It’s a well known fact that
geologists like to go to the bar after work and drink beer. At the bar all we
talk about is what we do all day long, i.e., work. It’s no secret that
secrets become less secretive after a few brews, news and rumor from the bush
are exchanged freely, stock tips get traded, maps, sections, and cartoons are
scribbled onto bar napkins, and other patrons are disturbed by loud
alcohol-fueled arguments as the session wears on.
But these nightly confabulations are an
integral part of our business. More exploration and mining deals are put
together in dark and dingy pubs after work than in the corporate boardroom or
on the golf course combined.
A recent topic of conversation at the
bar has been the dearth of success in finding giant ore deposits during this
six year exploration bull market. The junior resource sector is a boom and
bust business driven largely by the commodities cycle and especially the
price of gold. The current bull cycle started in mid-2003 when an ounce of
gold went over $300 and stuck.
Some may argue that we are no longer in
a bull market but I will point out that about $5 billion has been raised via
the Toronto markets for exploration, development, and mining projects since
the beginning of the year. Most of that money will go into the ground during
the next two years, delineating and developing new deposits, and keeping many
geologists and engineers gainfully employed.
However, I can think of only two giant
grassroots discoveries in the present cycle: the Fruta del Norte gold-silver
deposit in southeast Ecuador and the Navidad lead-silver deposit in Patagonia
Argentina. Both discoveries occurred in underexplored regions with known
mineral potential. The first was sold to a major during a government-mandated
mining moratorium and remains in an inferred resource category. The second
was awarded in litigation to another junior because of breach of
confidentiality. Navidad is undergoing delineation drilling but currently is
burdened by a Chubut province ban on open-pit mining. There are other
discoveries that may eventually prove to be major deposits. The Long Canyon
gold discovery in eastern Nevada comes to mind but will require much
additional drilling to determine its size potential.
Our rate of new discovery in this boom
has been abysmal. For the ten’s of billions of venture capital dollars
poured into exploration projects, a commensurate measure of wealth has not
Why is that? I’ll provide some
historical background on Canadian junior exploration before addressing the
The junior resource sector traditionally
has focused on greenfields exploration. “Greenfields” may
be defined as grass roots, reconnaissance-style exploration in frontier
geological terranes. In past booms, many juniors explored in the hinterlands,
a very few made big discoveries and sold out to mining companies, and the
great majority failed and became shells until the “next big
thing” in the venture capital markets came along. The single exit
strategy was to sell to a major miner. Most simply mined the stock market (Mercenary Musing, October 20, 2008) since few found a deposit worthy of mining in the ground.
Greenfields exploration programs were
largely confined to North America, specifically Canada and the United States.
No junior went south of the border to explore because no foreign entity could
control a Mexican corporation. Expropriation and nationalization of mining
operations in the 1970’s in countries such as Chile and Peru
discouraged majors and juniors from exploring in those endowed places.
Leftist governments, civil wars, guerillas, and terrorists made Central
America and parts of South America off-limits in the 1980’s. Other
continents were not on any junior’s radar screen. There was still
plenty of blue sky in Canada and the western US. The Aussie juniors
stayed put on their big island, too.
This provincial outlook changed during
the exploration boom of 1991-1997 and was driven almost exclusively by
geopolitics. Mexico’s mining law changed in 1992 allowing foreign
ownership. Democracy came to western South America and terrorist
organizations were debilitated. The Soviet Union disintegrated and Russia and
the mineral-rich “Stans” became exploration destinations. Civil
wars and internal unrest abated in parts of Central America. Juniors explored
in far-flung places thru out the world including former communist and fascist
countries of Southeast Asia and new nations in southern and western Africa.
Several major greenfields discoveries
were made by junior resource companies. Examples included world class diamond
mines in the Northwest Territories, a giant nickel-copper-PGE mine in
Labrador, and a large gold mine in Peru. Significant discoveries were made by
juniors in eastern Russia, Indonesia, western Africa, Mexico, and South
Unfortunately this boom was killed by
numerous gold salting scams including Bre-X in Kalimantan, Delgratia in
southern Nevada, and Timbuktu Gold in western Africa and a low price
commodity cycle. Contributing factors to the abrupt end of the bull market in
1998 included mineral tenure problems in various countries, a coup in
Indonesia, organized crime issues in Russia and some CIS countries, civil
wars and economic instability in others, and worldwide economic downturn as
globalization failed in Southeast Asia.
