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In today's fast-paced
market, investors sometimes forget that mining is an intricate and
time-consuming science experiment. Investors who can stomach the risk and the
wait are generally the ones who profit the most. Brent Cook, editor of Exploration
Insights newsletter, and Quinton Hennigh, a geologist and contributor to
the newsletter, believe that investments in prospect generators have yielded
some of their best investments, plodding along slowly to unearth some often
spectacular projects. In this exclusive interview with The Gold Report, Cook and Hennigh
discuss why prospect generators are worth the wait.
Companies
Mentioned :Almaden Minerals
Ltd. : Gold Standard
Ventures Corp. : GoldQuest Mining Corp. :
Kaminak Gold Corp. : Miranda Gold Corp. : Mirasol Resources Ltd. : NuLegacy
Gold Corp. : Pilot Gold Inc.
: Reservoir Minerals Inc. : Virginia Mines Inc.
Related
Companies : Midland Exploration Inc.
: Millrock
Resources Inc. : Minera IRL Ltd.
: Pershing Gold
Corp. : Rye Patch Gold Corp.
: Terraco Gold
Corp.
The Gold Report: Brent, Quinton recently
joined Exploration Insights. What does Quinton bring to the
publication?
Brent Cook: Quinton is a geologist
who can see the big picture. He focuses on how a mineral deposit forms and
assesses if it is economic. His contributions allow us to cover a lot more
ground in the same time and our discussions often refine and improve the
final investment decisions. It's a whole aspect to the business that's going
to help me make Exploration Insights better. Given the state of the
junior mining sector, this is the time to be picking up the deposits and
companies that are undervalued or that show potential value based on a real
economic evaluation.
"Because this is
such a high-risk game, we're mostly looking for homeruns."
Quinton came out of
Newmont Mining Corp. (NEM:NYSE) and Newcrest Mining
Ltd. (NCM:ASX). He knows how the big companies work and what their investment
criteria are. Ultimately, our goal at Exploration Insights is to
identify deposits that are going to have high enough margins and be large
enough to attract a buyout or purchase from a major mining company. Quinton
did that at Newmont.
TGR: You and Quinton will be
in San Francisco on Friday, Nov. 16 for the San Francisco Hard Assets
Conference to lead the workshop for investors, "Geo Tips for Tenbagger Investments," sponsored by The
Gold Report. What's the name of the last tenbagger in the Exploration
Insights portfolio?
BC: Well, I obviously wish
there were more, however, since starting Exploration Insights in 2008
we have scored big on companies like Mirasol Resources
Ltd. (MRZ:TSX.V), AuEx Ventures Inc., Fronteer Gold Inc., Kaminak Gold Corp. (KAM:TSX.V), and more recently Reservoir Minerals Inc. (RMC:TSX.V) and GoldQuest Mining Corp. (GQC:TSX.V).
TGR: Do you have a target
rate of return when you invest in companies?
BC: In a sense we do. It all
comes down to what a company is looking for, what that mineral deposit really
looks like and, if it's successful, what it's worth. How much is it going to
take to turn this rock into money? That takes into account the development
costs, capital expenditures, and process and infrastructure costs. It all
goes into determining what we need to see on a property. It's on a
property-by-property, country-by-country basis. That's how we get a sense of
what our target price might be. Then we follow the news as it goes along and
judge if we should stay in it, buy more or sell.
"You cannot judge a
deposit or a drill intersection based on the grade."
Because this is such a
high-risk game, we're mostly looking for homeruns. We do own a number of
prospect generators that just plod along and go up and down a little bit with
the market, but that's a different business model. I think we still have a
chance for a tenbagger in those, but it's a long-term investment.
TGR: Quinton, one of the
things that you're going to talk about at the workshop is red flags in mining
company press releases. Give us some specifics that make you raise your
eyebrows.
Quinton Hennigh: Let's say there's a news
release that comes out. It mentions a killer hole—a long interval for a
potentially good grade. But the company doesn't list a cross section, making
it very difficult to interpret. That's always a little suspect. Why isn't it
showing us the full picture here?
Grade smearing is a
chronic problem. Grade smearing is where a company takes a high-grade
interval or two and transposes that into a much longer interval of lower
grades in order to make it look like a bulk intercept.
Then there is drilling
where there was a previous campaign. Maybe a major had a property and did
some drilling. It got some results. Now a junior is coming back in and
drilling basically on top of that and reporting results as if it's a new
discovery. The company isn't showing the historic information and allowing
investors to gauge what it actually has in its proper context.
TGR: The difference between
true width and apparent drill width in drill results is also on the agenda.
Why do investors need to know the difference between those two things?
