Hard Asset Digest January 2021

Nick Hodge: It’s been absolutely weird, Mike! My oldest daughter is in preschool and next week we'll have our first parent-teacher conference and we’ll be doing that over Zoom… so no going into the classroom to meet the teacher is just one example. And so I think everyone has had to sort of adapt and make changes in their own life.

And thank goodness we’ve been able to accommodate and make a living out of our homes while also doing quite well in the market… all as a result of things I’m sure we'll be talking about in the coming minutes.

It seems like – albeit with a couple of new coronavirus variants we’ll have to keep an eye on – with vaccines starting to be disseminated and people starting to commit to wearing masks and with another round of stimulus on the way that we should be looking to get to the other side of this thing pretty soon.

And I’m certainly looking to get there for the reasons you mentioned… getting back to travel both for business and for leisure as well as attending other events. I think you're right that it has allowed us to spend a bit more time with family and with those closest to us and to really appreciate that time.

To a certain extent, with three very young ones at home, it’s time to get back to a schedule — as my wife would say!

NH: Yeah… it seems like so many of those major life milestones that we’ve always taken for granted are now happening in such different ways.

NH: Yes and we're thrilled to have you be a part of it, Mike! Since we last spoke, I left Outsider Club and Angel Publishing to form Digest Publishing. And I’m proud and excited to announce the launch of Daily Profit Cycle, which is our free website with daily market commentary.

Of course, we have your publication, Hard Asset Digest, as well as your Precious Portfolio.

And we have Gerardo Del Real who has launched his two publications — Junior Resource Monthly and Junior Resource Trader.

Gerardo Del Real, editor
Junior Resource Monthly
Junior Resource Trader

And then I have my three publications under the Hodge Family Office banner — Hodge Family Office, Hodge Family Office Advantage, and Foundational Profits.

So yeah… lots and lots of changes but it’s exciting to have all of the letters up and running under a new brand and to have some of our former subscribers follow us over.

We certainly appreciate that loyalty and have enjoyed reconnecting with them, and we look forward to this new endeavor and the new year. And again, excited to have you a part of it!

NH: Honestly, Mike, I appreciate the move we’ve made to Spokane every single day. Being able to be in a rural place and have that space and also have what I would view as the better connections that come with the rural community and rural neighbors.

And it’s not just me… you know, the trend continues. There are maps you can look up showing the states that people are leaving most and the ones they're flocking to.

Where Americans Are Moving



Like you said… it’s a lot of states with those bluer skies and greener pastures so to speak. And a lot of states with more favorable tax jurisdictions, which I think is a large part of the trend, right? People wanting their dollar to go farther by not having to give so much of it to the government.

And I guess to get a little bit esoteric, or a little bit out there, as part of The Fourth Turning, Neil Howe would say that, “Like-minded cohorts and like-minded age bracket people end up migrating to similar locations.”



I just find that part of The Fourth Turning absolutely fascinating. Because if I look at the rural road I live on, which is gravel by the way, the couple of neighbors that I've come to know and hunt with and that our families hang out with are all in the same age bracket… within 10 years of each other.

And we all have kids about the same age. So I just think it’s funny how that ends up working out… and I think it’s a trend that’s going to continue.

NH: Yeah, it’s crazy! And what’s going to be interesting in terms of the migration of people is how much land or real estate people are ultimately going to be able to afford as real estate and other asset classes continue to inflate.

A lot of people I’ve talked to recently who are in the house buying process have been outbid or have seen houses sold off-market above asking price. I’m sure you've heard similar stories.

And so that’s par for the course when you have a dollar that’s eroding in value and where you have people trying to take advantage of historically low rates to become real estate owners — but maybe not so much so in cities these days.

NH: Endgame is really tough, Mike. I mean, I've written a couple of times that I think you’ll see some sort of Bretton Woods-type agreement over the next couple of years that may or may not involve precious metals and may or may not involve some form of digital currency. There’s been digital dollar bills floating around Congress and congressional banking acts for the past two or three years now… and so that’s not a new or crazy idea.

And while I don’t know what the endgame is… I can tell you where I see the game heading. I can tell you what I see in front of me and you can go back and check the last time we spoke, which I believe was last April, and we were already talking about trillions of dollars at that point, right?

Now you've got a new administration with Biden talking about the first round of stimulus that he’s going to pass being multiple trillions of dollars. And I doubt that'll be the last round. There'll be some sort of a recovery package after that.

And we haven’t even gotten to an infrastructure bill, which is sorely needed, and so I think there’s a lot more spending yet to come.

The other thing that’s happened since you and I last spoke is the dollar has deteriorated by more than 10%. I was writing recently that since March or April of last year, the dollar, as indicated by the DXY, has deteriorated by a staggering 12%.

That’s more than a dime out of every dollar in your pocket!

At the same time, the Fed continues to do what the Fed continues to do… and now you've got Yellen in the new administration as well. And so it’s all very interesting because you also asked about gold, which recently rose to record prices but has since pulled back and has consolidated a bit because rates have started to go up.

