December 2015

LIKEMINDEDPEOPLEliberty markets prosperity

December 2015 IssueLIKEMINDEDPEOPLEliberty markets prosperity

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It’s been a tough year. And also a strange one.

Anyone who says otherwise is lying.

The Dow Jones and S&P 500 are both in the red for the year as I write. The Donald is leading GOP primary polls by a wide margin (some 31 points) and has proposed banning people of a certain religion from entering the country, which a Harvard Law professor has studiously decried as — and I quote — “stupid.”

I rest my case.

Oh, and we’re also likely to see military action as a result of the San Bernardino shootings and the willingness of the government and media to use that as distraction from the fact that one in seven Americans faces food insecurity.

I paid less than $2.00/gallon to fill up my truck this week, though, so we have that going for us, which is nice.

But that won’t help you if you had major exposure to companies that have a hand in making that fuel.

While the broad market is down about 1% for the year, the S&P Energy Select (NYSE: XLE) is down 22% and the S&P Oil & Gas Exploration and Production (NYSE: XOP) is down a third.

Gold stocks did slightly better than that, losing only 20% of their value this year — though they’ve lost nearly 90% over the past five years.

And uranium stocks were at the bottom of the barrel, down about 40% this year. Those, too, are down some 90% over the past five years.

Our gold and uranium stocks were certainly not immune, though I remain confident in their prospects when the macro market begins to turn.

Banks, software/tech, homebuilders, pharma/health/insurance, and consumer stocks were among the few sectors in the black this year.

Mining Limbo

While the oil implosions are yet-to-come, the implosions in the mining sector are at hand, and that could mean a bottom is near.

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For starters, Anglo American, one of the largest mining companies in the world, is down to basically a shell of itself. It used to have a valuation north of $60 billion. Today it’s worth $6 billion.

It has sold assets and closed mines. And it announced this month it will lay off more than half its global workforce. Anglo American currently employs 135,000 people. In the coming year it will shrink that down to 50,000 — firing 85,000 people, or 63% of its staff.

It also cut all dividends for the second half of 2015 and all of 2016.

As metal prices sit at their lowest levels in six years, the dividend cut was inevitable.

The only thing that can turn the sector around is higher metal prices, for which you either need much more robust demand or, as is more likely, utter capitulation in the sector that brings excess capacity offline.

Anglo is an indication the latter is here. When its restructuring is complete, in addition to firing two thirds of its employees, it will also have gone to 20-25 assets from 55. So it’s also going to sell more than half its projects. It is only going to focus on the highest quality projects that are economic at today’s debased commodity prices.

Sound like a familiar strategy?

Anglo American shares have lost ~70% of their value this year, and ~90% over the past five.

Rio Tinto has again cut its capital expenditure forecast for next year, now down to $5 billion from $8 billion spent in 2014.

Iron ore prices are now so low they are threatening the break-even cost of the world’s for largest producers: BHP Billiton, Rio Tinto, Vale, and Fortescue Metals.

BHP and Vale shares are the cheapest they’ve been since 2003.

If BHP can get back to the ~$70 per share it averaged from 2007-2014, gains of ~180% are on the table. Can you imagine what that means for the best-run juniors with quality assets once the bottom is in?

It’s mining limbo right now.

How low can you go without falling?

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We’re about to find out.

And there are tremendous gains waiting on the other side for those that make it through.

Just take Almaden Minerals (NYSE: AAU)(TSX: AMM), for example.

Almaden Minerals (NYSE: AAU)(TSX: AMM)

Almaden Minerals just bought an entire mill for $6.5 million. Not only is that incredibly cheap, but because of the bear market, it was able to negotiate extremely favorable terms. It only has to make a $500,000 payment this year and a $250,000 payment in 2016 to keep the option open.

Owning its own mill reduced the expected capex of the Ixtaca project in the “ramp-up” scenario by $70 million.

In other words, Almaden took on a $6.5 million option to improve the economics of its flagship product by about twice what the entire company is trading for.

Almaden has taken another step in advancing its 100% Ixtaca gold-silver deposit toward production.

That project, which holds 1.65M ounces of gold and 96.7M ounces of silver, had a positive PEA report in September 2014 that showed a 20% after-tax IRR at $1,200 gold and $18 silver. And those economics have only been improved with the recent acquisition of the Rock Creek Mill at a bargain price.

That was in mid-October.

