Will James Bay lead the way for a junior resource stock revival?

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In his April 4th Discovery Watch broadcast, John Kaiser bemoans the continued grinding lower of junior resource stocks. He closely tracks the state of the junior resource area on his website KaiserResearch.com, and he does not like what he sees. Looking at the average traded price and traded value of the junior resource stocks on the TSX Venture exchange, he notes that the traded value of resource stock is a fraction of the total traded value on the exchange, with the rest being non-resource including cannabis-related stocks:

What's really discouraging is that not only is there no rise in the traded value of resource juniors, but the traded price is flat and has been flat for some time now. We are now in the 8th year of a junior resource sector bear market

For a turnaround, Mr. Kaiser is watching for developments that could get traditional mining investors excited about the group again. Mr. Kaiser identifies two key investing audiences for junior mining.

First, there are speculators who like to make a lot of money when a junior makes a new discovery that "takes the stock up 5, 10, sometimes in world-class cases, 100 times in price." However, this group tends to be generally 55 years or older and the regulatory environment now makes it difficult for them to buy junior mining stocks through full-service brokers. According to Mr. Kaiser, regulators have generally decided that buying high-risk stocks like resource juniors is unsuitable for that age category. Since they cannot go to their full-service broker and put in an order to buy some cheap junior, they are stuck going to discount brokers, leading to an information vacuum. Mr. Kaiser laments, "nobody is telling them, here is something happening."

Mr. Kaiser concludes that this audience is waiting for something substantial to happen in the group that goes beyond the beehive of promotion schemes that can plague the junior mining area:

Not a pump and dump like we have seen... where you get these cheap 5-cent unit financings coming free trading, and then you get a bunch of clown newsletter writers all retained to start pumping it, and then you get the algo traders that crank these things up, and all of a sudden you see some worthless junior with an implausible story trading millions of shares per day, and the stock goes up 4 or 5 times, and then it just quietly dies and fades again as this crowd that engineers these pumps and dumps moves on to other things.

The other key type of audience for mining stocks has been the gold bug type who "has seen the juniors as a leveraged proxy for gold." But, Mr. Kaiser more-or-less writes off the traditional gold bug, suggesting that they have a problem.

To give a thumbs up for gold, and there are very good reasons to give a thumbs up for gold, is to also give a thumbs down to Donald Trump, their hero. And they don't really want to do that. So, their enthusiasm for gold ownership and then also the junior proxies, it is very muted.

That said, Mr. Kaiser suggests that a sort of neo-gold bug group could emerge under the right circumstances:

There is half the American population who conceivably would love to give a thumbs down to Donald Trump...but gold and the gold juniors are not even on their radar. We need to see a [very visible] rise in the gold price...and then people starting to talk, "why is this happening?" to move that entire audience back into the gold sector.

Overall, current conditions remain very tough for resource juniors. Mr. Kaiser reports that February was a depressing month because TSX Venture resource companies raised only about $50 million, the lowest amount since August 2015. Mr. Kaiser concludes, "with half of the 1,200 TSX Venture Resource listings with hardly any money or, worse, negative working capital, those companies are dead in the water." Meanwhile, the others are having a hard time raising money because of the sour mood hanging over the sector.

Kaiser cites Wolfden Resources (WLF) as an example. Although it still had several million in working capital, it wanted to raise additional money so it could continue exploring its Pickett Mountain VMS deposit in Maine and build up the business case for the project. But, the company hit a brick wall according to Kaiser:

As soon as they went to Bay Street to raise money, Bay Street said, 'Guess what? we aren't funding anything.'

The stock started trending down, so CEO Ron Little went after a strategic investor. Kaiser reports that a couple of weeks ago, Little scored with Kinross Gold (K) who provided $2.5 million at 20 cents, a slight market premium.

That initially had Mr. Kaiser scratching his head given that Pickett Mountain is a high-grade zinc-copper deposit with gold and silver credits, what is Kinross Gold thinking? Then the penny dropped.

