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Info Nugget's News (Precious Metals & Macro Report)


Staff member
  • Date Posted: November 26, 2020
  • Research Reports
  • Precious Metals & Macro Report
Precious Metals & Macro Report
Disclaimer: The views expressed in this report are not financial advice. The mention of particular securities, funds or financial products is not a recommendation to buy or sell. The information provided is educational only and does not consider the personal objectives, circumstances or needs of the reader. The reader is advised to obtain professional financial advice before making any investment. All investments carry risks and have potential for losses. While all care is taken, no warranty is made in respect of the facts and figures in this report. We are not liable for any loss suffered by the reader with respect to their use of, or reliance on, any information contained in this report.
Precious Metals Charts
Despite being under some pressure in the lead up to the U.S. election, the gold price has been quite resilient. In the previous issue of this report, a number of possible support levels were shown all the way down to $1680. In reality, the price held at $1860 and now appears to have made a good double bottom there. After the result of the U.S. election became clear, gold surged above the key level of $1920 and appears heading to $2000 again.

x1 Figure 1 – Gold price chart as of 7 November 2020

The result of the election was never really likely to be a major long-term issue for the gold price. Neither side of politics will turn around the fiscal problems in the U.S. and monetary policy will continue to be supportive. Also, the split Congress probably means there will continue to be gridlock over major structural economic reforms. A Biden presidency may at least remove short-term tweet-generated noise from macro markets.
x2 Figure 2 – Result long term irrelevant for gold price (Source: Forest For The Trees LLC)
Over the last seven years, precious metals have tended to be weakest in the three months to early December, often finding a bottom there and moving well in January and February.

x3 Figure 3 – Seasonal weakness often until early December

The silver chart continues to mimic gold with the expected extra volatility. Price has regained the uptrend line since the March bottom but in the short term does appear slightly less bullish than the gold chart. There may still be some work needed to remove some of the excesses of the hyper-move in August when the price briefly reached US$30.

x4 Figure 4 – Silver price chart as of 8 November 2020

One of the more interesting movements since the March COVID bottom has been in commodities. At the time of the March downturn, conventional market wisdom was that the demand destruction from limited economic activity would mean lower commodity prices. While that has been true for some commodities, such as oil, the vast majority have appreciated. In fact many commodities are now trading well above pre-COVID prices.
Of course the one thing linking all commodities is the currency they are priced in: the U.S. dollar. The action of the Federal Reserve to devalue the U.S. dollar has really overridden any preconceived demand destruction for commodities. And demand has actually stayed strong in many commodities for reasons that are not entirely clear. Government stimulus across the world and perhaps general boredom from being stuck at home may be propping up retail and creating perverse shortages in a whole range of items. Home renovation, electronics, bicycle riding and golf for example have seen massive increases in Australia at least. You can see this in the results being reported by local listed retailers.
The increase in demand is surely only temporary but the monetary devaluation is permanent (QE forever). This devaluation should continue to support commodity prices and particularly base metals.

Dr Copper
Copper is often used as the bellwether for the commodities space and for economic activity in general. The phrase ‘Dr Copper’ is used because it supposedly has a ‘PhD in economics’. The phrase is from a quaint time before markets were dominated by central banks and fiscal stimulus, and when commodity demand was linked to productive growth.
Copper can also be a signal for inflation expectations and right now the chart is very much signalling inflation is coming down the pipe. The copper price has spent six years in the doldrums below US$3.30/lb after peaking at US$4.50/lb in 2011. After the March spike low to US$2/lb a clear double bottom has formed on the long-term chart with the potential of strong upside if the price can break above US$3.30/lb.

x5 Figure 5 – Copper price chart as of 8 November 2020

The weak price environment of the last six years has meant a lack of supply from new projects coming into the market. Some incremental production growth is forecast from existing mines but the mega green-fields projects needed out past the next few years just aren’t there. Given the long lead time to develop a large project this situation is now ‘baked in’. If the copper price does start moving it will take years for supply to catch up meaning the prospects of a sustained bull market are good. This is similar to what happened in the early 2000s.

x6 Figure 6 – 25-year copper price chart (Source: TradingEconomics.com)

The broad situation for many of the other base metals is similar. Zinc and nickel have strong fundamental outlooks underpinned by a shortage of quality projects.
All of this is considering only the supply side of the equation. Demand for base metals is still a story of growth in developing markets (mainly China), but if the ‘green-tech’ story continues to play out with electric vehicles and the like it should also underpin demand for base metals in developed markets for many years.

