Perspective From One Of The Best In The Business

Publisher's Note: Today we're bringing you a conversation Gerardo Del Real recently had with Jeff Phillips, President of Global Market Development.

Mr. Phillips has been involved in the natural resource space for over 25 years as both a large shareholder and as a consultant for many companies.

He is a widely recognized and respected contrarian voice when it comes to junior resource investing, and we're happy to bring you a rare talk with him about some of the most exciting companies and trends in the commodities sector today.

Nick HodgePublisher, Outsider Club

Gerardo Del Real: This is Gerardo Del Real with Outsider Club. Joining me today is the President of Global Market Development and one of the most respected contrarian voices in the junior resource space, Mr. Jeff Phillips. Jeff, how are you this afternoon?

Jeff Phillips: I'm good, Gerardo. Thank you for having me.

Gerardo Del Real: Thank you for taking the time. I mentioned in the intro here that you are one of the most respected junior resource contrarian voices in the space. You've obviously done very well for yourself and many others by taking contrarian positions at opportune times.

There's a note recently, it's a report by Morgan Stanley, which predicted that lithium prices would fall by 45% by 2021. They recommended selling shares of lithium companies. It was interesting to me that they were buying on the note.

I don't have another person who I respect more in this space, and I wanted to get your take on the report. Did you get a chance to review that?

Jeff Phillips: I did read the report briefly, Gerardo. Again, I think there's a lot of assumptions in their report that I don't agree with. They have a number of assumptions about the Chinese providing lithium to the markets. They're really going to be refining lithium, not providing lithium to the markets.

They also, I believe, severely underestimate the time it takes from a development-stage project to see a producing asset, not only building a mine but the processing for that and turning it into a finished product.

When they look out four years, because of the lithium price, the commodity going up so much over the last number of years, obviously there's people out there looking to find lithium. So eventually, the higher prices will bring in more supply. I just think they're really being aggressive and overestimating the time to that supply coming on the market.

As far as your comment that they were buying, what New York Wall Street does, it never ceases to amaze me, and they get away with it for decades and decades in different areas. So it wouldn't surprise me that someone's talking bad about a sector so that they can acquire the sector. You've noticed most of the stocks, the producers, have bounced back quite quickly here, or are starting to bounce back. Same with the explorers and some development companies. I think the move down has ended.

Gerardo Del Real: Well, let me play devil's advocate a bit. Their assumption was that there would be an oversupply by 2025. Obviously, that prices would fall by 45% by 2021. Let's assume that they're halfway correct. Are there companies out in the space that are attractive, even if that comes through? Maybe companies that have catalysts within the next 12 to 24 months that would still benefit from the current lithium bull market that we're in.

Jeff Phillips: Again, I'm not saying they're correct, but if you want to play a game and say they are correct, I think the demand due to electrification is going to be even greater than most people realize. But let's assume they are correct. Again, my niche market that I invest in as a contrarian, again, sometimes I sit for a long time, like uranium lately. I'm patient, but again, this isn't really a contrarian play to me, the lithium sector. It's an event that's happening now with the news and the prices of lithium. So again, you've seen a multitude of companies come out. You've got the producers. Again, if you believe the timeline that they've put forth, owning a producer probably isn't a good investment over the next three, four years if prices are going to come down on that timeframe.

But that's not what I speculate in. I speculate in companies. I never want to build a mine in any commodity. I want to find something. I want to have a reason that what I'm going to find, or have already found, is going to be interesting to someone much bigger in the space so they are interested in buying my asset. So I only look at companies, and there's only a handful of all the multitude of lithium companies that have propagated in the last several years, there's only a handful of real companies to me, that have the opportunity to actually put the ball in the net and score a goal, and that's selling your company. That's what I look for.

Gerardo Del Real: Excellent. What are you looking at in this space right now? Are there specific companies that you like?

Jeff Phillips: Well, again, in interest of full disclosure, a very large holding of mine and a company I consult for, is a company called Advantage Lithium (TSX-V: AAL), listed on the Toronto Stock Exchange. Advantage Lithium is partnered with Orocobre, the last company to actually build a new lithium producing asset, down in the Cauchari Basin in Argentina. That joint venture, again, when it was made with Orocobre with Advantage Lithium, basically gave Advantage Lithium the right to earn 75% of that asset.

There was already historic resource there done by Orocobre. Advantage has been drilling that now for the past four or five months and had fantastic results, both in the northwest section and also in the southeast section, where I think they can expand that historic resource. My own numbers looking at what they're coming out with their drill results, I think they're going to exceed what they were hoping to do when they did that deal with Orocobre. I think that asset's going to become much larger.

Again, so you have a larger asset, so why am I interested in that? Again, coming back to how do I put the ball in the net? How do I score a goal? Well, if you look at the Cauchari Basin, right now you have Lithium Americas there with a discovery, and a quite well-known company that's backed by, I believe, a Chinese investment, also SQM, one of the largest producers of lithium. You also have Orocobre's producing asset in that basin. They're producing lithium there now. And you also have Advantage Lithium now with a discovery in the same basin, and is the smallest player in that field. And again, Orocobre's backed by Toyota recently, with 15% investment in Orocobre.

You see a lot of players in this basin. Advantage has said that they'll have their new resource out soon. I think that resource is going to surprise to the upside. It's in an area where we're already seeing development. We're seeing big players, from Toyota to SQM, to Orocobre, a smaller player, then smaller Lithium Americas, and tiny Advantage Lithium. So, Advantage Lithium, by far, would have the smallest market cap of those companies.

