Market warming up to discovery potential
Has gold's uptrend sparked new market interest in the resource juniors?
(YouTube Audio)
The KRO 2025 Favorites Index was up 8.8% as of February 7, 2025 compared to 10.1% for gold and 6.9% for the TSXV Index. Upside activity among the Favorites is still mainly driven by news releases about company projects. This week Canalaska Uranium Ltd and Solitario Resources Corp issued important news about their flagship projects which are the subject of this episode's Specific comments.
All of the January Kaiser Watch episodes have now been posted on Kaiser Watch Substack as unrestricted General and Specific comments. The February 7 episode will be the first one where the Specific comments are restricted to paid Substack subscribers. The YouTube audio segments remain unrestricted.
Last week's KW Episode (Is US smart money finally buying gold?) discussed the implications of news that American smart money has become such a heavy buyer of physical gold that the London Bullion Market's vaults have been nearly emptied and the LBMA is scrambling to borrow gold from central banks to maintain the liquidity of its market. Delivery times have shot from a few days to 4-8 weeks. This week LBMA gold made a new high of $2,874.65 on Friday which helped Agnico-Eagle Gold Mines achieve an all-time high of $142.39 per share.
The KRO 2020 Gold Producer Index is now rising faster than the price of gold, though it has not yet shot past the gold trend line; it is up 67.4% from its start on December 31, 2019 compared to 88.8% for gold. In the case of Agnico-Eagle, however, the stock is threatening to punch through the gold trend line; Agnico-Eagle is up 82.6% compared to gold's 88.8% gain. Although the resource juniors are starting to attract market interest, this will not gain momentum until the gold producers are outperforming the gold uptrend.
The retail investor is still ignoring gold as is clear by the sideways movement of the GLD ETF's gold holdings and traded volume. So it is no surprise that advanced shovel ready gold Favorites such as Vista Gold Corp and West Vault Mining Ltd are barely inching higher. These Favorites will undergo a slingshot move on the upside when the market begins to wander down the food chain from producers to near producers. Younger audiences of the sort who trade through Robinhood should take note that Vista Gold trades an NYSE-AM with the symbol VGZ and thus can be traded by Robinhooders. Solitario Resources Corp, which represents the opposite end of the gold spectrum in that its Golden Crest project is a gold exploration play with staggering upside potential, also trades on NYSE-AM with the symbol XPL. Vista Gold will trade as a proxy for the price of gold whereas Solitario will trade on the basis of exploration results.
What we are seeing among the Favorites is that companies delivering good exploration news are moving higher. Two examples this week which I will focus on in this episode are Canalaska Uranium Ltd which released radiometric uranium grades for the first 5 holes of the winter season at the Pike Zone in West McArthur, and Solitario Resources Corp, whose latest 2 holes from Golden Crest included one short interval that is blockbuster news for the hypothesis that the southern Black Hills may host a mirror image of the 90 million ounce gold endowment of the northern Black Hills. My Kaiser Watch Substack is now operational and the Specific comments about Canalaska and Solitario will be visible only to paid Substack subscribers.
While the 22 company Favorites Index is up 8.8% as of February 7, the 107 company Bottom-Fish Index was up 21.4% compared to gold up 10.1% and the TSXV Index up 6.9%. Until I created the Bottom-Fish Index this week I had no quantitative idea how this group of resource juniors was doing, though I did have a qualitative sense that these juniors are attracting investor interest. The Bottom-Fish Index allows me to see daily traded value which spiked this week to exceed the spike high of mid May 2024. The equal weighted index uses the December 31, 2024 closing prices as the base line and I have back calculated the index to January 2, 2024. This will allow me to monitor how both traded value and prices of the Bottom-Fish Collection compare to last year. The Bottom-Fish Collection is available only to KRO Individual and Pro members but I will be including the index chart as part of Kaiser Watch episodes because I think it will be a useful indicator about resource junior market sentiment. The TSXV Index is a poor indicator because only 75% of its members are resource listings, and the method of addition and deletion is skewed to hide the downside while featuring the upside of higher market cap listings.
An anecdotal example from the Bottom-Fish Collection of changing investor sentiment is Trifecta Gold Corp whose key missing piece is sufficient working capital to mount a major drill program at its Mt Hinton project. Last year Trifecta raised $1.5 million at $0.15 in April to fund work on its Mt Hinton project in Yukon's Keno Hill District and promptly tanked below $0.10. Historically exploration has focused on the gold veins in the mountains but last year geophysical surveys revealed that the valley bottom has an anomaly indicating a blind intrusion which may have created an intrusion related gold system.
