June 2017 Fund Performance & Market Commentary

The Delbrook Resource Opportunities Fund (the “Fund”) posted a return of -7.9% for the month of June vs. the SPDR S&P Metals and Mining ETF, the Fund’s closest benchmark, which increased 3.8%.  This brings the Fund’s 2017 YTD return to +17.7%.  Long positions in select precious metals underperformed as the bounce in the gold price we anticipated post the June 14th meeting of the US Federal Reserve did not play out until early July.  Although the Fund slipped mildly during the month, the volatility in short term price movements is par for the course in this sector and not entirely unexpected given the low volumes typically experienced during the quiet days of summer.

Entering June, we remained positively predisposed toward precious and select base metals, while more skeptical of bulk commodities, specifically coal and iron ore.

Commentary this month will highlight the importance of ‘boots on the ground’ due diligence.  We believe a tremendous amount of knowledge can be gathered from select site visits and we highlight a recent trip to IDM Mining’s Red Mountain Gold Project in northwestern British Columbia.

Red Mountain Site Visit:

As a long-time shareholder, we felt it prudent to visit site given IDM’s recently released Feasibility Study which outlined an economically robust high-grade gold project.  The economics of the project as laid out already appear attractive (40% IRR, and manageable CAPEX). We believe these economics could improve further given current exploration efforts, the success of which is being overlooked by the market.

Three main themes emerged upon reflecting on the tour:

• Management often refers to the dual mandate of preparing the project for mine construction, while simultaneously pursuing exploration targets.  This was definitively confirmed during our tour. We witnessed multiple active underground drill rigs. These rigs are  active 24/7 on the current 18,000 metre drill program. The recent releases announcing significant step-out assays provide us with confidence that the exploration program is adding to the resource. We expect this to be reflected when the resource is recalculated in Q4 2017.  This is material to shareholders as the project’s economics will be positively affected by the addition of ounces to the mine plan (NPV5% +C$40mm per additional year of production).

• The strong support for the project from the community of Stewart is evident.  Located 15 km from the project, the small town of 500 people has a rich history of mining and exploration.  As we spoke with numerous individuals on site, the pride and excitement about being part of a project with so much potential was infectious. A number of the senior staff had worked on the project in the early 90’s and are thrilled to see Red Mountain on the cusp of production.  In addition, a strong partnership has been forged with the Nisga’a Nation, who will be a very important partner in the development of Red Mountain.  We believe this overwhelming support bodes well as the project works through the permitting process.

•  With approximately C$135mm in pre-production capital required, the project should be easily financeable considering a less than 2-year payback and pre-tax NPV5% of C$155mm.  As mentioned previously, adding to the existing resource has significant impact on the economics and we estimate that once a new resource estimate is calculated in the fourth quarter, the pre-tax NPV5% will land somewhere in the C$215mm and C$225mm.

On July 10th IDM announced that it had filed its Project Application and Environmental Impact Statement. Assuming the process progresses as planned, construction could begin as early as February, 2018. Having seen the recent developments at site, speaking to management at length about potential areas of concern, and gaining insights on the quality of the project’s community relations first hand, commencing construction in the first half of 2018 appears feasible.  For core positions in the Fund, this sort of ‘boots on the ground’ diligence has become increasingly important.

Lastly, we are pleased to welcome Elivin Asadov to the Delbrook Team.  As a MSc. Finance student at Beedie Business School in Vancouver, Elvin is actively involved in Canada`s largest student-run investment management fund(SIAS). He is responsible for investments in Canadian energy companies and supports the team`s security selections. Prior to joining the MSc. Finance program and SIAS, he worked as a financial analyst in a petrochemical company in Europe and obtained his Bachelor of Science degree from Bocconi University in Milan. He is a CFA candidate. 

As always, please contact our office at 604.229.1450 with any questions you might have.

Matthew Zabloski