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Kaiser Watch December 9, 2022: Favorite & Bottom-Fish Plans for 2023

Posted: Dec 9, 2022JK: Kaiser Watch December 9, 2022 with Jim Goddard and John Kaiser
Published: Dec 9, 2022KRO: Kaiser Watch December 9, 2022: Favorite & Bottom-Fish Plans for 2023
Kaiser Watch is a weekly 15-30 minute audio show produced by KaiserResearch.com with Jim Goddard and John Kaiser discussing the junior resource sector. The show has three parts: the first is a general topic, the second discusses developments involving the KRO Favorites which as of January 1, 2022 are no longer exclusive to KRO members, and the third is a peek inside the members only KRO Bottom-Fish Workshop. KRO is transitioning into a Do-It-Yourself research platform that covers all Canadian and Australian resource listings and which also features a Bottom-Fish Workshop where John Kaiser highlights juniors with solvable "missing pieces". Companies that graduate from the Workshop may become part of the Annual Favorites collection whose profiles and related commentary are unrestricted for non-members. Visit the KRO Favorites Dashboard for quick access to all the unrestricted Favorites related content. KRO is not sponsored or compensated directly or indirectly by public companies. The business model is based solely on membership fees in the form of a USD $450 Annual Individual Membership that at some point will increase substantially to reflect KRO's shift to a research platform. However, when the change happens active members will be grandfathered to renew indefinitely at the current rate provided they maintain a continuous paid membership. Kaiser Watch is available at Kaiser Research YouTube and as a Podcast downloadable from KaiserResearch.com. Each episode will be made available through the publication of a Kaiser Media Watch blog report which will provide links to specific questions and include supplementary graphics. All episodes will be archived at Kaiser Watch.

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Kaiser Watch December 9, 2022: Favorites and Bottom-Fish Plans for 2023
Jim (0:00:00): How is the end of the year shaping up for the resource juniors?

The resource juniors are in the final throes of tax-loss selling season after a very bad year that started out quite promising in Q1 for some juniors though by mid year all of them got dragged down by the general equity bear market. At the start of the year 27% of TSX and TSXV resource companies were trading below $0.10, but that had climbed to 42% by December 9. That is slightly less than the percentage at the end of November, so the worst of it may be over.

What is really interesting is the divergence of traded value between TSXV listed resource and non-resource listings. Since 2012 non-resource TSXV listings have represented 60%-80% of traded value with a couple short-lived exceptions in 2016 and late 2017, plus the second half of 2020 when $2,000 gold helped the resource juniors to command more than 50% of the traded value. But since December last year the traded value ratio has reversed and in Q4 it has been above 60% with a spike to 79% in recent days. Some of that is due to an ongoing decline in non-resource listing traded value, but in Q4 TSXV resource listings have seen a steady increase in traded value.

You can also see this in the daily average traded price for resource and non-resource TSXV listings. Since 2012 it has ranged $0.40 to $1.40 for non-resource listings and is now below $0.40 per share, a level reached briefly in H1 of 2020 when we had the covid meltdown but before the H1 2021 melt-up. Since 2012 the resource listings have averaged below $0.40 except for the gold related spike in H2 of 2020, and the spike in Q4 2021 through Q1 2022 which led me to believe that thanks to a decade long resource bear market during which producers slowed down new mine development, coming supply disruptions due to geopolitical fracturing of the global economy, and new usage demand from the energy transition, I felt that metal prices and by extension both resource majors and juniors, would buck the general equity market downtrend as interest rates rise to subdue inflation. The Russian invasion of Ukraine caught me by surprise, and while it should have helped metal prices because of sanctions, the severity of China's zero-covid policy sapped raw material demand and by H2 all metal prices except lithium were in decline, with copper, a symbol of macro-economic strength, the biggest disappointment.

But the average traded price, while still below $0.40 has been climbing in Q4 and I think we may see this trend continue in 2023 because China is biting the bullet on its zero-covid policy, preparing to sacrifice over 1 million elderly Chinese in order to turn around its faltering economy and rising anger of its eternally locked down citizens. What makes me cautious is concern that Powell's interest hikes have set in motion the forces that create a global recession as real estate prices succumb to high interest rates. And there is also the risk that if jammed hospitals and rampant covid infections make the Chinese even angrier with XI Jinping's autocratic policies, he may create a patriotic diversion by annexing or blockading Taiwan. That could result in massive supply chain disruptions for non-autocratic economies which are still to a very large degree dependent on importing goods from China. At the same time Russia is very unpredictable with Putin also having boxed himself into a corner. Now we have Ukraine's Zelensky using a slingshot to snap drone pebbles off Putin's ass which could lead to a dangerous escalation of the sort of weapons Putin deploys against Ukraine. The China-Russia axis remains problematic and could crash the economy next year.

