Mining and minerals exploration are tough businesses to succeed at. Rocks rarely behave as you would like or expect and costs are always more than projected. Making money in this industry, either through mining or investing, therefore requires continually updating your knowledge base with new technologies and science. Even more critical to getting ahead in this business are the insights and experiences gained from your peer’s working on projects around the world.
The following Exploration Insights are gathered from my ten-day “road trip” that consisted of a unique opportunity to interact with some of the bigger thinkers in the investing, resource, and political world, followed by a few days at the Cambridge House Investment conference in Vancouver and, finally, the technically-oriented Cordilleran Roundup.
The Roundup is the second biggest gathering (after PDAC) of geologists, miners, prospectors, and promoters in Canada (if not the world). It’s a perfect event at which to catch up with associates actually working in the field and to learn the stories behind the hype. Bottom line, there is a lot of good scientific work going into minerals exploration by junior and major companies. This is happening despite the stifling work environment being imposed by the human relations, legal and safety departments at the big companies (some of the impositions are truly unbelievable) and the demand by junior promoters for “good” results, regardless of their value.
Looking into the junior mining and exploration industry and market, what became most apparent to me after the week’s trips and research is that there are too many junior companies in the sector—way too many. The Canadian brokerage industry is out of control, printing paper at a pace that is only limited by the number of trees between Vancouver Island and Newfoundland (comic credit to Rick Rule). There are too many companies vying for the limited dollars, too many clamoring for attention, too many to competently and efficiently execute an exploration program, and just too many to keep track of.
I honestly don't see how any investor could possibly cruise the conferences or Internet and come away with much more than a feeling of bewilderment and utter mystification as to who actually has a chance at a discovery. Hell, I do this for a living and was overwhelmed by the volume and hype. Even given my reputation as a “discriminating” speculator, I must have been shown 15 “new” deals looking for financing in new vehicles. There were an equal number of requests for help in finding a solid VP Exploration and President for both new and old deals. We’re pushing the limits-- this can’t end well.
Turning to the right side of the balance sheet, nearly all the input costs of exploration and mining are rising, as is the difficulty of finding and developing deposits. Larger exploration programs are going after deeper and more technically challenging deposits that will take tens of millions of dollars to advance, if “encouraging” results are encountered---are they ever not! Porphyry copper targets that begin 400 meters or more below the surface and are predicted to improve up to 1,000 meters deeper are very expensive exploration propositions. Consider the challenge of testing such a blind target with a drill rig sitting at 4,500 meters in the Andes or cut into in the steep primordial forests of Indonesia. What grade and tonnes are required to make a project of that scale and depth work—certainly something considerably above the average porphyry deposit grade. How much will it cost to test the target—certainly more than the average junior can afford.
For anyone speculating in this sector, my advice is to be very, very selective and get advice. If a company does not have sufficient cash to last two years, look out-- money will be tough to come by this year without a splashy drill hole or exceptional target. However, if a company meets either of those two criteria, the dollar spigots will be wide open. There’s money for exploration and development but not for expensive, yet average, concepts and deposits. Unfortunately, as Mother Nature has gamed it, most projects are below average and expensive.
The industry is chronically short of experienced and competent scientists and engineers to perform the work required to find, evaluate, and develop mineral deposits. The result is that much of the work is being rushed, or handled by people without the background to know where and how to find the flaws. Computer jockeys are processing the data, plugging the numbers into spreadsheets, and assuming the results reflect reality. Rocks do not conform to formulas built for Microsoft. Be wary of early resource estimates; I know from experience, and conversations with recognized resource estimators and large companies, that there is a lot of “latitude” being given by some firms. This is a dangerous situation, and one must question why so many large, low grade deposits remain on the shelf.
Turning to the 30,000 foot macroeconomic and political view, I expect next January will look much the same as this January--confusing with economic disaster one-year closer. After a volatile 12 months, base and precious metal prices will be more or less flat, the dollar and US economy somewhat stronger, and the European economy and Euro significantly weaker--minus Greece. China’s growth will have slowed, but not dangerously so, and US and Sovereign debt issues that are all the news now will remain large and unresolved. In the US, Obama is serving his second term, Newt is foaming in a cage somewhere, Mitt has faded into the Caymans, Lindsay Lohan is back in rehab and more of us are wishing we’d listened to Ron Paul—again.
That’s the way I see it.
By Brent Cook
Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.