Many resource market investors greet the approach of summer with the adage: Sell in May and go away. Michael Ballanger, an investment advisor at Union Securities and a 30-year veteran of the junior resource market, says he is taking the opposite tack. In this exclusive interview with The Gold Report, he explains how the continuing worldwide financial upheaval is influencing his investment decisions regarding the resource sector and why his focus on the huge opportunities for junior resource stocks in the Yukon cause him to say: Buy in May and make some hay!
Companies Mentioned: ATAC Resources Ltd. Clifton Star Resources Inc. Explor Resources Inc. Hinterland Metals Inc. Kaminak Gold Corporation Kinross Gold Corp. Lake Shore Gold Corp. Osisko Mining Corp. Taku Gold Corp. Tinka Resources Ltd. Xstrata PLC
The Gold Report: In your last interview with us in April of 2010, you predicted higher precious metals prices and inflation. Both came true. We continue to see more quantitative easing (aka money printing), global civil unrest and high unemployment. Do these factors portend higher prices for precious metals?
Michael Ballanger: Approximately three years ago, I read Ayn Rand's Atlas Shrugged for the first time, after which I urged every client to do the same. Of the hundreds of books that I have read over my 34-year career, no book has ever mirrored the current investment landscape like this one. You have big government in bed with big business on a global scale at the expense of the middle class. Period. History has proven that capital moves to locations in which it is fairly treated and since the G20 nations are hell-bent on debasing the purchasing power of their respective currencies, capital has been fleeing currencies in favor of hard assets of every flavor-gold, silver, copper, oil, grains and so on so forth...where that capital is fairly treated.
TGR: What about near term, over the summer months?
MB: Near term, until around mid-August, the junior mining sector will be very, very quiet as measured by the TSX Venture Exchange. Not only do we have the seasonally quiet summer months, we also have a sector that rallied from 1,400 to around 2,460 since our last interview. Any market up 75% in 13 months is ripe for a correction and we have already seen a 20% haircut off the highs in early March.
TGR: The old market maxim dictates: Sell in May, go away. We're through May and apparently survived the Rapture. Do you have a plan for summer investing?
MB: For the junior mining sector, it is actually March that historically marks the peak and tends to coincide with the PDAC (Prospectors and Developers Association of Canada Mining Investment Convention) held in Toronto each year. However, I have patented a new phrase which applies to the Canadian Yukon explorers. Buy in May and make some HAY!
The traditional rationale is based upon climate, money and precedent. Climate constraints make it impossible to drill in the winter months, so all of the activity fires up in June. As for money, last year the Yukon attracted around $70M in exploration and it all began with the $140M friendly buyout of Underworld Resources, Inc. by Kinross Gold Corp. (TSX:K; NYSE:KGC), followed by the big discoveries for Kaminak Gold Corp. (TSX.V:KAM) in the same White Gold area as well as the Rau-Osiris discoveries by ATAC Resources Ltd. (TSX.V:ATC).
This year, the junior Yukon companies have raised over half a billion dollars for exploration that has to be compressed into a five-month period. As for precedent, we watched two juniors generate enormous wealth for investors as Kaminak advanced from $0.35 to $3.80 while ATAC moved from pennies to $9.00 in that same five-month window back in 2010. With a 12-fold increase in exploration capital going into the Yukon, there are going to be more discoveries and enhancements of the existing discoveries by KAM and ATC. Therein lies the strategy of being underweight the TSX.V (non-Yukon) but overweight the Yukon.
TGR: You're a real veteran of the junior resource investment market going back into the 1970s. How does the current investing environment compare to years past?
