One of The Best Contrarians In the Resource Space on How to Navigate A Brutal Bear Market

May 16, 2019

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Gerardo Del Real: This is Gerardo Del Real with Resource Stock Digest. Joining me today is the President of Global Market Development, and one of the most respected contrarian voices in the junior resource space, Mr. Jeff Phillips. Jeff, how are you this morning?

Jeff Phillips: I'm doing well. Thank you, Gerardo.

Gerardo Del Real: Thank you for coming on. I mentioned that you are one of the most respected contrarian voices. You absolutely have to be a contrarian to speculate and dabble in the current junior resource space. It's definitely a challenging market. I thought that, frankly, I don't know anybody in the business that has the background or experience and is as honest and generous with their time in sharing those experiences.

So I thought I'd have you on, Jeff, to ask you how this bear market stacks up with other bear markets you've seen in the past. And then I'd love to transition into how you've played those and then we can maybe even talk a few stocks later on. But this is a tough market, how does this stack up to some of the bear markets you've seen before?

Jeff Phillips: It's the worst. Yeah, I've only been in the market – I mean there's other people that've been around longer than I have – since the mid-‘90s, which I guess is getting to be a long time now. I had lunch with a well-known entrepreneur and brokerage firm owner, a friend of mine. I won't use his name because I don't have permission, per se, although you read his name everywhere. I asked him the same question. I said, "You know, I've only been around since '95, you've been in the resource market since the late ‘70s."

I said, "How's this stack up?" I think he agreed with me that this is worse than even the bear market after the '98 Bre-X scandal and the resource market and gold at $300 an ounce in 2000. The market was pretty bad from '98 to 2003. I think this stacks up. I think it surpassed that bear market.

Gerardo Del Real: The comparison is interesting to me, Jeff, because we all know what happened after that, right? We had one of the better bull markets in the gold space following that bear market. With that being said, so this is the worst you've seen?

Jeff Phillips: In all bear markets, Gerardo, you have, let's use something that's timely now that's now as archaic as metals. Three months ago everybody said Bitcoin was done, it was a waste of time and it was trading below $4,000 a coin or whatever. Today I think it was over $8,000 a coin in less than three months and you've seen everybody talk about it again. So you could've doubled your money very quickly in three months in a fairly liquid, I guess you'd call it a commodity.

So again, when everybody throws in the towel, it's usually the time that you'd see these huge run-ups in different sectors. So you definitely, as the old saying is, "You want to buy when there's blood in the streets." The resource market, the sector's covered in blood right now.

Gerardo Del Real: Interesting. So let's talk how you use the market to your advantage or do you in a market like this, Jeff? What are you doing right now? And I know you don't give specific investment advice. I'll ask you just on a personal note. How are you playing this market? Are you averaging down? Are you kind of staying away? Are you diversifying into other sectors?

Jeff Phillips: Yeah, that question is different for everybody because of the simple fact is like you just said, diversification's important. I honestly have assets in multiple different classes. I choose my professional, I consult for natural resource companies. I do financings in natural resource companies. I own some Biotech companies because I have some diversification. I don't consult in that business, I don't make a living doing that. I own dividend-paying stocks. I own a number of things. So when you say what you do when you're in a bear market in the resource sector, it's a percentage of my overall assets that's in the resource sector. It's a higher percentage than most people should have, mainly because that's the sector I've made a living consulting for companies over 20-something years.

So it's all different for different people, but there's people in our industry right now that I talk to, almost everybody in our industry, whether they're like me and they have a portion of their assets, a larger portion than the normal person should have in the resource sector, everybody's down. The biggest players in the industry, no one's up. So if someone says that, they might be up in one stock out of 20 stocks they own, but they're not up overall. They're definitely down. But most guys have been in this market and understand that and when you're down that much, you add to your positions, if they're quality positions with quality assets. You add to those, you average down.

But what you end up finding out, in bear markets like this, is a lot of people overextend themselves. So they don't have diversification. They know the resource sector. They've put all their money in the resource sector and I hear this all the time. When I have companies come to me and say, "We need to raise money." Well you need to restructure and let all your big shareholders participate. But you need to get ready for the next bull market. And you won't be in a position to take advantage of that if you don't.

The answer is, "Well we would do that, but we have no more money to write checks to own a piece of our company so we get diluted out." Well that's because they're overextended. And in other cases, companies don't have to restructure, and quality assets can get through, but a lot of these people can't keep averaging down forever and at a certain point if this goes on for – not that I think it's going to – another 10 years, if I kept averaging down every year, at some point I have to stop averaging down. Right?

Gerardo Del Real: Interesting.

