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A Monday Morning Musing from Mickey the Mercenary Geologist
Contact@MercenaryGeologist.com
August
6, 2018
During a recent episode
of the popular “At the Bar with Brent Cook and Mickey Fulp” video
series, our host Kelly Earle briefly mentioned a long-lived truism practiced
by real economic geologists: “Drill it to kill it”.
Her interjection got me
to thinking about the junior resource sector and how drastically our business
has changed since it emerged from the post-Bre X debacle in mid-2003. The
thought process led me to ask the unholy trinity of me, myself, and I a
pointed question:
What the hell ever
happened to “drill to kill”?
How many of the current,
mostly unsavory horde of nanocap, penny-crapper “mining stocks”, most of who
only mine stock market speculators, continue to utilize this tried and true
exploration methodology to evaluate their projects?
And collectively, we
answered with no apparent dissent from the peanut gallery, “A very few”.
“Drill to kill” was a
universally accepted mantra that guided three generations of exploration
geologists. However, it has been all but abandoned over the past 15 years. So
the next set of questions we must ask is, “How, why, and when did this
happen?” And what is the remedy?
I submit that NI 43-101
regulations promulgated in response to the series of gold stock frauds
culminating in Bre-X in 1997 are the main reason. These much needed
regulations were designed to establish standards for reporting of technical
project data and they certainly accomplished that goal. But they also led to
unintended collateral damage to the venture capital resource market.
In particular, the
regulations radically changed the junior resource sector focus from
early-stage generative exploration to repetitious testing of previously
discovered, advanced exploration projects and recycling of sub- to marginally
economic mineral deposits.
This is in stark contrast
to prior bull market cycles where a successful junior company would have a
portfolio of several projects and a pipeline of prospects in various stages
of exploration.
In the 11-year boom from
2003 to 2013, the market demanded flagship projects and the tabling of
resources at an early stage of exploration. This led many companies to post
loosely-constrained, geostatistical mineral inventories as “inferred resource
estimates” after as little as two modest
drill programs.
The net result was that
most companies no longer had a reason to pursue reconnaissance exploration
programs using new geological concepts, innovative exploration techniques,
and/or prospecting in unexplored, under-explored, and covered terrains.
If juniors chose to
follow the old model of grassroots exploration with a prospect and project
pipeline, they were with few exceptions unable to raise funds required to
carry-out said programs.
In other words, the best
exploration geologists lost the incentive to do what the best of the best
have always done best: think outside the box. The result was
predictable: few world-class mineral discoveries have been made over the past
15 years.
The new market paradigm
established for successful exploration juniors was combined with a litany of
old projects with a long history of exploration, past development, or
production, record-high commodities prices, and the ease of establishing and
listing new juniors via a plethora of shells and capital pool companies. The
result was a surge of listings on the Toronto Venture Exchange from the
mid-2000s to early 2010s.
At the same time, a long
bull market for commodities driven by double-digit GDP
growth and massive infrastructure build-out in China resulted in tens of
billions of speculative dollars pouring into the sector.
Given these concomitant
positive factors:
·There was a large and
growing number of companies vying for mineral projects.
·There were not enough
good projects in the world to satisfy demand.
·There quickly became a
shortage of experienced and successful corporate executives and managers.
·A dearth of experienced
geologists and engineers capable of choosing and evaluating the merit of
projects soon followed.
For all these reasons,
the long-proven model for junior company success of prospecting, acquiring,
exploring, drilling, and either dropping or advancing multiple properties was
abandoned. Most junior explorers no longer had the necessary project pipeline
in various stages of exploration and development to be successful. They were
wholly beholden unto the vagaries and vicissitudes of one flagship project.
So in order to survive as
somewhat viable speculative vehicles, they abandoned the tried and true ideal
of “drill it to kill it”.
In the latest boom from
2003 to 2013, drilling was often designed to merely extend the life of a
project. Well-placed holes could provide additional market-pleasing
grade-thickness intercepts. The drill, instead of the means to an end, became
the way to facilitate another money raise and another round of drilling and
another year of management salaries.