QH: There's a lot that goes
into interpreting the geometry of a deposit. Drill intercepts are never a
simple line. We have a one-dimensional line of data. Deposits are not
one-dimensional. They're three-dimensional. We need multiple holes to see
what's going on. You can't say much about geometry until you have multiple
intercepts.
"The advantage of
Nevada is that all the infrastructure is
there."
True width is the width
of an intersection or a vein that gives us one of the three dimensions we
need to determine the tons of a deposit or a system. We need true width
versus apparent width or drill width, which can give us an exaggerated width.
TGR: Brent, you've said in
other interviews that a 1 gram per ton gold (g/t) deposit could be economic
in Nevada whereas a 2 g/t gold deposit might be uneconomic elsewhere. Other
than the fact that you have walked over most of it, why are you partial to
Nevada?
BC: The real point of that
statement is that you cannot judge a deposit or a drill intersection based on
the grade. It has to be viewed in the context of what it costs to get the
gold out of the rock. There are certain types of deposits that average 1 g/t
in Nevada that you can make tons of money on because they're so cheap to
process and recover the gold. There are other deposits of 1 g/t that would
not be economic anywhere; it's all about the costs of turning that rock into
money.
The advantage of Nevada
is that all the infrastructure is there. A 1 g/t
deposit makes money in Nevada, but the same deposit out in the middle of
Burkina Faso will have infrastructure costs that are much higher. Then add in
processing costs that are going to be more, plus energy costs and a host of
other issues and it is clear we are not dealing with the same base case
scenario. Jurisdiction and location relative to infrastructure are also key
components of determining what a deposit is actual going to be worth.
TGR: Absolutely. What are
some companies you are following in Nevada?
QH: The more exciting story
at present is Gold Standard
Ventures Corp. (GSV:TSX.V; GDVXF:OTCQX). It has a program on
the south end of the Carlin Trend that's an extension of the Rain mine, an
old Newmont mine. It has been drilling blind targets based on geophysics and
coming out with very good results. The system is complex—some holes
hit, some holes don't. It's one of the more exciting stories right now. We no
longer own it but it is certainly high on my radar screen.
"The system [at
GSV's Railroad] is complex. It's [an] exciting story right now." –
Qinton Hennigh
Gold Standard is not
alone though. There are other projects out there. For instance, Pilot Gold Inc. (PLG:TSX) is drilling at Kinsley
Mountain, which is an old gold mine that is seeing new interest due to higher
gold prices. The technical team at Pilot put together the genetic model that
delineated the nearby Long Canyon gold deposit and they are now developing
some new concepts to test at Kinsley.
Miranda Gold
Corp. (MAD:TSX.V) is a very good story.
It has a lot of joint ventures and exposure to good properties. CEO Ken
Cunningham is a first-rate geologist and knows how to pick projects.
NuLegacy Gold
Corp. (NUG:TSX.V) is doing some very interesting
work south of the new discovery that Barrick Gold Corp. (ABX:TSX; ABX:NYSE)
has at Goldrush. The Goldrush project looks as if it's going to be a
substantial discovery of more than 10 million ounces. Barrick is actively
drilling it right now. NuLegacy is targeting a similar zone on its project
about five miles south.
 TGR: There's been a lot of development in Nevada
over the years, but it seems most of these projects are proximate to other
producing assets. Is that part of your investment thesis?
BC: Most of these deposits
in Nevada line up along clear trends. These trends represent deep structures
into the earth's crust that are the conduit to mineralization. That's where
you go to look. We certainly want our investment thesis to make sense in the
context of the basement geology throughout Nevada, or anywhere around the world
for that matter.
TGR: You stay with a small
number of companies for the newsletter. You have a very specific thesis. But
in a recent edition, you said you were going to get into some other types of
plays.
BC: Given the current
currency debasement from quantitative easing, the speculative money is going
to jump back into these sorts of plays very selectively. We decided it was
time to get a bit more aggressive in early-stage exploration. Having said
that, we bought a big company that Quinton identified but nixed two other
much smaller companies that we initially had high hopes for being worthy of
our clients' money. Although we want to get aggressive, we're not getting
careless. I still feel the market is not going to buy your mistakes.
Our thesis is the same,
though. I still want to keep it to 20 companies or fewer. A few stocks in the
EI portfolio really don't count as exploration stocks. Prospect generators
are a different business philosophy and risk profile, for instance. If I
bring something in, I want to be able to throw something out as well. That
allows me to continually upgrade the portfolio. But exploration takes a bit
of time. It's a process. I'm not going to throw out a company until I've seen
it follow through with the process and our original investment thesis has
been tested. However, I am looking to upgrade the portfolio as quickly as
possible.
