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Exploration Insights

Brent Cook
Exploration Insights
Posted Feb 14, 2011

The Rant

Screens: 10,000 properties and only 5.2 billion dollars to go around

There were 1,178 mining related companies listed on the Toronto Venture Exchange worth nearly $42 billion at year end 2010 according to the TMX Group (Toronto Stock Exchange). At the beginning of 2010 a stunning 93% of the Venture Exchange companies were worth less than $50 million, with 41% of them looking for gold. Although the market value of mining related equities more than doubled in 2010, odds are that the overwhelming majority of companies are still selling for less than $50 million. Financings also more than doubled in 2010, with about $5.2 billion raised in the 2,110 financings on the Venture exchange, of which 208 were new listings. The TSX main board contains an additional 353 mining companies that raised another $12.5 billion in 2010. By nearly anyone’s but Mr. Bernanke’s standards, that is a significant amount of money going into mining and exploration companies that aim to explore and develop the 10,000 plus worldwide projects that TMX notes in their promotional material.

The majority of these companies, plus the roughly 1,000 other mining equities listed outside of Canada, are junior explorers who purport to be on to the next big discovery or are at least about to find something significantly more valuable than their current market capitalization. That may or may not be the case--what is true is that there is no way anyone (not even John Kaiser) can keep track of the comings and goings of these companies, let alone read between the lines of each promotional press release. Although blindly investing based on the excitement of a news release or hot tip may work in a frothy market like last year’s, over the long run that investment style is sure to lose money when a company’s true value equals the dollar per acre value of some cold and buggy moose pasture.

We all need screens and hopefully Exploration Insights is one of yours to filter the hype and hope from these thousands of companies.

There is no way I can effectively know enough about the 2,000 or so mining and exploration companies and their 10,000 prospects to make an educated investment decision on each one. I employ personal filters that reflect my geologic bias built up over 32 years of experience looking at quality and dog properties around the world. This bias allows us to make rapid yes-no decisions on projects or companies, based on reading between the lines of the minimal data usually provided. It also means we are bound to miss some market winners. However, to consistently win in this sector my experience is that it is more important to first not lose money. That is where investment screens come into play.

So what are a few of EI’s biases?

  1. In general, small or marginal mines get screened out because they are tough to make money on. Proper analysis of any mining operation requires an in depth knowledge of all the cost inputs and what could go wrong. The “what could go wrong” list is exhaustive, but includes everything from metallurgical characteristics of each ore type within the deposit right down to the wear and tear on tires and machinery. This is a job for a mining engineer who has spent decades in big and small mines. I get claustrophobic and bored in mines.

  2. Narrow vein deposits usually don’t make it into EI either. Base metal dominant veins are particularly frowned upon. There are of course exceptions, and a high grade (high margin) deposit like Mirasol’s silver discovery in Patagonia is a good example. However, the famous greenstone breaks on the Eastern Canadian Shield (Timmins, Cadillac, etc.) are usually pushed to the bottom of the list. The reasoning is this: there are hundreds of small companies exploring these belts. Each of the companies working there have a gold bearing outcrop, a vein, a shaft, or some drill holes, all of which come with a lot of history. That history, which includes who did what where, what went wrong and why, etc., is lost to the general public and often not included in the company information. Anyone not intimately familiar with the project or living next door is at a disadvantage. Finding these details can be very time consuming when there are hundreds of companies, all of whom are next to or on trend from some bigger mine. Then the issue becomes one of differentiating the potentially few good deposits from a majority of mediocre ones, when most start out with a 6 to 12 gram per tonne gold intercept and a fairly high degree of grade variability. That said, we made good money on San Gold because I went there and saw the exploration upside; I do continue to evaluate some projects in those geologic breaks.

  3. Poorly presented, incomplete, missing or misrepresented data is a big red flag and screen even non-technical investors can use. The key to understanding a property well enough to make an investment decision is full and complete disclosure of and access to the data. This includes not just the “highlights” but also all the information that has been generated by the company and presented in a way that makes sense (drill data on corebox.net for instance). This includes the all-important previous explorers’ efforts and results. Again, sometimes the company is too rushed and just hasn’t had the time to put all the data together, and it turns out they actually have found something. Nonetheless, in the overwhelming number of cases the missing or incomplete data usually points to either incompetence or intentional deception on the company’s part.

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Feb 13, 2011
Brent Cook
email: kcook@explorationinsights.com
website: www.explorationinsights.com

Brent Cook is an independent exploration analyst and advisor. He currently serves on the Advisory Board of several junior exploration companies and acts as a consultant to several institutional investors. Brent Cook produces the weekly investment newsletter Exploration Insights. For more information on Brent's letter please visit www.exporationinsights.com

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