Twinning of previous
holes, small step-outs from previous intercepts, multiple holes from
different angles and directions from a single drill pad, recurring “new”
geological interpretations of previous failures, and reinterpretation of old
data were (and are) tricks used by management to keep a flagship project on
life support when it should have been dead on arrival.
I submit that the
institution of NI 43-101 regulations in 2001 has led to several ongoing
issues that plague the junior resource sector:
·An unsustainably large
number of exploration companies.
·Drilling of recycled
projects that have repeatedly failed in previous exploration cycles and are
likely to fail again.
·A marked downturn in
early-stage prospecting and exploration in frontier regions of the world.
·A decline in the number
of projects of merit due to the aforementioned prospecting and exploration
pipeline not being maintained.
·An increasing number of
“lifestyle companies” whereby entrenched management collects salaries without
advancing a viable flagship project or acquiring new projects of merit.
·A growing number of
companies with stranded assets that have failed as exploration, development,
or mining projects but are kept on the books to maintain stock market
listings.
·An ever-increasing
percentage of “zombie miners” with significant negative working capital on
their balance sheets.
As with all venture
capital and entrepreneurial markets, success is an anomaly in the junior
resource sector. Most exploration companies will find at some point that
their flagship project is a failure and it cannot be developed into a mine.
That is simply the nature of the business.
Therefore, I think it is
incumbent upon management to reach the decision point to drop a project as
quickly as possible and move on to other prospects.
In the past, these
decision points were reached by employing a corporate philosophy of drill to
kill.
Few companies approach
business in this manner anymore because they do not have a pipeline of plays
in various stages of exploration to advance, drop, or add to the current
roster.
Here’s the bottom line,
folks:
There are far too few
good projects and there are far too many bad companies listed on the Toronto
Venture Exchange. This market has been capital destructive over the past 15
years and it is broken in its current form.
A functional equilibrium
of viable exploration companies with a sufficient number of viable
exploration projects is the obvious solution.
To achieve this,
speculators must petition the TSXV to drastically reduce the number of listed
companies. This could be achieved by promptly delisting all the zombie miners
with negative working capital and removing the capital pool company option
for public listing. Combined with natural attrition, the current problem could
be resolved in relatively short order.
However, the Toronto
Stock Exchange (TSX) and its junior market, the Toronto Venture Exchange
(TSXV), are both a part of TMX Money Inc, a public company that is listed on
the TSX. As such, it gleans significant revenues from the listing, filing,
and regulatory fees collected from companies on the very exchanges that it
manages. TMX Money has a strong vested interest in growing revenues and it
does that by increasing the number of listed companies and/or its fee structure.
That seems to be a
conflict of interest to me. Indeed, over the past few years the Exchange has
shown no interest in pursuing these two obvious ways to improve the health of
its market despite repeated petitioning by concerned stakeholders.
It’s kind of like trying
to sell a snow cone to an Eskimo in the middle of the winter.
Oh how I long for those
good ol’ days of “drill to kill”!
Ciao for now,
Mickey Fulp
Mercenary Geologist
Acknowledgement: Thanks to Paul Mcgroary for
comments on my salesmanship that led to the analogy above.
The Mercenary Geologist
Michael S. “Mickey” Fulp is a Certified Professional Geologist with a
B.Sc. Earth Sciences with honor from the University of Tulsa, and M.Sc.
Geology from the University of New Mexico. Mickey has 35 years experience as
an exploration geologist and analyst searching for economic deposits of base
and precious metals, industrial minerals, uranium, coal, oil and gas, and
water in North and South America, Europe, and Asia.
Mickey worked
for junior explorers, major mining companies, private companies, and
investors as a consulting economic geologist for over 20 years, specializing
in geological mapping, property evaluation, and business development.In
addition to Mickey’s professional credentials and experience, he is
high-altitude proficient, and is bilingual in English and Spanish. From 2003
to 2006, he made four outcrop ore discoveries in Peru, Nevada, Chile, and
British Columbia.
Mickey is
well-known and highly respected throughout the mining and exploration
community due to his ongoing work as an analyst, writer, and speaker.
Contact: Contact@MercenaryGeologist.com
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