TGR: You just have these 20
companies. How do your readers feel about that?
BC: They seem to be pretty
happy with that. When I worked at Global Resources, the biggest problem I
saw—and I still hear this from various subscribers and others out
there—is that they've got a list of 100 companies, but they have no
idea why they bought them, what they're worth or what to expect. That's a
real problem and headache in this sector for retail investors. They hear that
they should buy something for whatever reason and then they forget why they
bought it and watch it slowly go down.
TGR: You've said that the
odds of a geochemical anomaly becoming an economic deposit are roughly 10,000
to 1. Nonetheless, hundreds of millions of dollars are raised each year with
those odds in place. Is the system broken? Or are enough people making money
on the way up that it doesn't matter what happens on the way down?
BC: It's not broken, but
it's certainly inefficient. The scientific side of exploration often doesn't
understand the money side and the money side doesn't usually understand the
scientific process. A lot of money gets wasted through unrealistic
expectations on both sides. It's much easier to raise money on an old
property, as Quinton mentioned, that's got an old drill hole in it from years
ago. They say, "Look, they drilled this hole. It was 100 meters at 2
g/t. We can repeat this. Maybe it gets bigger?" And, a money guy can
say, "Yeah, I can see where we can repeat this hole. We get some
excitement. I get off my paper in four months and I can move on." A lot
of money gets wasted with that thinking and more often than not retail
investors get stuck, if they haven't done their due diligence.
TGR: Is that wasted money
coming home to roost now? Canaccord is shutting down a number of offices and
the brokerage community is struggling in general.
BC: Most definitely. A lot
of hedge funds that bought into these two years ago didn't understand the
long odds of success and how to evaluate early-stage concepts or the people
behind them. Now they're stuck with some stock that's down by half, or more
in some cases, with no liquidity. It's a real problem. It's very difficult to
raise new money on anything but the very highest quality drill holes or
prospects right now. I believe that's going to last through this year at
least.
TGR: The TSX Venture Exchange
recently changed its regulations to allow companies to finance at less than
$0.05 a share. What are your thoughts on that, Quinton?
QH: It's like a stimulus for
juniors. It's going to amount to an excessive amount of paper being issued.
Junior companies are going to have to issue a lot of it to raise anything
meaningful. A first-class drill program can cost $1.5–3 million (M) in
a reasonable location. That's a lot of nickels. We're going to be like
Australian companies with a few billion shares out pretty quickly.
TGR: Are there some other
companies that you want to tell us about today?
BC: The prospect generator
model is a business model employed by some juniors that recognize the long
and poor odds of success. It focuses on generating good conceptual ideas that
can then be brought to another company with more money to spend to test the
exploration thesis. It's a very intelligent way to efficiently explore and
make money, but it's slower and not as exciting as the big go-for-broke drill
hole play.
The bottom line is that
we're investing in ideas, the intellectual capital of the people in the
company. If I'm an investor in a company's intellectual capital, I want to
keep my percentage of that as high as possible and dilute my interest at the
project level, which is the drilling level. That way I get many more shots at
potential discovery over time without excessive share dilution.
TGR: Have you ever done any
quantitative analysis between prospect generator companies and the typical
capital pool company method?
BC: No, but my experience
has been that the prospect generators are less volatile and they last longer.
Ultimately, I've made more money off of those than the occasional homerun
because they go through a number of projects—10, 15, 20 of their
projects drilled by partners that eventually fail—that is the reality
of exploration. Eventually, however, they seem to come up with a project that
they recognize as being special. They know that because the more work they
do, the better it gets. Many of them will keep that project for themselves.
Then we own a company that has 100% of a project that is recognized as
special and we have not been diluted out of the discovery by previous failed
exploration efforts. We've got something that really works.
The examples are Mirasol
Resources, Kaminak Gold, Virginia Mines
Inc. (VGQ:TSX) and AuEx Ventures. They
have been huge homeruns, but it took time for them to get to the stage where
they recognized the project was good enough to take on their own.
TGR: Do you have anything to
add to that, Quinton?
QH: Project generators tend
to be run by people who have a prospecting mentality. These are good
geologists who can see the big picture. They can recognize the potential of a
region. They can go in and pick up areas that are clearly geologically
important. A lot of people that we know in the companies that Brent just
mentioned know what they're doing and know the areas that work and pick up
that land. That alone tells you that they're a pretty good bet.
TGR: Almaden Minerals Ltd. (AMM:TSX; AAU:NYSE) is a good example of a
prospect generator.