If you look at a chart of US 10-year rates, for example, they’ve more than doubled since August.



That’s really what’s been keeping a thumb on gold… and that’s what people have failed to understand and what gold bugs have failed to comprehend. It’s a bit counterintuitive because you always hear that when there’s inflation or when there’s money printing and when the dollar is going down — gold should be going up, right?

And we have all of those things. We have rampant inflation as evidenced by record stock prices and 8-year high copper prices and Bitcoin at $41,000. And you have a deteriorating dollar, as I just said, and you have more of that to come. And yet, here is gold not responding, right?



That’s because rates have started to go up. And so with gold yielding nothing, and with other assets inflating so fast, including stocks, I mean, you have to put stocks in an asset class, right… there’s just been other places that are going up faster than gold.

So while it’s boring for now… I think that once we get through this – let’s call it a mini-cycle of inflation manifesting elsewhere – we can get gold back to new highs, which, it’s had a couple of good days recently and has been back up above $1,850 an ounce. I think once we get gold back to the $1,950-level and have that hold… then it can once again start testing new highs above $2,000.

And once that happens… it’s Game-On from there!

I guess what I would add to that is a lot of other asset classes are inflating. A lot of small cap stocks have gone up very quickly. Cannabis stocks and energy stocks are now starting to reinflate. And so it’s a bit of a boring time in the precious metals.

Hence, you should be using that, and your readers should be using that, to take advantage of the quality precious metals equities that you and the other experts have been covering here in Hard Asset Digest over the last several months.

NH: Oh man… I’m not necessarily sure I foresaw the amalgamation. I think what I saw in Teranga was a quality, relatively low-cost gold producer in Africa with a high growth profile.

The company has had the Sabodala Project and was building another asset called Wahgnion and then had other exploration assets on top of that as well. And this was long before they struck their deal with Barrick to get to Massawa as Barrick started shedding non-Tier-1 assets.

And then, you've got another much larger company active in the continent in Endeavor who came in and made an offer. It looks like that deal is going to go through.

Since you and I spoke, the stock has doubled. It’s pulled back a bit along with most of the sector. But, nonetheless, a 100% gain in less than a year is pretty good! And I just look for assets that are able to grow and that are not being recognized by the market.



A couple of years ago when I was talking about Teranga, not too many people had heard of it. And it’s sometimes those overlooked gems that can give you a good win. And Teranga Gold ended up being one of those.

NH: Well, I do have one that I’ve yet to recommend in any letter… but as they say, variety is the spice of life! It’s one I've long thought was going to get bought out, also in Africa — Roxgold (TSX: ROXG)(OTC: ROGFF).



And they’ve been putting out some pretty high-grade drill results and have been operating themselves. And it makes logical sense for them to be a takeout candidate. So Roxgold is certainly one I have on my list.

NH: Ivanhoe and Sibanye have both done quite well. And Ivanhoe, you might even say, has done phenomenally well as it develops three world-class assets with multiple metals that have all seen price ascensions over the last couple of years.




Ivanhoe has Kamoa in Africa and then Platreef and Kipushi. And at a US$6.5 billion valuation, and with the stock doing what it’s done, it might be hard for some people to see a path higher. But at the same time, there’s no assets in the world that compare to those across multiple categories, giving you access to, as you said, copper and platinum group metals as well.

And so I've sold a tiny bit of my Ivanhoe position but just a tiny bit. I continue to hold most of that position and continue to think it’s going to be one of the go-to names if you're looking for large, world-class mineable assets that are going to provide what’s needed for this next round of electrification and electric vehicles, right? Because you're talking about not just copper and PGMs but nickel as well with Ivanhoe… and Sibanye-Stillwater continues to look great.

You're asking for a new name? Generation Mining (TSX: GENM)(OTC: GENMF) with their Marathon palladium asset has been one that’s impressed me over the past couple of months. And I guess I regret not having taken a position sooner.

So if you're looking for one that’s in a good jurisdiction – and by the way which actually has close ties to the other name you mentioned in Sibanye-Stillwater – then Generation Mining is one worth taking a look at.

NH: I think some uranium bulls have already popped their corks, Mike! And I’m not sure if that’s premature or not. But if you look at the charts of some of the uranium equities, they’ve done quite well in recent months including two that you and I talked about last time.



So before we get to those names, let’s just talk about the fundamentals for a little bit. You have a sector here that was already in a structural supply deficit by tens of millions of pounds, as far as what’s able to be taken out of the ground under $50 a pound. And the COVID-19 pandemic has just exacerbated that with mine supply taken offline in Kazakhstan and the opacity that comes with that. So you don’t really have clarity around what that fully looks like.

And the same thing with Cigar Lake being taken offline twice now and what that means as far as not only supply being taken offline, but Cameco having to go into the market and buy at the spot price to satiate its existing contracts.

So it seems like the timeline, if it was already soon, has been expedited even more. But I continue to say what you need for the uranium price to really get going is the utilities to come in and buy. And we’ve yet to see that happen. But the pressure has got to be on them because their contracts are rolling over, some this year, and then really starting materially in 2022 and beyond. And so they’ve got to come in and start to buy at some point, right?