Western geologists had made numerous
discoveries in many countries that were explored for the first time in the
1990’s. When the cycle of low commodity prices ensued, most of the
newly discovered deposits remained undeveloped and smaller mines that had
been put in production soon failed.
However, during that time that ended so
badly for our business, the entire world was the proverbial oyster of the
exploration geologist. We became experienced world travelers and learned a
second or third language with the aid of “sleeping dictionaries”;
some married the same, and many expatriated to second and third world
countries. Important logistical support, infrastructure, and both public and
private contacts for mineral exploration and development had been established
around the globe.
This exploration boom is fundamentally
different than all that came before and contributing reasons for fewer major
greenfields discoveries are many:
Stock market regulations resulting from the scams of the late
‘90’s have led to quality control of data and strict requirements
for public posting of material news.
43-101 regulations for classification of resources and reserves resulted in
investor, newsletter, and analyst demand for junior companies to fast track
their flagship projects to resource definition and economic studies as
rapidly as possible.
The internet has produced a transparency of corporate reporting and
information, company and insider transactions, and exploration program results
with a concomitant increase in corporate responsibility and investor savvy.
Most regions of the world with giant mineral endowments have entered a mature
phase of exploration under post-mineral cover or at increasing depth.
Exploration, development, and mining are more difficult and expensive with
lowered chances of success in these areas.
Much of the Earth now has been trod many times by geologists and most
outcropping deposits have been discovered.
Because the boom ended so abruptly in 1997-98, many significant mineral
occurrences that had been discovered over that six year period were not
drilled and killed. They were only partially defined, delineated, developed,
or mined and remained viable projects.
Geologists and engineers who had worked for major mining companies were laid
off in the late 1990’s. In the 2000’s, they moved to the junior
resource sector with knowledge and experience in the lesser explored parts of
the Earth. Their contacts with former employers led to acquisition of many
advanced projects deemed too small or marginally economic by the majors.
Technological advances in bulk mining methods and metallurgical processing
combined with high commodities prices have turned previous mineral resources
into ore reserves.
Because of these many factors, most
juniors have focused their equity dollars on brownfields exploration
instead of the greenfields exploration role that juniors traditionally have
“Brownfields” may be defined
as exploration around current or previously operating mines and districts or
expansion, advancement, and development of known deposits that were
marginally economic or subeconomic, partially explored, delineated,
developed, or mined in the past.
For a few juniors, focusing on a
flagship project and advancing it from exploration, delineation, and
development to eventual mine production has paid off handsomely for
shareholders. Many other junior explorers are now making the transition to
small or mid-tier mining companies with the goal to generate cash flow.
Juniors did not mine in previous booms. Mining is risky. Some will succeed,
some will fail.
The overall success ratio of junior
companies has not been good. It never is and that’s just the nature of
our business. The majority of companies funded during the irrationally
exuberant boom days of 2004-2007 did not own projects with the geological
merit to make ore bodies. Management, because of inexperience, incompetence,
or indifference, did not tightly control share structure, finance timely,
explore wisely, or spend equity dollars frugally, and when the economy went
south so had their working capital. Now they are broke, trading for pennies,
and on the road to shell hell.
Many have failed, more are failing, and
many more will follow as time goes on. This purge is welcomed by most
seasoned professionals as there were too many companies with little chance of
success. The junior resource industry will emerge in the next year with many
fewer but much stronger companies.
Giant ore deposits are found by field
geologists in greenfields exploration programs. The recent emphasis in
the junior resource sector on advancing flagship projects to development and
production decisions has resulted in few and fewer dollars budgeted for
generative greenfields exploration programs.
Fewer dollars means fewer geologists
walking fewer kilometers, taking fewer samples, and drilling fewer holes
resulting in fewer major ore discoveries. This is partly by necessity: There
just aren’t that many prospective places left on Earth where some
geologist has not traversed.
Simply put: Geologists are running out
of virgin geological terrrane that is prospective for discovery of giant
outcropping ore bodies.
