-- Weekly Market Update for 13th May 2019

Big Picture View

Here is a summary of our big picture view of the markets. Note that our short-term views may differ from our big picture view.

The BULL market in US Treasury Bonds that began in the early 1980s ended in mid-2016, but there will be many years of topping action in bond prices and bottoming action in bond yields before major new trends get underway. A major decline in government bond prices will unfold during the 2020s. (Last update: 11 September 2017)

The stock market, as represented by the S&P500 Index, commenced a secular BEAR market during the first quarter of 2000, where "secular bear market" is defined as a long-term downward trend in valuations (P/E ratios, etc.), gold-denominated prices and inflation-adjusted prices. This secular trend will bottom in 2020 or later. (Last update: 11 September 2017)

A cyclical BEAR market in the US Dollar began in 2016-2017. (Last update: 11 September 2017)

Gold commenced a secular bull market relative to all fiat currencies, the CRB Index, bonds and most stock market indices during 1999-2001. This secular trend will peak in 2020 or later. (Last update: 11 September 2017)

Commodities, as represented by the CRB Index, commenced a secular BULL market in 2001 in nominal dollar terms. The first major upward leg in this bull market ended during the first half of 2008, but a long-term peak won't occur until 2020 or later. (Last update: 11 September 2017)

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True Fundamentals Summary [Notes: 1) The date shown next to the current True Fundamentals Model (TFM) signal is when the most recent change occurred. 2) Charts of the Gold and Equity TFMs are included in the "Charts and Indicators" section of the TSI web site]

Last week's posts at the TSI Blog

What is GLD's gold inventory telling us?

Summary of current thinking/positioning

1) The Dollar Index (DX) is precariously poised at support at 97. A sustained break below this support would ignite tradable rallies in anti-dollar plays.

2) Gold, silver and the associated mining indices should begin to rebound very soon. The coming rebounds probably will be counter-trend reactions rather than new multi-month upward trends, although a downward reversal in the DX could lead to tradable strength in the gold sector.

3) Last week's pullback in the US stock market was, we think, the first leg of a significant correction. The short-term risk/reward is bearish, but the intermediate-term upward trend probably isn't over.

4) There's a good chance that a large T-Bond decline will commence before mid-year following a test of the March high.

5) We are holding a cash reserve of 30%-35%.

The old Keynesian guidelines have been forgotten

Keynesian economic theory is useless if the aim is to understand how the world of human production and consumption works, but it is useful when attempting to figure out the policies that will be implemented in the future. The reason is that government and central bank policy-making is dominated by Keynesian ideas.

One of the most prominent Keynesian ideas is that changes in aggregate demand drive the economy. This leads to the belief that the government can keep the economy on a steady growth path by boosting its deficit-spending (thus adding to aggregate demand) during periods when economic activity is too slow and running surpluses (thus subtracting from aggregate demand) during periods when economic activity is too fast.

To further explain using an analogy, in the Keynesian world the economy is akin to a bathtub filled with an amorphous liquid called "aggregate demand". When the liquid level gets too low it's the job of the government and the central bank to top it up, and when the liquid level gets too high it's the job of the government and the central bank to drain it off. Keynesian economics therefore has been called "bathtub economics". The real-world economy is nothing like a bathtub, but that doesn't seem to matter.

In any case, the point we now want to make is that in the US the traditional Keynesian guidelines are no longer being followed. Gone are the days of ramping-up government deficit-spending in response to economic weakness and running surpluses or at least reducing deficits when the economy is strong. These days the US federal government applies non-stop Keynesian-style stimulus and regularly exhorts the central bank to do the same. So, debt-financed tax cuts were implemented in 2017 when the economy seemed to be performing well, and now, with the unemployment rate at a generational low, the stock market near an all-time high and GDP growth chugging along at around 3%/year, the US government is planning a US$2 trillion infrastructure spending spree and the executive branch of the government is demanding that the Fed cut interest rates from levels that are already very low by historical standards.

