The Gold Report: The Market Vectors Junior Gold Miners ETF (GDXJ) hit a low on May 16, and some pundits and speakers at the Cambridge World Resource Investment Conference earlier this month said they felt we’d hit the bottom. You are dubious, though. In your June 10 Exploration Insights, you wrote:
China continues to slow, Korea and Japan even more so. India looks to be hitting a wall, and Europe is in a slow-motion disaster. The copper price is declining as are iron ore and base metals in the world that, overall, seems to be deleveraging, with consumption declining. More succinctly, as my Uncle Coyote puts it, “They’re all just swirling ’round the drain.”
Would you share more about your general impressions of investing in mining stocks in this market?
Brent Cook: I don’t typically guess bottoms or play with technical charts. I just look at what I’ve seen happen and make what is hopefully an educated guess as to what is coming. Over the past two years, in excess of $10 billion (B) has come into the junior resource sector via the Venture Exchange alone. During that time, we’ve seen more than 300 new companies listed and probably 3,000 financings. Despite the mad rush of money into the sector, not much of it has actually produced returns as measured by the GDXJ, the junior miner index.
“So what I see happening here as part of the global deleveraging is the people who jumped into the junior miners without looking are now jumping out without looking.”
So what I see happening here as part of the global deleveraging is the people who jumped into the junior miners without looking are now jumping out without looking. They jumped into companies that had resources without digging deep enough to see that they have other issues that complicate the value of those resources. In my opinion, they were willingly led astray by banking analysts touting questionable resource estimates and economic assessments. A lot of money has been lost in the process, and until that works its way out of the system, I think it gets uglier.
TGR: Investors who have been burned are skittish about getting back into the fire.
BC: Indeed. If I were told some company’s 8 million ounces (Moz) was going to be worth several billion dollars and then the stock falls by 75% when a prefeasibility study comes out showing it ain’t, I would have to conclude that I had no idea what this industry was about nor do I have any business ever investing again. That said, there are certainly a few experienced funds in the industry that are still interested in investing and probably relishing the current disaster. eRetail money, which doesn’t tend to be very selective, has been hit pretty hard, too, over the past year and a half. So I don’t see where the new speculative money comes from.
In fact, I see a lot more money exiting than entering as the volatility and chaos being played out in the real world of investing drives people to stuff their remaining cash under the bed where it’s safest. Over the rest of this year, I think we’ll see a lot more junior companies go out of business, hibernating or financing at prices highly dilutive to current shareholders. Junior companies with average or below average projects and management are in trouble and, keep this in mind, most projects are below average despite claims to the contrary.
TGR: In a lot of your presentations, you juxtapose the very dramatic visual of the Carlin Trend’s enormous gold pits with the idea that we are mining the equivalent of the entire Carlin Trend’s production to date every year. You do the same visual using the Bingham Canyon Mine’s massive open pit for copper. Considering what you just said about investing sentiment on the one hand and the need to find more ounces and pounds to meet demand on the other hand, there must be opportunities for the astute investor.
BC: That’s exactly right, and that’s the second part of my presentation. I lay out the bad news, that a large percentage of these companies will go out of business because they don’t have a chance in hell of finding anything of value and they can’t finance. On the flip side, major mining companies are producing 19 million tons/year copper and 83 Moz/year gold. In order for a mining company to stay in business, it obviously needs to replace what it mined with new reserves. Fortunately for us, it can’t do this internally and will need to buy whoever finds the reserves it needs. It’s very, very difficult for them to replace that much, and it’s getting even more difficult for a lot of reasons I go into detail about in my letter. For that reason, legitimate profitable deposits are going to command a serious premium, and people who own stocks in those early-stage exploration companies that pull it off will make a lot of money. But there’s no room at all for error because as suggested earlier, the dumb money has all gone to money heaven and I think it unlikely anyone will bail out mistakes in judgment.
TGR: So investors who want the cream of the crop in terms of mining assets need clarity as to what those assets are. You’ve talked about having to replace the equivalent production of a Carlin Trend every year to satisfy demand for gold. That’s a mind-boggling amount for anyone who knows how big the Carlin Trend is. Where are some of the areas the seniors expect to find so much gold to replenish their reserves?
BC: Their first choice is to find a deposit near where they have operations, be that in Nevada, Peru, Brazil—somewhere they’re comfortable. Quinton Hennigh, a geologist who works with me, went into a lot of detail on this in the June 10 Exploration Insights and again in an interview The Gold Report published June 18. Because he used to review potential acquisitions for Newmont Mining Corp. (NEM:NYSE), he knows the process. Number one, companies are obviously looking for deposits that are profitable. A major mining company that looks at a junior’s project doesn’t just use the third-party resource estimates and preliminary economic assessments (PEAs). The majors do the detail work themselves. You’d be surprised how much their evaluations of a property differ from a third party’s prepared for the seller.