Copper Miners
Given the rallying copper price some of the mining stocks have performed well over the last few months. One of the largest pure-play copper producers in the world is Freeport McMoran and its stock has doubled in the U.S. since June. Oz Minerals on the ASX, a medium-sized, pure play copper producer is up more than 60% over the same time period.
The speculative end of the market has seen some decent moves from developers/exploration plays like Hot Chili on the ASX (up >200% since June at the time of this report) and SolGold on the LSE (up a more modest 20% at the time of this report).
Most of the largest mining companies in the world such as BHP, Rio Tinto and Barrick have a decent amount of copper exposure in their portfolio but all have publicly signalled a desire to obtain more. These companies have a good look-through on the supply difficulties given they get to see the struggles of profitably mining and exploring on a daily basis.

x7 Figure 7 – Copper miner and developer chart over last 6 months
Note that this chart is shown for historical purposes only and is not a recommendation or prediction of price movement for any of the stocks mentioned.

M&A Activity Lights Up the ASX Gold Sector
On the 6th of October there was big news for the ASX gold mining sector with the announcement of a merger-of-equals between Northern Star Resources and Saracen Minerals. Both companies have grown in recent years to be the 2nd and 4th largest listed Australian producers, respectively. The proposed merger still needs to be voted on by Saracen shareholders with formalities expected to be sorted out by February 2021.
Northern Star will absorb Saracen, with Saracen shareholders offered 0.3763 NST shares for each SAR share held. This makes the transaction a ‘nil premium’ deal as the share conversion matched the company share prices the day before the deal was announced. This is similar to some of the other mega mergers in the gold sector like Barrick–Randgold in 2019.
The merger comes after each company bought a half of the Kalgoorlie KCGM (‘Super Pit’) assets at the beginning of 2020. Each company had been gushing in praise for the other during the year in presentations as they realised that their operational philosophies were quite similar.
The combined FY21 production guidance for the ‘MergeCo’ is 1.62 Moz making it the 8th largest producer in the world by output and 6th largest by market cap. This makes it a true ‘major’ world gold producer joining Newcrest on the ASX. (Majors are generally defined as having greater than 1Moz in annual production.)
Importantly, the combined entity will have all its production from ‘tier 1’ jurisdictions in Western Australia and Alaska. Many of the other major companies have at least partial production from riskier jurisdictions in Africa or the Pacific. In a time when many of the other majors do not have production growth, the MergeCo has also defined a path toward 2Moz over the next five years. This is from its existing assets only and ignores potential processing synergies from adjacent infrastructure in the WA Goldfields.

x8 Figure 8 – Proposed NST–SAR merger puts combined entity into top-10 world producers (Source: NST)

ASX Specs Retrace from Highs
Commenting on previous precious metals bull markets, many analysts have mentioned the cascading effect where money flows to the biggest companies first; then to mid-cap producers; then to the junior producers, developers and explorers. Gold also tends to outperform silver in the early stages of a bull market and silver then plays catch up. The general reason for the cascading effect is that the early investors sell some of their holdings and use the profits to buy other precious metals stocks whose share prices have not yet moved.
Mid-year, a wall of money hit the sector across the board and there was minimal cascading. If anything, the mid-caps and junior producers under-performed as money flowed to the more speculative end of the market. Many exploration companies had huge moves to the upside, increasing three- or four-fold within a few weeks on the back of excitement from the drill bit. Often a single high-grade intersection would be enough to get the market frothing. (Never mind that the intersection was narrow, deep and/or with insufficient adjacent hits to form a mineable resource.)
One common theme for these companies is that they do not have published feasibility studies or reserves to give the market a guide on potential project value. In fact, some have not even defined indicated resources. (Recall that the key difference between resources and reserves is that reserves require the consideration of economic extraction and the study of all enabling factors such as geological confidence, engineering, metallurgy, environmental and social.)
A pre-feasibility study (PFS) or Definitive Feasibility Study (DFS) will provide a sum of the discounted cash flows once in production and an estimate of the capital cost to build the mine. The output of this process is known as a net present value (NPV). Without an NPV, project value tends to be more subjective and the share price is more likely to be speculation-driven. Sometimes early stage valuation relies on rule-of-thumb ratios such as market cap per resource ounce, but these ratios can be misleading as the quality of resources varies significantly between companies.

x9 Figure 9 – Selection of junior exploration plays on the ASX over last 6 months
Note that this chart is shown for historical purposes only and is not a recommendation or prediction of price movement for any of the stocks mentioned.

