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Kaiser Watch January 6, 2023: Introducing the 2023 Favorites

Posted: Jan 6, 2023JK: Kaiser Watch January 6, 2023 with Jim Goddard and John Kaiser
Published: Jan 6, 2023KRO: Kaiser Watch January 6, 2023: Introducing the 2023 Favorites
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 January 6, 2023: Introducing the 2023 Favorites
Jim (0:00:00): Why does your 2023 Favorites Collection have twice as many companies as last year?

At the end of 2021 I made a strategic decision to change the basis of the $450 annual KRO membership so that it includes only the use of KRO as a research platform covering all Canadian and Australian listed resource companies and as a bottom-fish workshop for the hundred plus juniors I tag as bottom-fish. The Favorites were a smaller group of recommendations which were not missing any key pieces that were preventing lift-off from the bottom. These qualified as traditional stock picks. I realized that my paying membership consisted of two audiences.

One is a sophisticated group that has a reasonable understanding of how the junior resource game works. Some of this group have been with me since 1994 when I launched myself as an independent analyst through the Kaiser Bottom-Fishing Report. These bottom-fishers or value hunters prefer me not to have a large number of subscribers because they don't want lots of competition while accumulating my bottom-fish ideas. Some of them are more sophisticated than I am and mainly use the search engine and company profiles as a time saving research platform.

The other audience is the more traditional retail investor interested mainly in buying something with a good story that promptly goes higher. They show up when the resource sector is hot such as it briefly was in the second half of 2020 but generally not during the past decade. This group is overwhelmed by the abundance of information, the complexity of my analysis and the conversations we have in the KRO Slack Forum. A few decide they want to learn how this works and become longer term members willing to ride out the market slumps. The rest lose interest when the market stops going up.

The result is a very volatile revenue stream which is a problem because the Kaiser Research platform has substantial expenses (KRO does not get compensated by companies directly or indirectly to endorse them). Without this data infrastructure that needs to be updated constantly I could never run a bottom-fish workshop that filters the universe of companies for candidates. The other headache was that these momentum oriented investors are inclined to post restricted members-only ideas and sometimes verbatim content in open social media forums. This annoys my longer term sophisticated membership. And of course it is no fun listening to all the complaints from this audience when the resource juniors go south.

The solution I launched with the 2022 Favorites was to make them free to the public. The $450 membership fee was for the use of the KRO research platform, access to the bottom-fish commentary, and, membership in the parallel Slack forum provided they behave themselves. Companies that had graduated from the bottom-fish workshop, which usually meant doubling or tripling from their bottom crawling level, would become part of the unrestricted Favorites collection if I had reason to believe further substantial gains were possible. When a Favorite is given a Good Spec Value rating it means that I think the market does not understand the upside potential based on the fundamentals already in place. I assign a Fair Spec Value rating when additional upside is contingent on fundamental developments that are not guaranteed to happen.

This arrangement should be a win-win for all parties. The paying membership gets access to the research platform, my bottom-fish rankings, and the collaborative Slack environment. Plus, when a bottom-fish gets its act together and gets promoted to Favorite status, the paying members who may already be sitting on a double or triple get the benefit of an open-ended audience discovering the story as to why the Favorites could end up substantially higher. The general public interested in the resource juniors doesn't have to pay anything for access to my commentary related to the Favorites. When a Favorite fails or the resource sector trends downward, they just stop visiting the web site, ignore my tweets or simply un-follow me. And I benefit because a small percentage of the Favorites audience may decide they want to be on the bottom-fishing ground floor and learn how the resource junior game works. Potential new members can Register for a Nembership and former members can Resubscribe here.

The 2022 Favorites had only 8 companies because this was an experiment. I believed that the resource sector would buck a general equity market down-trend that was inevitable as quantitative easing turned to tightening. I had a large 150 plus bottom-fish collection and I expected some of these would become 2022 Favorites. I was correct until late in Q2 of 2022 when the resource sector also fell victim to the severity of the downturn in equity and bond markets. Metal prices sagged as the Chinese covid lockdown persisted and the inflation busting monetary policy promised a couple years of economic recession to depress demand. Gold also sagged as debt yields rose. There was nowhere to hide in 2022 and the Favorites finished the year down 36%, almost as bad as the 39% decline by the TSXV Index. Only one Favorite, Verde Agritech, finished the year up at 77% after delivering a 283% gain at its peak price. Only three of the 2022 Favorites have been continued as 2023 Favorites; the rest of been shunted into the bottom-fish workshop though I will keep them unrestricted until the end of 2023.

The 2023 Favorites collection has 16 companies to cover a broader spectrum of themes and ideas. Including the five ex-Favorites there will be much more to talk about in Kaiser Watch episodes. Last year I ended up talking about bottom-fish spec value rated companies because often there was nothing to say about the Favorites. This year I am going to keep bottom-fish comments behind the KRO paywall except for lithium juniors.

KRO 2023 Favorites Index

KRO 2023 Favorites List

KRO 2022 Favorites Index

KRO 2022 Favorites List
Jim (0:04:19): Your 2023 Favorites include 3 lithium companies, Brunswick Exploration, Critical Elements and Cypress Development. Why did you pick these companies and what can we expect from the lithium sector in 2023?

During Q2 of 2022 I began to get my head around the lithium supply problem as it related to the energy transition goal of replacing ICE car sales entirely by EV sales in 2035. I ignored Lithium Mania 1.0 during its 2015-2018 run because I did not believe EV adoption would happen as rapidly as predicted. I also assumed the Lithium Triangle in South America and the Australian pegmatites would supply whatever the EV sector needed. Between 2018-2020 the price of lithium carbonate crashed from its $10-$15/lb range to below $3/lb when the Australians proved very efficient at mobilizing new lithium supply. So ignoring lithium spared me the lithium winter that followed. In 2021 two important things happened. First, Trump failed to steal the 2020 election so that he could continue his promotion of fossil fuels and climate change skepticism, and, second, more importantly, the car companies had ignored Trump and committed themselves to switching to electric vehicle fleets to such an extent there was no turning back. This reversed the lithium supply surplus and lithium carbonate prices increased more than ten-fold, spending most of 2022 in the $30-$35/lb range.

