Republished with permission of Brent Cook, originally published in 2014:
By Brent Cook of Exploration Insights
As we all know, for most speculators and investors the past few years in the mining and exploration sector have been disastrous. However, there are a number of fundamental trends that have been set in motion over the past few years that follow upon the previous decade long bull market that point to an improving investment climate for the junior miners. We will deal with that below and lay out some useful rules of thumb for interested investors; but first, let's briefly consider where we are today.
With inflation expectations low and metal prices apparently contained, I don't see a pending catalyst to pop metal prices or entice the crowd into our antiquated sector. Further, given the mining sector's very poor returns to investors who bought into the commodity boom and currency debasement story, it is difficult to see them stepping back in again. Where the next big slug of new money for mining and exploration will come from is not apparent.
Barring a significant rise in metal prices, the larger mining companies will continue to cut wherever they can. This means: people, projects, exploration, and development. Most will also be forced to lower production costs via high grading—a process that ultimately guts a deposit, rendering rock previously classified as ore, as waste.
It also means we are unlikely to see a buying binge by the miners because they are in the unenviable position of proving that mining their current deposits is a viable business. Good luck on that one!
Money will remain tight for development projects, extremely limited for exploration, and virtually non-existent for conceptual ideas. Mediocre junior miners, and explorers without sufficient funds to survive the year, will be decimated. Therefore, I expect 2014 will also be another tough year for most explorers.
However (and I need to point out that this is the most positive I have been for some time) 2014 should be a good year for investors to begin positioning themselves in the better metal deposits, mining companies, and the most competent explorers. The reason is quite simple: the industry is not finding enough economic deposits to replace mine production.
The drastic cost saving measures being implemented by most miners, combined with the increasing difficulty and cost of exploring, plus the length of time to permit these activities, is compounding the already low odds of discovery success. Throw in the pervading political, social, environmental, and financial uncertainties of exploration and mining, and we are virtually guaranteed the industry will be devoting less time and money to finding the fewer and fewer deposits that might be viable. This dearth of exploration comes despite strong global metal consumption and the fact that a deposit found today would take between 4 and 20 years to begin producing. We are not replacing the 2013 global gold production of ~86 million ounces, ~7.4 million ounces of platinum, or ~18 million tonnes of copper, etc.
There is a pinch point coming sometime in the future that will coincide with the "investing" crowd waking up to the fact that mined Bitcoins actually don't go into refrigerators or cars, nor factor into a central banker's view of the world. We have covered this topic many times in past EI issues—this very simple idea is the one "macro-view" that seems most likely to be proven right, eventually. Quality metal deposits and the people capable of finding them will become increasingly valuable the longer this bear market lasts.
With that prelude out of the way, we here at Exploration Insights would like to offer those of you still interested in the junior mining sector some guidelines and rules of thumb for junior mining speculators.
The following compilation summarizes ideas collected from correspondence between myself and a number of accomplished friends in the industry—specifically: Ron Stewart, Managing Director Clarus Securities; Quinton Hennigh, CEO Novo Resources and all around top geologist; and Steve Ristorcelli, President Mine Development Associates.
Although there will undoubtedly be good projects or companies that are screened out by these "rules", in the long run I have found it to be more important to first, avoid a loss and next, concentrate on a gain. Money lost is hard to win back; and losses are especially painful if the writing was already on the wall.
The Rules and Guidelines. . .
An initial company review can be done at one's desk, and should take no more than about 90 minutes. Easily more than fifty percent of companies fall out at this first-stage review. Information that a company chooses to present on (or withhold from) its website provides valuable insights into the company's competence, or lack thereof, as well as its general approach towards exploration. In addition to the working capital, debt, burn, share structure, executive compensation, asset ownership, project jurisdiction, and management bio's that should be readily obtainable from page one, notice how the company is presenting itself.
Also useful "uh-oh" data points include:
With regards to drill holes:
Does the company provide sufficient supporting documentation for whatever results or claims they are issuing? This is really important.
Although most of you are unable to take a review to this level, we are including them here as we think it is important to understand the field review process. This is really where the rubber meets the road.
Geology is a subjective, interpretive, science; meaning, it requires thought and contemplation that goes beyond the capacity of any computer. It also means interpretations will vary between "experts" and change over time as more data becomes available. The simple act of drawing a fault contact or soil assay contour by hand on a map incorporates everything the geologist has seen and mapped in the field combined with previous experience on other projects and a subtle "feel" for what is happening at depth that cannot be captured in a digitized map based on GPS coordinates.
Presumably, your site visit will include a tour of the rocks (mine or core shack) and general site works, plus allow you access to the technical and management types. Ron Stewart is responsible for most of this simple guide to conducting a field-based resource and reserve model review, and I agree 100%.
With that, I wish you all success and luck in 2014. It could be a pivotal year for junior mining and exploration investors.
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