TGR: Are you saying that most juniors’ PEAs are useless to seniors that are seriously doing due diligence on a junior company?
BC: No, certainly not most, but a lot are not to the level a mining company needs to make a major investment decision. I’ve seen too many studies that didn’t quite match reality in costs, and particularly in resource estimates. In my view, too much sloppy work has been going on in terms of resource estimates. We also typically lose a lot of ounces of gold and pounds of copper when converting a resource to an actual mineable reserve. My point is that majors do their own due diligence and their analyses often come up with far less of a resource and valuation than the PEA would suggest.
Think about all the companies that have announced massive resources out there, and then think about the fact that we’re hardly seeing any acquisitions. That tells us they’re looking at a lot more detail than the junior companies do and coming away unconvinced. It’s not that the seniors aren’t hunting. As I say, they have to replace 83 Moz/year of gold production. That’s not an easy task at any gold price.
TGR: Does the slow rate of mergers and acquisitions also indicate that the majors are nervous about deploying their cash? Or that they’re just being more diligent?
BC: I think the latter. They go through a lot of detail. They have to weigh in the risk as well. As I mentioned, they’re looking for something close to where they’re operating, in a stable environment, something that doesn’t have a huge capital expenditure with a low margin—that’s one of the big issues right now. Then political jurisdiction, social issues and the increasing government take all enter into the decision.
TGR: Quinton outlined that—location, location, location—very clearly in Exploration Insights. He also talked about metallurgy and the importance of having accurate testing and assessment of what projects really will produce, and whether there’s potential for higher production as time goes by. In terms of minimizing risk, he pointed out, too, that majors look at the state of the junior’s infrastructure. Has it put in roads and power lines? Has it developed relationships with the locals that are positive and encouraging?
BC: They need people, too. There is a real shortage of qualified people in the mining industry. So when they look at a project or a company to acquire, they look to see if they can get some good people with it. A friend of mine running a midsized Australian gold company recently told me of losing six months of production when two key underground miners were poached to work at the iron ore mines. So people are a key consideration to mining companies these days.
TGR: With that whole mix of criteria as a backdrop in choosing companies, could we talk a little bit about some specific names?
BC: I just completed a field trip to Gold Standard Ventures Corp.’s (GSV:TSX.V; GDVXF:OTCQX) project on the south end of the Carlin Trend. Its recent drilling suggests that it may be on to a significant deposit, a new one. That’s certainly worth keeping an eye on, and as we all know, the Carlin Trend is one of the world’s richest gold belts.
TGR: With a market cap of $200 million, Gold Standard just started trading on the New York Stock Exchange on June 12. Is this stock overvalued at this point based on drilling results and such?
BC: It’s way overvalued. This is pure speculation, but I’ll tell you, we bought it in Exploration Insights when the first big drill hole was announced and I still own it and I’m not selling it because the risk-reward is massive. A major high-grade discovery on the Carlin Trend could be worth billions of dollars. I think Fronteer Gold Inc. (FRG:TSX; FRG:NYSE.A) sold its Carlin style Long Canyon gold deposit to Newmont for $2.3B.
TGR: And obviously, you don’t feel Newmont overpaid for Long Canyon.
BC: No, I don’t think so. If Gold Standard can find a significant deposit on the Carlin Trend, it would be worth a lot. Bear in mind, Goldcorp Inc. (G:TSX; GG:NYSE), Barrick Gold Corp. (ABX:TSX; ABX:NYSE) and Newmont are all active in the district—that’s where the guts of Barrick’s and Newmont’s operations are. Their roasters and autoclaves scattered around the state are desperate for ore, so capital and infrastructure costs there are considerably less than if you found a similar Carlin-style deposit in the middle of nowhere. Miners are right there, roads are there, it’s maybe an hour’s drive from gas stations, brothels and a cold beer. What more could you want in a gold discovery?
TGR: What about other companies in Nevada?
BC: Rye Patch Gold Corp. (RPM:TSX.V; RPMGF:OTCQX) is interesting. We own that one as well, and bought it as soon as I saw that it had staked claims over what used to be part of Coeur d’Alene Mines Corp.’s (CDM:TSX; CDE:NYSE) Rochester silver deposit in Nevada. This is basically a play on Coeur having to buy its claims back. That comes down to the General Mining Act of 1872. If the law holds true, Rye Patch owns those claims and Coeur, to continue its mining operations into the future, needs those claims. So there’s a deal there somewhere, and I think that deal is going to be struck at above the current share price.
TGR: It will be interesting to see how that gets resolved. Any others you want to talk about?