I could see that the Lithium Triangle and Australia's pegmatites could deliver the first half of the projected ten-fold demand expansion, but where was the other half supposed to come from? Goldman Sachs thinks it will come from Chinese brines and pegmatites, perhaps repeating what happened with rare earths, zinc and molybdenum during the 1980s, but I don't think that will be the case. The obvious answer was that it would need to come from pegmatites located within Archean settings in Canada, Scandinavia, Africa and South America. But because it takes 5-10 years to bring a new mine into production, if the other half is to arrive by 2030 when EV sales are supposed to go exponential, there has to be an exploration boom over the next three years that reveals the pegmatite resource base available for development.

I coined the term Lithium Mania 2.0 to reflect this pegmatite exploration boom that will sweep beyond Australia. Some people think it is impossible for a market worth only $1 billion in 2015 to grow into a $100-$200 billion annual market by 2035. Pegmatites, which you cannot easily find if they don't daylight, were frequently observed during decades of base and precious metals exploration, but ignored because the market was small less than $200 million before 2006 when usage was dominated by glassware and ceramics, and more than adequately supplied by the Chilean brines and Australia's giant Greenbushes pegmatite. It will not be hard to revisit these forgotten pegmatites and the trends within which they sit, figure out which ones are LCT type, and drill a few holes across them to establish which ones have sufficient grade and tonnage to be development candidates.

Lithium Mania 2.0 will explode in 2023 even if lithium carbonate prices drop back into the $10-$15/lb range. Usually the optics of the reversal of an exponential price rise hurts market sentiment, but so long as the price stabilizes in the $10-$15/lb range and does not crash to $5/lb as Goldman Sachs hopes, the boom will continue because at that price pegmatites grading 1% Li2O are well in the money. This is a discovery exploration boom, not a gold price gain optionality story. Brunswick Exploration is the pegmatite grassroots discovery junior in the 2023 Favorites while Critical Elements with its Rose pegmatite is the development stage Favorite. The Rose project is in the money at $12/lb lithium carbonate.

Cypress Development is included in the 2023 Favorites because it is working on a feasibility study for its claystone project in Nevada. Claystone deposits were the rage in Lithium Mania 1.0 because these are giant, open pittable systems though with a low grade. None is yet in production because they have been hung up in permitting issues involving Native Americans and sensitive habitats while less advanced ones like Cypress have been solving flow-sheet problems. Water rights are a big obstacle for developing a claystone deposit. The extraction flow-sheet is never simple for claystone deposits and has to be customized for each deposit. Cypress has water rights, is not in an environmentally sensitive area, and is on its second flow-sheet iteration which appears to have solved key problems. Costs will probably be double, but, using the ore schedule in the PFS, Clayton Valley is very much in the money in the $10-$15/lb range.

Kaiser Watch episodes in 2023 will frequently touch on lithium and discuss companies whether or not they are Favorites because the lithium topic is crucial to the energy transition which will continue to march onwards even during a recession.

Brunswick Exploration Inc (BRW-V)

Fair Spec Value
Hearst Canada - Ontario 2-Target Drilling Li
Critical Elements Lithium Corp (CRE-V)

Fair Spec Value
Rose Canada - Quebec 7-Permitting & Feasibility Li Ta
Cypress Development Corp (CYP-V)

Fair Spec Value
Clayton Valley United States - Nevada 7-Permitting & Feasibility Li
Jim (0:11:55): Canalaska Uranium is the only uranium junior in your 2023 Favorites. What are your thoughts on uranium and why pick Canalaska?

2022 was a pivotal year for the uranium sector, partly because the Sprott Physical Uranium Trust and uranium optionality companies were active purchasing uranium in the spot market for stockpiling purposes, which helped U3O8 establish a new trading range in the $45-$60/lb range. That is still below the $80/lb needed to justify developing new uranium mines, and Kazakhstan as the biggest producer with an apparent ability to lift supply to meet rising demand remains the biggest obstacle to higher prices. Much more important for the uranium juniors was that the energy transition finally got legs when Biden managed to get the Inflation Reduction Act passed, which reinforces the need for nuclear energy to provide baseload electricity when solar and wind power are not generating electricity. That does not mean places like the United States will build new large scale nuclear power plants, but the pace of decommissioning will slow, as turned to be the case with Diablo, California's only nuclear power plant. However, there is growing interest in small modular reactors, a new smaller scale technology that will take less time to permit and install. SMRs are not a replacement for large scale baseload nuclear power, but are suitable for remote locations. This could be a new source of demand for uranium.

The Russian invasion of Ukraine also helped out because it highlighted the profound foolishness of Chancellor Angela Merkel's knee-jerk response to Fukushima in 2011 when she pulled the plug on Germany's nuclear energy sector in favor of increasing dependency on Russian gas. As things turned out Merkel's pandering to the anti nuclear lobby led to increased reliance on thermal coal combustion, a step backwards for Germany's energy transition goals. The irony is that the anti-nuclear lobby overlaps with the anti-fossil fuels lobby, an example of how unthinking purist demands can backfire in the face of practical realities. Germany is in a pickle because if it chose to restart its nuclear power plants it would take several years to recertify them so that they can be restarted. On the plus side Poland, which relies heavily on coal which it also mines and has no nuclear power plants, is going ahead with two nuclear power plants. Japan, which has only 9 of 54 reactors operational, has relied on LNG imports to generate electricity from natural gas. Germany never did allow Nordstream 2 to start delivering gas, and during the summer Russia cut off Nordstream 1 supply.

The hope that Russia would one day resume pumping gas to Germany evaporated when both pipelines were ruptured by mysterious undersea explosions which were clearly an act of sabotage requiring a sophistication normally possessed only by state actors. Fingers have been pointed at both Russia and the United States who have submarine fleets capable of executing such an act of sabotage, but neither has an obvious strategic benefit from such an act and way bigger problems if proven to have been responsible. However, taking Russian gas offline indefinitely is of major financial benefit to natural gas producers who can convert domestic surplus supply into LNG and ship it to places like Japan and Germany. It's quite possible that a private sector group pulled off this stunt with the help of a mercenary group; the assumption that it required a high degree of sophistication to be undetected may be wrong. The Russians and Americans monitor everything underwater in the Baltic and North Seas, so it is odd that no grounded accusation has surfaced. It might have been an operation too low-tech to be detected, with both American and Russian officials scratching their heads about the culprits.