In other words, although the 'Keynesian bathtub' appears to be almost over-flowing, the US government is pushing for more demand-boosting actions. The strategy is now full-on 'stimulus' all the time. That's part of why it doesn't make sense to be anything other than long-term bullish on "inflation" and long-term bearish on Treasury bonds.

Commodities

The Vanadium-Niobium Substitution

The price of vanadium extended its relentless slide over the past few weeks, but one sign that the decline might be almost over is that ferro-vanadium now trades at a discount to ferro-niobium, a potential substitute.

As explained in the article by PCY's Michael Drozd linked HERE, niobium can sometimes be used instead of vanadium as a steel-strengthening additive. Here's an excerpt from the article:

"In something known as high strength low alloy (HSLA) steel, a minor addition (many times less than 0.5%) results in a large increase in strength. HSLA steels are used in building structures (structural steel), automotive frames, airplane fuselages (aluminum alloys), and jet engines (titanium alloys). All of these alloys use vanadium. There are some uses of alloys (such as rebar, reinforcing bars that are part of concrete structures) that can use the "periodicity" of a metal (elements in the same column of the periodic table sharing chemical and alloying properties) to substitute for the metal above or below it on the periodic table. This is the case for vanadium and niobium, as they are both in column 5B and so have similar properties.

The difference between vanadium HSLA steel and niobium HSLA steel derives from the manufacturing process and the quality control. Vanadium steel can be manufactured at a lower temperature due to better grain size formation. Niobium rebar has to be raised to a higher temperature and be cooled under much more stringent conditions so as to maintain metal quality. Additionally, niobium rebar can be more brittle (cracks form earlier) than vanadium rebar. This means that after proper alloy development, it is possible to substitute one metal for the other. These substitute alloys have slightly different properties, and the particular alloy has to be vetted to determine whether the differences are minor. Usually, as the molecular weight increases, the elements in the group become less viable as a substitute -- because the molecules become too large. So niobium HSLA alloys may be more brittle than vanadium alloys, but this brittleness may be acceptable since the tensile strength (the maximum load that a material can support without fracture when stretched, divided by the original cross-section area of the material) may be a more important property than the lateral stability or shear strength. (Shear strength is a material's ability to resist forces that can cause parts of the internal structure of the material to slide against each other. Adhesives tend to have high shear strengths.)"

The following charts show that the ferro-vanadium price has fallen from a peak in the high-US$120s/kg last November to US$41.50/kg at the end of last week, and that over the same period the ferro-niobium price has risen slightly -- from the low-$40s/kg to US$45.30/kg. (Note: We normally show charts of the vanadium pentoxide (V2O5) price, which has fallen from a peak in the low-US$30s/pound last November to US$10.50/pound at the end of last week.)

We expect that the battery industry will become the main driver of the vanadium price within the next 5 years, but right now vanadium demand is dominated by the metal's use in steel alloys. Consequently, for the time being we must consider the niobium price when assessing the sustainability of an upward or downward price move in the vanadium market.

Interestingly, even though the vanadium price keeps making new 12-month lows, some vanadium mining stocks are showing signs of having bottomed a few weeks ago. For example, vanadium producer Largo Resources (LGO.TO) made at least a multi-week bottom on 22nd April -- one day after it was highlighted as a potential trade in a TSI commentary. If LGO can close above C$2 it will signal that a short-term bottom is in place and that a rebound to the 200-day MA (currently at C$2.80) is possibly underway.



The Grains are incredibly cheap

The US-China trade war has been the main driver of price weakness in the grain markets over the past 12 months, but the tariffs-related reduction in Chinese demand for US agricultural products only extended a well-entrenched trend. As illustrated by the following weekly chart of the iPath Grains ETN (JJGTF), grain prices have trended relentlessly downward since Q3-2012. Furthermore, JJGTF has fallen by almost 20% since early this year despite being at a depressed level prior to the start of its latest short-term plunge.