It showed its strength again in mid-November by raising $3.38 million in a non-brokered private placement that saw just over 4.5M units priced at C$0.75 each with a half warrant good for two years. Chairman Duane Poliquin participated, as did several strategic investors I’m familiar with.

Not many junior mining companies can raise that kind of cash in this terrible (let’s be honest) resource climate. And Almaden did it with no discount to market and only a half warrant.

We know that the Ixtaca deposit is essentially for sale. It has been consolidated and largely de-risked. And now it also comes complete with a mill that improves economics.

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Doing this kind of raise all but dares potential suitors to buy it. It’s the equivalent of saying, “We’re cashed up and ready to go, the project has good economics, and we can take this into production ourselves.”

Almaden is a buy at market.

Golden Sales

We of course are not immune to the carnage the sector has faced. And to be honest we’ve likely been a bit too heavily weighted in that sector.

Let’s use the end of the year to exit our positions in the DB Gold Double Long (NYSE: DGP) and the Vanguard Precious Metals and Mining Fund (NASDAQ: VGPMX).

I would roll those positions into Almaden Minerals, Midas Gold, Fission Uranium, or Arianne Phosphate.

The Uranium Market

I gave a webcast presentation last month as part of the eMoneyShow. I took a look at the macro reasons for a coming uranium bull and discussed four ways to invest in it.

I think it gives a pretty good overview of the current fundamentals of the uranium sector, as well as catalysts that could increase the value of related equities. You can watch it by clicking here or the image below.

Click to Play

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The nuclear/uranium market continues to show signs that brighter days are ahead.

Though it was restarted in late October, Japan’s second reactor to restart — Sendai 2 — officially began commercial operations on November 19th. It has also been granted a 40-year operating license, as have Takahama 3 and 4. Those last two are undergoing pre-operational inspections right now and will be restarted early next year.

Beyond that, the rest of the world is moving forward on nuclear in a big way.

China and France have signed a nuclear partnership that will see China National Nuclear take a minority stake in French nuclear giant Areva. Dundee Capital analyst David Talbot thinks that’s positive for the entire space:

“Recapitalization could have significant ramifications on AREVA’s mining business, with likely positive spill-over into the sector. Increased funding may escalate exploration/development spending, or M&A activity. Enhanced security of supply tensions may spur long term contracting, as a minority interest may result in future uranium deliveries being largely redirected to France and China. This could reduce available supply for the rest of the world and increase competition between nuclear utilities.”

Everyone knows a supply shortfall is looming. Large companies are starting to act. And that should spur further action down the chain.

That’s the argument, anyway. And we’d sure welcome the firing of a starter pistol in the uranium race.

Maybe the Chinese will race on over to the Athabasca basin.

Anyway, the Obama administration has also extended the U.S.’s nuclear cooperation agreement with China. That happened a few weeks ago, and will allow the U.S. to export Westinghouse reactors that could generate some $200 billion in economic activity here at home.

China is also exporting nuclear technology, as Uranium Energy Corp. (NYSE: UEC) CEO Amir Adnani recently reminded me. China recently announced a $7.7 billion deal to build two nuclear reactors in Romania.

Multibillion-dollar deals like that also include the supply of uranium. That’s an afterthought now, but every announcement like that adds to future uranium demand and is a catalyst for higher prices.

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The race is also heating up elsewhere. Egypt has now contracted with Russia to build four reactors that will come online starting in 2025. And India has signed a deal with Australia that will allow it to get uranium from down under.

The pace of deals is accelerating. All this is ultimately good for the uranium sector and our holdings in it, though the market isn’t pricing it in yet. You can tell that because Fission recently released some awesome results, and the market didn’t care at all.

Fission Uranium (TSX-V: FCU)(OTC: FCUUF)

Fission announced assays for the final 17 holes of the summer program on November 25th. Sixteen of them hit uranium mineralization. One hole in R600W returned ultra-high grades like 26.03% over six meters inside of 11.02% over 25.5 meters.

Announcements like that are going to mean millions on Fission’s market cap when uranium prices are north of $65 per pound.