In any case, Japan now has to compete with Europe for LNG imports which has focused Japan's attention on the idea of restarting more of its nuclear power plants. But this faces a new challenge in that during the past decade the worker force with technical knowledge about operating nuclear power plants has slipped into retirement, and what young person will have pursued an education related to nuclear energy? In this regard the small modular reactors become important because they are likely to be installed and operated a lot longer than older large scale power plants.

Putin's noises about reconstituting the Russian Empire has made the "stan" countries like Kazakhstan nervous, and since they are all autocracies, the United States and its allies are unlikely to lift a finger if Russia were to invade any of them. But even if this were to happen, China, which eventually will be the world's biggest uranium consumer, will buy uranium from whoever runs Kazakhstan, so there really is little risk that uranium production from Kazakhstan will stop flooding the market. But the fragmentation of the global economy into geopolitically constrained trading zones could become a problem for France and the United States, which is why I am mainly interested in juniors exploring for uranium in Canada's Athabasca Basin which hosts the world's richest uranium deposits.

Canalaska Uranium is my uranium 2023 Favorite because it has an emerging high grade discovery on its West McArthur project that has a geological context which allows us to dream about a McArthur River scale discovery. Canalaska did enough drilling in 2022 with an inadequate rig to furnish data allowing management to believe it understands the geometry of this system between 800-1,200 m depth. Drilling will resume in Q1 of 2023 with a proper directional rig and by the end of Q2 we may have confirmation that the emerging discovery at West McArthur qualifies as world class.

Canalaska Uranium Ltd (CVV-V)

Fair Spec Value
West McArthur Canada - Saskatchewan 3-Discovery Delineation U
Jim (0:17:59): If you are so keen about the energy transition, why do you have Colonial Coal in your 2023 Favorites?

Thermal coal had a fabulous year as countries switched back to burning coal for electricity, a setback for energy transition goals. But these were emergency measures in response to natural gas supply disruption caused by Russia's invasion of Ukraine. The long term shift away from burning thermal coal remains intact. Colonial Coal owns two properties in northeastern British Columbia called Hugenout and Flatbed which together host 700 million tonnes of both open pit and underground coal resources for which PEAs were completed several years ago. The coal is "metallurgical" coal, a harder, cleaner burning coal than thermal coal whose most valuable use involves heating it to produce a residue called coke which can be used as a fuel but is mainly used in blast furnaces that smelt iron ore. Some of the carbon remains in the steel which makes it stronger, but most of the carbon combines with the oxygen in the iron oxide ore and blows off as carbon dioxide. While metallurgical coal is a significant contributor to global warming, like cement there is no cheap alternative while there are alternatives to burning thermal coal to generate electricity. As a pragmatist I have no issue supporting a metallurgical coal play despite my eagerness to see the energy transition become reality. The coal mines in this part of British Columbia produce metallurgical coal. The world is not going to stop using steel any time soon and coking coal is the cheapest way to make steel, so it is not really threatened by the energy transition.

Colonial Coal wants to be bought out by a group which seeks a long term supply of metallurgical coal from a secure jurisdiction. The stock was hammered in December when the BC government rejected Glencore's application to mine the Sukunka project located between Chetwynd and Tumbler Ridge on grounds it will disturb local caribou herds. At the same time Teck sold its mothballed Quintette Mine just south of Tumbler Ridge where Colonial Coal's projects are located to Conuma for $120 million implying a price of $3/lb for the remaining 40 million tonne resource. David Austin is hoping to see a $1-$2 billion offer for Colonial Coal based on a similar metric, which is why the goal is a buyout between $5-$10 per share. Chinese and Indian steelmakers are the prime candidates to buy the company, but efforts to get a deal done were undermined by the Covid pandemic which in particular chilled Chinese global travel thanks to Xi Jinping's insane quarantine requirements. Now that China has given up on its zero-covid policy there is hope that negotiations will accelerate in 2023 once the covid rampage is over and China gets back to growing its economy.

The Sukunka decision was unhelpful because Glencore has been working on its permit for a decade, jumping through all the government hoops, only to be blocked by what looks like a long ago foregone conclusion. Is this a sign Canada does not want any new coal mines, including metallurgical coal feeding the global steel industry? It may be that the Sukunka property footprint was just too small to allow adequate areas to be set aside for caribou that would be displaced; Colonial Coal has large land positions with room for habitat reserve negotiations should caribou become a permitting issue. The other concern is the hostile attitude Ottawa has adopted toward Chinese investment in Canadian resources, but this applies to critical minerals such as lithium which are in short supply relative to projected demand growth. Canada does not need to hoard metallurgical coal for domestic consumption; its only destiny is export markets. The wild card is India whose steelmakers seem to have retreated to the sidelines. India has the potential to hit a super cycle tipping point by 2030, undergoing a development boom similar in scale to what China accomplished in 2000 onwards. In an indirect way Colonial Coal is a bet that India will grow more confident in its super-cycle potential and act quickly to secure Canadian metallurgical coal supply.

Colonial Coal International Corp (CAD-V)

Fair Spec Value
Huguenot Canada - British Columbia 6-Prefeasibility CM
Jim (0:20:34): FPX Nickel is the only nickel junior in your 2023 Favorites and was continued from 2022 after a so-so performance despite high expectations. Why will this year be different?

FPX Nickel had a decent start in 2022 when Tsingshan's LME nickel short backfired after Russia invaded Ukraine and sanctions threatened to keep nickel from Norilsk out of the LME warehouses. Tsingshan is a steelmaker which relies on nickel pig iron produced from Indonesian laterites to make stainless and thought it could profit with an arbitrage trade. The unexpected Russian invasion made it impossible to resolve this short position and a short squeeze emerged that forced the LME to take drastic action to prevent financial failure among key members. Nickel prices retreated from their lofty heights but stabilized well above the $7.75/lb base case price FPX used in its PEA.