Jeff Phillips: Or take a huge risk and bet I’m right around the corner, because at some point I've well overextended myself. The old adage, "You've got to be in the game to win the game." So when the game starts, which it will again, the resource market will hit a boom. It will when everybody least expects it, which is probably coming up here shortly, because everybody pretty much doesn't expect it right now. It'll start to take off and you know, after things double and triple, you’ll see people start to pile in and you'll have a bull market again for a couple of years where you make 10 times your money. But again, if you bought five years ago and never averaged down, you'll probably get back to break even.

Gerardo Del Real: That was going to be my next question. Obviously, nobody gets into speculating and catching falling knives in the resource space for a double, right? We get in this business to be able to make 10, 15, 20 times our money. And if you're lucky enough to be able to participate in private placements and collect a warrant, you can multiply that.

Where do you see a large portion of the gains happen in that initial turnaround where it's clear that we're off to the races? Which sectors do you see the biggest opportunity right now considering the valuations in the resource space? Is it gold? Is it copper? Is it all of it?

Jeff Phillips: Well I think it's hard. I think you've got different things going. Gold tends to lead. When gold does well, the rest of the resource market tends to do well. You do have the backdrop, the simple fact is that we have a bull market in almost every asset in the world and we have an expansion that's lasted 8 years. You've really got to ask yourself if we're really having an economic expansion, especially over the last number of years, why is the price of the copper – they call it Dr. Copper for a reason, it's used in almost everything and the electrification of vehicles is going to increase demand – why are we not seeing copper skyrocket along with the rest of the markets? I don't know. I don't have an answer for you. I think it's very strange. I think either you're about to see the metals explode to the upside or you've got some fundamental problems in the overall markets that have led to these inflated values.

In either case scenario I think whatever the answer is to that question, I think gold will do real well. If commodities are about to catch fire over as the last asset class in the tail end of a boom era, gold will do well anyway. If for some reason the financial markets come unraveled, gold's going to do well, too. So I think having some exposure to both physical gold and more speculative and highly leveraged gold deposits in the ground or assets is a good call.

Gerardo Del Real: Care to share a couple of pics in the gold space that you like at these levels?

Jeff Phillips: Yeah, I could talk about uranium. Again, you can't produce the metal for what it sells for. So at some point, uranium's going higher. It's not just gold, where we sit now in time, it's probably got a good risk-reward ratio.

Names in the space, something I don't own, I don't consult for, but I think is an interesting company is Sprott, Inc. There's a bunch of different Sprotts, I mean the actual company. You'd have to look up the symbol, I don't know it off the top of my head.

Gerardo Del Real: Are we talking the Sprott stock that pays the 4% dividend, or four-point-something percent dividend? Is that the one we're talking about?

Jeff Phillips: Correct, we're talking about Sprott, Inc., which essentially is Eric Sprott and Rick Rule's company that's heavily focused on the resource sector and is a central fund in Canada, which is a way to buy gold and actually own the physical gold stored for you. Brokerage firm, highly leveraged to the resource market and pays I think a 4% dividend right now, roughly $3 a share. The stock's been $10 higher a share in what, the last 10 years, and I think it's gotten as low as the low $2s.

I would say Sprott's an interesting way to catch all the metals and have exposure to the resource market. And again, Rick Rule's a gentleman who’s made lots of money and, in this case, I'm going to be aligned with his interests. I know that his interests are the same as mine by owning Sprott, and it's one of the stocks I'm going to be getting around to buying this summer, which is typically a slow season, not a lot of liquidity in the resource space.

But the simple fact is that Sprott offers you lots of exposure. Rick Rule's a large shareholder, so he's got a vested interest in seeing that company do well, and you get to be covered by a lot of commodities and exposure to gold and many other things. I think that's an interesting way to play the space.

Gerardo Del Real: Excellent and just to clarify on those ticker symbols, I believe that's SPOXF on the US side and SII on the Toronto exchange. You mentioned early on this interview that you are diversified and you dabble in other sectors. Outside of the resource space, are there things you like? Are there things you're invested in right now? Things you're buying or holding?

Jeff Phillips: I've bought a number of pieces of real estate. But again, I wouldn't recommend buying real estate right now. I think the time to buy real estate was 2010 and '11 when people thought after the real estate correction, that similar to the resource market right now. People didn't really want to buy it. That would be a good example of buying an asset that's out of favor. I think owning real estate obviously regardless if you think real estate's about to have another correction or not, is a good way to diversify and hold a physical asset.