We are long-term bullish on the grains due to the expected effects of climate change (global cooling) on the production of these commodities, but we have not been interested in buying direct exposure to grain prices via funds such as JJGTF. As explained in previous commentaries, the best way to obtain LONG-TERM exposure to grains and other food commodities is via the stocks of fertiliser producers such as Mosaic (MOS) and Nutrien (NTR), weekly charts of which are displayed below. We think it makes sense to average into these stocks on weakness.

The stock price of NTR has held up well, but there has recently been plenty of weakness in MOS. This has a lot to do with Vale's iron-ore tailings dam disaster in Brazil in January. A knock-on effect of this disaster has been the suspension of mining at MOS's Brazilian phosphate operations while the company implements plans to meet new regulatory requirements.

There's a risk that MOS will test major support at US$20-$22 before making a sustained reversal to the upside.

The Stock Market

Current US Market Situation

Last week the news backdrop was decidedly negative, with the US-China trade conflict unexpectedly getting ramped up and the Uber IPO being a flop (Uber listed in the US on Friday and ended the session about 8% below its IPO price).

The negative trade-related news began on Sunday 5th May with a Trump 'tweet'. Trump threatened to hike existing tariffs on $200B of imported Chinese goods from 10% to 25% on Friday 10th May and impose 25% tariffs on all remaining imported Chinese goods at a later date if China's government didn't cave to US government demands. Unsurprisingly, China's government didn't cave, so existing tariffs have been hiked and the process of adding new tariffs has been started. There was some damage control from both governments late in the week, however, in the form of Xi sending Trump a "beautiful letter" (Trump's words) on Thursday and the US Treasury secretary announcing on Friday that on-going US-China trade talks had been constructive.

There is still a high probability that a US-China trade deal will happen within the next few months, but at the same time there's a high risk that brinkmanship by the negotiators will lead to additional stock market volatility in the short-term.

Despite entering last week 'overbought' and 'overbullish', the US stock market held up well last week in the face of the negative news. For instance, the S&P500 (SPX) and the NASDAQ100 (NDX) managed to hold above their respective 50-day MAs on a daily closing basis. Even the relatively-weak Russell2000 SmallCap Index (RUT) failed to give a daily close below nearby moving-average support. Refer to the following charts for details.

What we have at the moment isn't really a correction; it's just a 4%-5% pullback from an 'overbought' extreme to initial support. It will become a genuine correction if last week's lows are taken out.

We think there's a high risk of a genuine correction that results in the senior indices dropping by 10% or more from their early-May highs, but anyone trading this market from the short side should be aware of the possibility that good news on the trade front will hit with no warning.

US bank stocks are better longs than shorts

It's time to delve a little deeper into the relative value being offered by the US banking sector. This is a topic we first broached a week ago, at which time we wrote:

"...we suspect that the up-turn in the BKX/SPX ratio from its March low (refer to the bottom section of the following chart) has staying power. This is linked to our expectation that long-term interest rates will rise over the next 6-12 months and to bank stocks being attractively valued, on average, relative to the broad market. Consequently, although it is not a trade we plan to do we like the idea of simultaneously going long KBE (the Bank ETF) and short SPY."

Here's an updated version of the chart mentioned in the above excerpt:



To further explain, we think that two fundamental influences will result in bank stocks being relatively strong over the next 6-12 months. The first is rising long-term interest rates relative to the interest rates that banks pay to their depositors and other creditors. That is, our outlook for interest rates points to greater profits for the traditional banking business.

The second reason to expect outperformance by bank stocks over the intermediate-term is the low relative valuation of the average bank stock. We can demonstrate this low relative valuation in two ways, the first being via a long-term chart of the BKX/SPX ratio (the Bank Index divided by the S&P500 Index).

The following chart shows the performances of the BKX and the BKX/SPX ratio since 1995. Notice that although the BKX is not far below its all-time high, the BKX/SPX ratio has barely recovered at all since the Global Financial Crisis. It is not far from a 25-year low and only slightly more than a third of its peak in the early-2000s.



