Adrian Day | Thoughts on PDAC 2019 & Investment Opportunities as a Result of the Recent Wave of Mega Mergers

Adrian Day of Adrian Day Asset Management is a seasoned investor, speaker, author, and adviser.  In this interview, Adrian shares regarding his observations from PDAC 2019 and where he thinks will be the best investment opportunities as a result of the recent wave of major miner mega mergers.  Adrian also discusses the Vale tailings damn collapse, copper’s supply and demand fundamentals and the state of mining finance.


Bill: Welcome back ladies and gentlemen, thanks for tuning in to another Mining Stock Education episode. I’m Bill Powers, your host. I’m still at the PDAC 2019 and I’m sitting down with Adrian Day of Adrian Day Asset Management. Adrian, thanks for taking the time to sit down.

Adrian:  Well, thank you for having me, Bill.

Bill: So we did an interview six or so weeks ago, which was well received. I’d like to get your thoughts on PDAC thus far, you’ve been to many of these. How is this one similar or different than past conferences?

Adrian:  It seems to me there are fewer people here. Now, does the weather play a part? We’ve had a pretty balmy Toronto for the last couple of years. This one’s not so balmy. Does that play a role? I don’t know. There’s different things that play a role, but there’s definitely fewer people in particularly fewer investors of what they call the investor forum. So is that a good contrary indicator? Maybe.

Bill: Anything else you are picking up on with the conferences?

Adrian:  The companies are much more active, it seems to me. There’s a lot of financing’s going on. I’ve had actually someone asked me last night, I counted them. I’ve had seven finances offered in the last two weeks and I haven’t even walked the floor yet, so there’ll be more. So there’s been a lot of financing’s, a lot of exploration work going on. So from a corporate point of view, from the company point of view, I think it’s a very positive environment.

Bill: If we could compare that to past years, how many financings were you offered around PDAC in previous years?

Adrian:  Yeah. Normally, three, four maybe. So it’s a lot more this year.

Bill: Does that mean companies are looking for money? Starving for money or do you think that there’s some projects?-

Adrian:  It’s a combination. Some of the companies that are coming out are starving for money, they need it desperately. Some of them just think this is a good time to finance, there’s been a little bit of a pickup in new market, is a good time to finance. But frankly, interestingly, at least half of these or three of them out of seven are either new companies or shells being taken over, new people coming into a project and that’s very positive.

Bill: As you do your due diligence on these opportunities when they’re presented to you, what percentage of these opportunities do you actually take?

Adrian:  Well, funnily enough, these seven are all seven that I’ve done. So we have been offered more of a seven of all seven that we’ve done and that’s very high number for me to do in a two week period. We manage a fund, but most of their assets are an individual accounts, so there’s obviously a limit to how much money you can put into what tend to be more illiquid stocks. Private placements tend to be relatively illiquid. They’re smaller companies, typically they have four month olds. So there’s a limit to how many of them you can do. This is definitely more than normal. How many do take? I tend to be a lot more selective than a lot of people.

To me, when you’re offered a private placement, the first thing I ask myself is would I buy this company, this stuff in the market at today’s price? Would I buy it? Because if I’m not interested in buying the company at today’s price, I don’t care if it has a 10% discount and a five year warrant with whatever. It doesn’t matter to me how attractive the terms are if you don’t actually want to own a company. We look at ourselves as owners, not as traders. So I only invest in companies that I actually want to potentially hold for several years.

Bill: In our last interview, several weeks ago we talked about the mega mergers, the gold majors, and then in the last week or so, Barrick is now trying to do what I’ve heard is called a “take-under.” In your mind, what are your thoughts?

Adrian:  I have different views from a lot of people. I think first of all, I think for Barrick-Newmont merger makes sense and a lot of people talk about-

Bill: Because of the synergies?

Adrian:  Because of real genuine synergies. Now Newmont certainly will get most of those synergies in another form by setting up a joint venture to run Nevada. But it’s not just Nevada, there are real synergies, potential synergies with that deal. Whereas if you look at Newmont Goldcorp, there’s really no synergies. I think Newmont’s at $100 million of synergies, which for a company that size is a rounding error, it’s meaningless. What are you going to do? Save on the paper clips and rubber bands or something?

Okay, rubber bands. Good. So, there’s no synergies there. Barrick-Randgold, they really weren’t any synergies, but there was a rationale which was buying a good team of good operators, which Barrick unfortunately lacks. Barrick has some good assets but lacks good operators. I’m talking in generalizations here of course. So they picked up a good team. You might argue there are cheaper ways of buying a team than buying a whole company, but nonetheless they were rationales in that particular deal. I don’t think there’s a lot of rationale in Newmont buying Goldcorp, probably just getting bigger. Now where I differ from a lot of people is, I think Barrick has a very good chance of succeeding in that bid for Newmont and the reason is if you just look at the share register, the top five owners of Barrick, all are top five owners of Newmont. Top 20, the top 20 shareholders of Barrick actually own 90% of the shares of Newmont. So if Barrick can convince its own shareholders that it’s a bad deal for Newmont to buy Goldcorp and that a much better deal is for Barrick to merge with Newmont, they’ve got the deal done.