I like hard assets and being invested I tend to be extremely underweight. Again, this is my own personal position right now, but I've raised a lot of cash over the last few years and I own quite a few after the big correction of some bigger stocks, well-known company names from the technology field to other areas. I even own some cannabis stocks, but you've seen those valuations skyrocket. So I've raised a lot of cash at this point.

But everybody's different. If you're 30 years old, you know, it's different than someone like me who’s 50 years old, just like it would be different if you're 70 years old. At 70, I'd want to have mostly cash, because I just want to spend it. A good friend of mine always says, "You might as well. If you don't fly first class, your kids will."

So again, it just depends on where you're at in life. It's hard to, in an interview it's hard to tell anybody, I can only speak to my own experience. Right now, I guess in my early fifties, I feel very comfortable. I sleep very good at night having quite a bit of cash right now and having real estate, and I continue to add.

As I've said, we did this interview last year, it's really the same interview, the market's bad. Since 2016, we had a sort of a mini little run there in the resource sector after three years of a really bad market and that lasted about six months, and it's been all downhill since then. So I've continued to average down in the resource space.

So you ask me other picks, it's no secret I consult and I'm a large shareholder in Midas Gold, which has a project in Idaho that's 6 million ounces of gold and in the permitting stages now and everything looks like it will go well, except it always takes more time. Should be permitted by the end of the 2020. Barrick Gold is one of the major shareholders in the company along with John Paulson, the famous hedge fund manager. You can buy that stock, really at one of the cheaper prices in the last two, three years.

It's boring, it's permitting, but it's highly leveraged to the price of gold, and in my opinion, once they have the permit, I think Barrick Gold takes the company out. So if you think at the end of 2020, we'll have the elections and everything, that gold's going to be a lot lower than it is now, then you may be getting taken out at a lower price in my opinion, this is just my speculation obviously. So if I told someone to buy it at wherever it's at today, $0.65 or whatever Canadian, and gold's down $300 an ounce at the end of 2020, well then the takeout in my opinion might be lower than the current price. But I don't believe that. I believe that over the next year and half, I'm going to see a stronger gold market, and I think I'm going to get quite a bit more than $0.65 a share. Obviously, I'm not selling my stocks, so that's what I believe. But again, that's an interesting stock.

Another one's Almaden Minerals, which we've talked about before which you know has some country risk in Mexico. Although I believe the country risk is exaggerated, and they do a good job with the local communities. They've got a 4 million ounce deposit that's going through permitting right now, and I think will be much quicker. But again, that's another asset that if someone asked me the other day, "I don't want to sell. Would you sell Almaden?" No, not at these prices, it's trading at a 52-week low. The symbol's AAU I think on the New York Stock Exchange. It's trading at a 52-week low, I'd hate to sell it right now. I want to sell it in a gold bull market, not at the bottom and definitely there's people fishing, big companies. They're looking for assets like this that would like to buy things at the bottom of the market.

I sure as hell don't want to be in a stock for seven years and sell it at the bottom of the market, even if I'm averaging down and am able to make a little bit of money. Like you said earlier, you're in this to make tenfold your money. So you hold that asset, you control your expenses, and I think Almaden has an excellent chance of selling at many multiples in the next bull market.

Gerardo Del Real: And to kind of highlight your point there, it's got a current market cap on the US side I think of approximately $46 million. They own a mint condition mill that's got a replacement value, if I'm not mistaken, of approximately $70 million. And on top of that, you get an excellent polymetallic gold-silver deposit with amazing exploration upside. So symptomatic of the current market we're in.

Jeff, it's been insightful as always.

Jeff Phillips: Yeah, it's a horrible market, if I didn't already say that.

Gerardo Del Real: There you have it folks. This is the worst market that Jeff Phillips has seen. Jeff is a friend and mentor of mine. I know the gentleman he was referencing that was around in the ‘70s is a friend and mentor to him. Everybody's saying the same thing, this is the worst bear market that most people have gone through which I think speaks to the opportunity, if you're a contrarian. But you got to have the liquidity and the stomach for the volatility to ride it out, because it could be two months from now we're in a bull market and it could be another year, right? And you got to be able to weather the storm.

Any last words Jeff?

Jeff Phillips: Yeah, same thing when they asked me in New Orleans what I'd say to someone walking into the Gold Resource Conference there for the first time. Congratulations. If you're looking at resource stocks for the first time, I think you have an excellent opportunity to get in at the bottom which beats getting in two, three, four, five years ago. Yeah, anyway so congratulations if you're looking at it. Do your due diligence and set your goals and get some good advice.

Gerardo Del Real: Jeff, thank you so much for your time, I appreciate it.

Jeff Phillips: Thank you, Gerardo.

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