The other way that we can demonstrate the banking sector's low relative valuation is to cite P/E ratios. The average 12-month trailing and forward P/E ratios of the five largest US banks (JP Morgan, Bank of America, Citigroup, Wells Fargo and Goldman Sachs) are 10.4 and 9.0, respectively. These are roughly half the equivalent S&P500 P/E ratios.

Now, it possibly would be reasonable for banks to trade at such depressed relative valuations if a major liquidity crisis were brewing in the banking industry. At this time, however, this is no sign of such a risk.

As evidence we point to the following chart of the LIBOR-UST3M spread (the 3-month rate at which banks lend to each other minus the 3-month rate that the US government pays). In the early stage of a banking crisis some banks become concerned about the financial positions of other banks and begin to restrict credit, causing 3-month LIBOR to rise relative to the 3-month T-Bill yield. With the LIBOR-UST3M spread currently at the bottom of its 15-year range, that clearly isn't the case right now.



We reiterate that it could make sense to simultaneously go long KBE (the Bank ETF) and short SPY for an intermediate-term trade.

This week's significant US economic events [Notes: 1) The most important events (to the markets) are shown in bold. 2) A list of global economic events can be found HERE]

Gold and the Dollar

Gold

For gold, the fundamental backdrop is slightly to the bullish side of neutral and the sentiment situation is supportive but not decisively so. That is, fundamentals and sentiment aren't giving us much to go on. We therefore must look elsewhere for clues.

Our most recent look at the strong positive correlation between the Yen/US$ exchange rate and the US$ gold price was in the 15th April Weekly Update. At that time we wrote:

"We are revisiting the gold-Yen relationship today because the Yen made a new low for the year at the end of last week. This is a warning that the US$ gold price could do the same within the next couple of weeks.

To make a new low for the year the US$ gold price would only have to drop below $1280, so the gold-Yen relationship doesn't imply significant additional downside in the gold price."

The gold price subsequently dropped from around $1300 to the $1270s, thus moving into line with the Yen.

Over the past three weeks the Yen has rebounded from a 4-month low to a 2-month high while the gold price has hardly moved from its recent low. Refer below for a picture of the current situation. This means that the gold-Yen relationship is now a positive influence on the gold price. There is no divergence, but the recent strength in the Yen points to a more significant rebound in the gold price than has occurred to date.



The following daily chart shows that last week the gold market was very quiet. The US$ gold price held above $1280 and managed to close above its 20-day MA, which we wrote would be the first sign that a rally had begun. We also wrote that a stronger sign would be a daily close above the 50-day MA and the downward-sloping trend-line drawn on the following chart, which didn't happen.

We would view a daily close above $1295 as a clear sign that a significant rally had begun.



On the weekly chart displayed below, the decline in the US$ gold price from its February-2019 high looks like a routine multi-month correction to alleviate an 'overbought' condition. It may well be exactly that, but the performance of the gold-mining sector over the past few weeks is a cause for concern.

As mentioned in previous commentaries, a lot will depend on what happens in the currency market. If the DX makes a sustained break below 97 then the gold price probably will move up to and through its February-2019 high, but if the DX does no worse than consolidate in the 97-98 range then the best we likely will get from gold in the short-term is a 2-4 week rebound that ends well below the February high.



Gold Stocks

A week ago we wrote:

"The gold stock indices and ETFs are more 'oversold' now than they were a week ago, but the short-term risk/reward is not materially different [that is, not yet bullish]. Again there is a decent chance for a rebound, but again the rebound -- assuming it happens -- probably won't get very far before the downward trend resumes."

And:

"The short-term 'oversold' condition that suggests the potential for a rebound should be weighed against the intermediate-term indicators that turned bearish over the past few weeks."

The intermediate-term indicators we were referring to are the HUI/gold ratio, GDX's Advance-Decline Line and the GDX/SPX ratio. All three broke below important demarcation levels over the past month or so.

Last week the HUI rebounded to its 200-day MA and then reversed course. On Friday it broke below support at 150 and closed at a new low for the year.



On Friday the HUI/gold ratio also closed at a new low for the year.



