|Kaiser Watch December 22, 2022: Can you guess the 2023 Favorites?
|Jim (0:00:00): You have frequently talked about Lithium Mania 2.0 but have not mentioned many lithium companies and there were none in your 2022 Favorites Collection. What sort of lithium juniors would you consider including in your 2023 Favorites?
I have two lithium juniors flagged to be part of the 2023 Favorites which will be released to the public on January 3. One will be a diversified Canada focused grassroots explorer which is finishing the year with $10 million working capital. It spent 2022 assembling a large portfolio of prospects in Ontario, Quebec and Atlantic Canada and will begin drilling in January. The other is at the opposite end of the exploration-development cycle with a lithium pegmatite deposit in eastern Canada. It just completed a feasibility study on its pegmatite deposit and is currently in the permitting stage. The stock is being priced at the value generated by its lithium base case price, which is equivalent to $12/lb lithium carbonate whose spot price is currently at $36/lb. The general view is that by 2030 the price of lithium carbonate will have settled down into the $10-$15/lb range, but they may remain high or even higher over the next few years. Projects headed for production by 2025 are using higher prices in the first few years of their cash flow models, declining in the later years.
My concept of Lithium Mania 2.0 is all about exploring for lithium enriched pegmatite deposits. That caught fire in Australia during Lithium Mania 1.0 which ran from 2015-2018 when the success of Australian companies like Pilbara Minerals over-supplied the market. By 2021, however, the car makers had embraced EV rollouts to such an extent that the supply-demand imbalance reversed, causing lithium carbonate to increase ten-fold to its current level. The Lithium Mania 1.0 period also focused heavily on the Lithium Triangle area that includes Chile, Argentina and Bolivia. The Bolivian salars are off limits to juniors with Chinese and Russian entities negotiating with the Bolivian government for development rights. But in Chile and Argentina all the areas with lithium brine potential is locked up and we are seeing consolidation happen. For example, on Tuesday December 20 Arena Minerals agreed to be acquired by Lithium Americas for paper at a 28% premium to the market in a deal which values Arena at CAD $311 million. Recharge cycles, water rights and dealing with impurities make assessment of brine deposits a complex matter. I'm not spending too much time on the brine plays because I think their upside will be limited by the desire of existing shareholders to get a liquidity event such as was the case with Arena. This will help Lithium Mania 2.0 because the proceeds are unlikely to be recycled into other brine juniors, certainly not claystone plays which face flow-sheet demonstration challenges, but very likely into lithium pegmatite plays.
The Canadians are only now waking up to the potential for LCT type pegmatite deposits in Archean settings, often within greenstone belts where gold and base metals drove past exploration. This includes eastern Canada stretching into Saskatchewan and heading north into the Arctic. Other key regions are Scandinavia, Brazil and the cratons in southern Africa, in particlur Congo and Zimbabwe. Western Africa also has LCT pegmatite potential but this region is becoming unstable because of Islamic jihadi groups terrorizing the rural regions and Russian mercenaries getting involved with military groups. The Australians who have their Lithium Mania 1.0 pegmatite experience under their belt are leading the charge.
Currently KRO members are accumulating lithium juniors that made it into my 2023 Bottom-Fish Collection. Some of these may graduate to the 2023 KRO Favorites Collection next year. The main reason I believe Lithium Mania 2.0 will explode in 2023 is because the car makers are starting to understand that even if they build refineries outside of China, the ten fold lithium supply expansion required by 2035 to make EV replacement of ICE car sales a reality is not in place. Lots of money is going into direct lithium extraction (DLE) technologies to recover lithium from brines beneath salars without waiting for the sun to evaporate the water, as well as brines associated with oil field structures and even geothermal systems such as at California's Salton Sea. This process technology R&D may work out very well, but it also might not. When you discover a bedrock hosted lithium enriched pegmatite deposit you can delineate it very quickly, assess the impurities that need to be avoided, and design a flow-sheet to produce a spodumene concentrate.