During 2022 FPX was plagued by a Utah based generalist fund that came on board through the April 2021 financing and got cold feet in late 2021. Rather than just contact management and let it know that it would like to exit the stock, the fund simply sold into the market at inopportune times. The final block came out in late December. FPX originally hoped to have a prefeasibility study done by the end of 2022, but the pilot plant study took longer than expected. The PEA, which is robust at current nickel prices even if you boost CapEx and OpEx by 20%, was based on bench scale metallurgical studies supporting a flow-sheet that involved grinding, magnetic separation and flotation to produce a 63%-65% ferro-nickel concentrate that could be fed directly into stainless steel mills. This was made possible because the nickel mineral is awaruite, a natural stainless steel alloy of nickel and iron. The Davis Tube Recovery established grade of the multi-billion tonne Baptiste deposit at Decar in central British Columbia is 0.10%-0.14%.

No nickel deposit with that low a grade has ever been mined, so there is skepticism about the flow-sheet. And because CapEx is over $1 billion for a 120,000 tpd mine that will operate for 40 years, only a major will ever build this mine. FPX Nickel is not interested in a carried to production farmout because once such a deal is done, the stock will languish because the major effectively controls the deposit and its future. A buyout of a 100% owned project is the only near term exit strategy. If you believe the PEA assumptions the stock should be trading in the $2-$3 range, but only if it is reasonable to believe a major will at some point buy out FPX Nickel with the goal of developing Decar.

The pilot plant study will be a key milestone that creates a basis for a major to sign an NDA and take a very close look. The study is expected to be complete in January 2023 and it will yield about 18 kg of concentrate which is being used for another metallurgical study, namely for the hydrometallurgical flow-sheet that will convert the concentrate into battery grade nickel and cobalt sulphate, key inputs for the cathode in the battery used by higher end electric vehicles. Those results will be available in Q2 of 2023.

Being able to convert the ferro-nickel concentrate into battery grade sulphates is not critical to the viability of Decar whose primary target market is as feedstock for making stainless steel, an alloy whose demand will track global macroeconomic trends. But because Decar could end up being carbon-neutral thanks to the carbon sequestration capacity of the brucite form of magnesium in the tailings, and because the supply would be ESG certifiable, Decar is of interest to downstream battery makers and even carmakers. In late November FPX Nickel announced a $12 million investment at a premium to the market by a strategic investor at 9.9% who has requested anonymity. The discussion in the press release and in a subsequent interview CEO Martin Turenne did with Bill Powers of Mining Stock Education largely ruled out that the strategic investor is a major mining company who has the capacity to acquire FPX Nickel and build Decar, in essence an upstream "peer". Most likely it is a downstream party with no ability or desire to build and operate a multi-decade nickel mine. No concessions such as off-take rights or rights of first refusal were granted by FPX Nickel to the strategic investor. But the financing helped FPX Nickel finish the year with $18 million working capital, more than enough to deliver the PFS by Q4 of 2023 and continue environmental baseline studies as part of the feasibility study-permitting stage in 2024. During 2022 none of the key questions about the viability of Decar were answered, but in 2023 they will be answered, and if they meet expectations, the stock will undergo a substantial upwards repricing.

Jim (0:24:12): Why do you have a tin play called Cornish Metals in your 2023 Favorites?

Cornish Metals was stuck with a Bottom-Fish Spec Value rating for years while management worked on the South Crofty tin project in the Cornwall region of England. Tin is unusual among metals in that it did not experience demand growth during the China Super Cycle on a scale comparable to other base metals such as copper and zinc. Its primary usage is as a lead replacement in solder though it has other industrial uses in chemicals that I defy anybody to name. Tin is a key alloy for copper to make bronze, but what is made of bronze these days? And tin has not been part of a "tin can" since the middle of the twentieth century. Tin seems to be a forgotten metal but it is increasingly being pegged as an energy transition metal because of its role in solder and the fact that electric vehicles have a lot of copper wiring connected with the help of solder. Demand is expected to increase when EV sales go exponential.

This could become a problem because about 70% of supply comes from southeast Asia with China in the lead at 30% followed by Indonesia at 24%. Peru, Brazil and Bolivia account for another 20%. Australia supplies just under 3%. The rest comes mainly from unstable countries in Africa. England no longer produces tin and all its former mines are flooded. Most tin production comes from small scale mines, so it is doubtful that southeast Asia will be in a position to expand supply if demand lurches higher. Given the geopolitical shift of the past decade where the west gave up believing that China would become a free market based democracy, the reliance on tin supply from this region is sketchy.

Cornish Metals wants to revive South Crofty as a tin producer. Tin has been stuck between $7-$10/lb for most of the past decade but in late 2021 tin went for a short-lived wild ride above $20/lb. It has since pulled back into the $11-$12/lb range. The fortunes of Cornish Metals changed in 2022 when it caught the attention of Sir Mick Davis, former head of Xstrata, who has been using his Vision Blue Resources company to make big equity investments in juniors with a critical metal story. He led a major financing in 2022 which makes him the largest shareholder and which allows Cornish Metals to design and build a water treatment plant to begin dewatering South Crofty by mid 2023. At the same time it is doing a feasibility study that includes additional metallurgical work. Sir Mick's goal is a 300%-500% return on his investment and that is entirely possible based on the existing tin only resource which the junior hopes to increase when the dried out mine allows underground drilling. With a backer like Sir Mick it is also plausible to entertain a scenario where rather than being bought out when it gets South Crofty into production, Cornish Metals becomes a tin aggregator.

Cornish Metals Inc (CUSN-V)

Fair Spec Value
South Crofty United Kingdom - Other 7-Permitting & Feasibility Sn Cu Zn
Jim (0:27:05): What are your thoughts on copper and why did you pick Amarc Resources and Faraday Copper for your 2023 Favorites?