And they’ve got to be cognizant that the last time Cigar Lake went offline – which remember is some 7%, 8%, 10% of world supply – uranium prices went to record highs.

So you’d think they’d want to start locking in contracts sooner rather than later. And that’s really what’s needed because we need to see where these contracts are going to go because you can’t contract at the $30 per pound spot price – which is where we're at now – because not enough production can come online at those price levels. It has to be materially higher.

If you look at some of the well-known names, like Cameco for example, many of those have done well in recent months. And then the names you and I talked about last time; one was Azarga Uranium (TSX: AZZ)(OTC: AZZUF). And Azarga has since got its final permits from the EPA for its Dewey Burdock Project in South Dakota.



And being in America, Azarga actually has the best undeveloped in-situ uranium asset in the US at a time when Congress has just funded a national uranium reserve. So that’s certainly a good place to be. They were able to raise $6 million on the back of that EPA permitting news… so Azarga continues to be a name to look at.

And then the other one we discussed last time was Skyharbour Resources (TSX-V: SYH)(OTC: SYHBF). And while their stock has done well since you and I last spoke, I feel it continues to be a relatively overlooked name in the space given that it has a flagship asset that’s producing solid drill results at its Moore Uranium Project in Canada’s Athabasca Basin. And it also has several partner-operated projects as well… all in the Athabasca.



Looking at those two charts, you can see that they’ve both done quite well over the past year. And both would be ones I would continue to look to for exposure to the sector for two reasons:

One, there’s just not a lot of quality names in the uranium space. For example, if you look at the Uranium ETF, URA, you’ll see that there are not a lot of quality names in there. Naturally, you have industry leaders like Cameco and Denison. But then where do you go from there, right? There’s just not a lot of quality to choose from.

And two, even if the move ends up being next year instead of this year… you’ll be positioned. That is critical in explosive sectors like uranium where a large portion of the gains come early in the cycle.

NH: Well, what we’ve done in my entry-level letter is we’ve taken a bit of profits from Wheaton Precious Metals, which has outperformed a little bit, and I've advised purchasing Franco-Nevada for those who maybe don’t own it or are looking to add to their holdings in the royalty space.

And that’s just a function of balancing out one that has outperformed, which is Wheaton, to one that has a bit of catching up to do in Franco-Nevada. Historically, they’ve traded pretty close to one another… and so that’s been my strategy with the larger royalty players.




There’s also a couple of new names that have come into the space of late. And what’s been interesting is that, as gold was hitting record prices… you’re often told and what has historically been the case… is that the miners and especially the junior miners outperform the price of gold, right? That’s because they give you leverage to the price of gold.

Yet, what has happened – at least so far this time and I don’t think it’s going to be the case forever and certainly not once gold gets back to new highs – but what happened last year is that it was the royalty companies that actually outperformed and delivered the most leverage to the price of gold.

And so they’ve become a key place for investors to look to deploy capital. The market has done what the market does to accommodate that. And now we’re seeing some new royalty names entering the market.

The other thing that’s interesting to note in the royalty space is how the royalty companies have been valued. And what I mean by that is, if you look at Wheaton and Franco, for example, which were spun out of Newmont and Goldcorp back in the day — they’ve gone on to rise in value to match their parent companies on a market cap basis.

Now, what Gerardo Del Real has been able to find is a company that’s recently been spun out of a top-ten gold producer. Their royalty portfolio was spun out and is now trading under another company.

If history is any indicator – and if its market cap has to rise like Franco and Wheaton rose to match their parent companies’ valuation – then this company has to rise by at least 10 times. And you may even be able to make a case for 20 times the current valuation.

And so that’s a very interesting new royalty company in the gold sector that just started trading in recent months that your readers might want to take a look at. We made a video about it so your readers can learn more.

Click the video to learn about Gerardo Del Real's Top-Pick in the Gold Royalty Space.

NH: Only that the same way that it has been somewhat counterintuitive for gold not to have gone up more than it has in recent months with a rise in inflation and a perpetually eroding dollar… counterintuitively, stocks can continue to go higher even though they're already sitting at record prices.

Certainly, there’s more stimulus coming. The Fed seemingly won’t let the market go down. And because of how depressed earnings were last year, a lot of companies are going to post some pretty significant earnings growth numbers in the current quarter based on how dismal some of those numbers were much of last year due to covid.

And so there’s actually some fundamental reasons why stocks could trend higher still to go along with all the free money in the world. So don’t count out the possibility of stocks continuing their dizzying upward trend. And that’s just one more thing to keep an eye on in addition to everything else we discussed.

NH: Exactly… and the patience to ride out this current bubble. And I guess another word of caution is to keep an eye on when those chairs start being taken away because I think you're seeing quite a bit of euphoria in the broader indices at the moment.

And like I just said, I think that can last a bit longer… but you'll want to be looking for the first signs of that starting to wear off and then to position accordingly.

NH: You as well, Mike!