Rising Costs of Australian Gold Producers
Given the price of gold in Australian dollars has moved from A$2150 to near A$2700/oz over the last 12 months, it is notable that the shares of some local gold producers (i.e. with majority of production in Australia), such as Regis Resources (RRL) or St Barbara Mining (SBM), are down on a 12-month basis. Investors often focus on the gold price expecting the miners to follow. Margin is ultimately the most important number in any business, and that means looking at costs not just revenue.
All-in Sustaining Cost (AISC) is an industry standard way to measure per ounce costs of gold production. (The methodology can be applied to other metals as well.) Importantly the AISC covers some of the capital cost of sustaining operations. Before ~2013 the industry standard was the ‘cash cost’ measure which was inconsistently applied across companies and a poor guide to actual profit margin. Ironically the AISC measure has somewhat gone the same way and larger producers are now using the ‘All In Cost’ (AIC) which is the most transparent and includes all costs the company incurs even green-fields exploration or expansion capital.
The AISC of the top-five local producers (excl. Newcrest) has generally increased by 20–50% in the last three years. There are a few factors behind this:
  • General depletion of higher quality ounces with new production being lower grade or with higher stripping (waste to be moved to get to the ore).
  • Some companies under-invested in exploration around existing operations
  • A decision to prioritise growth in production (via acquisition) rather than focus as much on costs.
  • Lower capital investment by companies in the gold market downturn of 2013–17 to maximise free cash flow and pay down debt.
The general gold mining industry is doing well now in Australia which means wage pressures starting to return. This was a major theme of the Australian (and global) mining sector between 2004–12, but during the downturn in 2013–17 there was rationalisation of workforces, mine closures and an oversupply of labour. Many companies in Australia were making less profit per ounce in 2011 with gold at A$1600 than with gold at A$800 in 2006. Energy prices were a major factor back then too in rising costs, but have so far stayed low during this bull run.

x10 Figure 10 – Rising costs for many Australian gold producers in recent years

From a revenue standpoint, many ASX-listed gold producers still have legacy hedging arrangements at much lower gold prices. Hedging means they have committed to sell a certain number of ounces at a certain price and time.
Generally, the main ASX-listed producers are selling 20–35% of their gold into hedges (the latest quarterly report for each company lists hedging commitments). In the September 2020 quarter the five companies above had an average selling price for their gold of between A$2150/oz (SBM) and A$2500/oz (NST). New hedge commitments are not being added at the same rate as those being delivered into, meaning the overall hedging rates are coming down and companies have more exposure to spot prices.
Regis has a particularly low hedge still selling about 25% of production below A$1600/oz. That’s more than A$1000/oz it is missing out on, or millions in quarterly revenue. On the other hand, Northern Star has 13% of the next three years of forecast production hedged, the lowest of the group.
Outside of the mid-cap producers, West African Resources (WAF) and Medusa Mining (MML) on the ASX have no hedging commitments giving them full exposure to spot gold prices.


Staff member
Research Reports

Posted on: May 6, 2021

Precious Metals and Macro Report​

Disclaimer: The views expressed in this report are not financial advice. The mention of particular securities, funds or financial products is not a recommendation to buy or sell. The information provided is educational only and does not consider the personal objectives, circumstances or needs of the reader. The reader is advised to obtain professional financial advice before making any investment. All investments carry risks and have potential for losses. While all care is taken, no warranty is made in respect of the facts and figures in this report. We are not liable for any loss suffered by the reader with respect to their use of, or reliance on, any information contained in this report.

