Contango Ore revisited (October 2014)

Contango Ore recently announced a joint venture with Royal Gold (press release).  Royal Gold will invest $5M initially with an option to increase its ownership in the project.  It looks like I was too optimistic in my assessment of the company.  I thought that the company was ready to advance the deposit to production.  The terms of the joint venture suggest that this isn’t a sure thing.  The partners will likely need some luck to find more ore to make the deposit economic.

Looking back on my analysis of junior miners, I did not do a very good job in spotting deposits that would turn into profitable mines.  Nevertheless I managed to make money by playing the volatility and by being lucky.

  • Queenston Mining:  It’s too soon to tell if this will become a profitable mine.  However, I managed to make a lot of money on this stock since Osisko bought the company.
  • Contango Ore:  I was a little overoptimistic, though there is some value here.
  • Noront:  Currently, I don’t think this deposit will be economic.  I lost money.
  • KWG Resources:  I did not realize that this deposit was uneconomic.  I lost money.
  • Selwyn:  At the moment, their flagship deposit (now sold) doesn’t look like it will turn into a mine.  I lost money.
  • Alderon / Altius:  I speculated on Alderon’s Kami project being built.  I sold my Altius shares at a nice profit and managed to side-step the ensuing drop in Altius’ share price.  Currently, it looks highly unlikely that Kami will be built anytime soon.
  • Canada Lithium:  I originally thought that it would turn into a profitable mine.  I was very, very wrong.  I started shorting this stock when I realized that their new mine would be a disaster.

I anticipate that I will eventually get 0-2 correct predictions out of 7 picks.  I could very well go 0 for 7.  Of the 7 stocks, all but Canada Lithium had a senior partner invest in their flagship deposit.  It seems like these types of investments are not a guarantee that a (profitable) mine will be built.  I can’t believe I made money going long these stocks.

Oddly enough, a lot of people in the mining industry have made money without discovering a deposit that turned into a profitable mine.  Altius Minerals has made a fortune on prospect generation even though none of their prospects have turned into a mine, let alone a profitable mine.  I’m pretty sure that we are in the middle of mining mania.  Frankly, I’m pretty scared when it comes to junior exploration stocks.  While I am naturally inclined to be cynical, I don’t think that I was cynical enough about junior exploration stocks.  While some might consider my earlier viewpoints to be extreme, it turns out that perhaps they were not extreme enough.

Here’s my current plan:

  1. Take small short positions in cash flow negative miners, as well as mines under construction that will end in disaster.  See the post on my current thinking on mining stocks (Dec 2013).
  2. Go long the cash boxes (Kobex, Ryan Gold) and piles of stocks trading at a discount (Northfield Capital).  I don’t like Northfield that much because Northfield owns Canadian Orebodies and Canada Lithium, stocks that used to be excellent shorts.
  3. Largely avoid mining, even though share prices have dropped significantly.  There is still a lot of overvaluation because investors don’t understand how bad the management teams are.
  4. Perhaps take a short position in GDXJ (index ETF of junior miners) or JNUG (leveraged ETF that consists of GDXJ common shares and illiquid swaps).

*Disclosure:  Shorting some juniors.  Long Kobex, Ryan Gold, and Northfield Capital.

3 thoughts on “Contango Ore revisited (October 2014)

  1. My take is different. The fact that Royal Gold is willing to invest ~40 Million into the prospect for a ~40% stake is a strong sign that the property is worth more than its current valuation of ~32 million. Simple math implies that Royal Gold is pretty sure the property is worth much more than ~100 million or they wouldn’t take the risk.

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