But I do think resource juniors will continue to dominate traded TSXV value in 2022 and to understand why, just look at the charts for Hive Blockchain and Canopy Growth. HIVE is down 93% from its 2021 peak of $36 while WEED is down 94% from its $72 peak in 2021. The crypto and cannabis bubbles, key drivers of TSXV non-resource listing traded value, are finished. Bitcoin itself is down 73% from its $65,000 peak in 2021. In light of the FTX fiasco, how stupid do you have to be to continue to hold bitcoin, or even, worse, buy more of it? It is a ponzi scheme pumped by libertarian ideologues to take your money away. If gold had declined from its $2,039 peak this year it would be at $550 per oz. Instead, after dipping into the $1,600-$1,700 range it is around $1,800 today. I have no idea where gold is headed in 2023, but I can't imagine it going to zero like bitcoin could because it is invisible and not useful for anything beyond facilitating criminal payments and funding regimes like North Korea and Iran through cyber-theft. The old gold is the real gold.

Price Range Distribution for TSX & TSXV Resource Listings

Long Term Chart of Relative Traded Value for TSXV Resource and Non-Resource Listings

Short Term Chart of Relative Traded Value for TSXV Resource and Non-Resource Listings

Long Term Chart of Average Daily Traded Price for TSXV Resource and Non-Resource Listings

Long term charts for copper, nickel, gold and silver

Long term charts for iron, aluminum, zinc, potash, phosphate rock & vanadium

Long term charts for tin, cobalt, lithium carbonate, oil, thermal coal & uranium

Crash charts for crypto miners, cannabis and bitcoin
Jim (0:08:22): How have things worked out for your 2022 Favorites? Will any of them make it to the 2023 Favorites Collection?

The 2022 KRO Favorites as a group had a very disappointing year. The Favorites index is down 39.2%, very close to the 39.4% level reached several times since August. At the moment it is slightly worse than the TSXV Index which is sown 38.4%. Gold in contrast is only down 1.3%. At the moment only 2 of the 2022 KRO Favorites are for sure going to be continued as part of the 2023 Favorites Collection. FPX Nickel Corp, which is only down 10%, just did an important $12 million financing which will fund the junior into 2024. Verde Agritech Ltd, which is still up 76%, now has 3 million tpa K Forte production capacity in place to serve the 2023 growing season. Both stocks have substantial upside from current levels, with $2-$3 my target for FPX by Q4 next year when it releases its PFS, and $10-$20 for NPK premised on a higher profile through a NASDAQ listing and evidence by Q2 that its guidance for sales of 2 million tonnes in 2023 is on track. If potash prices hold up in 2023 so that NPK can continue to sell K Forte at $100/tonne or higher, achieving its guidance would make it a $200 million revenue company.

The biggest potential extra drag on the Favorites Index for the remainder of the year is Eskay Mining Corp which still has not reported any assays for its 2022 summer work program. That is worrisome because the junior will need to refinance for next summer's work in the Golden Triangle. I have low expectations that much will have changed for the TV-Jeff area as a result of this year's work whose visual descriptions suggest the zones have not grown beyond a couple high grade pods. My greatest hope lies with the Scarlet Ridge drilling, but based on the company's news releases and the fading stock price, I think the results will simply portray a very juicy geological context, not the hole 109 equivalent the Eskay Project needs to confirm an Eskay Creek BZone repeat discovery. Unless we get a Christmas miracle news release Eskay Mining, which is already down 65% and vulnerable to last minute tax lossing, is headed for the 2023 Bottom-Fish collection.

Galway Metals Inc has turned into a negative drag on the 2022 Favorites Index. On Wednesday the company suspended drilling to conserve cash and allow assays to catch up. The market does not care about the 2 million ounce resource at Clarence Stream, nor does it believe my Outcome Visualization based on Marathon's Valentine project even after I increased CapEx to reflect the higher construction cost for Valentine. My OV projects a future after-tax NPV of CAD $500 million at 8% which translates into a future price target of $2.29 based on 219 million FD. That's about 10 times higher than the current price. So Galway will become part of my 2023 BF Collection.

Northwest Copper Corp is the biggest disappointment so far this year, down 73%, even though it had the busiest year in its history. It was my emerging advanced copper junior with a gold kicker that has suffered from copper's retreat from $4.50/lb to $3.50 and gold's softness in the face of sharply higher interest rates. It has probably also suffered collateral damage from being a member of Mark O'Dea's Oxygen Capital group whose Pure Gold Mining imploded this year. But the biggest drag on the stock price has been news flow. We are still waiting for assays from the 8 holes drilled at East Niv which is an emerging copper-gold porphyry discovery, though at this stage the market no longer cares about the results. The big event promised by the end of the year is a PEA describing how the Stardust underground and Kwanika open pit mining plan will work. If we get the PEA before year end and it is positive I may keep Northwest Copper as part of the 2023 Favorites; otherwise it will join the 2023 Bottom-Fish Collection.