Precious Metals Charts

The month of April has been good for gold with a solid bounce from a 9-month low around $1,680 on Mar. 31. As mentioned in the previous report, the high $1,600s was expected to act as a firm support level given the amount of price action at this level in 2020.
The technical target from the double bottom at $1,680 is ~$1,820 and short-term trading action appears to have some underlying strength, suggesting this is achievable soon. On a medium-term time frame, however, it’s hard to be overly bullish until first $1,850 is overcome, and then ultimately $1,950.
Gold miners have been leading the gold price on the down move and many bottomed in early March. Price action in the large caps has been strong with many up 20% from the lows. If the tendency of miners to lead continues then a move into the $1,800s looks likely.
Figure 1 – Gold price chart as of Apr. 26, 2021
Silver prices continue to trade sideways in the middle of the range carved out since peaking last August. From a medium to longer-term lens the silver chart remains stronger than gold.

Figure 2 – Silver price chart as of Apr. 26, 2021
After a few weeks of pause the copper price has moved back to recent highs around $4.30/lb. The speed and extent of the move in copper is reminiscent of the reversal after the 2008 GFC. That move was followed by a period of a few months of consolidation and it may be that 2021 requires the same before the price can shoot out to record highs. The supply/demand picture is bullish for copper given lack of investment in new mines over the last decade and electrification tailwind.
Figure 3 – Copper price chart as of Apr. 26, 2021

Dollar Wrecking Ball? Doesn’t Look Like It

Last month, I mentioned that a rising dollar (supported by higher yields) was putting some short-term pressure on commodities. My view has been that the dollar is in a correction within a longer-term downtrend that will take it well into the 80s on the dollar index chart. April saw the dollar roll-over at the 93 level and reverse hard. There is nothing in the chart that suggests a dollar wrecking ball is about to take hold. Fundamentally, the U.S. centric view has been that they are much further along the vaccine roll-out path (than Europe in particular) which should be supportive for economic growth. The fact that the dollar is struggling despite that narrative is telling.
Figure 4 – Dollar index chart

Inflation Watch

In April the U.S. released the first set of consumer price inflation statistics that were 12 months since the pandemic shocks of Mar. 2020. These numbers were widely anticipated because they would have strong ‘base-effects’ which could show outsized inflation. Instead the number was a mild 0.6% monthly increase and a 2.6% increase from 12 months earlier. While these numbers were marginally above expectations (0.5% and 2.5%, respectively) in the short term they quelled fears of a blow out to say +3% in 12-month terms.
Figure 5 – CPI since 2019 (Source: WSJ)
Remember that the Federal Reserve has consistently said that they expect inflation in the short term to be transitory. The CPI data released on Apr. 13 fell right into the Goldilocks zone (not too high but not too low). Treasury yields subsequently pulled back from the highs in March and stocks, commodities and gold rallied.
Figure 6 – U.S. 10-Year Treasury yield fading from recent highs
It’s still too early to see if the move in yields since the start of 2021 is in reversal mode or just a consolidation with an uptrend. The below chart of global inflation suggests that consumer prices are likely to keep rising as they tend to lag input costs, which have been soaring of late. As said in previous newsletters, ultimately the Fed will step in with more aggressive bond-buying if nominal yields rise beyond levels that constrain growth in the economy (or more accurately, asset prices).
Figure 7 – CPI lags input prices (Source: JP Morgan)

Archegos Blow-up a Reminder of a System Dangerously Over-Leveraged

A relatively unknown fund (family office) called Archegos Capital Management blew up in late March in a story that has some eerie similarities with the beginnings of the 2008 Financial Crisis. Archegos had been making big leveraged bets (at 5x or more) on individual stock names. The strategy had been very successful in recent months but when some of the trades started going bad the fund quickly fell.
Hedge funds blowing up is not new but the scale and speed of losses here are mind-boggling. Reports suggest the fund lost up to $20 billion in two days. The fund had been using opaque instruments with the largest investment banks in the world including Credit Suisse and Nomura, whose share prices subsequently plummeted. The investment banks had failed to spot the risks that Archegos had been borrowing at different banks using the same collateral.
Similarly, in the last month we’ve also seen the collapse of Greensill Capital which provided supply chain financing to thousands of companies worldwide. Like Archegos, the workings of the privately-operated business were opaque and the linkages with investment banks intricate. Credit Suisse took a bath on Greensill too.
While these stories don’t appear to have the systemic risk of the 2008 GFC, it’s a reminder that today’s financial system is horrifically over-leveraged and just a few short steps away from major issues. As interest rates rise even slightly we begin to see the most over-leveraged businesses start to collapse, in much the same way as a Ponzi scheme. As Buffett says, “it’s only when the tide goes out that you see who is swimming naked.”
The below chart shows how margin debt has continued to rise in the U.S. in line with the S&P 500.
Figure 8 – Margin Debt Levels since mid-90s (Source: Advisor Perspectives)
The leverage in the system combined with over-exposure to equities is a dangerous cocktail that historically has not ended well. The recent surge in retail shareholders is typically another sign of a bull market running on fumes.
Figure 9 – Equity allocation at all-time highs (Source: Bank of America)

Fiscal Policy to Dent Market Confidence?