Bill: And thus they went straight to the market and made their case.

Adrian:  Exactly. It’s the same shareholders. Now the same shareholders are also in the top five of Goldcorp, but the dollar percent, the dollars that BlackRock and First Eagle and the others own in Goldcorp, is a lot less than the dollar’s they own in Barrick. So their best interest, they’re going to say where is our best interest? And I think they’re going to come on the side of Barrick merging with Newmont.

Bill: If this deal goes through, how does that affect the miners lower down on the food chain?

Adrian:  That’s a very good question because Newmont and Goldcorp in particular have both been, are both very active in joint ventures, regional alliances, different kinds of deals with junior companies and exploration companies. Goldcorp in particular has been active in taking over smaller companies that have had a discovery. So these companies are very important for the juniors. If either these two deals takes place, we will get a lot of asset disposals and we’re going to get asset disposals from Barrack and Randgold. They just haven’t happened yet. So there’s going to be a lot of assets that are smaller, marginal to the bigger companies, but they are going to come onto the market.

I suspect some of them will be packaged and spun off into the market as a public company. But however it’s done, all of that is taking money from the market. Now there’s only so much money available in this business. But in particular if companies like Agnico, Yamana, and even smaller companies like let’s just say B2 Gold or whoever, are looking at the assets of Barrick and Newmont are going to be getting rid of, that’s money. If they buy those assets today, that’s money, they can’t spend on juniors. So I think for a few months at any rate, there might be a little bit of a drought in money available for juniors.

Bill: Then from the retail investor’s perspective, where might good investment opportunities arise because of this merger?

Adrian:  Good question. We have sold at Goldcorp and purchased Newmont even though on an arbitrage basis, it’s a negative arbitrage, but we’ve done it because if Newmont succeeds in buying Goldcorp, I think Newmont will go up. If Barrick succeeds in being Newmont, I think the combined entity will go up. So we’re still exposed. But if Newmont doesn’t buy Goldcorp, Goldcorp will fall. So we’re protecting our downside in that. I think it’s a matter of … I really think this is a dynamic thing. We just have to keep our eyes on the market. I’m sure there will be companies buying assets that you say, “Wow, what a great deal that is”, company X buying one of Barrick’s cast-offs and you say, “Wow, what a great deal that is”. But we don’t know what that is until it happens and then you want to buy the company.

Bill: So then investors just need to be knowledgeable about the certain projects and the valuation.

Adrian:  Sure, and maybe company X wants to buy a project, is a great project for them, synergies fits, getting it at a great price, but they have to go into the market to raise money, the stock falls, maybe that’s the time to buy it. So you just have to be knowledgeable and aware. But I think that’s a dynamic process right now. Let me say one other thing, if I may. I also think this brings up potentially a lot of good opportunities for the major royalty companies, the ones who have a lot of money because again, I mentioned company X buying assets and having to go to the market to buy, to raise money. Well of course another way of funding it is to sell a royalty to Franco or Royal Gold a Wheaton or whatever. So there’ll be opportunities for the royalty and streaming companies.

Bill: Another major miner is Vale and they had their dam collapse and there was many casualties as a result of that and the management’s really been taking a lot of heat. What are your thoughts on this and what are some key takeaways for investors?

Adrian:  Yeah, how can I put this without the risk of a libel suit? Let’s just say, I don’t think it’s a surprise that it happened to Vale in Brazil and didn’t happen to let’s say, Goldcorp in Mexico. So lets not say more about Vale cause I don’t want to get a lawsuit. But generally speaking, I think the major North American companies, the major Australian companies are all very, very environmentally aware. You can have an accident of course anywhere, but this was an accident that shouldn’t have happened, right? I mean it was upstream and they were just piling more and more stuff on, more and more waste onto the pile before it had a chance to settle. So this was an accident that shouldn’t have happened.

I don’t think you’re going to see this kind of thing with Goldcorp or Barrick or Newmont, which are more responsible operators. But clearly everyone is going, everyone is concerned about this, both from a reality. I mean, it’s a tragedy. It’s a horrible tragedy from a reality, but also from a perception and so companies are getting engineers to check their tailings dams so they can put out a statement saying, “We’ve had this form checked at tailings dam and everything’s all right”. So I think in the end that’s good for companies. It’s good for investors. I don’t mean tragedy was good. I mean, the result is good in the sense that investors now can have more confidence on A, B, C, D and E, even if they don’t have more confidence in E, F, G and H. So I think that’s good. There’s also a move afoot that you probably know to set international standards on tailings dams and then tailings dams will be certified.

Bill: So its going to spur on change.

Adrian:  Yeah.