The two copper juniors in my 2022 Favorites, P2 Gold with its Gabbs project in Nevada and Northwest Copper with its Kwanika-Stardust project in British Columbia, suffered as copper retreated from $4.50/lb to the $3.50/lb amid looming recession fears as interest rates were driven up to combat persistent high inflation. Both companies were supposed to deliver PEAs in 2022. In the case of P2 Gold it has a balloon payment looming in May which it does not have the money to pay; efforts to negotiate an extension have been stymied by the fact that Waterton is being wound down by its main founder while key members of the team are launching a new battery materials focused fund. P2 Gold has deferred publishing a PEA until it is no longer in danger of defaulting, so I downgraded the junior to a Bottom-Fish Spec Value rating while we wait to see what happens with Gabbs. In a worst case P2 Gold loses Gabbs and then focuses on the BAM project in the Golden Triangle for whose surface gold zone it hopes to deliver a maiden resource in 2023 before launching a drill program to test the potential for a higher grade feeder zone linked to an underlying Galore Creek style porphyry system.

I downgraded Northwest Copper to a Bottom-Fish Spec Value rating because I did not like the way the junior blew through its $20 million treasury while the stock price sank. In early January 2023 Northwest Copper did release a PEA for a combined Stardust underground and initial Kwanika open-pit mining scenario, but the project does not clear either NPV nor IRR development hurdles using the base case prices of $1,650/oz gold and $3.53/lb copper. At this point Northwest Capital is an optionality play on higher real copper and gold prices with an unhappy shareholder base and an umbrella group with a credibility problem.

Although copper is expected to undergo a demand surge when EV adoption starts to accelerate because a much bigger amount of copper wiring is used in an EV car than an ICE car, that impact will become noticeable later this decade, not during a global recession which the market expects will manifest itself in 2023. A lot of new copper supply was mobilized in response to the China super-cycle decade, but during the past decade the mining sector paused its rush to develop new copper mines. Although the copper price will track perceptions about global economic trends in 2023, significantly higher prices will eventually emerge not just because of new EV related demand and a slowdown of copper projects in the development pipeline, but because Latin America is experiencing a surge in government nationalism and local opposition to new mine development.

Due to the long time needed to permit and build a new mine and the mining industry's awareness that its supply mobilization response tends to deliver when the business cycle finally undergoes a downturn, base metal prices tend to follow a boom-bust cycle. This happened in the early 2000s when the copper producers didn't understand the super-cycle nature of China's growth trajectory until 2006 and were so busy forward selling copper that the futures curve was in constant backwardation. But thanks to new demand from China's infrastructure buildout the entire curve lifted over time, causing the producers to leave a lot of money on the table. Something similar may happen in the second half of the 2020s as the EV rollout accelerates and if India's own super-cycle expansion potential starts to get legs.

For the 2023 Favorites I have chosen Amarc Resources as my discovery exploration focused copper junior and Faraday Copper as my feasibility demonstration junior. Amarc has been an also-ran within the HDI stable for the past two decades during which it maintained a singular early stage exploration focus on British Columbia. Bob Dickinson and his HDI group have been distracted during the past decade by the frustrating opposition to Northern Dynasty's world class copper-gold Pebble project in Alaska. Amarc started to come to life in 2014 when it discovered the copper-molybdenum-silver IKE porphyry in southern British Columbia. It went on to consolidate the entire district and secured two farmout partners, both of whom were forced to drop out due to unrelated developments (Thompson was acquired by Centerra and Hudbay succumbed to a Waterton dissident proxy battle).

Amarc sank back into the gutter in 2019 but in 2021 Amarc secured a major farmout of the Joy project north of Kemess to Freeport-McMoran which has spent about $20 million by the end of 2022 delineating the Pine deposit and testing district wide targets. In late 2022 Amarc secured a similarly strong farmout deal with Boliden on the Duke copper project which started a winter drill program in late 2022. Majors can be fickle with regard to sticking with a project, and while it is possible Freeport may stall spending in 2023, Boliden will go full tilt on Duke throughout 2023. However, given the current unwillingness of the majors to buy out juniors which own existing copper pounds in the ground deposits, much of which was already done in the earlier part of the past decade before copper succumbed to a metal price downturn, it makes sense for majors to persist with district scale farm-in deals where all the money they spend goes into the ground to establish a majority interest and only a modest expense will be required to take out the junior's minority stake when it comes time to permit a mine.

Amarc plans to revisit the IKE Cu-Mo system and drill enough holes to allow a maiden resource estimate, but the discovery upside lies with the Empress area at the northern end of the IKE project where gold enriched copper replacement style mineralization sits in the older volcanic-sedimentary rocks north of the contact with the Coastal Plutonic Complex that hosts the IKE porphyry system. Amarc also quietly optioned the Hearne Hill copper breccia pipe system near the Duke project which it plans to rethink as a bulk tonnage copper system.

Faraday Copper used to be Gianni Kovacevic's Copperbank which he styled as a new version of Ross Beaty's Lumina model that was "banking" marginal copper deposits while he promoted a glorious future for copper prices with the help of his book "My electrician drives a Porsche". The most promising property he acquired was Copper Creek in Arizona which Redhawk explored during the China super cycle as a potential underground mine in Arizona. In September 2021 he handed the reins to Paul Harbidge and Russell Ball who raised $20 million at $0.80 in May 2022 from high profile investors and set to work rethinking Copper Creek as a 30,000 tpd combined open pit and underground mining scenario. They expect to deliver a PEA in Q2 of 2023. The company has been renamed and migrated from the CSE to a TSX listing. Copper Creek is located in a part of Arizona that is not proximal to areas special to Native American groups such as is the case with the Resolution underground project which Rio Tinto and BHP wish to develop. However, as a feasibility demonstration play it is vulnerable to a disappointing PEA outcome if forced to use a low copper base case price, though the calibre of the recent new backers is such that they will take the longer view of higher copper prices as Copper Creek gets pushed into the PFS stage.

Amarc Resources Ltd (AHR-V)

Fair Spec Value
Ike Canada - British Columbia 3-Discovery Delineation Cu Mo Ag Au
Faraday Copper Corp (FDY-T)

Fair Spec Value
Copper Creek United States - Arizona 5-PEA Cu Mo
Jim (0:34:39): Verde Agritech was a big and only winner among your 2022 Favorites and was continued as a 2023 Favorite. Will Verde Agritech shine again in 2023?