BC: In central Idaho’s old Yellow Pine District, up in the mountains east of McCall, Midas Gold Corp. (MAX:TSX) consolidated the district and has been very successful in proving up gold, silver and antimony resources. It has a resource in excess of 6 Moz in all categories in three main deposits, grading almost 2 grams/ton, open pittable. The antimony and silver scattered through it provides an extra byproduct. Permitting is likely to be a long endeavor, but probably doable, because of this area’s long history in large-scale mining operations. Midas is doing some intelligent things, environmentally speaking.
This area is in the headwaters of one of the forks in the Salmon River. Salmon spawn in the river below, but can no longer get up the river because the old pit stopped them. So Midas plans to reroute the river so the salmon can continue up above the mine. Also, because the metallurgy is more complex, Midas probably will produce concentrate and may truck it to the Snake River Plain for processing. As a result, no cyanide will be used onsite.
TGR: Have you stomped around on this property yet?
BC: Not since Midas came in. I looked at it probably about 10 years ago as a consultant and in fact in my teens I used to run around Yellow Pine fishing and causing trouble. Another positive is that Midas is now led by Stephen Quin, who’s been very successful growing and selling companies in the past including Miramar Mining Corp., which was sold to Newmont, and Sherwood Copper Corp., which was combined with Capstone Mining.
TGR: What’s Midas’ next big step?
BC: It is currently drilling now and working on its prefeasibility study. That’s probably the next big thing.
TGR: Mexico is a fantastic mining address despite what some consider jurisdictional risk. But again, we’re seeing more and more discoveries there, surprising some but probably not you.
BC: Mexico is a fantastic place to explore, although it has become more dangerous, particularly in the Sierra Madre. But it’s still a great place to look, and there are areas that I have no problem going to. Almaden Minerals Ltd. (AMM:TSX; AAU:NYSE) is on the top of my list in Mexico. I like big, big geothermal or hydrothermal systems because they produce big deposits and big companies like big deposits and pay big bucks for them. Almaden’s Ixtaca property in Puebla is a very large system. So far, the company has defined one zone that’s looking pretty good. Almaden hasn’t produced a resource estimate, but it certainly has good grade and, more importantly to me, the property has the potential of producing a very large precious metal deposit.
“Mexico is a fantastic place to explore.”
In my view, Ixtaca is just a piece of what eventually will be found there. It’s complicated. It’s covered, so you’re drilling blind, but that’s a really interesting system run by a competent group of people. And with $25M in the bank, Almaden isn’t going to be diluting us right away.
TGR: What about other companies in Mexico?
BC: Riverside Resources Inc. (RRI:TSX) has a number of joint ventures with different groups on projects scattered in reasonably safe areas throughout Mexico. Riverside is one of the prospect generators that turns up ideas and brings somebody else in to spend the high-risk dollars. If you consider studies by various groups showing that maybe one out of a thousand prospects actually turns into an economic deposit of some sort, it makes good sense to generate targets and then vend out the high-risk, high-cost part to somebody else. That way, as shareholders we maintain our piece of the business as opposed to losing it when the project gets drilled and probably fails.
TGR: Almaden is also among your project generators, and isn’t MAG Silver Corp. (MAG:TSX; MVG:NYSE) like that in some ways?
BC: MAG Silver is different. MAG is drilling in tandem with Fresnillo Plc (FRES:LSE) on the Juanicipio project, and just put out a solid PEA on that. It is also drilling its Cinco de Mayo project and ventured into one other project that it has been drilling as well. So, no, MAG Silver spends its own money. It is also earning in on its deal with Canasil Resources Inc. (CLZ:TSX.V) and has put out some decent results, although I haven’t watched it closely. To me, it’s all about the Juanicipio silver deposit and how and who develops it.
TGR: Let’s get back to your prospect generators.
BC: In addition to Riverside and Almaden, we have Lara Exploration Ltd. (LRA:TSX.V), Virginia Mines Inc. (VGQ:TSX) and Altius Minerals Corp. (ALS:TSX.V). A few weeks back, I reviewed the whole portfolio, and among those five companies we’re involved in 88 potential discoveries, 88 projects being drilled and worked by somebody else. A free ride on 88 chances of a discovery at minimal financial risk to us—that’s pretty good odds.
TGR: Especially when you think about the brain trust that’s behind those companies.
BC: That is an important aspect, for sure.
TGR: What other companies should we talk about?
BC: Lydian International Ltd. (LYD:TSX) has an oxidized gold deposit in Armenia. We’ve owned this one since I visited a few years ago. It is now in the final stages of putting out a feasibility study that I think will show it’s worth quite a bit. Lydian has advantages in that the cost of recovering oxidized gold is fairly low and with the deposit on a hill, the cost of mining also is fairly low. This will be the type of low-cost operation I think a midtier company would be interested in taking over.
TGR: Is the Armenian government supportive and a good partner?