One interesting development in the last week has been the suggested rise (likely to be confirmed in coming weeks) in capital gains taxes and income taxes in the U.S. to fund Joe Biden’s spending agenda. Up until now, the stock market appears to have been largely immune to the potential for changes, even though they were core planks of Biden’s election platform. The stock market had been rallying on the idea that infrastructure spending would be good for the economy and companies without thinking about funding too deeply (or probably just assumed the Fed would pay for it).
The issue for the U.S. stock market is that after a 12-year bull market many investors are sitting on very large long-term capital gains. Tax changes may spur some investors to sell before they come into effect and put pressure on the overall market.
Proposals in a similar vein are being put forward across developed economies and this trend is likely to accelerate.

What to Look for in a Junior Mining Stock

In previous reports, I’ve mentioned a few things I have learned in a decade analysing junior mining and exploration companies. Here are some more:

Quality of Management

One of the best indicators of success in exploration and mining is if company management has been successful in the past. The reality of the mining sector is that a few talented people are responsible for the majority of value created. Some variation of the Pareto principle applies here (20% of the people account for 80% of the gains).
In theory, a pure virgin exploration discovery could be found by any company but even in this sense, there seems to be a tendency for some to be continually luckier than others. Perhaps this comes down to being better connected and being able to acquire the best exploration areas, or perhaps some people just make their own luck.
One key is to look for management with specific experience in the same commodity and also preferably in the same jurisdiction. A manager with gold experience in WA may not be the best person to manage an iron ore exploration play in West Africa, for example.
Management experience and qualifications should ideally match the stage the company is at in its development life cycle. Generally, geologists are more suited to run exploration companies but once the conversation moves to building or operating a mine then a mining engineer or other operational skillset will be more suitable. A capital markets background is also important the closer a company gets toward mine financing (an area where many struggle). The smaller the company, the more important the board experience is for giving guidance, given that small companies will have very few direct employees (the board members may outnumber the employees in some cases).
I like management to own stock as well so their interests are aligned with shareholders. Preferably the ownership from management would be significant as a proportion of their own net worth and not just a token amount. For the stock to have been acquired on market (at current prices) is also important vs management having been granted cheap options.