Verde Agritech was the star performer among the 2022 Favorites, benefiting from potash prices that began to soar in 2021 even before Putin invaded Ukraine. The company was able to sell out its 600,000 tpa capacity while pursuing imported potassium chloride parity pricing for its alternative potash product, K Forte. At its peak Verde Agritech was up 283% from the start of 2022 on speculation that Plant 2, with 2.4 million tpa output capacity, would be operational by early July, in time to supply a key planting window for the Brazilian farmers. This even led the company to boost its January guidance in May. However, Plant 2 was not operational until early September, and then the company was blindsided by underground water flow problems which compromised a key access road, forcing the company to spend September rebuilding a bridge and upgrading the road. By the time it was done the delivery window had closed and Verde Agritech reverted to its January guidance which it is likely to meet, though we won't know until April 2023 when the annual financials are due.

The full 2.4 million tpa capacity of Plant 2 is now operational, and the big question for 2023 is how much K Forte will Verde Agritech sell and deliver? The company is only guiding 2 million tonnes out of a total 3 million tonne capacity, but if it is able to sell K Forte at $100 or better, this would more than double the company's 2022 revenues, possibly exceeding $200 million with a healthy margin. Verde Agritech is a growth story that could become a billion dollar annual revenue producer as it seeks to displace more than 50% of Brazil's potash import dependency. Permitting work is already underway on establishing a future capacity of 10 million tpa. This does not even include innovations such as BioRevolution which load K Forte with micro-organisms designed to rehabilitate depleted soil, an application that could open export markets. If Verde Agritech secures a NASDAQ listing its growth story will be accessible to a vastly expanded audience, which may allow the stock to achieve a valuation that prices in the growth potential.

Verde Agritech Ltd (NPK-T)

Good Spec Value
Cerrado Verde Brazil - Other 9-Production K
Jim (0:37:52): You have two prospect-generator-farmout juniors called Eagle Plains and Kenorland in your 2023 Favorites. Doesn't this type of junior at best go sideways in an overall gloomy market?

It is true that prospect-generator-farmout juniors did not fare well during the decade long resource sector bear market that began in 2011, especially those which did private placements with five year warrants. Eagle Plains has been in this business for two decades, is a survivor and now has $10 million working capital after SSR Mining bought out Taiga Gold Corp in early 2022 for a price less than everybody had hoped for. But it left Eagle Plains in excellent financial shape as we head into a year where high interest rates fighting stubborn inflation will weigh on the market and the global economy.

Eagle Plains specializes in British Columbia and Saskatchewan with an approach that involves research of past assessment work and rethinking the potential. Its farmout partners tend to be other juniors who are looking for a discovery story to fund and promote (SSR and the Fisher project was a recent exception). The problem with this approach is that such juniors are often just looking for a project that is a stepping stone for some other acquisition and would be horrified if exploration, typically operated by a division of Eagle Plains, delivered evidence of an emerging discovery. If the bear market that engulfed the resource juniors in H2 of 2022 persists in 2023, this type of farmout partner will be scarce because its promoters will have a hard time raising money. On the plus side a lot of claims will come open as life-style juniors and armchair stakers let them lapse, giving Eagle Plains a chance to build its inventory of interesting properties.

The deals usually involve a series of cash and stock payments plus escalating exploration expenditure which allows Eagle Plains to profit regardless of the outcome, plus it gets back the property with quality work done on it. Deals either leave Eagle Plains with a temporarily carried 20%-40% net interest, or a 1%-3% uncapped royalty with limited buyback provisions when it sells 100%. In early 2023 Eagle Plains announced a plan to spin out the royalty portfolio to a new company and distribute most of the shares on a 1 Eagle Plains royalty company for 3 existing Eagle Plains shares. This spinout would be worth about $0.10 per Eagle Plains share which is not accounted for in the current pricing, so we could see a 50% gain just on this transaction alone if it is made definitive and approved.

The greatest upside for Eagle Plains in 2023 lies with the Vulcan project which is a Sullivan style play in southeastern British Columbia which various groups have explored for decades. In 2020 Eagle Plains drilled a couple holes to fulfill assessment requirements which tested an MT target near the road which proved to be caused by graphite. But the program was a success in that it answered a question about the location of the Sullivan Time Horizon which turned out to have been mistaken when past operators designed their drill programs. Flush with cash in 2022 Eagle Plains drilled additional holes based on this new understanding, with the goal of upgrading the project for a farmout to a major such as Teck. While they did not intersect Sullivan 2, they encountered sufficient peripheral smoke to be confident that they are in the vicinity of a prize with size. This became Tim Termuende's Andre Gaumond moment; drilling funded on a 100% basis will begin in June.

Kenorland has been around for only a few years and is headed by Zach Flood, son of the late Ed Flood who was part of Robert Friedland's world. Kenorland is focused on Alaska and eastern Canada where it starts with a big picture analysis of a region's geology and then conducts grassroots work to upgrade the conceptual prospectivity before seeking a farmout. Kenorland has been remarkably successful securing majors (Sumitomo, Barrick, Centerra, Antofagasta) as farmout partners, usually retaining a 20%-30% temporarily carried interest and often being the initial operator. One of them, Sumitomo, has become a 10% shareholder. When it comes to farmout deals with juniors Kenorland typically sells 100% for stock and a royalty. Although focused on precious and base metal targets, Kenorland has generated a number of lithium projects which it has been busy farming out 100% to juniors. One of the share positions it received turned into a $9 million windfall, boosting its working capital to $20 million heading into 2023.

Farming out to majors during the past decade was a slog because the majors in the face of weak metal prices arising from the supply mobilization response to the Chinese super-cycle of the prior decade took a break from exploration and development. While they are in no hurry to buy out marginal deposits while we wait for metal prices to recover from the global recession setback, they are warming up to the idea of putting money into the ground by farming into projects with district scale potential. Eagle Plains and Kenorland are very different types of prospect-generator-farmout junior. One is a market orphan guerilla outfit backed by a retail audience; the other is like the exploration division of a major with high powered backers. It will be interesting to see which one outperforms the other in 2023.

Eagle Plains Resources Ltd (EPL-V)

Fair Spec Value
Vulcan Canada - British Columbia 2-Target Drilling Zn Pb Ag
Kenorland Minerals Ltd (KLD-V)

Fair Spec Value
Frotet Canada - Quebec 3-Discovery Delineation Au
Jim (0:45:05): None of the three gold juniors in your 2023 Favorites, Aurion, Endurance and Solitario, have 43-101 ounces in the ground. Are you bearish on the gold price trend for 2023?