BC: Yes. The government has been very, very supportive and keen to bring in foreign development leading to jobs and taxes. I’ve been there, been through the country and met government officials. Armenia is a great country to explore in—desperate for development that will bring in some tax revenue. The government has been as helpful as you can imagine in expediting all the permits Lydian has needed. In fact, its contract with the government requires Lydian to advance the project at a certain pace.
TGR: Lydian apparently is doing a lot of things socially in the community, which seems quite unusual for a junior company.
BC: Precisely. That’s one of the points Quinton made as well. When a major looks at a junior, if the company has the groundwork in place, the environmental studies out of the way, the social issues settled and the people on board who build schools, put up hospitals, support soccer teams, those sorts of things—if the dirty work, as Quinton calls it, has been taken care of ahead of time, it’s much easier for a major to acquire that company.
TGR: Let’s talk a little about other countries you like. You’ve been to Colombia many times. We saw a swelling in investor interest in Colombia in 2010 and 2011, but not much progress in juniors advancing their projects there this year. What’s behind that slowdown?
BC: Geologic reality rarely matches the hype. Colombia is a well-endowed gold province. That’s both good and bad. It’s good in that there certainly are some major deposits. Ventana Gold Corp. (VEN:TSX) was taken over. Continental Gold Ltd. (CNL:TSX; CGOOF:OTCQX) has made a great discovery and AngloGold Ashanti Ltd. (AU:NYSE; ANG:JSE; AGG:ASX; AGD:LSE) has made a few. On the other hand, there’s so much gold in Colombia that everybody and their dog rushed in, staked a claim with a gold vein on it and raised money. But 99% of those gold veins will amount to nothing of any significance. That’s the reality. People went there, took some samples, had some good grades and promoted it as if it were the next Ventana, when in fact that’s not the case. Most of what will be found down in Colombia will be small veins or low-grade, small porphyries.
TGR: And the garimpeiros are doing their best to drag out a few ounces from those small veins and porphyries. A lot of artisanal mining persists in Colombia.
BC: Exactly. Not geologically but in terms of gold distribution, it’s not that different from the Yukon. We saw the same thing in the Yukon, with 200 companies going there and staking claims, each with a soil anomaly and a vein of some sort on it. But concentrating that geologically into something that makes a lot of money is a very rare situation. So we’re seeing the reality in both the Yukon and Colombia that most of the gold will be of no economic significance. Gold doesn’t sell for about $1,600 an ounce because it’s easy to find.
That said, Continental Gold and AngloGold Ashanti are working there, and I’m certainly keeping an eye on Miranda Gold Corp. (MAD:TSX.V), which follows the joint venture model. The president of Miranda, Ken Cunningham, has a project ventured out to Red Eagle Mining Corp. (RD:TSX.V), has staked quite a few claims and it is in discussion with other groups to come in and work its projects.
Red Eagle also has a big drill program going on its own property in San Ramón, a potentially interesting project that I’m also watching. It has just completed two drill holes into the San Ramon vein. They are encouraging, but it’s drilling along the whole strike length, so until we see a long section that provides an idea of what continuity looks like, we’ll just keep watching.
TGR: Do you have any parting thoughts you’d like to add about investing in the market now, beyond the obvious need to be very, very careful in choosing the companies we invest in?
BC: I think we’re approaching an excellent time to be investing in this sector. It’s down. People hate it. But there are some real gems out there. By identifying those companies or projects that really offer the potential to turn into a major discovery, something that a mining company will want to buy and put into production, I think a lot of money will be made on investments people make over the next six months. But as I pointed out, you must be very selective because no one’s left to bail you out and you have no room for error. Due diligence is key. Talk to the people. Read the reports. Get outside advice from someone who knows what they are talking about. It’s really important. After all, it’s your money, do everything you can to improve the odds of success.
TGR: Thank you, Brent.
[Fresh from the Cambridge World Resource Investment Conference in Vancouver—where Brent Cook gave a "Turning Rocks into Money" presentation that provided tips and tricks for navigating today's turbulent stock market, served on an exploration panel with Eric Coffin, Thom Calandra and Jay Taylor, and conducted a workshop to answer investor questions about junior mining companies—Cook suggests that Cambridge Conferences give investors access to resources that can help immensely in doing their homework. In Exploration Insights, he points out that these conferences "are free to the public and always a good place to get a 'feel' for market sentiment as well as to visit many companies in a short period of time."—Editor]
Brent Cook, a world-renowned exploration analyst and geologist, is the author of the weekly Exploration Insights, a mining and exploration newsletter that selectively covers junior mining and exploration investment opportunities. Cook has 30-plus years of experience providing economic and geologic evaluations to major mining companies, resource funds and investors. He has worked in more than 50 countries on virtually every mineral deposit type, being involved in projects from the conceptual stage through detailed technical and financial modeling related to mine development and production. He served Global Resource Investments through 2003, providing analysis to retail brokers and in-house funds.