MB: Nowhere does the dynamic duo of fear and greed play a stronger role than in the junior mining sector. And nowhere do the merciless matrons called Lady Luck and Mother Nature exert a greater control over our fates. That was the case in the 1970s and it is the same today. The only method that I have learned to overcome the random nature of success in this sector is through investing in companies with extraordinary management. By that, I do not refer to companies with superb promoters at the helm-I refer to companies where management excels in execution on the ground. It is very difficult in today's environment to find managers with the experience and knowledge to execute. By contrast, it is easy to find great promoters talking up their deals. I have rarely made any money focusing on the sizzle rather than the steak.
TGR: In your last interview, you gave your criteria for investment in juniors. Any changes in your criteria since then?
MB: In today's market, I'm paying more attention to execution than at any other time in the cycle. The easy money made in the advance from $300/oz. to $1,500/oz. in gold is not going to repeat itself in the next 12 months. If you want to make money from here on, you better have successful projects that can fly at current prices rather than praying that you are going to get skated onside by rising prices. That's a sucker's bet after the kinds of advances we have seen.
TGR: Last year, you were hot on silver as the better precious metals play over gold. You were right and it had a great run. What are your thoughts on it now?
MB: It was a delightful run, but I am even more delighted that we have now corrected that heavily crowded trade that marked the move from $30/oz. to $50/oz. No one was saying anything about silver when we did the interview a year ago, but it sure was the metal du jour in April 2011. Any time you get so many experts coming on to CNBC and Bloomberg for commentary, you know the market is ahead of itself.
Rather than the price of silver itself, I am far more focused on junior mining stocks like Tinka Resources Ltd. (TSX.V:TK; Fkft:TLD; Pksheets:TKRFF), which I mentioned, and it was around $0.25 per share last year. It has recently corrected from $0.73 to under $0.50. Tinka's President and CEO Andrew Carter and his team have had extensive operating experience in Peru. In terms of Mother Nature, the geology's right and what they have there is really interesting, which is a NI 43-101-compliant silver resource of approximately 20.3 Moz. that could grow dramatically with continued exploration. They have just begun the long-awaited drilling of the Colquipulcro deposit. This is still my favorite silver story for 2011 and in the interest of full disclosure, I am a shareholder and our firm has an investment banking relationship with Tinka as well.
TGR: We know you are keen on the Yukon. Many new companies are rushing to the party up north. What strategy would you recommend for sifting through these companies and investing there?
MB: In any area play, there is always a leader that actually creates the area play. In the White Gold area of the Yukon, Underworld Resources Inc. was the leader until it got absorbed by Kinross in March 2010, after which the Latte and Supremo discoveries by Kaminak vaulted it into lead dog status. Coincident with the White Gold discovery was the Rau District discoveries by ATAC. If you are going to play the Yukon, you pretty much have to own either one or the other or both. The White Gold District is in what was once the hub of North America's largest gold rush-the Tintina Gold Belt, which has produced nearly 30 Moz. of gold, and boasts estimated resources of over 39 Moz.
Now, as to the juniors with ground in the area, I have stayed with what I refer to as the Shawn Ryan Claims. Since Ryan won Prospector of the Year in 2011, his scientific methods for prioritizing properties using intensely disciplined soil geochemistry allowed him to screen much of the White Gold Area. I also look at the time that the land was acquired. If it was acquired after 2010 or late in 2010, chances are that either the Ryan crews or those competing with the Ryan crews got the premium ground. As for the Rau District, ATAC would appear to have the lion's share of premium ground, so the juniors in the Rau are difficult to handicap.
TGR: What are the challenges faced by and benefits to companies exploring in the Yukon?
MB: The fact that there is such a short exploration window is the major challenge. Accelerated costs due to a relative paucity of infrastructure is also a challenge. However, therein lies the benefits to Yukon explorers. Little systematic exploration has been done in the area, until now. Considering that the 1903 Klondike Gold Rush has yielded over 18 Moz. of gold to date from placer deposits, one can only speculate how many ounces might be discovered if these companies locate the bedrock, up-elevation sources of these placer deposits.
TGR: What are some of your favorite names in the Yukon and why?
