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John Kaiser's Top Picks: March 6, 2016

The mood at PDAC the first day was distinctly better than during the past six years, confirming that we are now in the second year of what will be a 3-to-5 year junior resource sector bull cycle of the sort we had in the nineties when everything was about discovery exploration.

The big signal of a major structural shift took place in February when a half dozen juniors led by Osisko raised $100 million in largely bought deals for exploration of the Windfall district in Quebec where Osisko has a 400,000 m drill program underway. This is shocking because for decades the Windfall district has been notorious for small high grade zones so ratty that even the 1.6 million oz gold resource at 7-9 g/t at the Windfall deposit was not worth developing at $1,200 gold according to a 2014 PEA. Osisko's work, however, has revealed a geological context similar to the Timmins district which has yielded 70 million ounces over the past hundred years. The emerging view is that past exploration in the Windfall district has not been aggressive enough.

The overall market funding focus since 2003 has been on feasibility demonstration of existing deposits in the context of sharply higher metal prices thanks to the now finished super-cycle and gold's catchup to its inflation adjusted equivalent to $400 in 1980. Gold at $1,200 is a wash in real price times. The mantra during the past couple years is to focus on juniors with so called optionality plays, namely worthless deposits that need a higher metal price to justify development. Don't spend money on exploration, just hibernate and wait for the price of gold to go up. This attitude has caused a resource junior market linkage to the trend in gold. Last year's bear market turnaround rally tracked gold's rebound towards $1,400 but stopped cold in mid-August when gold reversed.

The market has tired of waiting for things the resource juniors cannot control and having stock prices jerked around by traders every time there is a metal price trend change. The big market shift, especially in those corners capable of putting up $100 million, is that companies should make themselves valuable by finding a deposit that works at the metal prices we have. But the age of outcropping monsters is over. Anything new and good will be blind. The best place to start is known mineralized systems, rethinking their potential, and using the drill bit to test those theories. The old approach of setting up a target for a discovery hole kill shot is out the window; drilling scout holes to build the geological context is in.

This is really important because in the optionality game it is easy to rank projects based on tonnage-grade and the costs associated with the best mining scenario. You cannot do that with discovery exploration. This means that the field is wide open for new money to come in and bankroll interesting exploration projects without worrying about having missed the boat. Bay Street may have poured $100 million into the Windfall district, but a world class discovery could emerge from any project that has visionary geologists behind it and a serious drill program underway. The retail investor is generally not aware that we are back in this kind of market.

Top Picks:
Scandium International Mining Corp (SCY.TO) Last purchased at $0.04 in February 2014.
Company has delivered a positive definitive feasibility study, secured a development consent and will soon get a mining lease to build the world's first primary, scalable scandium mine. Subject to the price at which the $100 million CapEx financing is done, successful commercial production would support a valuation in the $1-to-2 range with a higher target if offtake demand supports funding expansion with internal cash flow.

Probe Metals Ltd (PRB.V)
Probe is the spinoff from Probe Mines which Goldcorp bought for $500 million in 2015 for the Borden gold discovery. Probe's current focus is rethinking the deeper potential of the former Beliveau Mine at Val D'Or East where it has found a new dyke zone and a very high grade vein. Company has $40 million and a portfolio of grassroots prospects in Ontario and Quebec.

InZinc Mining Ltd (IZN.V) Last purchased at $0.08 in December 2014.
InZinc owns the West Desert zinc-copper skarn deposit in Utah which according to a 2014 PEA is worth developing at current metal prices. Zinc has the best upside prospects among base metals due to declining output and a likely environment driven supply cutback in China. West Desert is part of a big underexplored system that could become this year's discovery version of Arizona Mining once funding is secured.