That said, there are still places on the
planet that are under explored and under developed. These areas may be called
emerging environments and include countries that largely were left
untouched during the boom of 1991-1997, most often because of unfavorable
A prospective emerging environment
should have the following characteristics:
First and foremost, requisite geological setting favorable for formation of major
ore deposits. It should be on a tectonic plate boundary, structural fold
belt, or suture zone that has known economic mineral occurrences in country
or major ore deposits in adjacent countries with the same geological setting.
Stable, democratically elected, transparent government with manageable
bureaucratic and corruption issues, populist respect for the rule of law, and
an independent judiciary.
Free market economic system with entrepreneurialism and venture capitalism
encouraged and foreign investment welcomed.
Favorable taxation, importation, and expatriation regimes and membership in
regional geopolitical, world trade, and international arbitration
Secure mining law and mineral tenure system and surface rights that can be
acquired with reasonable cost and effort.
The international community, particularly the United States and Europe, with
a specific or strategic interest in the environment in which investment is to
be made. Financial participation by international banking organizations or
major mining companies lends credence to a country’s acceptable
geopolitical risk/reward profile.
No significant terrorism, random violence, or organized crime issues.
Reasonable access, infrastructure, and exploration costs, especially for
Lack of significant local opposition to exploration and mining or threat of
major NGO-financed opposition efforts.
Once a country is chosen, a company
maximizes its chances of success by:
Developing an exploration and/or acquisition strategy from study of the
prospective geological environments and with thorough understanding of the
nature and quality of previous work by government and private firms.
Acquiring a trustworthy local partner with influence, honesty, and an
in-depth knowledge of country and local issues including economics, politics,
business protocol, community relations, social attitudes, and environmental
problems, constraints, or legacies. A local labor supply with a strong work
ethic is required.
Exploring in emerging environments
is attractive for two reasons:
Major outcropping ore deposits are more likely to be found by simple “boot
leather and drilling.”
Recent technological advances in remote
sensing techniques such as satellite imagery and alteration mapping, regional
geochemical exploration, and regional geophysical data processing have
improved prospecting efficiency with better and more focused target selection
prior to field examination.
Advanced projects, deposits, or past-producing mines can be acquired and
developed in fast-track fashion.
The first company to invest in an
emerging country often can acquire the best and most advanced projects,
deposits, and mines that were scuttled in the past because of geopolitical
events, bureaucracy, mismanagement, and corruption, demise of a centrally
planned economy, and/or lack of understanding of capitalistic principles.
Emerging environments with recent
exploration success stories include Armenia, Haiti, Colombia, Indonesia, and
Burkina Faso. I will review specific companies in some of these countries in
subsequent Mercenary Musings.
Exploration in other emerging countries
has been technically successful but development of economic mines has been
For instance, a junior resource company
defined the world class copper-gold porphyry at Oyu Tolgoi, Mongolia in the
early 2000’s. A subsequent windfall profits tax adopted by the
government has left successful mine development and project economics in
serious doubt not only for this project but all exploration and mine
development in country. Mongolia is now regarded as an environment with
unacceptable geopolitical risk.
Permitting and development have been
delayed on the previously mentioned world class discoveries in Ecuador and
These cases illustrate the difficulties
and potential pitfalls of working in emerging environments. Geopolitical risk
factors can and will change rapidly and unpredictably.
However, venture capital will always
flow where perceived risk is lowest and possible reward is highest.
Exploration in emerging environments
balances high risk with high reward. Risk can be mitigated by an in-depth
knowledge of a country’s geopolitical situation, international
standing, government structure, socio-economic environment, and a commitment
to best practices exploration and sustainable development with a local
Much like the individual considering a
company for investment, a junior resource company considering greenfields
exploration in emerging environments must do thorough due diligence. It must
choose countries where deposits can be found, mines can be developed, and
profits can be returned to shareholders.
The potential reward of being the first
field geologist exploring in virgin geological terrane is discovery of a
world class ore body.
And that’s enough to excite any
If you are interested in listening to an
interview with Al Korelin and me on this topic, I invite you to visit the
following link: Exploration in Emerging
Ciao for now,
The Gold Report
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