It turns out that Kinross's best mine ever was the Crown Jewel high-grade gold deposit in Northeastern Washington which they originally tried to develop as an open pit mine, but eventually gave up because in that part of the world open pit mines do not get approved, developed it as an underground mine, and it was the most profitable of all its operations in its history.

With that in mind, the Kinross investment into Wolfden starts to make sense, explains Kaiser:

The State of Maine spent several years completely revamping its mining law. It doesn't allow any open pit mining. It's now set up for business for something like this. The Picket Mountain deposit as it stands now is a high-grade underground mine. Whatever else they find is also going to be underground. So, this is an investment by Kinross that actually makes sense because it has experience operating high-grade underground mines profitably in the United States.

This is a welcome development as Kaiser explains that Wolfden's treasury is back to a level is where they can resume work starting with revisiting one of the last holes drilled last year to the north of East Lens and West Lens zones. He suggests:

If this downhole survey demonstrates that there is a conductive body down there, then they will be able to resume drilling in probably May...and do shallower drilling to try and find an increase, maybe 50%, maybe even more [than] the existing resource which they could continue to expand by chasing it down plunge, but that involves drilling deeper, more expensive holes.

Mr. Kaiser wraps up his opening segment by concluding that the Wolfden episode demonstrates how tough it has been for even some of the best stories on the junior mining street to get funding.

In his third segment, he lays out a scenario from the James Bay area in Quebec that has the potential to revive interest in the junior mining area with speculators. Right now, he describes a situation where a lot of eyes are glued on Midland Exploration (MD)'s Mythril project (See the last part of Pacton Gold a relative value Pilbara speculative play). He suggests, that if the company has a world-class copper, gold, silver, and molybdenum discovery, it probably also projects onto the west where Azimut Exploration (AZM) and into an area where at least one other junior is operating.

James Bay, Quebec mining area (source Azimut Exploration)

While only drilling results will shed light on the potential of the project, generally, Kaiser believes a successful world-class discovery needs a couple of key ingredients:

First, he believes there has to be serendipity associated with the emergence of a new discovery,

It has to be in an area where something like this has never [been] known to exist before. And there also have to have been good reasons for previous explorers to never have stumbled upon this.

In the case of the Mythril project, he suggests a discovery would not have been identified by traditional airborne surveys, so the system was overlooked. However, he explains,

Midland has done an IP survey which indicates that there is a chargeability anomaly beneath the trend of this boulder field. They just announced...that an extension of the survey to the northeast shows that this chargeability anomaly shows up in an overburdened, covered area...that's suggesting substantial strike potential.

Mr. Kaiser reports that Midland started drilling a 10-hole program of 2,000 metres in mid-March. Five holes are done. The stock has been trading off its highs, but Mr. Kaiser reports there has been a seller, one of the parties that took part in a 2015 financing at 70 cents (there were 20 million units done) who is doing risk mitigation ahead of drilling results. Mr. Kaiser believes that Midland is keeping a tight lid on results and that drilling will continue until Good Friday. So, that means we will have to wait several weeks for results to see if Mythril can spark an area play.

Right now, he thinks this Midland James Bay project has the greatest shot at bringing back traditional discovery exploration style speculators to the Canadian juniors.

The broadcast also discusses the latest vertical drilling results form PJX Resources (PJX) Vine project which went down 1,488 metres. Kaiser reports that the hole did not hit anything resembling massive sulphides, but they did hit tourmaline alteration. While not economic on its own, Mr. Kaiser suggests this alteration is a good sign that there might be a Sullivan type system in the vicinity. Kaiser reports that the next step for PJX is to do a downhole geophysical probe. He doesn't expect to know what the results are until sometime in May. The Vine project is located in Southeast B.C.

This post first appeared on INKResearch.com. Disclosure: I hold a position in Azimut Exploration

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