Here is the updated map:

Click to Enlarge

Remember, because President Ross McElroy certainly won’t let you forget, that R600W is not included in the Preliminary Economic Assessment, and every morsel of high-grade uranium found there improves the bottom line of the mine that will be built at the Triple R Deposit:

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“This final set of summer assays from the resource expansion drilling is a very strong finish to the program and once again highlights the significance of the shallow, high-grade R600W zone, which remains open in all directions. Further growth of this zone will be a core focus for the 2016 winter program and it’s also worth bearing in mind that regional drilling 470m north of R600W intercepted anomalous radioactivity in the downhole gamma probe. A resource estimate for the R600W zone has yet to be conducted and every successful winter hole has the potential to add substantial lbs to a future resource estimate and potentially impact the already robust preliminary economic assessment of the Triple R deposit.”

Fission continues to sit at 52-week lows.

We know this is a world-class asset. We know it should be valued much higher.

And we knew it should 100% be in the hands of Fission shareholders. That’s why the merger with Denison was canceled.

Now, we can put another issue behind us and get back to growing this deposit and attracting potential suitors.

As you may know, a group was formed called FCU Oversight Canada to formally fight the Denison merger.

I agreed that merger was a bad deal.

But its most recent move was to nominate new board members and cause a power struggle.

This, I do not agree with.

Without getting all soap opera, suffice it to say the gentlemen behind this group own a small amount of Fission shares and have an affiliation with Alpha Minerals, Fission’s former JV partner in the Patterson Lake South project. Alpha let a monster project go for a song and I’ll let you draw your own conclusions on how they feel about that now and why they want some control of it back.

This is all a non-issue. FCU Oversight Canada didn’t have the shares or the support to get a new board member elected, and has now withdrawn its nominees.

You should be voting for Fission’s nominees. And you can see information on how to do that here. 

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In the grand scheme of things, this was a really pesky issue.

It will be good for Fission, and hopefully its share price, to get back to the business of Patterson Lake and the Triple R Deposit. Given that temperatures are rapidly falling up there, and now rarely get above freezing, the lake should be solid and drills turning soon.

And just to make sure I drill it home as much as possible, much of the recently discovered mineralization in R600W is on land and was not included in the Preliminary Economic Assessment. The assumed costs in that assessment, which were already very low, will now be lower, thereby improving the economics of the project and value of Fission shares.

Plus, we still have blue sky exploration potential and any upside that comes with a return to favor of the uranium sector in general.

Fission Uranium (TSX: FCU)(OTC: FCUUF) is cheap and you should be buying it.

Arianne Phosphate (TSX-V: DAN)(OTC: DRRSF)

Arianne still awaits final permitting from the government in Quebec.

Remember, it has a Feasibility Study (FS) on its massive Lac à Paul phosphate project, done in 2013, that shows an open pit mine with a concentrator producing higher quality product than is typically found in the industry. That FS also showed a 4.4-year payback and a 21% internal rate of return pre-tax, as well as a net present value of $1.9 billion.

In other words, with a current share price of ~C$0.80 and 111 million shares fully diluted, Arianne Phosphate is trading at a value of C$89 million — or less than 5% of the intrinsic value of the phosphate asset it controls.

And Arianne has reduced projected costs since then.

Its Environmental Impact Assessment was also filed in 2013.

And in October 2015 it was issued a positive BAPE report. That’s an acronym for a French phrase about the public’s opinion of the project. It’s done by an independent third party, and the results were positive.

The BAPE report is the last step before the final permit is issued, on which a decision is now expected very soon. The government of Quebec has invested C$2 million into Arianne via a private placement, which leads me to believe it won’t snub the company on the permit.

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I think a final permit will be a major catalyst for this stock. The company becomes much more valuable overnight with a permit in hand.

Arianne Phosphate (TSX-V: DAN)(OTC: DRRSF) remains a buy under C$1.00/US$0.75.

The full report has been published for you here.

Uplisting Opens Doors for Stellar Biotechnologies (NASDAQ: SBOT)(TSX-V: KLH)

One of the benefits of moving to a major exchange is the doors it opens for broader coverage by analysts.

We are already seeing that with Stellar, which has been trading on the NASDAQ for about a month now.

Investment bank Maxim Group recently initiated coverage on Stellar with a Buy Rating and $17 price target.

Here’s how Maxim’s analysts put it:

• Stellar Biotechnologies leverages their on-land aquaculture facilities to manufacture the keyhole limpet hemocyanin (KLH) protein, derived from the keyhole limpet ocean mollusk. KLH is a potent immune stimulator that is rapidly becoming a key component in the development of vaccines.

• Stellar’s aquaculture facilities allow them to raise keyhole limpets on land (not ocean-harvested) to provide a sourced, well-characterized, GMP protein product that can be used for in-human vaccines.

