Gold is back. After years of watching faltering starts and fizzling rallies, the gold market is at last showing the kind of strength we’ve been anticipating for the past five+ years.
Finally, there’s plenty of opportunity for savvy investors to profit from gold. Here’s my simple 1-2-3 formula for winning…
At this stage in the market cycle, I like to find junior and intermediate companies that offer the potential of becoming buyout or merger targets. This is why I’ve invested in Canadian-listed Freeport Resources Inc. (OTC: FEERF / TSX-V: FRI / Frankfurt: 4XH.F). Let me explain…
First off, by far the body of analysis and opinion looks to continued strength in the gold price with the potential of further upside. So, the good news is that if you’re not already well-positioned, there’s still time to get on board the gold train. Remember, the trend is your friend…
Second, I like the leverage juniors offer. And while they may be higher risk, they offer the kind of potentially high returns you just don’t get in the physical metal (hard asset) or in major mining producers. Junior exploration companies give you a shot at the elusive ten-bagger (potential 10X upside).
Third, at this stage of the market cycle, major mining companies have plenty of capital, and will take advantage of that strength to add depth and breadth to their property or asset portfolios. That means attractive juniors in the space can and will potentially get bought out. My strategy is simple: buy potential buy-out targets at the junior level to realize the best profit gains. Sure, it’s a bet, but one that I have done well by for the past 20+ years.
Analyst Derek Macpherson VP Research at Red Cloud Securities sums it up nicely. “Historically, majors outperform in the early stages of a bull market,” he noted, pointing to recent large scale M&A activity in the gold sector. “This round of M&A focused on smaller companies could provide a boost. Our work suggests that in a bull market it is ultimately the smaller companies that outperform, and in our view it’s just a matter of time before the smaller-cap gold companies outperform their larger peers.”
Win by Betting on the Jockey
Of course, selection is especially critical when it comes to junior mining.
These companies are at early stages of exploration and development, and the absence of any past corporate performance or typical metrics such as cash flow or earnings per share can make choosing the right target challenging and risky. However, over the years I’ve learned that one of the critical factors in junior resource investment success is backing the right people.
In other words, you have to look past the corporate fundamentals, or absence thereof, and get to know the track record of the people involved with and backing the venture. People with mining industry and capital market know-how and a record of winning can give you a head start on reaching your investment goals. The trick is, in part, to bet on the jockey, as the common wisdom goes.
The people involved in Freeport Resources, and their records of past success, amounts to one of the big reasons I’ve put my own money into the company’s shares. Obviously, of course, there’s more to it than that, as I explain below…
Right Place, Right Time, Right Property Asset
Property acquisition can involve a bit of luck along with good timing, as well as considerable skill, at least when it comes to getting your hands on the right kind of big asset—or the kind of property Freeport has recently acquired.
On September 18, Freeport officially acquired a 100% percent interest in the Star Mountains Property, a large, advanced stage gold/copper porphyry project located in Papua New Guinea (PNG).
Since the 1970s, past ownership has spent more than US$50 million on the property, including a whopping $30 million spent in the past six years.
In 2018, the Star Mountains Property was held by ASX-listed Highlands Pacific. In 2019, Cobalt 27, now Conic Metals, completed the friendly acquisition of Highlands Pacific to create a leading high-growth, diversified battery-metals investment company.
Highlands’ key asset at the time was its 8.56 percent interest in the long-life, world-class Ramu Nickel Cobalt Operation located near Madang on the north coast of PNG with production of approximately 3,000 tonnes of contained cobalt and 30,000 tonnes of contained nickel annually.
However, Highlands’ Star Mountains copper/gold asset didn’t fit with Conic’s battery metals core business. Conic sold the Star Mountains property to a private company, where it has been parked ever since.
Freeport Resources signed a definitive share purchase agreement, dated effective September 4, 2020, to acquire the property from a private entity for 10 million common shares of the Company. On September 18, the Company received TSX approval on the acquisition. At a dollar-equivalent at today’s share price of well under $CAD10 million, this price could arguably be called a bargain.
The Low Down on High Potential
The Star Mountains Property is located in the highly prospective PNG Orogenic Belt, just 25 km from the giant Ok Tedi mine and in the same geological arc as Grasberg, Frieda River, Porgera, and Ramu.
Papua New Guinea, as a country, is known to be mining-friendly and stable, and there are well-established logistics at the property including an exploration camp, airstrip, helicopter pad, and core shed. The property is close to supply centers of Tabubil and Mt. Hagen.