My gold ounce in the ground 2022 Favorites, Galway Metals and Perpetua Gold, were among the worst performers even though gold didn't crash and burn like Bitcoin and other Cathie Wood darling stocks. Galway is nowhere near completing a PEA that allows us to see what gold price is needed to make Clarence Stream be worth developing. And in late 2022 Galway suspended drilling to "save money". Perpetua Gold is now in the comment period for its latest Environmental Impact Statement, but even if it is accepted as Final in Q2 of 2023, the real question is how inflation and project changes have affected the CapEx and OpEx numbers used in the feasibility study published late 2020 when John Paulson fired Stephen Quin's Canadian technical team. When I apply a 20% cost escalation to CapEx and OpEx within the FS mining scenario the project needs $2,000 gold to be worth developing. We will probably get $2,000 gold if inflation continues to rampage, but might that not simply drag up the costs and require an even higher gold price, like chasing the setting sun? The problem for projects like Stibnite is that they require a higher real gold price, not one that is merely tracking inflation because undeveloped marginal deposits stay marginal in the latter case.

The best hope for a higher real gold price is a continuation of the central bank gold buying trend unleashed by America's sanction response to Russia's invasion of Ukraine. The US dollar is the global reserve currency, but because it belongs to the United States, it has the ability to stop it being used to settle international transactions that do not have the United States as a participant. China has explicitly thrown in its support for Putin's imperial aspirations, and is perfectly happy to buy Russian commodities at a discount to the global market price. Other countries such as India have chosen not to take sides and are more than happy to ignore sanctions if it means buying commodities at a discount to market. This means settling transactions without using the US dollar. Autocracies have taken note how the United States was able to freeze Russia's US dollar reserves and their central banks are contemplating how to reduce holding USD instruments ahead of also becoming a sanctions target. Holding other currencies such as the China's renminbi doesn't seem like a great idea, but gold is nobody's currency and so we may see central banks step up their accumulation of gold. But until we see this translate into a sustained gold price rising much faster than inflation, I am reluctant to pretend that a higher real price has to happen. So for 2023 I downgraded Galway and Perpetua to Bottom-Fish Spec Value rating to reflect the key missing piece, either an economic study that reveals development and operating costs that show the project is in the money at the current gold price, or a clearly higher real gold price.

My three gold Favorites for 2023 are all discovery exploration juniors because I want the upside to hinge on what these companies deliver, not what happens to the gold price. Aurion has a 30:70 JV with B2 Gold on the ground adjacent to its 100% owned Risti project, which adjoins to the south of Rupert's Ikarri project in Finland. Aurion spent a good part of 2022 doing basal till sampling on the overburden covered part of Risti, a strategy that led Rupert to its 5 million oz Ikarri discovery which a PEA says is worth over $1 billion. Aurion has plenty of working capital which will allow it to contribute its share of B2 Gold's 2023 spending on the Helmi discovery, which doesn't yet have the grades and widths to be comparable to Ikarri, and allow it to drill new targets on Risti. B2 Gold is the obvious party to consolidate the district by acquiring both Rupert and Aurion, but Agnico-Eagle is also potentially in the wings and it is a much bigger company than B2 Gold.

Endurance Gold has an emerging discovery at its Reliance project in southwestern British Columbia which still has 14 holes pending, all in areas where good results would expand the mineralized orogenic gold system within the Royal-Treasure Shear corridor. The drilling in 2022 has enhanced management's understanding of the geometry, and a financing in late 2022 equips the junior to carry on drilling in 2023. The company also managed to get a fir needle arsenic sampling program done on the Olympic property to the northeast it optioned from Avino in 2022. This survey revealed a parallel linear arsenic anomaly which suggests a setting similar to the Royal-Treasure Shear corridor. A knock against the Reliance project is that it is based on a single gold zone, but this development supports the idea that a district scale rethink could reveal multiple such mineralized zones. So far the company has focused on shallow drilling tracing the strike of the gold system; these epizonal orogenic gold systems have substantial vertical extent, and the chemistry indicates that the mineralization at Reliance is much higher than at Bralorne, which opens the possibility that Bralorne style veins show up at depth. 2023 promises to be the year when Endurance adopts a more aggressive drilling strategy that chases the system down plunge.

Solitario Zinc Corp has been upgraded from a Bottom-Fish Spec value rating to a Fair Spec Value rating because the company expects to have its plan of operations approved in Q2 which will allow it to begin drilling the Golden Crest project in H2 of 2023. Golden Crest is a district scale land package equivalent in size to that which represents the 100 million plus ounce Black Hills district that includes the Precambrian aged Homestake deposit, the early Tertiary aged Wharf gold-silver system, and a host of other nearby deposits. The Golden Crest property has stratigraphy at surface which is younger than anything at surface in the Black Hills district to the east because this area was not uplifted and eroded like the Black Hills. For example, in the case of the Homestake deposit the Precambrian basement that hosts it is exposed at surface whereas at Golden Crest it is hidden under at least 300 m of younger sedimentary rocks.

What makes Golden Crest potentially the last and most exciting gold exploration frontier in the United States is that Solitario has discovered high grade gold at surface since acquiring the project in 2021. This mineralization may not hang together to create an open-pittable resource or a structurally controlled underground mineable resource, but at a minimum it represents leakage from a hydrothermal system that may have harvested its gold payload from a much older basement hosted Homestake style system, dropped out gold laterally when it passed through the Wharf style host stratigraphy, and potentially zones in receptive formations just below the surface that do not exist in the prolific Balck Hills district to the east. Once Solitario has its drill permit it will drill 500 m holes to test all three target types. Golden Crest has very little evidence of prospecting by old-timers, and Homestake drilled only a few holes despite completing a BLEG survey that yielded a sizable gold anomaly.

