Due diligence is also key. Know what you're buying in the Gold Mining sector...
WORLD-RENOWNED exploration analyst and geologist, Brent Cook is the author of the weekly Exploration Insights, a mining and exploration newsletter that selectively covers junior Gold Mining and exploration investment opportunities.
Cook has 30-plus years of experience, and has worked in more than 50 countries on virtually every mineral deposit type. Here in this interview with The Gold Report, and speaking from the Cambridge World Resource Investment Conference in Vancouver, Brent Cook says that investors who postpone buying decisions for too long risk missing the boat on some real "gems"...
The Gold Report: What are your broad impressions of investing in Gold Mining and other mineral stocks in this market?
Brent Cook: I don't typically guess bottoms or play with technical charts. I just look at what I've seen happen and make what is hopefully an educated guess as to what is coming. Over the past two years, in excess of $10 billion has come into the junior resource sector via the Venture Exchange alone. During that time, we've seen more than 300 new companies listed and probably 3,000 financings. Despite the mad rush of money into the sector, not much of it has actually produced returns as measured by the GDXJ, the junior miner index.
So what I see happening here as part of the global deleveraging is the people who jumped into the junior miners without looking are now jumping out without looking. They jumped into companies that had resources without digging deep enough to see that they have other issues that complicate the value of those resources. In my opinion, they were willingly led astray by banking analysts touting questionable resource estimates and economic assessments. A lot of money has been lost in the process, and until that works its way out of the system, I think it gets uglier.
TGR: Investors who have been burned are skittish about getting back into the fire.
Brent Cook: Indeed. If I were told some company's 8 million ounces was going to be worth several billion dollars and then the stock falls by 75% when a prefeasibility study comes out showing it ain't, I would have to conclude that I had no idea what this industry was about nor do I have any business ever investing again. That said, there are certainly a few experienced funds in the industry that are still interested in investing and probably relishing the current disaster. Retail money, which doesn't tend to be very selective, has been hit pretty hard, too, over the past year and a half. So I don't see where the new speculative money comes from.
In fact, I see a lot more money exiting than entering as the volatility and chaos being played out in the real world of investing drives people to stuff their remaining cash under the bed where it's safest. Over the rest of this year, I think we'll see a lot more junior companies go out of business, hibernating or financing at prices highly dilutive to current shareholders. Junior companies with average or below average projects and management are in trouble and, keep this in mind, most projects are below average despite claims to the contrary.
TGR: In a lot of your presentations, you juxtapose the very dramatic visual of the Carlin Trend's enormous gold pits with the idea that we are mining the equivalent of the entire Carlin Trend's production to date every year. You do the same visual using the Bingham Canyon Mine's massive open pit for copper. Considering what you just said about investing sentiment on the one hand and the need to find more ounces and pounds to meet demand on the other hand, there must be opportunities for the astute investor.
Brent Cook: That's exactly right, and that's the second part of my presentation. I lay out the bad news, that a large percentage of these companies will go out of business because they don't have a chance in hell of finding anything of value and they can't finance. On the flip side, major mining companies are producing 19 million tonnes per year of copper, and 83 million ounces per year of gold.
Now, in order for a mining company to stay in business, it obviously needs to replace what it mined with new reserves. Fortunately for us, it can't do this internally and will need to buy whoever finds the reserves it needs. It's very, very difficult for them to replace that much, and it's getting even more difficult for a lot of reasons I go into detail about in my letter. For that reason, legitimate profitable deposits are going to command a serious premium, and people who own stocks in those early-stage exploration companies that pull it off will make a lot of money. But there's no room at all for error because as suggested earlier, the dumb money has all gone to money heaven and I think it unlikely anyone will bail out mistakes in judgment.
TGR: So investors who want the cream of the crop in terms of mining assets need clarity as to what those assets are. You've talked about having to replace the equivalent production of a Carlin Trend every year to satisfy demand for gold. That's a mind-boggling amount for anyone who knows how big the Carlin Trend is. Where are some of the areas the seniors expect to find so much gold to replenish their reserves?
Brent Cook: Their first choice is to find a deposit near where they have operations, be that in Nevada, Peru, Brazil – somewhere they're comfortable. Quinton Hennigh, a geologist who works with me, went into a lot of detail on this in the June 10 Exploration Insights. Companies are obviously looking for deposits that are profitable. A major mining company that looks at a junior's project doesn't just use the third-party resource estimates and preliminary economic assessments (PEAs). The majors do the detail work themselves. You'd be surprised how much their evaluations of a property differ from a third party's prepared for the seller.
TGR: Are you saying that most juniors' PEAs are useless to seniors that are seriously doing due diligence on a junior company?
Brent Cook: No, certainly not most, but a lot are not to the level a mining company needs to make a major investment decision. I've seen too many studies that didn't quite match reality in costs, and particularly in resource estimates. In my view, too much sloppy work has been going on in terms of resource estimates. We also typically lose a lot of ounces of gold and pounds of copper when converting a resource to an actual mineable reserve. My point is that majors do their own due diligence and their analyses often come up with far less of a resource and valuation than the PEA would suggest.
Think about all the companies that have announced massive resources out there, and then think about the fact that we're hardly seeing any acquisitions. That tells us they're looking at a lot more detail than the junior companies do and coming away unconvinced. It's not that the seniors aren't hunting. As I say, they have to replace 83 million ounces per year of Gold Mining production. That's not an easy task at any Gold Price.
TGR: Does the slow rate of mergers and acquisitions also indicate that the majors are nervous about deploying their cash? Or that they're just being more diligent?
Brent Cook: I think the latter. They go through a lot of detail. They have to weigh in the risk as well. As I mentioned, they're looking for something close to where they're operating, in a stable environment, something that doesn't have a huge capital expenditure with a low margin – that's one of the big issues right now. Then political jurisdiction, social issues and the increasing government take all enter into the decision.
TGR: Quinton outlined that – location, location, location – very clearly in Exploration Insights. He also talked about metallurgy and the importance of having accurate testing and assessment of what projects really will produce, and whether there's potential for higher production as time goes by. In terms of minimizing risk, he pointed out, too, that majors look at the state of the junior's infrastructure. Has it put in roads and power lines? Has it developed relationships with the locals that are positive and encouraging?
Brent Cook: They need people, too. There is a real shortage of qualified people in the mining industry. So when they look at a project or a company to acquire, they look to see if they can get some good people with it. A friend of mine running a midsized Australian Gold Mining company recently told me of losing six months of production when two key underground miners were poached to work at the iron ore mines. So people are a key consideration to mining companies these days.
When a major looks at a junior, if the company has the groundwork in place, the environmental studies out of the way, the social issues settled and the people on board who build schools, put up hospitals, support soccer teams, those sorts of things – if the dirty work, as Quinton calls it, has been taken care of ahead of time, it's much easier for a major to acquire that company.
TGR: Do you have any parting thoughts you'd like to add about investing in the market now, beyond the obvious need to be very, very careful in choosing the companies we invest in?
Brent Cook: I think we're approaching an excellent time to be investing in this sector. It's down. People hate it. But there are some real gems out there. By identifying those companies or projects that really offer the potential to turn into a major discovery, something that a mining company will want to buy and put into production, I think a lot of money will be made on investments people make over the next six months. But as I pointed out, you must be very selective because no one's left to bail you out and you have no room for error. Due diligence is key. Talk to the people. Read the reports. Get outside advice from someone who knows what they are talking about. It's really important. After all, it's your money, do everything you can to improve the odds of success.
TGR: Thank you, Brent.
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