Perpetua Gold Corp, down 58%, is now in a new comment period for its Stibnite permitting cycle but I now believe that its 2020 FS is stale. When I reran the DCF model with a 20% CapEx and OpEx escalation the project needed $2,000 gold to justify construction. Given the uncertainty about the permitting cycle and what an updated FS will look like, I will not continue Perpetua as a 2023 Favorite but will make it part of the 2023 Bottom-Fish Collection. If they move to the next stage in the permitting cycle and gold breaches $2,000 on the upside, I would turn it back into Favorite in 2023.

P2 Gold Inc, which is down 63% and has probably bottomed, will be moved to 2023 Bottom-Fish Collection. The BAM drilling in the Golden Triangle has delivered positive results for a low grade open-pittable system which management thinks can support a 2-4 million ounce resource it plans to deliver in Q2 of 2023. The disappointment at BAM is that the company could not get a key geophysical survey underway early enough to deliver the deeper feeder target which P2 Gold believes will have much higher gold grades. The survey was completed but the data is still being crunched. The junior plans a similar 14,000 m drill program starting in June 2023 with 70% of the drilling earmarked for testing the deep feeder target. Like Northwest Copper the stock is suffering from weak copper and gold prices and the PEA for the Gabbs project in Nevada planned by year end has not yet been delivered. The simplified OV I created does not deliver a positive economic outcome at current prices because it uses life-of-mine averages. The key for Gabbs to be economic at current prices is an optimized ore schedule and staged development that starts with heap leaching the oxide gold cap and defers the mill CapEx down the road for the copper rich sulphides. The PEA has been postponed to Q1 of 2023, but the big cloud hanging over the market is a USD $5 million payment due to Waterton Global in May 2023. They are seeking an extension but Waterton has been distracted by a restructuring which will wind down Waterton while key people launch a new fund called Kinterra Capital for which they apparently trying to raise $500 million. Kinterra will have an energy transition focus which means metals key to the EV sector which includes copper, the primary metal at Gabbs. P2 Gold is struggling to complete a $1 million financing at $0.27 per unit which the street has already forced management to turn into a full warrant. We probably won't see the PEA until P2 Gold secures an extension for the Waterton payment deadline. With all this uncertainty I cannot keep P2 Gold as a 2023 Favorite but it will be a great member fo the 2023 Bottom-Fish Collection.

I do not yet know if I will keep Aurion Resources Ltd as a 2023 Favorite. Aurion, which is down 55%, decided to participate in the 70:30 JV with B2Gold on on the Kutuvoma project that adjoins Aurion's 100% owned Risti project to the west and south of Rupert's Ikkari project. B2Gold has been delineating the Helmi discovery but the results are not as good as the Ikkari deposit which Rupert discovered by grid drilling an overburden covered area that yielded gold in till values. At Risti Aurion conducted target development work in 2022 on the over-burden covered part which may set the stage for a discovery in 2023. Most of the past drilling has been in the outcropping northern part where Aurion has encountered high grade but erratic gold mineralization. Last week Rupert published a PEA for the 4.2 million ounce Ikkari deposit which envisions a 10,000 tpd milling operation that will have 11 years of open pit mining and another 12 years of underground mining. The after-tax NPV at 5% came in at USD $1.6 billion using $1,650 gold as a base price. CapEx was only $404 million. If Aurion can discover a similar open-pittable resource at Risti the exit strategy would be future acquisition by Rupert if it develops Ikkari on its own, or by whomever acquires Rupert, which could be B2Gold. At a minimum Aurion will be part of the 2023 BF collection.

I already have a number of new candidates for the 2023 Favorites which will be revealed on January 3. At the moment I am very busy compiling my 2023 BF Collection.

KRO Favorites 2022 Index Chart

KRO 2022 Favorites Performance Table

Charts for Verde Agritech, FPX Nickel, Eskay Mining and Galway Metals

Charts for Northwest Copper, Perpetua, P2 Gold and Aurion
Jim (0:22:37): What criteria are driving your choices for the 2023 Bottom-Fish collection?