As you can imagine, with more than $US50 million spent on this gold/copper property, I believe there should be extensive and detailed geological mapping and data to pull from.
Multi-millions have already been spent on exploration since Star Mountains was first discovered. Only two short years ago, in 2018, H&S Consultants Pty. Ltd. completed a maiden mineral resource estimate for the Olgal deposit within the four tenements at Star Mountains. Using a 0.3 percent copper cut-off grade, the deposit is estimated to contain 210 million tonnes of inferred resource grading 0.4 percent copper and 0.4 gram per tonne gold for 2.9 million ounces of contained gold and 840,000 tonnes (1.9 billion pounds) of contained copper.
At today’s gold and copper prices, this is equivalent to approximately 5.7 million ounces of gold or 1.7 million tonnes (3.8 billion pounds) of copper. There remains significant potential for additional discoveries within the existing tenements.
As of this writing, the price of gold on a per ounce basis stands at US$1,908.00. This potentially translates into an asset value, if early numbers stand correct, to be around US$11 billion dollars placed on the property… but before we get ahead of ourselves…
Freeport Resources (OTC: FEERF / TSX-V: FRI / Frankfurt: 4XH.F) notes that it is not treating these historical estimates as current and has not completed sufficient work to classify these historical estimates as up-to-date mineral resources. However, it does believe the work conducted by H&S Consultants is reliable and may be of assistance to greater recognizing the resource value currently and moving forward.
Backing the Jockey
I’ve said it before and I’ll say it again, when it comes to junior resource ventures you have to bet on the jockey as much as on the horse. Freeport’s current management team certainly has plenty of bona fides.
Gord Friesen, President, CEO and Director
Mr. Friesen has over 35 years of capital markets experience and has been the principal fundraiser for a number of successful start-up companies, primarily in the mining industry.
Dr. Nathan Chutas, Senior VP Operations and Director
Dr. Nathan Chutas is a professional geologist with over 20 years of experience with a variety of exploration and mining companies, including Teck Cominco, NovaGold, Sandfire Resources America, and Era Resources. He has served in a spectrum of roles, including senior positions in management and technical roles focused on exploration of greenfield, brownfield, near-mine resources, and project evaluation. Dr. Chutas has experience on projects throughout North America, South Africa, Mexico, and PNG. He holds a PhD in Geological Sciences from the University of Washington and is a Certified Professional Geologist with the American Institute of Professional Geologists.
Daniel Beck, VP Business Development
Mr. Beck is the Vice President of Business Development at Freeport Resources Inc. He formerly worked as a business development analyst for TSX-V listed Cobalt 27 Capital Corp., the leading pure play cobalt metal and streaming company prior to its sale for $500+ million in October 2019. Mr. Beck began his career as a financial analyst intern at Switzerland-based Pala Investments AG, one of the world’s leading private investment firms focused on the mining industry. Mr. Beck has extensive expertise in the evaluation and modeling of mining projects. He holds an undergraduate degree in Applied Mathematics and a graduate degree in Minerals Engineering.
Robert Weicker, Technical Advisor
Mr. Weicker is a professional geologist with more than thirty years of experience in all aspects of the minerals exploration and mining industry. Mr. Weicker has worked for major (Asarco, Noranda, Lac Minerals) and junior mining companies and his own independent consulting company, in exploration, management and administrative roles. His experience includes development and production of the largest gold mine in Canada, development and production of an open pit zinc operation, development of an underground gold mine, and numerous exploration projects for precious, base and industrial metals. He has authored or co-authored prefeasibility studies, feasibility studies, assessment reports, valuation studies, 43-101 reports (both domestically and internationally) and technical reports and reviews for the TSX-Venture and AIM exchanges.
Scott Davis, CFO and Director
Mr. Davis is a partner of Cross Davis & Company LLP Chartered Professional Accountants, a firm focused on providing accounting and management services for publicly-listed companies. His experience includes CFO positions of several companies listed on the TSX Venture Exchange. His past experience consists of senior management positions, including four years at Appleby as an Assistant Financial Controller, two years at Davidson & Company LLP Chartered Professional Accountants as an Auditor and five years with Pacific Opportunity Capital Ltd. as an Accounting Manager.
Allan Glowach, Director
Mr. Glowach is a consultant in the oil & gas industry assisting public and private companies for 31 years.