This means that the market has become a little more stretched to the downside. However, with the gold-stock indices and ETFs ending last week at their lows for the year in both dollar terms and gold terms, clearly there is no evidence that a bottom is in place.

We continue to expect nothing more than a counter-trend rebound in the gold sector over the weeks immediately ahead, but the more stretched to the downside the market becomes the greater will be its rebound potential. As previously mentioned, something more interesting than a 10% counter-trend rebound will become likely if the Dollar Index makes a sustained break below 97.

The Currency Market

A week ago we were waiting for the currency market to tip its hand. That's still the case. All the major currencies have shown preliminary signs of reversing upward against the US$, but trend changes haven't been signaled yet.

An early warning of a trend reversal will be a daily close below 97 by the Dollar Index (DX). The following chart shows that the June DX futures contract has tested support at 97.0-97.2 multiple times since the beginning of this month, but up until now it has held support on a daily closing basis.



Updates on Stock Selections

Notes: 1) To review the complete list of current TSI stock selections, logon at http://www.speculative-investor.com/new/market_logon.asp and then click on "Stock Selections" in the menu. When at the Stock Selections page, click on a stock's symbol to bring-up an archive of our comments on the stock in question. 2) The Small Stock Watch List is located at http://www.speculative-investor.com/new/smallstockwatch.html

Company news/developments for the week ending Friday 10th May 2019:

[Note: AISC = All-In Sustaining Cost, EBITDA = Earnings Before Interest, Tax, Depreciation and Amortisation (a measure of cash flow), EV = Enterprise Value or Electric Vehicle, FS = Feasibility Study, FY = Financial Year, IRR = Internal Rate of Return, ISR = In-Situ Recovery, JV = Joint Venture, MD&A = Management Discussion and Analysis, M&I = Measured and Indicated, NAV = Net Asset Value, NPV(X%) = Net Present Value using a discount rate of X%, NSR = Net Smelter Return or Net Smelter Royalty, P&P = Proven and Probable, PEA = Preliminary Economic Assessment, PFS = Pre-Feasibility Study]

  *Africa Oil (AOI.TO) published its financial results for the March-2019 quarter.

At 31st March the company had no long-term liabilities to speak of, US$322M of working capital and US$71M of equity investments (a 34.5% stake in Africa Energy Corp (AFE.V), an 18.8% stake in Eco (Atlantic) Oil and Gas (EOG.C), and a 30.1% stake in private company Impact Oil and Gas), that is, the company had US$393M of working capital plus equity investments (WC+EI). This compares to US$407M of WC+EI at the end of the preceding quarter.

By the way, AOI accounts for its equity investments at cost rather than current market value. Currently, the market value of these investments adds up to about US$118M, or US$47M more than the amount included on AOI's balance sheet.

The bulk of the US$14M reduction in the reported WC+EI amount during the March-2019 quarter was the result of expenditures associated with appraisal activities and developments studies at the 25%-owned South Lokichar Basin oil project in Kenya. The rest of the project is owned by Tullow Oil (operator, 50% stake) and Total (25% stake). It is expected that over the next few years South Lokichar will be developed into a producing oil field with output of around 100K barrels of oil per day (bopd).

According to AOI's press release, the Front End Engineering and Design (FEED) work associated with South Lokichar is in the process of being finalised and Environmental and Social Impact Assessments are on track for submission to the National Environmental Agency at the end of the second quarter. Completion of the FEED should pave the way for a Final Investment Decision (FID) late this year, which would be a major milestone and could lead to a substantial upward re-rating of AOI shares.

In addition to its 25% stake in South Lokichar and its equity investments, AOI is in the process of acquiring 12.5% of a company that holds interests in multiple offshore oil fields in Nigeria. This is a major acquisition that when complete will immediately transform AOI from an oil explorer/developer to a profitable oil producer. However, the completion time is unknown.

Accounting for AOI's equity investments at market value and converting USD to CAD, the WC+EI amount is C$595M. This equates to C$1.26/share, meaning that if you buy AOI at the current price of C$1.20/share you effectively get the company's South Lokichar stake for free. That's a pretty good deal.