During the last quarter of 2021 I was very optimistic that the resource sector would flourish in 2022 despite a general equity bear market as interest rates rise to subdue inflation. The key reason was that the resource juniors had been in a bear market for a decade while metal prices tracked sideways and the majors, after over-building in response to the prior decade's China super cycle, were reluctant to build new mines. So if the global economy continues to grow there will emerge future supply deficits that will lead to higher real prices that in turn will encourage M&A and funding for exploration and feasibility demonstration work by the resource juniors. This does not apply to gold which is not required for anything. An additional driver for higher prices is new usage demand related to the energy transition. Copper and nickel stand to benefit from the EV replacement of ICE car sales, and, of course lithium, which is an essential metal for all the battery configurations being adopted by the car makers, has the potential to grow into a $100-$200 billion annual market, a hundred times what it was in 2005 when lithium demand consisted of the stable glassware-ceramics market and small rechargeable batteries for cell phones and laptops. And yet another factor is the risk of supply disruption arising from the geopolitical fragmentation of the world into autocracies and democracies. Geopolitical tensions did accelerate in 2022 when Xi Jinping and Vladimir Putin created an axis whereby China approved of Russia's invasion of Ukraine and benefited from cheaper energy prices. As a result of my optimism I flagged about 160 resource juniors for my 2022 Bottom-Fish Collection, the biggest number ever.

At the start of 2022 the resource juniors did reasonably well but by the middle of the year when the scale and pace of interest rate hikes shocked the market, metal prices started to decline, recession fears spooked the market out of producers, and during H2 investors abandoned the resource juniors along with everything else that had risk. Market sentiment became so negative that I coined the idea of an "emerging discovery" to describe a situation where a junior drills a hole that doesn't quite qualify as a no-brainer discovery hole that sends the stock into S-Curve territory, but yields enough geological context that it is clear additional drilling will deliver confirmation intersections. In normal markets such juniors experience anticipatory speculation, but in the current bear market the junior is lucky if it tracks sideways. This situation allows market observers to identify and accumulate juniors an terms that offer much better reward potential than failure punishment risk. But to recognize such bottom-fish one has to understand the underlying story, which takes a lot more work. So for 2023 my Bottom-Fish Collection will be half the size of the 2022 Collection and will consist of juniors whose stories I have become familiar with.

Normally I make heavy use of the KRO Search Engine to identify juniors with good financial positions and insider incentive structure in place, but 2022 was a very weak financing year for resource juniors. About two-thirds of the juniors have a December 31 year end; the key 9 month September 30 financials were due only at the end of November, and the updating cycle will not be complete until the third week of December. This does not stop me from adding juniors to the Bottom-Fish Collection in 2023, but what is available between now and the end of December will be only 50-80 bottom-fish.

At the moment I am putting my research effort into identifying juniors involved in lithium exploration, in particular pegmatites. I have historically ignored lithium juniors which proved quite justified when Lithium Mania 1.0 collapsed in 2018-2021 when lithium carbonate prices dropped below $3/lb. But starting in H2 of 2021 the EV demand surpassed the available supply and lithium carbonate prices soared ten-fold to the current level, from which they may yet spike higher. However, these levels are not sustainable for two reasons: 1) the ten-fold demand growth projected for 2035 will not happen if electric vehicles are not affordable to the masses, and, 2) current price levels will lead to over-supply that crash the lithium carbonate price just as happened when the Australians proved highly efficient at developing Pilbara hosted LCT type pegmatites during Lithium Mania 1.0. A future price range of $10-$15/lb lithium carbonate is needed to achieve the supply expansion, and it will limit feasibility demonstration work to the better discoveries. I expect that in 2023 Lithium Mania 2.0, which is focused on finding and developing LCT pegmatite deposits and which is not yet appreciated by the retail market, will explode on the upside. The juniors themselves already get the concept and a couple hundred have already picked up lithium prospects, often by just staking in the vicinity of earlier juniors with management teams that understood what one is supposed to be looking for. Since I only came to appreciate the concept of Lithium Mania 2.0 in Q2 of 2022, I have a lot of research catch up to do.

I cannot be confident the resource sector overall will do well in 2023 as we navigate a possible recession and geopolitically related problems, but I do know that the car industry is committed to the energy transition and is starting to appreciate the nature and scale of the upstream lithium supply problem. Because it takes 5-10 years to find a deposit, delineate it, conduct economic studies, and complete the permitting cycle so that a mine can be constructed, if the car industry wants EV sales to go exponential by 2030, the resource juniors will need a massive capital inflow over the next 3 years to secure the future supply for 2030-2040. My timing for the eruption in Q2 of 2023 may prove early, but I am absolutely confident it will happen over the next two years.

TSXV Resource Junior Working Capital Range Distribution

TSXV Positive and Negative Working Capital Distribution by Price Range
Disclosure: JK owns shares of FPX Nickel and Verde Agritech

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