Over the next three years we will see a tremendous exploration boom that will result in numerous discoveries, some of which will become development candidates for 2025-2030. The car makers need to see the future supply in place, or their EV plans become pipe dreams. This needs to happen even if we get stuck in a recession next year that tanks real estate and puts further pressure on equity markets in general. The Great Pegmatite Hunt has the potential to become an exploration boom island that attracts speculators. The recent LIFE exemption which allows non-millionaires to participate in private placements has the potential to draw the younger Gen Z and Millennial generations into the resource junior exploration game because the S-curve dynamic of a new discovery means lots of money can be made and the collective outcome benefits them much more than the Boomer generation which has been the primary audience for resource junior exploration.
During 2023 we will probably also see Rio Tinto make a major acquisition in the pegmatite sector. Their Jadar project in Serbia, which is a different type of mineral than the spodumene that typifies pegmatite deposits, is stalled because of politics. They have already moved into the Lithium Triangle with an $800 million acquisition. In September Rio Tinto announced that it was having success at its Sorel-Tracy facility with a pilot plant study aimed at creating a spodumene concentrate with a higher Li2O grade than the 5%-6% range for chemical and technical grade generated by current flow-sheets. If Rio Tinto is successful it could acquire remote projects and develop mines which produce a higher grade concentrate that lowers shipping cost to the hydroxide refineries, which in turn will have lower costs per lithium output unit. By 2035 annual lithium supply would be a $100-$200 billion market, putting it in the same league as copper. And that assumes lithium carbonate prices drop into the $10-$15/lb range.
|Jim (0:14:31): Prospect generator farmout juniors have been a staple recommendation for decades by people like Rick Rule. What is the outlook for prospect generators in 2023 and will you include any in your 2023 Favorites?
I have two tentative picks for the 2023 Favorites. One is a traditional follower of the model which religiously farms out the prospects it generates. It is a fairly new junior that is not cheap, is focused on Canada, and has strong financial backing. The other has been around for decades and has delivered several spinout wins for its shareholders but none of them of a spectacular nature. Periodically, however, it bucks the farmout rule and drills a project with its own nickel. This is what made Andre Gaumond famous in 2004 when he annoyed Paul Van Eeden by making Virginia Gold drill Eleonore on a 100% basis. This led to a $750 million buyout at $14 by Goldcorp within a couple years even before publishing a maiden resource estimate. Eleonore, which is located in Quebec's James Bay region, never really lived up to its promise, but Virginia Gold shareholders had quite a payday. In contrast, consider Mirasol Resources which specialized in South American exploration. Over two decades it spent over $80 million generating prospects and farming them out, and yet has nothing to show for it today. I had it as a bottom-fish pick several times and it did flutter into the $2-$3 range during resource sector bull cycles, but nothing ever emerged that qualified as a major discovery. The company was quite successful farming out projects to majors, but even success by one of them would have limited the upside of the stock price and dragged out a liquidity event because the partner is the only buyer of the minority stake.
I think the prospect-generator-farmout model is sound, but I tend to favor juniors whose management knows what a 100% keeper looks like and is willing to test the potential for low hanging discovery fruit. The one I have in mind has a Sullivan 2 Hunt play that appears to be an emerging discovery based on the peripheral results obtained this year. And it also has plans to monetize its royalty portfolio through some sort of spinout. I had a fair number of prospect-generators in my 2022 Bottom-Fish Collection but not many for 2023. Because I am expecting further interest rate hikes an ongoing trouble for the economy and general market I am keeping the 2023 Bottom-Fish Collection small, but will add juniors as I become more familiar with their proposed story paths to success.
|Jim (0:20:20): During 2022 you developed the idea of the story path and the emerging discovery. You currently have several emerging discovery stories in your 2023 Bottom-Fish Collection. Will any make it into your 2023 Favorites Collection?
I developed the story path concept at the start of this year precisely because I had flagged so many juniors for the 2022 Bottom-Fish Collection and I needed a system to keep track of their stories. Resource juniors have two basic story paths. One is grassroots exploration for a type of deposit or target metal that would be a brand new discovery for the region. The other type involves rethinking the potential of established regions using new geological models, exploration methods and even processing technologies. It also involves rethinking existing deposits in the context of higher real metal prices or anticipated higher prices, a perennial aspect of gold plays. When 2022 started I was optimistic the resource sector would avoid a general market downturn because a decade long bear market had not pushed much new supply into the development pipeline, the global economy was still growing, geopolitical dislocations were creating security of supply issues, and new usage demand was being created by forces such as the energy transition. But by June the severity of the equity market downturn and Powell's rapid interest rate increases to subdue persistent inflation engulfed the resource sector and the second half of 2022 was a full blown bear market that saw lots of capitulation selling.