  *Continental Gold (CNL.TO) published its financial results for the quarter ending 31st March 2019.

At 31st March the company had working capital of US$66M (up from US$58M at 31st December) and long-term debt of US$350M (up from US$266M at 31st December). This implies that the company spent US$76M during the quarter on the development of its Buritica gold mine in Colombia.

The US$66M of working capital plus the US$100M up-coming payment associated with the streaming deal done by the company in March means that CNL will have about US$166M to get through to the point where the project is cash-flow positive, which we suspect will happen around mid-2020. This should be enough.

We continue to think that CNL would be a reasonable candidate for new buying in the mid-C$2 area.

  *Cobalt 27 Capital (KBLT.V) advised that it has received court approval for the acquisition of Highlands Pacific. Consequently, within the next week or so the company should own 8.56% of the Ramu nickel-cobalt mine operated and majority-owned by Metallurgical Corporation of China.

This acquisition should provide KBLT with current annual nickel and cobalt production of 6.4M pounds and 600K pounds, respectively. Furthermore, it makes the company more of a cobalt-nickel play as opposed to a pure cobalt play. This reduces risk, because the efforts by manufacturers to minimise the amount of cobalt in EV batteries lead to greater demand for nickel.

KBLT also advised that its revolving credit facility has been amended to reduce stand-by fees and increase flexibility. The facility was US$200M. It is now US$100M with an option to expand to US$150M.

The company expects to use US$40M of credit plus cash on hand to fund the US$65M balance of the Highlands purchase.

  *Premier Gold (PG.TO) reported some very encouraging intercepts from initial underground drilling at the east margin of the Marianas Zone, one of the primary exploration targets at the Company's 100%-owned Mercedes Mine in Mexico. The best intercept was 31.0 m grading 4.96 g/t Au & 71.06 g/t Ag.

The Marianas zone potentially could add to PG's production as soon as next year.

Also, PG published its financial results for the quarter ending 31st March 2019.

During the March quarter PG's net cash position (working capital minus long-term debt and deferred revenue) decreased by about US$7M -- from US$42M to US$35M. The $35M figure includes an $18M in-flow of cash as part of a financing completed in January and an offsetting $18M long-term silver-stream liability associated with the same financing.

Due to improving grades, the Mercedes mine should be a cash generator over the reminder of this year. However, due to investments being made in other projects, most notably the US$30M that is budgeted for investment in two new mines at South Arturo over the course of 2019, it's possible that PG will be cash-flow negative until early next year.

  *Petrus Resources (PRQ.TO) published its financial results for the quarter ending 31st March 2019.

During the quarter the company's net debt (long-term debt minus working capital) increased from C$133M to C$141M, but this balance-sheet deterioration was due to changes in the market values of the derivatives the company uses to manage risk. Excluding these market value changes the net debt fell by almost C$3M.

Production during the March-2019 quarter averaged 8,505 boe/d compared to 7,934 boe/d in the fourth quarter of 2018.

PRQ has been attempting to deal with the very low price of Canadian natural gas by increasing the liquids (oil plus Natural Gas Liquids) proportion of its total production and reducing its operating costs. This strategy is working, but the company's financial progress will be slow until the Canadian natural gas price makes a sustained move above C$3/GJ (the Alberta (AECO) price averaged about C$1.50/GJ over the past 2 years and C$1.84/GJ during the first quarter of 2019).

  *The US Gold Corp. (USAU) stock price has rebounded from the low-US$0.80s to resistance at US$1.20 over the past two months. A consequence is that the company is now back in compliance with NASDAQ listing requirements. If it has made a sustainable upward turn then any pullback over the weeks ahead should hold at/above US$1.00.



USAU is an exploration gamble, with emphasis on "gamble". It is looking for the proverbial needle in a haystack at its highly prospective Keystone gold project in Nevada. With only 17M shares outstanding and a tiny market cap, the stock price will rocket upward if any drilling result so much as hints that the company has found the needle (a large, economic gold deposit).

