PDAC 2015: Greg McCoach’s firms to watch in 2015

Newsletter writer Greg McCoach of the Mining Speculator is sharing  a number of quality names that he believes are worth looking at, despite the current downturn in the resource market, in part due to the strong U.S. dollar. 

“We are in this gigantic war between gold and the dollar, and the dollar is winning that war right now … we are living in the most unique times, where this is the defining battle of the financial world,” McCoach said during the recent Prospectors & Developers Association of Canada (PDAC) conference. 

This is going to change, but not quite yet, McCoach says. He believes that in the short-term the greenback will rise, as the U.S. Federal Reserve moves to protect the dollar from the negative effects of governments’ debts and deficits. As a result, he predicts the Fed this year will inch up interest rates to keep the dollar strong. 

“So just the small bump up in interests rates will create a yield that will increase and not decrease the flows of capital into the U.S. dollar, and that will keep our mining stock market in check, unfortunately. And it will keep gold prices in check for another year,” he said. 

This adds to the harsh reality the junior mining market is facing, he says, including excessive executive salaries, broker fees and expenses, increased regulatory environment and longer permitting times for drilling and development. The sector also faces longer discovery times, as the easy deposits have been found and access to capital is limited, he says. 

McCoach argues that value creation in junior mining shares has changed, explaining share prices previously increased after good corporate news that led firms to raise equity at higher prices, gradually building value, whereas now stocks may fall on such news, as investors are eager to sell for small gains. “Before we used to wait for at least a double or a triple before we sell. But now, people are willing to sell for 5–10%, because they are making more in that matter than they are with the money sitting in the bank.” 

McCoach suggests retail investors should stick with quality companies that have high-grade, low-cost projects in safe jurisdictions, with little or no debt and good share structure. “You are looking for the best of the best of the best in production, development and exploration,” he said. 

In his opinion, high-quality silver firms include: Mag Silver (TSX: MAG; NYSE-MKT: MGV), which is advancing two projects in Mexico, and as of last September had no debt and US$88 million in cash; Fresnillo (LSE: FRES; US-OTC: FNLPF), the largest silver producer and second-largest gold producer in Mexico; and Tahoe Resources (TSX: THO; NYSE: TAHO), which owns the Escobal silver mine in Guatemala and is merging with Peru-focused miner Rio Alto Mining (TSX: RIO; NYSE: RIOM). “For people who don’t want a lot of risks, and believe that the gold and silver prices are going higher, these are the types of companies that I believe have very little risk,” McCoach said. 

Other recommendations are Mexico-focused silver producers Excellon Resources (TSX: EXN; US-OTC: EXLLF) and Endeavour Silver (TSX: EDR; NYSE: EXK).

Some quality gold stocks that he recommends include: Pretium Resources (TSX: PVG; NYSE: PVG), which owns the high-grade Brucejack project in B.C.; Quebec-focused explorer Balmoral Resources (TSXV: BAR; US-OTC: BALMF); and Kaminak Gold (TSXV: KAM; US-OTC: KMKGF), which is advancing its high-grade Coffee gold project in the Yukon. McCoach believes Kaminak is likely a takeover target. 

While there are different models for investing in juniors, McCoach says investors should match their resource portfolio with their goals and risk tolerance. 

“Exploration companies are for people who understand risks, they are extremely volatile, we can make big money or we can lose big money. And you have to understand that. You really need to set your goals and expectations with the companies in the parts [or stages] of our resource sector that make sense,” McCoach says. 

It is good to remember that only 1 in 1,000 prospects become an economic producing mine, he says. An investor should know which companies can make it through the current downturn and realize what constitutes a failure for a firm, and the “fatal flaws,” or red flags, associated with a project. 

To help answer these questions, investors should assess if a firm’s management has the experience, time and ability to raise enough money to do what they want to achieve. 

“As soon as [the company’s] thesis is no longer valid, dump your shares and move on,” McCoach said.

He adds that investors should manage their cash and be cognizant of when they sell and buy. “Right now we should be in cash. When the market is running up we should be selling, not buying, and holding onto that cash. What often a lot of people do is they take their cash and reinvest right away. Hold the cash and wait for the real values to show up. Because in this industry, we always know they will.” 

While expecting a difficult year ahead with the strong dollar, McCoach believes that when the market turns, people who own positions in quality companies will reap the most gains. “When this thing goes, it is gonna go like nothing we have ever seen before. The people who took positions in quality firms will be the people who make the most money. It will just go up really quickly.”