BC: Almaden has been around
for over a decade now. The company only has about 59M shares out. It has
about $20M in the bank, which it got by selling stock in companies that
ventured into its projects or selling projects to somebody else, not by
issuing shares. It finally came across Ixtaca in Mexico, which was better
than average and continues to be better than average. The stock has done
fairly well. It's drilling out a project that offers homerun potential and
it's doing it effectively and efficiently. That's how the prospect generator model works.
 
Studying maps like this
topographical mineralization map of Almaden's Ixtaca property can help
investors understand project economics.
TGR: The projects are
longer-term investments, right? You have to be willing to hold these for a
while.
BC: Exploration is really a
long-term scientific process where we test a thesis, go back to the drawing
board, test it again. It's a process. Companies
don't just go out there, drill a hole, and say,
"Bang! That was easy. Let's go out and drill another one!"
TGR: Are you recommending to
your readers that they should stay out of most of the names in the junior
mining business until tax-loss selling season is over?
BC: There's going to be a
lot of pressure on these juniors coming into the end of the year. It's been
going for quite a while; we've seen a reprieve, but there are a lot of funds
that have to get liquid and get rid of this stuff before the end of the year
so they can start new and work on their bonuses for the next year. There's
going to be a lot of pressure. There's no urgency to chase things up unless
there's an obvious drill-hole discovery in the making.
TGR: Quinton, do you have
anything that you want to add?
QH: Things do seem to be
picking up, but we're going to see continued volatility. Looking back on the
past two years, one thing that stands out in my memory is that companies were
issuing paper in a big way when things were riding high. There's a lot of
overhang from that period. There are warrants out there. Funds are looking to
liquidate certain positions just to get out of them. We're not out of the
woods yet.
TGR: Thanks for your time,
gentlemen.
Brent Cook and Quinton
Hennigh will be teaming up with fellow geology experts Chris Wilson and
Andrew Tunningley from Exploration Alliance S.A. to present a special geology
and mining education seminar called Geo Tips for Tenbagger Investments: A
Streetwise Reports Seminar. It will be offered as part of the Premium
Education Program at the San Francisco Hard Assets Conference on Friday, Nov.
16 from 9:00 a.m. to 1:00 p.m. In this exclusive seminar, you'll find out how
savvy investors spot the 2% of mining discoveries that can become wildly
profitable, and how to spot the hidden clues inside mining company press
releases. Learn how to recognize tenbagger opportunities from these experts
using the most innovative geology and mining concepts. If you are registered
for this event, you may submit your questions or topic suggestions here to be addressed during the seminar. This is
expected to sell out, so reserve your seat now.
Brent Cook brings more than 30 years of experience to
his role as a geologist, consultant and investment adviser. His knowledge
spans all areas of the mining business, from the conceptual stage through
detailed technical and financial modeling related to mine development and
production. Cook's weekly Exploration Insights newsletter focuses on
early discovery, high-reward opportunities, primarily among junior mining and
exploration companies.
Dr. Quinton Hennigh recently joined Exploration Insights
where he provides geological expertise reviewing companies, projects and
activity in the junior mining space. He began his career as an economic
geologist with large mining companies including Newmont Mining Corp.,
Newcrest Mining, and Homestake Mining, where for 15 years he managed exploration
projects in North America, Europe, Australia, Asia and South America. In
2007, he joined the junior gold sector where he has held executive and
advisory roles at Gold Canyon Resources, Novo Resources Corp., Euromax
Resources, Prosperity Goldfields and Evolving Gold Corp. He earned a Master
of Science degree and a Ph.D. in geology and geochemistry from the Colorado
School of Mines in 1993 and 1996, respectively.
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DISCLOSURE:
1) Brian Sylvester of The Gold Report conducted this interview. He
personally and/or his family own shares of the following companies mentioned
in this interview: None.
2) The following companies mentioned in the interview are sponsors of The
Gold Report: Gold Standard Ventures Corp., Pilot Gold Inc. and Almaden
Minerals Ltd. Streetwise Reports does not accept
stock in exchange for services. Interviews are edited for clarity.
3) Brent Cook: I personally and/or my family own shares of the following
companies mentioned in this interview: Mirasol Resources Ltd., Reservoir
Minerals Inc., Almaden Minerals Ltd. and Miranda Gold Corp. I personally
and/or my family am paid by the following companies
mentioned in this interview: None. I was not paid by Streetwise Reports for
participating in this interview.
4) Quinton Hennigh: I personally and/or my family own shares of the following
companies mentioned in this interview: None. I personally and/or my family am paid by the following companies mentioned in this
interview: None. I was not paid by Streetwise Reports for participating in
this interview.
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