Even if Solitario finds nothing at Golden Crest, by 2024 Nexa will be ready to undertake a district scale drill to kill program on the Florida Canyon zinc-lead-silver project in Peru. Nexa is plodding through the permitting process which it expects to have completed by early 2024; it wants to test all these other replacement style targets so that it has an idea about the scale it should choose for developing Florida Canyon (ie deplete the existing resource quickly because there will be many more tonnes to feed the mill from these other targets?). Solitario has a carried to production 30% interest which when the time is right Nexa will want to buy out. It is also a 50:50 partner with Tech on the LIK zinc-lead deposit in Alaska near Teck's Red Dog mine. Solitario has a NYSE-AM listing which makes it eligible for trading by the Robinhood crowd but also the algo traders. If the bluesky of Golden Crest starts to confirm the hypothesis that Golden Crest is a new gold frontier on a par with Homestake, the stock could explode on the upside.

Aurion Resources Ltd (AU-V)

Fair Spec Value
Risti Finland - Other 3-Discovery Delineation Au
Endurance Gold Corp (EDG-V)

Fair Spec Value
Reliance Canada - British Columbia 3-Discovery Delineation Au
Solitario Zinc Corp (SLR-T)

Fair Spec Value
Golden Crest United States - South Dakota 2-Target Drilling Au
Jim (0:53:55): Why did you include NioBay Metals in your 2023 Favorites? Isn't the James Bay niobium project hopelessly bogged down by the internal politics of the Moose Cree First Nation?

NioBay Metals deserves to trade in the $2-$5 per share range based on the PEA it completed in 2020 for the James Bay niobium project located about 40 km southeast of Moosonee in northern Ontario. NioBay was focused on the Crevier project in 2009-2012 during which it spent $9 million on a 41 million tonne dyke system discovered in the 1970's whose niobium grade was only about 0.2% NB2O5. At the time the junior emphasized the tantalum by-product but in view of the need to expand lithium supply ten-fold over the next decade to make the EV replacement of ICE a reality by 2035 there will be no shortage of tantalum supply because tantalum will be a by-product of LCT type pegmatites. James Bay was acquired in 2016 as a new focus but the company could not get any work started because the chief in Moosonee was philosophically opposed to mining in the territory of the Moose Creek First Nation and refused to engage in required consultations. She was replaced in 2019 through tribal council elections by a new chief who was at least willing to discuss exploration and development of the James Bay deposit and NioBay got a green light to do the drilling needed to support an updated resource estimate and PEA.

On the basis of the PEA NioBay got funded to pursue a PFS but could not get a drilling program underway in 2021 because of a warm winter. The reliance on an indigenous contractor who cut corners in violation of conditions set by the Moosonee community caused further problems. But NioBay did get drilling underway in Q1 of 2022 but the anti mining faction meanwhile organized an informal survey which caught the open-minded community members asleep at the switch and managed to collect more "we don't want a mine in our backyard" votes than supportive votes (reminds one of the Brex-It vote which has worked out so well for the British). Because NioBay understands that no mine will ever be developed in this region without support from the MCFN it immediately suspended work and the stock crashed to $0.10 as the market concluded the situation was hopeless. I assigned a Bottom-Fish Spec Value rating to NioBay as a bet that one day the MCFN would see the benefits of advancing James Bay not just in the form of meaningful jobs for the Moosonee community but also for the greater good in facilitating another robust supply of niobium to balance the 85% supply that comes from the monster Araxa deposit in Brazil.

It may be a little premature to elevate NioBay to a Fair Spec Value rated 2023 Favorite but in December the stock doubled when KRO bottom-fishers began to digest the implications of a news release NioBay put out about a 10 hole drill program it completed on the Crevier project. Jean-Sebastian David, who was appointed CEO in 2022, could not do anything to advance James Bay, but he decided to undertake a geological rethink of the Crevier project. The pegmatic syenite dyke discovered in 1975 is a late stage intrusion within an alkaline syenite intrusive complex which somehow acquired a modest grade for niobium and tantalum which is absent in the surrounding rock. Historical fieldwork had noted "carbonatite injections" within the complex but these were too small to be of interest. The hard nature of the syenite dyke allowed it to outcrop in the manner of similarly hard pegmatite dykes though these have a genesis unrelated to this type of intrusive complex.

JS David wondered from where the dyke harvested its niobium-tantalum payload. It turned out that the area around the existing resource had been clearcut logged so the field crew was able to discover more evidence of outcropping carbonatite within linear depressions such as creeks. Carbonatite is a much softer rock than nepheline syenite so it is easily eroded and buried by overburden. The first 4 holes drilled near the dyke didn't intersect anything interesting, but hole #5, drilled across the creek to the west of the dyke where carbonate rocks were observed did hit something that prompted the company to move the rig to the edge of Lac Touladi about 2 km west of the dyke and drill hole 6 under it. Most of this hole encountered carbonatite and bottomed in carbonatite at a vertical depth of 350 metres. Three more holes were drilled under the lake with similar results before snow shut down further work.

Pyrochlore crystals, the primary host for niobium, were observed in core and confirmed by electron scanning work. An XRF unit also registered niobium levels higher than in the syenite dyke core, but this gives only a qualitative indication. Geochemical assays are needed to establish that grades of 0.4%+ NB2O5 comparable to Niobec and James Bay are consistently present within long widths. The physical implication is that a billion tonne plus carbonatite sits underneath the lake, hidden all these decades by water, surrounding bush and overburden thanks to its recessive nature. The scale is comparable to Niobec which Magris, a 27.5% partner in Crevier, operates 150 km to the southeast. The project is located in a First Nations jurisdiction whose members are engaged in all sorts of commercial activities, unlike the MCFN in northern Ontario. There is only one cottage on the lake used for summer fishing. If assays confirm the Crevier carbonatite as a world class discovery comparable in scale and grade to Niobec, the James Bay story becomes irrelevant and Crevier turns into a new discovery delineation play in a location very favorable for development. If not the stock sags back to its bottom-fish price and a remains just a long term bet that James Bay will one day be back on track.

NioBay Metals Inc (NBY-V)

Fair Spec Value
Crevier Canada - Quebec 7-Permitting & Feasibility Ta Nb
Disclosure: JK owns Brunswick, Eagle Plains, Endurance Gold; FPX Nickel, NioBay, Verde Agritech; FPX Nickel and Verde Agritech are Good Spec Value rated Favorites; all the rest are Fair Spec Value rated Favorites

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