fund projects all over the world. And if Canada wants to continue to be the source of funding, people have to trust the system more.

Gerardo Del Real: Well said.

Joe Mazumdar: There's not a lot of trust right now.

Gerardo Del Real: And there shouldn't be, to be absolutely clear. You should be suspicious. You should be looking at the MD&As, and looking at that, and seeing what travel expenses for these companies are, what marketing expenses. You know I want a company to market. As someone who co-owns a website that relies on sponsors, I want companies that have quality stories, quality assets that want to talk about those. But man, when 70% of your budget is allocated to marketing and advertising, there's not any amount of money that I'll take a check from to tell that story because it's not sustainable. The recent example of the company I think we were both referring to is a perfect example of that.

So, for those of you who are listening, that are newer in the space or don't do it, look at expenses. Look at advertising expenses. Look at travel expenses. Get in there and dig. Call the company and ask them. And if you can't get a call back, they're probably not good stewards of your capital anyways.

Joe Mazumdar: What would be nice, is when you looked at the management team, if you could go straight to the BCSC or even that they would have to issue on their website that, "Hey, here's a red flag. This guy has been issued a cease-trade order before. This guy has not been able to trade in X company." If there's a history there of malfeasance, it should be known right away.

Gerardo Del Real: Agreed.

Joe Mazumdar: And those companies will be avoided. And those management teams will not be able to raise money.

Gerardo Del Real: Maybe those of us that are in the space, Joe, who have newsletters and platforms, websites, blogs, etc., need to do a better job. There's a couple of us that do it. I could absolutely do more highlighting. I think all of us can step that effort up a little bit.

Joe Mazumdar: I mean, by far, the person who does the best job is Inca Kola. He gets onto it right away, and he sorts them out. The problem that we have, or that I have, at Exploration Insights, is that there's so many of them that it's hard to spend all my time talking about things that I avoid. But I will go into one if one of our subscribers asks us about a particular company. And we went down that road just this weekend because of an issue we had with a company we owned, that actually traded up with the knowledge of the release of the drill holes would be the next day. And the same week, we had the issue with Pretium. And then we also started reading about another company that a subscriber asked us about.

All of these were several examples of a bigger population of issues that need to be dealt with. Not for the next quarter, but in terms of the long-term for the Canadian market to be a steward of people's money, with respect to investing in Canadian markets to raise money for exploration, for development, for production in the mining sector. If they’re really keen on sustaining that level of influence, they have to do better.

Gerardo Del Real: Agreed. Let's look ahead a little bit, 2019. I think almost everyone is glad that 2018 is behind us. What do you see in the gold space? I know that Goldman had the note recently, they see a $1,425 gold price. I think if we can break through $1,374, we're going to have a heck of a year.

But what do you see, Joe? You've been around for a long time, you've done a lot of work for a lot of the majors, you're one of the best analysts out there. Share your thoughts.

Joe Mazumdar: Well, one thing we tried to do over the latter part of last year is give our subscribers a perspective in terms of what we were thinking in respect to 2019. And right now, with everything going on, global uncertainty on the trade part of it, government shutdown in the US, the potential of the US dollar actually peaking right now, that combined with the Fed discussing maybe lowering the number of rate increases that they do in 2019, that combination speaks well to the gold price breaking out of its funk. Especially in the first quarter.

So saying that we thought, "Where do we want to be?" And we prefer to be in the high liquidity companies right now, because they would be the first to move. And so we basically said, "Okay, here's 20 companies, North American-listed companies, which ones would we want to own?” Let's look at liquidity, let's look at working capital, let's look at do they make any money, let's look at solvency. All of that, we basically selected a few.

And in that study that I did, what came out of it was exactly what you saw with Newmont and Goldcorp, and Barrick and Randgold. Two of the worst performing companies, with respect to retained earnings on their balance sheets are accumulated deficits basically of the list we had, were Goldcorp and Barrick.

Gerardo Del Real: Yup.

Joe Mazumdar: So Barrick, in an effort to be better, bought a company that was better than it, in terms of performance, which is Randgold.

Gerardo Del Real: Right. Well said.

Joe Mazumdar: And Goldcorp, in an effort to capitulate, because shareholders had no faith in the management team to do anything, let alone their long-term strategy of growing their reserves, get acquired by somebody who had a better idea of what to do. So you're basically getting two companies now with more assets.