MB: My rule dictates that if you take the risk of entering an area play, you absolutely must own the lead dog and that means that Kaminak and ATAC are core holdings. Moving to the pre-discovery companies and going back to what I said earlier about when and how the ground was acquired, Taku Gold Corp. (TSX.V:TAK; OTCBB:TAKUF) acquired claims through a deal with Shawn Ryan on two parcels. Taku Gold is one of the largest stakeholders in the White Gold District, with 3,683 claims totaling 76,238 hectares.
The first of the Ryan parcels is the Rosebute Property, located due north of Kinross' Golden Saddle where soils and geophysics have made them drill-ready this July. The second is the Dan property, again tied on to the Kinross J.P. Ross property. Taku has begun an aggressive exploration program relying on Shawn Ryan's methodology and guided by state-of-the-art airborne survey, soil sampling, mechanical trenching and drilling techniques.
Kinross also has a TAG Gold-Silver Project near Atlin in northern B.C. This project follows a 6.2 km. gold-bearing fault that has yielded gold and silver in 67 holes drilled to date. In 2008, trenching work revealed a new discovery with values of up to 7.8 grams per ton gold (g/t Au.) in an area underlain by a quartz diorite intrusion. This suggests the potential for a large-tonnage open-pit deposit. This is an advanced project that could benefit from a climate that is suitable for year-round drilling, as well as a fully winterized camp and convenient barge access for equipment and supplies.
TGR: Anyone else you like?
MB: Also high on my list is the Ballarat Property of Hinterland Metals Inc. (TSX.V:HMI; OTCPK:HNLMF), which will ultimately reside in Stakeholder Gold Corp. Stakeholder is a Hinterland subsidiary that is a spinout holding of Hinterland's Yukon properties in a beautifully structured company with only 20 million shares outstanding. Ballarat is located between Kaminak and Kinross and is also drill-ready for July.
TGR: What about other jurisdictions?
MB: Talk to me in mid-August. Then we can look at politically friendly areas like the provinces of Ontario and particularly, Quebec, which is the best mining jurisdiction on the planet. Within those provinces, our favorite exploration company remains Explor Resources Inc. (TSX.V:EXS). We maintain that, over time, Explor's Timmins Porcupine West property, adjacent to Lakeshore Gold's Thunder Creek discovery of 2009, will prove to be one of the most significant gold discoveries in the Timmins West camp. Explor is close to unlocking the secrets of what could be an elephant-type discovery modeled around the Hollinger-McIntyre-Conorarium Model, which is a 30 Moz. model. An elephant in the junior exploration game is an ore body that takes on, just like it sounds-elephant status, something huge.
TGR: Since you like Explor so much, can you elaborate a little more on its prospects?
MB: First let me say in the interest of full disclosure that I am a shareholder and our firm and I have been corporate finance and investment banking representatives for this company since May 2007. Explor is in the heart of the Abitibi Greenstone belt, which is a geological environment stretching from north of Duluth, Minnesota, across the top of Ontario and into northern Quebec. Over the last 120 years, the Abitibi Greenstone Belt has produced 180 Moz. of gold and 450 Mts. of copper-zinc ore.
I'm very impressed with Explor's CEO and president, Chris Dupont, who is a seasoned ex-Inco, ex-Noranda mining engineer born in the heart of the Abitibi. He knows the area very well. The land package that Explor has put together is the biggest quality package of any junior I've ever seen and it is largely within the Abitibi Greenstone Belt.
As I mentioned, the one that is the most exciting in the gold arena right now is an acquisition they made in 2009 in the Timmins Porcupine, west of the Mattagomi River in Timmins, Ontario. Over the last 100 years, 70 Moz. of gold have been produced out of Timmins.
