Nova Copper (NCQ) is an amazing story that starts with two incredibly rich properties, Donlin Creek and the Ambler District west of Fairbanks, Alaska. There is a lengthy permitting process underway but the geological findings indicate that this penny stock will grow to a muscular mid cap and become a major world mining site. It offers lessons and opportunities for both trading and investing but first one must meet the cast of characters.
You can't understand Nova Copper without understanding Nova Gold (NG) an ailing mid-cap contrarian play, and you can't understand Nova Gold without knowing its fractious relationship with precious metals giant Barrick Gold Corp (ABX) that has been scaling back its exploration and slowing its development of nascent assets. The edgy, relations of Nova Gold to Barrick involve the latter's acquisition of Premier Metals and its neighboring properties. Dr. Thomas Kaplan, CEO of the Electrum Strategic Resources LLC which owns 27% (51 million shares) of NCQ also is Chairman of the Board of Nova Gold on which sits Dr. Marc Faber. Lastly the attention and purchases of Seth Klarman of Baupost and John Paulson of Paulson and Company who has about 30% of his $13 billion portfolio into Spider Gold ETF (GLD) and another 8% into Anglogold Ashanti Ltd (AU).
Nova Copper is a spin-off of Nova Gold , both of them favorites of Baupost. By the end of the 3rd quarter Klarman had upped his holding of NCQ to more than five million shares and 10.73% ownership. Paulson's holds 12.9% of the promising fledgling. As noted above, Electrum Strategic Resources with its many resource development affiliates, some in concert with Newmont Mining (NEM) is a major player. It takes a valuable asset to attract a brotherhood like this. This should be worth a 12-part TV series.
As was reported in SA early in August, more than six years ago Barrick offered to buy Nova Gold outright. The latter's ownership didn't like the tender so Barrick bought small cap Pioneer Metals with adjoining property. This is how they play ball on the piers of Manhattan.
Byron King has scrutinized Nova Copper's Donlin Creek and Ambler District samples and is impressed, devoting several pages of sample analysis, maps and projections in a special report in spring 2012. NCQ projects to 1.5 million oz of gold/year for twenty-seven years at a cost of $409/oz. The life of mine and low cost of NCQ compare very favorably to some of the best of the precious metal companies like Gold Corp (GG), Barrick, Kinross Gold Corp (KGC) and mid-cap AuRico Gold Inc (AUQ). Technical innovations are almost certain to extend the already extensive production curve as well as uncover additional ores. Nova Copper will produce gold, silver, very high purity copper, cobalt, lead and zinc.
NCQ began trading in late April 2012, just in time for the May plunge in precious metals echoed by the lows (for some companies, double bottom) of late July. Its range in just eight months began at $4.67 hit $1.65/share early in August and since then has been a markedly volatile micro-cap whose development phase is still a few years off. This reflects the exceptional richness of its properties and the interest this potential has drawn from major investors whose affiliations include industry majors like Barrick and Newmont. The EPA also can painfully protract the process when their care might be employed better at behemoth rare earth sites like Baotou in China's province of Inner Mongolia.
The complexity and intensity of interest presents an occasion for both solid investing and periodic trading and profit-taking. For more than four months, Nova Copper has been see-sawing between $3 and $1.75/share. It cratered after the election and has been near $2/share since then. At some point the upper range will move out of penny stock neighborhood but because getting permits let alone development and production will take years the higher highs and lower lows will take a while to become a fact of its trading life. That gives us a takeaway:
If you do not own this prize yet, by all means establish a position when the share price is below $2 (NCQ was at $2.04 after hours on Thursday, January 3; on Friday the 4th it traded between $1.97 and 2.05. Like many equities it has been jumpy on the 'fiscal cliff' the clichéd reporting on which mask basic differences about fiscal and socio-economic policies and the latest Fed minutes suggesting that its massive bond purchases and electronic printing may, repeat, may cease late in 2013. But as the world turns or seethes these days that's not a promise to bank. Still there's a lesson here.
When Nova Copper dips below $1.90 (having watched it closely, it can be expected to touch $1.80 or less a few more times before permanent ascension sets in), load up. If it suits your needs or taste, when it passes $2.60 trim a bit and take some profit but by no means liquidate your position. Keep an eye on the charts for the onset of the higher lows and higher highs that will arrive at some point, depending on how severe a correction occurs when the nitty gritty of deficit reduction gets banged out. As spring approaches there is likely to be significant volatility so my previous column's suggestion about a 10% minimum cash position holds.
The Fed's latest guidance and the immediate drop in precious metal holdings merit an afterword on their role in portfolio allocation and mid to long term value. There were steep sell-offs on the announcement as futures contracts for gold, silver, platinum, palladium, copper and other commodities sagged on the strengthening dollar and ICE index. Is it a time to buy? Several experienced analysts, notably the venerable Richard Russell have argued that given the economic fundamentals and fiscal policies of the major central banks, gold should be 33 - 50% of a portfolio. Most people, I suggested and suggest cannot afford that weighting given that fundamentals and reason yield to sentiment and perhaps even more, manipulation of markets. Silver is a perfect example of the conjoined effects of sentiment and manipulation. A metal with many and diverse uses, -- currency, jewelry, silverware, electronics, photovoltaic's and more should make for a rather steady, sober market. The opposite is true: silver's hyper-volatility relative to gold is well known. Proponents of Elliott Wave theory have suggested that if silver breaks below $27.75/oz it may descend to $22 before resuming its strong bull run. The action January 3-4 gave credence to this analysis.
Given the power and variety of major macro-economic and political variables, it would be wise for those not in the '1%' neighborhood to keep exposure to precious metal miners and bullion in the 10-15% allocation range. The price should go much higher for the metals. Informed, experienced and successful Jim Sinclair has been calling for $3500 minimum for some time; many analysts have suggested gold at $10,000/oz in part because such a re-valuation would eliminate most of the national debt and restore major currencies to sanity. It makes sense but the policy goals of the inner ring of power long have planned a period of intense currency instability to prepare for a global currency, "call it the Phoenix" a prestigious and prescient journal wrote in January 1988. Despite the logic for a major increase in precious metal prices, given current shakiness, volatility and the long-term governing agenda, those who cannot hold out till a trend reversal might want to look for high days to reduce an allocation close to 10%. There will be ample occasion to add back and increase. Moreover, central banks are continuing to acquire large amounts of gold and it is plausible that whatever currency or currencies are left standing after this strange and terrible end of the floating fiat era will be backed by significant gold reserves. That should support higher gold and silver prices.
No matter how the macro climate develops in the near and mid-term take advantage of the volatility to build a healthy position in Nova Copper. It's a winner in its intrinsic qualities and because of the intense interest of major investors and producers.
Disclosure: I am long ABX. I own shares in Nova Copper and Barrick Gold