I look at that company in the next 12 months as something that could be taken over very easily. And there's a multitude of people to kick the ball in the net for me. That's why I like Advantage Lithium. But again, I am a large shareholder. I consult financially for the company. The company is fully cashed up, so they are able to develop this asset over the foreseeable future. But I really don't expect Advantage Lithium to be around 12 months from now, if not a lot less. I think this resource they come out with will be quite impressive, but we'll see.

Gerardo Del Real: Do you think the potential supply of lithium that they would be able to provide to a company like, let's say, Orocobre or Lithium Americas, if they were taken out, would be on the lower half of the cost curve?

Jeff Phillips: Yes, I do. Looking at the numbers that are coming up with the drilling they're doing, I absolutely believe that. Again, I think that, even if you're assuming the report by Morgan Stanley - that's correct, right? It was Morgan Stanley who came out with the report?

Gerardo Del Real: Correct.

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Jeff Phillips: Basically, again, even if you assume that, I'm not playing what happens in the lithium sector five years from now. I'm looking at an asset that I'm already seeing drilling, growing an existing asset. I've got four other major players in the area backed by two deep-pocket partners from other areas. I absolutely think this district will get consolidated. And again, that will go towards, at some point, providing Morgan Stanley's advice right, that prices of lithium will come down because there'll be additional supply. That's what happens. But they'll still be making money, these larger companies, and again, they have to add to that. Again, that's why I like Advantage. They're a small player in a very well-known area that's getting better well known, and they're having great success with the drill bit.

Gerardo Del Real: Let me ask you another question, Jeff. I actually visited that project last year, and one of my main takeaways, I was so impressed by the exploration portfolio outside of the Cauchari joint venture. What do you see as potential options, and I know I'm getting a bit ahead of myself here, assuming that the company is a takeout target and it is bought out. What do you think would happen to the other four properties they have in their portfolio? Because I've got to tell you, the infrastructure for those is absolutely excellent. I would love to see that become a new company, and that to get attention as well.

Jeff Phillips: Yeah, as a large shareholder you're only speculating right now. You're also assuming, which is a dangerous thing. Again, I do believe, without the overall markets completely falling apart, I think that this is a takeout target in 2018, Advantage Lithium. What I hope to see, and I've seen this with other companies I'm involved with. One we talked about in Mexico earlier off the interview. But what I've seen is that the best idea would be that if they sell this asset to one of the bigger players in the district, is hopefully to spin out the other assets to shareholders in a new vehicle.

Again, those assets came from Orocobre, the same as the one that I believe, in the basin there, that has the opportunity to be taken out. Orocobre isn't one of these companies that just came out in the last two years and tried to find a lithium project because lithium prices have gone a lot higher. They've been down there for a long time. These projects were picked very carefully. Again, I agree with you. I can't say that they will do that. And again, obviously, if I was Orocobre, and that ended up being the buyer, Advantage Lithium, I may want those assets back if I'm buying the whole thing. But if it was somebody bigger, I may drive the bargain that yeah, you can have the district, but I'd like to see a spin out. But we'll have to see. We're assuming a lot, but absolutely, that's possible.

Gerardo Del Real: Excellent. Jeff, thank you so much for your time. Is there anything else that you'd like to add? Anything else that you like as a contrarian in this space? You mentioned uranium earlier.

Jeff Phillips: Yeah, I think uranium if you're patient. Obviously, no one cares about uranium. The stocks are sort of sitting there doing nothing at this point. They've sort of found the bottom and bounced off that bottom a little bit. Typically, that's how a bear market ends. Again, I can't tell you when the bull market begins, but there will be speculation in that space, so quality uranium plays look good to me, and companies doing the right thing.

You and I talked before the interview about the recent announcement from Almadex Minerals down in Mexico that they've brought in Newcrest as a major partner in the project that's in Almadex and they're spinning all the other assets out into a new company. And that's the third time because originally, as you remember, Almaden was the first company, and they spun out Almadex. Now they're spinning out a third company. And as what I believe is a new bull market in the resource space that began slowly and bottomed in 2016, I'm going to be rewarded greatly as a shareholder of that company for being patient over the years in a bad market when all three of those companies turn out to have major assets.

That's the sort of thing you and I were talking about with Advantage. It'd be nice to see. Again, I'm fairly confident that we have a good shot at being bought out there. But in a perfect world, I'd like to see the exploration assets spun out into another company. I'd like to have another kick at the can, which is all free because I sold the original asset and made money.

Again, we didn't touch on this, but I think if the resource just comes out at Advantage Lithium on the historic side, I think if we look at recent investments over the last 12 months in the space, if that resource comes out to where I think it can come out to be, looking at the drilling, you're talking about compelling value versus the current price.

Gerardo Del Real: What type of returns do you look for in the juniors given the high-risk nature of the sector. What do you need return-wise to make it worth the risk?

Jeff Phillips: What I'm looking for, in high-risk stuff, I need to have triple-digit returns to speculate because again, there are lots of things that can go wrong, country risk, world politics. You need to have 100%-, 300%-type returns in a 12-month timeframe.

Gerardo Del Real: Well, Jeff, you know I come to you for advice on many different issues. Thank you as always. I appreciate your time and your insights.

You guys got a top pick in the lithium space, a potential takeout target in 2018, and perspective from one of the best in the business. Thanks again for your time Jeff.

Jeff Phillips: Thank you for having me, Gerardo.

For the past decade, Gerardo Del Real has worked behind the scenes providing research, due diligence, and advice to large institutional players, fund managers, newsletter writers, and some of the most active high-net-worth investors in the resource space. Now, he is bringing his extensive experience to the public through Outsider Club, Junior Mining Monthly, and Junior Mining Trader. For more about Gerardo, check out his editor page.

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