On June 25, 2009, in an area west of Timmins, a junior called Lake Shore Gold Corp. (TSX:LSG) made a discovery at 83m of 12 ¾g at an elevation of 865m of depth. This was the first of its kind west of the Mattagami. In fact, it was one of the best drill holes in Canadian gold mining and exploration history. Explor has a 1,900-hectare parcel of ground called The Timmins Porcupine West Gold Property, which has had around $25M of shallow exploration work completed over the years. Explor is executing a deep exploration program following the Hollinger-McIntyre model, which is significant because those two mines (located about 10 km. to the east) produced over 30 Moz. and, like Explor's land, were associated with a major porphyry unit.
The second major package is the first serious land package assembled in over 40 years, located next to the world's largest and richest volcanogenic massive sulfide deposit, Xstrata PLC's (LSE:XTA) Kidd Creek Mine. It was a 140 Mts. copper-zinc-lead-silver deposit that would have an in situ metal value of over $70 billion at today's metal prices. The most recent addition to that assemblage is a four-claim block located 600m from the Kidd open pit.
The third property, called the East Bay property, is located in the Duparquet region of Quebec, and is tied onto the Clifton Star-Osisko joint venture. When Clifton Star Resources Inc. (TSX.V:CFO) announced a joint venture with Osisko Mining Corp. (TSX:OSK) on November 3, 2009, their stock was trading around $2.35/share. Within three months of that joint venture announcement, the stock traded as high as $8.25/share. They have a low-grade, big-tonnage, big-ounce deposit in that area and Explor has the biggest land package surrounding that deposit.
TGR: What final thoughts do you have for our readers?
MB: As I have stated numerous times since gold moved beyond $300/oz. some 10 years ago, never underestimate the replacement power of stocks within an inflationary spiral. Today, policymakers are conflicted by rising prices everywhere in the cost of living, except for the area where it's causing the greatest pain-housing. Politicians in the U.S. and abroad are empowering their central banks and treasury departments to reflate in order to liquefy the system, but the quantitative easing (QE) exercises are reflating everything except housing. If they now tighten, housing will continue to be a deflationary nightmare to a great many American families. In my view, they must turn housing around in order to save the American middle and working classes. I believe that there will be a QE III and QE IV and as many QEs as required until we see the Case-Schiller Index begin to turn. Until that happens, the conditions for rising gold and silver prices will put a serious bid into the TSX Venture Exchange until well into 2012. Unless we see citizens in the U.S. and Europe coming after the policymakers with pitchforks and torches, currencies will continue to rot, commodities will advance and the TSX Venture Exchange will continue to forge ahead to my longer-term target of between 4,000 and 5,000.
TGR: Thank you for taking the time to give us your current insights and ideas.
MB: Thanks for the opportunity.
Michael Ballanger completed his undergraduate studies at Saint Louis University, where he earned a BSc in Finance and a BA in marketing. He joined the investment industry in 1977 with McLeod Young Weir, Ltd., and currently serves as an investment advisor at Union Securities, Ltd. His substantial background in corporate financing is further informed by his 30 years of experience as a junior mining and exploration specialist.
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1) Zig Lambo of The Gold Report conducted this interview. He personally and/or his family own shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Gold Report: Explor Resources Inc.
3) Michael Ballanger: I personally and/or my family own shares of the following companies mentioned in this interview: Explor, Tinka, Hinterland, Taku and KAM. I personally and/or my family am paid by the following companies mentioned in this interview: U.S. is paid investment banking fees on financings associated with Explor, Hinterland, Taku, Stakeholder, and Tinka.
The securities mentioned herein are speculative and should be considered by risk tolerant investors only. The opinions expressed in this document are only those of Michael Ballanger and not of Union Securities' research department or any of its analysts. Neither Michael Ballanger nor Union Securities Ltd. take responsibility for errors or omissions which may be contained therein, nor accept responsibility for losses arising from any use or reliance on this report or its contents. Neither the information nor any opinion expressed constitutes a solicitation for the sale or purchase of securities. Union Securities Ltd. is a member of the Canadian Investor Protection Fund.
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