One reason I like discovery exploration juniors is that they start with little more than an idea, and launch into S-Curve price action when they deliver evidence of a new discovery that is going to work with the metal prices we already have. This happens in a bear market if the discovery hole is a no-brainer, but not if the drill results simply point to a new discovery that may take only a few more holes to confirm as a big deal. But the bearish mood during the second half of 2022 was so bad that the best juniors did in response to very encouraging results was not go down in price. In normal markets stocks respond on the upside to encouraging results and if you are not already on board you have to chase the stock at higher prices. But this year you had time to assess the results, get your head around the geological context and the implications, and buy the stock at your leisure. Turnaround time for results from followup drilling continued to be bad in 2022 so one had lots of time to accumulate positions in "emerging discoveries" at the same price as before.
I have three Bottom-Fish with emerging discoveries that will become 2023 Favorites, and fourth which may get results next week that pull it out of bottom-fishing territory. One has an emerging uranium discovery in the Athabasca Basin which has a geological context that allows one to dream of a McArthur River scale discovery, the richest in the world.
One has an emerging high grade gold discovery in southwestern British Columbia which the company has the potential to replicate on parallel structures thanks to additional ground acquired in 2022.
While I have mentioned the other two in past Kaiser Watch episodes, the third one I have only talked about to KRO members. It has a large grassroots gold project that is the last major gold exploration frontier in America. It generated this play in 2021 and its exploration has been limited to geophysical surveys, prospecting and trenching because a drill permit requires an environmental assessment. They hope to have drill permits in place by Q2 of 2023 and be drilling 500 m holes in H2 that will test different targets within the carbonate stratigraphy and the Precambrian basement below. It is comparable in size to a next door district that has an endowment of over 90 million gold ounces. And yet it has received almost no historical exploration because the rocks at surface are younger than the host rocks to the east, generally obscured by soil and bush, and where outcropping rather mediocre looking. But when the company put boots on the ground it began to find high grade gold at surface, evidence that the system has been the focus of unrecognized hydrothermal activity 50-65 million years ago, similar to what formed the younger deposits next door.
The fourth potential emerging discovery candidate for the 2023 Favorites is a past Favorite that should have been a homerun but its flagship project ended up in limbo because of First Nation politics. KRO members have been accumulating it since last week when the junior put out a peculiar news release about drilling it had done on a second rate project. It was a bottom-fish pick at $0.10 but is now trading in the $0.15-$0.20 range. This property has a low grade niobium deposit discovered in the seventies whose 25 million tonne deposit will never be worth developing. But this year the company undertook a rethink of the geological context, and thanks to recent clearcut logging, discovered evidence of a softer potential host rock for niobium than the pegmatitic nepheline syenite dyke which is a very hard rock visible at surface. It appears that a couple km to the west a lake was hiding a giant carbonatite system. It has the scale to be another Niobec which is 150 km to the southeast. But we won't know until we have assays.
|Jim (0:31:24): How many of your 2022 Favorites will make it into the 2023 Favorites?
During the December 9 KW episode in which I reviewed the 2022 Favorites I indicated that two would for sure survive as 2023 Favorites. Since then I have had a chance to do further research and confirmed that a third will also make it to 2023. The others will be consigned to the 2023 Bottom-Fish Collection from which they may graduate next year if copper and gold develop uptrends, something I do not expect of the Federal Reserve plunges the world into a deep recession. The three keepers all have unusual stories whose outcome does not hinge on macroeconomic trends and metal market sentiment. There is a major risk of a recession in 2023 which is unlikely to boost precious and base metal prices, which make advanced feasibility demonstration projects a hard sell to the market. I think geopolitics and the energy transition will stay topical in 2023 regardless of the economy. In other words critical metals, with an emphasis on battery metals, both of whose supply could be disrupted or which needs to be expanded to feed new usages, will pull investor interest into resource juniors. Advanced copper and gold stories will be for bottom-fishers with a longer time horizon to accumulate.
|Disclosure: JK owns some of the candidates for the 2023 Favorites Collection