The success Amarc Resources Ltd has had testing the talus buried Aurora anomaly in a valley at the Joy project in the Toodoggone District of British Columbia, and the success Snowline Gold Corp had testing a similar blind valley target in southeastern Yukon which is now the 7.2 million ounce Valley deposit, has investors thinking that Trifecta might have similar success when it drills the GC anomaly in late Q2 of this year.
What I find interesting is that Trifecta's story has attracted the attention of some investors with apparently deep pockets who during the prior week started cleaning out the offers. And this week they even posted a "snow plough" 1.3 million share bid in the hope somebody needs a liquidity event. It is a sign that the glass is switching from 90% empty back to half full, which could end up teaching respect to the algo traders who have been abusing the resource junior sector. Trifecta is an anecdote but that this anecdote can even be talked about strikes me as very positive.
With Trifecta having only 37 million fully diluted the 100% owned Mt Hinton project has an implied value of only $12 million at the current stock price. If you accept that as fair speculative value, it implies a potential outcome of about $500 million, half of what Snowline's Valley project is currently implying. That would translate into a future stock price above $5 if drilling establishes a gold enriched intrusion related gold system. The implied project value chart below helps show this upside potential.
These IPV charts are a graphical demonstration of the rational speculation model. The X-axis represents the 9 stages in the resource exploration-development cycle while the Y-axis is the value the market is assigning to a company's project on a 100% ownership basis. The formula for implied value is fully diluted times stock price divided by net interest. In the case of 100% ownership the implied value is the fully diluted market capitalization of the company. Net interest is what the company ends up with after all partners to a farm-out or farm-in deal maximize their interest which is reasonable to expect if a project's results indicate it is a mine development candidate. The implied value of a company's project is plotted according to the stage of the project.
The rational speculation model is demonstrated by the red, yellow and blue channels which represent the fair speculative value range for each stage for potential outcomes of $100 million, $500 million and $2 billion. Fair speculative value is defined by the uncertainty ladder which assigns a certainty range to each stage of the exploration-development cycle. Fair speculative value is the certainty multiplied by the expected outcome, which in the early stages of resource junior exploration is the hoped for outcome. That potential outcome cannot be any number; the potential size of the prize needs to be linked to the geology of the project and what the region has delivered in the past.
The IPV chart for Trifecta shows its Mt Hinton project has an IPV of $12 million and plots within the upper end of the yellow channel for a $500 million outcome at the target drilling stage. Compare that to the IPV of Snowline's Rogue project, Sitka Gold's RC project and Banyan's Aurmac project, $965 million, $135 million and $76 million respectively. All three have delivered resource estimates for their intrusion-related-gold-system deposits in the Yukon and are now at the stage where infill drilling and metallurgical studies get done ahead of a PEA (preliminary economic assessment) economic study which engages in cost discovery for the optimal mining scenario. Companies can be in this stage for a long time when there remains room for expansion which is the case with all three juniors.
The main IPV chart is designed to allow multiple projects to be plotted on it to show comparative valuations. For flagship projects I also create a pair of charts dedicated exclusively to a company's project which I call "Ultimate Implied Outcome" charts. This type of chart takes the implied value of a project as representing the mid-point of the fair speculative value range for that project's stage, calculates what potential outcome this represents, and creates a blue channel within which the IPV should travel as the project marches through the various stages. The chart below presents the IPV in absolute dollar terms as $12 million with an ultimate potential outcome of CAD $697 million which at the current fully diluted for Trifecta would translate into a future stock price of $18.57.
The chart below is the same thing except that the Y-axis reflects the stock price. The danger of this chart is that the fully diluted number will increase over time as the junior raises money to fund exploration. The yellow channel represents the market speculative value ranges which typically accompany a major new discovery. The yellow band is calculated by taking the current IPV to represent the upper limit of the market speculative value range. Note that the yellow band shoots well above the blue band during the discovery delineation stage and sinks below the blue band once a PEA has been delivered. I call this the S-Curve though its pattern has also become known as the Lassonde Curve.
What it describes is the tendency of the market to assign a value during the discovery frenzy whose peak ultimately reflects what the project ends up being worth if it does become a mine development candidate. And once the size of the prize has been quantified by an economic study, the tendency of the market is to under price the fair speculative value of the project. This is the so called trough or valley of despair where a project spends years plodding through the various economic study stages and permitting obstacles. It is caused by the uncertainty of timing for a construction decision as well as the risk that the fundamentals of the discounted cash flow model worsen as more gets known about what it takes to mine the deposit. That is why the best scenario is for a resource junior to get bought out before it ever delivers an economic study. Younger audiences unfamiliar with how the resource junior sector works should make an effort to understand the rational speculation model and appreciate why these IPV charts are a powerful tool for quickly assessing whether a play offers good, fair or poor speculative value. I use the term "Bottom-Fish" speculative value when there is some missing piece such as money that prevents a junior from pushing a project through the exploration-development cycle.