Bill: Productive change, because there’s not really a way for the average investor in North America to know if this tailing dam is about to collapse.

Adrian:  No, absolutely and I’m not, I don’t think I’m an average investor, but I wouldn’t have known except that Vale had these problems before, which having had the problem, it should never happen again frankly, and as I say, some companies perhaps have a different reputation than other companies, let’s just put it that way.

Bill: So that’s the main thing, an outside investor could assess the company’s history in dealing with this certain issue.

Adrian:  Right. But having a sort of international certification on tailings, I think is important. There’s a lot of companies, for example, when they’re doing feasibilities and in particularly Latin American countries who would put a dry tailings dam into the feasibility even though in truth, they don’t need a dry tailings dam. Even knowing in truth, a wet tailings dam would be perfectly safe if properly built, perfectly safe, a lot less expensive and the appropriate thing for that project. But they put in the extra money in for dry tailings dam simply for perception, to help calm the fears of locals, to get it through the local permitting process a lot quicker. So that is already happening.

Bill: I would like to get your feedback and your commentary on this report that PDAC put out just as this conference commenced. One of the summary points is that the mineral industry equity financing in 2018 dropped by nearly 35% from a year earlier to establish a new decade low for both total value raised in number of transactions completed according to the report. What are your thoughts on this?

Adrian:  Yeah, I think the largest part of the drop would have been among the major companies. There was still a reasonable amount of activity among juniors, but it’s particularly picked up this year with the pickup in the market. Typically juniors will go to market. I mean, obviously when they absolutely need the money, when the market’s receptive and we had a very short rally at the beginning of 2018. It petered out much sooner than people thought it would. So for nine, ten months of the year, it was just simply not a good market to raise money. This year we’ve got a bit of a catch up already from people who didn’t raise money last year who should have or wanted to. So we’re getting a lot of companies taking advantage of this rally, so I suspect these numbers will get an increase this year.

But so much of this of course depends on the major companies and that can be one deal here. If one company raises a billion dollars, it offsets a hundred juniors raising a million or more than that, raising a million or 5 million.

Bill: Last time we talked about copper.

Adrian:  Yes.

Bill: What’s your current thoughts on copper?

Adrian:  Well, I’m still bullish. I think there’s a definite supply deficit, a real supply deficit coming in three, four years and when I emphasize … I emphasize the word real because unlike say with the deficit we have in Uranium at the moment, that’s not a real deficit because the deficit is closed by Kazakhstan stopping a lot of the exports and by Cameco shutting down McArthur River, which was the largest publicly owned, nongovernmental Uranium Mine in the world. So those things could be reversed pretty quickly. With copper, we’re getting a real structural deficit coming in a few years.

Yeah, two things have happened recently. One positive, one potentially negative for copper. One is, we’ve seen a slow down in the economy in China and every time I talk about a slowdown in the economy, we have to put that in the context. It’s a slow down in growth rate. It’s still growing pretty dramatically. But we’ve seen a decline in the growth of electric vehicle sales. Electrical vehicle sales in China, we should point out, China is the largest market in the world for electric vehicles and we don’t really think of China necessarily as being a green country, but … So that’s a negative, if that economy continues, the rates of growth continues to slow and car sales continue to decline, that would be a negative for Copper because a lot of copper obviously goes to electric vehicles.

On the other hand, if we see as looks increasingly likely from the recent news, if we see a trade deal, successful trade deal between US and China, I think that will relieve a lot of pressure on the Chinese economy and so, that will be good for copper. The thing about copper, you’ve got the traditional uses and 50% of the copper consumed in the world is in China. So we need the Chinese economy to be reasonably strong for, what I call the standard traditional uses of copper to be strong. At the same time you’ve got the new uses of copper, particularly in electric vehicles and again, we really depend largely on China but not entirely for those sales. So the Chinese economy is very important to China.

Bill: As we conclude this interview, Adrian, for the remainder of 2019, are you still bullish on commodities?

Adrian:  I am. I’m particularly, I think gold and silver are the most attractive, because they don’t depend on a strong global economy. The base metals depend on a strong global economy and when you look at, to me the most important thing that must happen for gold and silver, but particularly the gold. Number one, we had the volatility in the stock market at the end of the year, which led a lot of investors particularly institutional investors to feel they need some gold as a hedge. So we saw large inflows into ETFs. So the volatility in the financial markets is very important and the fact that the Federal Reserve has stopped, has paused it’s tightening, which surely didn’t last very long. That’s very, very positive for gold and it’s particularly positive for gold because the Fed basically blinked. When they saw the financial market, the stock market volatility, they blinked, and when the Federal Reserve will not or cannot pursue the policy it wants to pursue because of market reaction, that is very, very positive for gold in my view.

Bill: Excellent insights. Well, as always, I appreciate sitting down with you, Adrian, and I look forward to speaking with you again.

Adrian:  Well, thank you very much for having me.

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