The company also owns the Copper King gold-copper project in Wyoming -- a project with a 1M-ounce M&I gold resource and a PEA suggesting economic viability. We wrongly thought that the value of Copper King would underpin USAU's stock price, but USAU is being valued by the stock market as if Copper King didn't exist.

List of candidates for new buying

From within the ranks of TSI stock selections the best candidates for new buying at this time, listed in alphabetical order, are:

1) AAU (last Friday's closing price: US$0.47)

2) KBLT.V (last Friday's closing price: C$3.99)

3) OIH (last Friday's closing price: US$15.49)

4) PG.TO (last Friday's closing price: C$1.73)

5) SBB.TO (last Friday's closing price: C$1.05)

The above list is limited to five stocks. It sometimes will contain less than five, but it never will contain more than five regardless of how many stocks are attractively priced for new buying.

New (or potential new) TSI positions

1) In last week's Interim Update we wrote about A40 Mineral Assets (A40.AX), a junior lithium producer based in Western Australia. The stock price rebounded from a late-April low of A$0.16 to an intra-day high of A$0.24 last Friday, but it is now pulling back.

A40 will be added to the TSI List as a long-term position IF it trades at A$0.18. At that price we think it has 1-2 year upside potential of at least 200%.

2) In an email to subscribers on 3rd April (Stock Selection Update #87) we introduced a speculative buying opportunity in a junior resource stock. For ease of reference, here's an excerpt from the email:

"eCobalt Solutions (ECS.TO) owns the Feasibility-stage, environmentally-permitted Idaho Cobalt Project (ICP) located near Salmon in Idaho, United States. The ICP has the largest NI 43-101-compliant cobalt resource in the US, with 45.7 million pounds Co in measured and indicated resources. According to a Feasibility Study (FS) completed in 2017, the project could be developed into a mine with annual cobalt production of 2.4M pounds, an after-tax NPV(7.5%) of $136M and an IRR of 21.3% assuming a cobalt price of $26.65/pound. It is reasonable to assume that the project would NOT be economically viable at the current cobalt price of $14/pound, but the asset has significant value due to its US location and the potential for the cobalt price to move much higher over the next few years.

ECS peaked at C$2.10/share in early 2018, but it has been downhill ever since. The share price bottomed a few weeks ago at only C$0.25.

Prior to the start of trading on Monday 1st April it was announced that ECS had agreed to be taken over by the Australia-listed Jervois Mining (JRV.AX) in an all-stock transaction, with each ECS share to be exchanged for 1.65 JRV shares.

JRV's flagship asset is the Nico Young nickel-cobalt project in New South Wales, Australia. The company is close to finalising an economic study based on a JORC-compliant inferred mineral resource of 167.8 million tonnes at 0.59 per cent Ni and 0.06 per cent Co, meaning that the project economics have not yet been estimated. Also, the current resource indicates that Nico Young is a nickel project with a cobalt byproduct, not a cobalt project."

We highlighted ECS primarily because it was trading at a 23% discount to the value of the JRV offer.

Since then the cobalt price has inched up from US$14/pound to US$15.50/pound, the ECS.TO price has dropped from C$0.34 to C$0.30, the JRV.AX price has dropped from A$0.28 to A$0.25 and ECS's discount has remained at 23%. Looking at it from a different angle, ECS would have to gain 30% to bring itself into line with the current value of the JRV bid.

Due to tentative signs that the cobalt price has bottomed and the substantial discount of ECS's current price to the JRV bid value, we have added an ECS trading position to the TSI List at C$0.30. Our aim is to exit within the next 6 months with a profit of at least 50%.

Note that JRV currently is listed only in Australia. The company plans to obtain a Canadian listing, but anyone buying ECS in anticipation of getting JRV shares at a discount should bear in mind the possibility that the shares they receive will be ASX-listed.



Chart Sources

Charts appearing in today's commentary are courtesy of:

https://stockcharts.com/
https://www.vanadiumprice.com/
https://www.barchart.com/