Waiting for the Starting Gun
In August, Freeport completed a 13.3 million share offering at $0.30 per share, for proceeds of approximately CAD$4 million. Now that the Star Mountains property acquisition is complete, the Company is ready to roll.
Of course, the acquisition of the property remains contingent on approval from the PNG government.
At this time, Papua New Guinea remains in partial COVID lockdown, and that has included, so far, government offices—so progress remains on hold until those offices reopen. There has been some progress in that regard, with potential September mine re-openings included.
More notably, in August, PNG revised its overall position on COVID. Prime Minister James Marape announced that he had been pushing for a new strategy to fight coronavirus that was based on “the reality” of life in PNG, citing economic costs as a critical factor going forward.
The Company and its advisors expect that it will receive approval from the PNG government as normal course in due time.
From an investment perspective, that means we can anticipate a major hit of good news and potentially a lift in Freeport value as the project is de-risked as a result.
In the meantime, I expect to see new people added to further strengthen the management slate. I’m betting on the fact there may also be additional acquisitions in the pipeline to further build out the company’s property/asset portfolio.
Now for the Copper Kicker
I’ve been bullish on copper for some time now. In fact, I called copper on FNN back in November 2018. (You can read my article here.)
Copper prices have advanced from June lows of US$2.40/lb to current levels above US$3.00/lb. Continued post-COVID recovery may be expected to drive prices higher.
Earlier this month, a Caixin survey showed that Chinese manufacturing activity in August expanded at the fastest pace in nearly a decade, and the official NBS Manufacturing PMI for China pointed to the sixth straight month of increase in activity as the economy continued to recover from the COVID-19 shock. I should mention, China is the world’s major consumer of copper.
London-based Capital Economics is predicting a price hike to US$6,800 a tonne by the end of 2020, then advancing to US$7,500 a tonne by the end of 2021 and finally surging to nearly US$10,000 a tonne by the end of 2025.
Robert Friedland, the founder of Canadian mining company Ivanhoe Mines (TSX: IVN / OTCQX: IVPAF), believes the fight against air pollution and climate change will lead to an explosion in demand for copper through the switch to cleaner energy supplies.
So, in short, it’s possible that the global copper market could be on the cusp of a historic supply squeeze as Chinese demand runs red hot and exchange inventories plunge to their lowest levels in more than a decade. That spells big potential for investors.
A Complete Package With Dynamite Upside
The Company is in the process of acquiring a large scale, high potential property in a mining-friendly jurisdiction in a region with a number of noteworthy, producing mines, and well developed infrastructure in PNG.
The Company already has a diverse portfolio of properties—the Red Rose Mine (a past producer of tungsten-gold-copper), Spanish Mountain Gold (adjacent to a proposed open-pit gold mine), and the Q (a large, well-known fluorspar deposit), all located in British Columbia, Canada.
The Company has smart money backing—people with a track record of developing mining interests and selling them at considerable profit.
The Star Mountains Property has seen US$50 million of exploration work, $30 million in the past few years, and given that, the Company is probably not far from being in a position to file a 43-101 report—an event that will further de-risk the project. In addition, the property remains open on strike and at depth.
Freeport (OTC: FEERF / TSX-V: FRI / Frankfurt: 4XH.F) provides exposure to the gold market, which is generally expected to remain hot for the foreseeable future. Moreover, it has substantial exposure to copper, which I believe, may turn out to be one of the big winners in metals resource investment over the next several years.
Critically, as a junior exploration company, the Company’s shares offer the advantage of exceptional leverage at a time in the market cycle when junior resource investments tend to outperform the majors, as money flows down the food chain and majors start spending on acquisitions.
In the immediate future, two key events—approval by the Government of Papua New Guinea and the possible filing of an updated 43-101 report—look to be events that could considerably de-risk the venture. Shareholders could see market valuations increase and reflect that reality, so now is the time to take a good look at Freeport Resources (OTC: FEERF / TSX-V: FRI / Frankfurt: 4XH.F).
As always, it’s vital that you do your due diligence and consider any investment within the context of your portfolio holdings and investment goals. That having been said, there’s no doubt in my mind that the time and effort you spend learning more about Freeport Resources will be especially worthwhile.
Blake Desaulniers, Contributor
for Investors News Service
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DISCLOSURE: Freeport Resources is a Blake Desaulniers portfolio holding.
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