Scale of a Deposit

Junior mining is undoubtedly a very tough business. For all the stories of a company going from ten cents to ten dollars, there are many more companies going broke or diluting shareholders such that the shares are near worthless. An investor really needs to find a deposit that has the potential to offer outsized returns to compensate for the inherent risks.
In the very early stages of exploration, before a drill hole has even been drilled, assessing scale is difficult. You could look at other regional deposits to assess the geological potential but this is generally a poor predictor of the scale of a potential discovery (or if one will be made at all). Companies that have at least drilled some holes 50 or 100m deep tend to have a better indication if an economic mineral deposit is there and what it might look like spatially.
Being able to look at drill hole diagrams is important here because it can give clues to if there is further growth in the resource in the ground.
Some key things to look for:
  1. Phrases such as ‘open at depth’ or ‘open along strike’ mean that mineralisation has been found to the extent of the currently completed drill holes (vertically or longitudinally/laterally). Further drill hole extensions will generally have a higher probability of defining more mineralisation. Companies will often not explicitly acknowledge that mineralisation is ‘closed’ in a certain direction so looking at drill cross sections or plans is again key. In the cross section below the deepest holes drilled to the west intersected economic grades so the mineralisation is still open at depth and a further hole is planned to test if the mineralisation continues.
  2. Consistency of mineralisation/grade. For a deposit to be mineable, it needs to be able to be modelled with some degree of predictability about what is in the ground. It is sometimes said that defining a mineral discovery is a bit like three blind men trying to describe an elephant to one another from feeling different parts of its body. If the mineralisation is variable in terms of grade/orientation then it will be difficult for engineers to come up with a plan to extract it, and/or for capital to be made available by financiers. Consistent lower grade material may be more desirable from a mining point of view than pockets of uncertain high-grade material. Most of the largest companies in the mining industry prefer low grade, low technical complexity operations over high-grade, high technical complexity.
  3. For open-pit type deposits (generally less than 200m deep), mineralisation starting from the surface is likely to be much more economical to extract than if it is covered by waste material that will need to be removed. Ore near the surface tends to be softer too, which means it may not need explosives or energy intensive grinding.
Figure 10 – Example cross-section of a near-surface deposit also open-at-depth Figure 11 – Three blind men trying to describe a mineral deposit
A junior mining speculator following the definition of a deposit needs to always be aware that a sub-scale deposit might be defined. In fact, that is the most likely outcome. As soon as this becomes clear the speculation game becomes about damage control. Get out and take a loss (depending on when you entered) or stick it out and see if the company has some other way of monetising the asset. Management of junior developers have real trouble admitting when something is sub-scale or uneconomic and can burn shareholder funds (collecting salaries) for years pursuing a project not worthwhile.
One possible way that juniors can monetise sub-scale deposits is to process ore at nearby processing plants. It is entirely feasible to truck gold ore of say 2g/t at least 150 kilometres if there is a good road network (like in WA’s goldfields region). For this reason, before I enter a junior developer I always look at proximal processing operations and their potential need for ore over the next few years. If a neighbouring producing mine has a short mine-life there is a good chance they are going to try and extend it.

Are you late to the game?

This topic is a little bit less technical and more about feel for the market. Many junior mining speculators get tips from friends/family/forums and start looking into a stock (or commonly not looking at all before buying). With a little bit of due diligence reading stock market forums such as HotCopper you can quickly see if every man and his dog already owns the thing your mate tipped you.
If a lot of people already own something (and are very bullish) then by definition there is a reduced pool of potential buyers to push the stock price even higher. The risk/reward may not be favourable if you are too late to the game. Oftentimes, stocks that are widely owned have created high expectations in the shareholder base and are primed to disappoint. The most frequent example of this is leading into a maiden resource for an exploration company. Shareholders will have been following a drilling campaign for months and one-upping each other by predicting how many ounces/tonnes are in the ground. Invariably the maiden resource will come in below these lofty expectations and the share price will fall (sometimes heavily). The ‘Lassonde curve’ below shows this fluctuation in the lifecycle of a junior explorer or developer. The maiden resource is the transition from discovery to feasibility on the chart.
Figure 12 – The Lassonde curve: Lifecycle of a mineral discovery (Source: Visual Capitalist)
In my experience in this sector it is often the least discussed, under-the-radar stocks that have the most outsized gains (in the medium to longer term). There is a balance here because obviously you don’t want the stock to be so under-the-radar that no one will ever find out about it.

Quality of the Share Register

Companies with a tight share structure and more long term focussed shareholders are more likely to deliver outsized gains. The quality of the share structure is often overlooked by junior mining investors who tend to focus on the market cap or the raw share price. Speculators innately think that a 10c stock is ‘cheaper’ than a $1 stock even if the two companies have the same market cap and fundamentals (see: unit bias).
The problem is that the crowd attracted to 10c stocks are frequently those who are happier trading them for 20% gains and are less inclined to focus on a three or five bagger over say 2 years (it doesn’t help that on the ASX the smallest trading pips are 0.5c which is 5% on a 10c stock). This creates a drag on the share price and a self-fulfilling idea that there must be something wrong with the company. Perhaps most importantly for a junior company, with no ability to generate revenue, it also makes it very difficult to raise money to fund drilling, feasibility and eventually mine construction. Capital raises get done at more dilutionary levels and if the company ever does actually become a miner the profits pie is split between billions of units.
The $1 type stocks on the ASX are more likely to be newer to the market and have done a recent IPO, likely attracting more sophisticated and patient capital. If a mineral discovery is made the share price can quickly reach levels where traders are less interested.
It’s also worth keeping an eye on any specialist mining investment funds on a junior’s register. These players are likely to have specialist technical employees such as geologists and engineers. Generalist investment funds are less likely to have done the technical due diligence but also indicate there is at least some substance to the company.

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