• As the KLH supplier, we believe that Stellar is ideally positioned to capture the value of what could be blockbuster vaccines in indications, like breast cancer, lupus, and Alzheimer’s disease (among others).

• External and internal catalysts could drive Stellar as other companies achieve clinical success using KLH-based vaccines. As vaccines are approved, the beneficiary could be Stellar as the KLH supplier. How much can Stellar sell? The company expects to continue building sales up to 8 kilograms of KLH by 2020 and more from there. At up to $50,000 per gram, that is $400M in topline revenues, which, at fair value, points to a $1B+ fair-value valuation. With a $62M market cap, there is significant upside, in our

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opinion.

• KLH-based vaccines are emerging players in immune therapy (oncology and autoimmune). Biotech and pharma companies moving into the vaccine space are looking for a validated platform to deliver antigens, and KLH is often the answer. Stellar’s GMP-quality KLH may be the key that drives many companies’ vaccines to commercialization. This gives Stellar a unique advantage, in our view, in that any company using Stellar KLH that drives a vaccine to commercialization by default needs Stellar as a KLH supplier. What if that vaccine is a blockbuster? It could drive substantial revenues ($20M-$200M per indication).

• Follow the Partners. Stellar is supplying KLH to multiple companies, including at least two moving into later stages of development including OBI Pharma (4174:Taiwan-$551-NR) in breast and ovarian cancers (phase III) and Araclon Biotech (private) in Alzheimer’s disease (phase II). One company’s success could validate Stellar’s platform. More partners are expected as the vaccine/immune therapy space comes of age.

Several dozen drugs that use KLH are being developed.

Not only can it generate sales for research and trial purposes, but one single drug getting commercialized can do wonders for Stellar’s valuation. That’s why Maxim concludes:

Each vaccine that is approved, depending on the indication, could be worth $20M-$200M to Stellar’s top line. With relatively high margins, just $100M dropping to the bottom line suggests a fair valuation of $500M. With a sub-$100M valuation today, there is significant upside, in our view.

Since debuting on the NASDAQ last month, Stellar Biotechnologies (TSX-V: KLH)(NASDAQ: SBOT) has endured volatility commonly associated with recent uplistings.

It’s been as high as $9.70 and as low as $7.01.

Many more investors — and many more types of investors — can play with an $8.00 NASDAQ-listed stock than one that trades below a buck on the TSXV.

So there will be some jockeying going on.

Just keep your eye on the ball.

Stellar remains well-positioned as the only company capable of providing a sustainable

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supply of fully traceable KLH to the pharmaceutical market at a time when at least 100 drugs are being developed that use KLH as an ingredient.

As those drugs move through trials, Stellar should begin selling increased quantities of its KLH.

But what we’re really in this for is a drug to be approved and commercialized that uses KLH supplied by Stellar.

The two nearest to that are OBI Pharma’s OBI-822, an immunotherapy for metastatic breast cancer for which Phase 2/3 results are due in early 2016, and Araclon’s Beta Amyloid therapy for Alzheimer’s, for which Phase 2 studies will kick off in the first half of next year.

Stellar Biotechnologies (NASDAQ: SBOT)(TSX-V: KLH) remains a buy under US$10.50.

Wrap-upCanadians must sell Canadian equities for tax loss purposes by December 24th. So between then and the end of the year I expect there to be a decent opportunity to pick up mining shares even cheaper. Make a note of that.

We will also be looking to pick up a few new income-yielding positions heading into the new year. I am doing my diligence on a few of them now.

Don’t forget we have a big special dividend coming our way from Newtek (NASDAQ: NEWT). That will be a whopping $2.69 per share — the reason we got in the stock! — and be paid as 27% cash and 73% shares on December 31 to anyone who owned the stock on November 13th. And we’re still waiting for its final quarterly dividend to be announced. In total, we’ll get $4.51 in dividends this year from a company we paid $13.31 for. That’s a big win anywhere.

Like Minded People, Outsider Club LLC Copyright © 2015, 111 Market Place, Suite 720, Baltimore, MD 21202. All rights reserved. No statement or expression of opinion, or any other matter herein, directly or indirectly, is an offer or the solicitation of an offer to buy or sell the securities or financial instruments mentioned. While we believe the sources of information to be reliable, we in no way represent or guarantee the accuracy of the statements made herein. Like Minded People or Outsider Club LLC does

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