But the big thing will be the divestitures. And when you look at specifically they Newmont-Goldcorp deal, they were talking about Newmont’s production profile is about 5.34 million ounces, Goldcorp's last one was 2.6 million ounces. Combined that looks like about 9 million ounces. But what they're talking about is not 9 million ounces, not 10 million ounces, not 12 million ounces, what they're talking about is a sustainable 6 to 7 million ounces.

So the whole thing about sustainable production, free cashflow growth, keeping your debt down, and not having to go back to the equity markets, or raising more debt, but managing your business like a business, such that you’re long-term, and you can better compete for less money against the ETFs, and I think that's where they're headed. Newmont is on the S&P 500 index, whereas I don't think Barrick is. So, that will get them more in terms of people's interest. But also Newmont has this dividend policy that's basically levered to the gold price, and that would be something that ETFs don't provide.

Gerardo Del Real: Correct.

Joe Mazumdar: That might encourage generalists to come in. There's definitely a motivation for Newmont to do this deal, to get that leg up. Geopolitically, their risk jurisdiction portfolio looks a lot better than Barrick's, because Barrick has acquired a lot of African assets. Whereas Newmont is acquiring assets in Canada, from Mexico. Probably the worst jurisdiction that Goldcorp had was maybe Argentina.

Gerardo Del Real: Correct.

Joe Mazumdar: Other than that, they're picking up a lot of triple A countries in terms of where the assets are. They’re increasing their exposure to Canada a lot, because they didn't have much before. So that's encouraging to anybody that invests in Newmont that doesn't want any issues with geopolitical risk. They would definitely be a company that some of these generalists would prefer, because of where their asset portfolio is.

From the Canadian perspective, what's interesting to me as well is that Barrick is the flagship gold company of Canada, but now slowly the management team that's taken over is from the States, John Thornton, the chairman, and also now from Europe and Africa with Mark Bristow. And so their allegiance to whatever happens in Canada is less so, now. And also now with Newmont, now that Barrick is changing, Goldcorp is gone. So who's the next one down that list, in terms of being a flagship company that's truly Canadian? It's getting less and less.

Gerardo Del Real: Interesting, interesting. Let me ask you this, Joe. For those of us that speculate in the higher risk juniors, what should we be looking at? Should it be a mixed basket of companies with robust assets, anchor assets, that can grow? Or should it be weighted more towards the junior explorers that have successful management teams that have done it in the past and have assets that can grow? Or should it be a mix of both? What's your approach, what's your advice there?

Joe Mazumdar: Well, I'm not an advisor.

Gerardo Del Real: Correct. How would you play it, Joe? How are you playing it?

Joe Mazumdar: Well, how I am playing it is basically, it all depends on your investment window. Our window is long in terms of, we can invest in exploration companies and prospect generators which we tend to lean towards, because that's sort of the nature of the beast with respect to Exploration Insights. But, when we see short-term opportunities, we take them, which is what we're doing now. We're increasing our exposure to bigger cap producers right now that are focused on precious metals with not a lot of geopolitical risk. We are focused a bit more on that because if there's a push up in gold, as well potentially in silver, that's where we've exposed ourselves more to on the liquid, solvent, free cashflow generating companies with a portfolio of assets. We have added more of that exposure to our portfolio.

Gerardo Del Real: Got it, got it. Excellent. Joe, always an enlightening discussion. Your insights are always on point, it's appreciated. How can people find you? Tell them about your newsletter, tell them about your Twitter handle. Tell them how to get to you.

Joe Mazumdar: I do have a Twitter handle, I think it's just my name. In terms of our website, it's explorationinsights.com. There's a lot of free stuff on there to go through, and eventually this discussion about what we did with these major companies, I'll end up publishing that as a free article in a week or so.

Gerardo Del Real: Excellent. Well, with your permission, we will post it up on the site. I read it yesterday, I mentioned I'm a subscriber, I think it was an important piece, and I think it's good of you to make it public after giving subscribers a chance to digest it. For the record, Joe, your name is your Twitter handle, @joemazumdar. Joe, thank you so much for your time, I appreciate it.

Joe Mazumdar: Okay. Thank you, Gerardo.

Gerardo Del Real: Have a good one. Have a great 2019. Look forward to chatting again.

Joe Mazumdar: Okay, thank you.

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