-- Posted Tuesday, 11 November 2008 | Digg This Article
| Source: GoldSeek.com
With feet planted on the ground and eyes trained on balance sheets, Brent Cook has earned a reputation for recognizing which juniors have the best chance of beating the odds and where rocks have the greatest potential for producing profit. An experienced professional geologist who has examined properties in more than 60 countries and learned the investment side of the business from master Rick Rule, Brent inherited investor/analyst editor Paul van Eeden’s newsletter in February. He repurposed it into Exploration Insights, and in this exclusive interview, shares some of his insights with The Gold Report readers.
The Gold Report: You talk about capital preservation as a key tenet of Exploration Insights, and you focus on the juniors. With the markets having gone totally crazy and practically everyone experiencing depreciation rather than preservation or appreciation, what do you see on the horizon for juniors? And how far out is that horizon?
Brent Cook: It’s really tough for the juniors right now, but let me talk about capital preservation because that is a really important aspect of what I try and do in Exploration Insights. I don’t take a shotgun approach to investing. Rather I prefer to take careful and selective aim on targets. Right now we have about seven stocks in the portfolio and that’s it. I don’t ever anticipate having more than 20. I’m so selective because I’ve learned that is the best way not to lose money. That’s Rule No. 1: Don’t lose money. In this junior sector you can lose it awfully fast if you are not very selective on your purchases. More often than not in the junior sector it’s what you don’t buy that’s more important than what you do. Although to be honest, over the past six months even our stocks have been hammered.
I’m very cautious in what I buy and I’ve been preaching or suggesting that people save their cash for the opportunities coming up. We’re starting to see some of those now. That’s what I mean by capital preservation—very, very selectively buying something that you are confident in the value of the assets and, that you’re getting at less than net asset value. Also, and this is Rule No. 2: If your investment thesis is proven wrong, sell. Once you’re investment thesis goes from certainty to hope, you’ve already lost your money.
I see people coming out with recommendations that you should buy a company selling for less than cash in the bank just because it represents a discount. But if you look at what most of these companies are doing with their cash; next year they may be broke. Buying a company that is drilling a project that doesn’t have or offer any value is not buying something for less than cash. Make sure the cash stays put and is used for something intelligent.
TGR: As you look at the juniors, either in your portfolios or ones you know about in general, are these viable if gold sticks in the $700 to $800 range?
BC: Most of the juniors don’t have any gold; they have the hope of finding gold. Rationally speaking, it doesn’t make any difference to them what the gold price is if they don’t have any gold. Of course, they’re hoping to find something that has gold, and obviously, a higher gold price would be better for them if they do.
But there are companies out there now who have gold resources in the ground and they are selling for less than the net asset value of their deposits. Likewise, there are a number of companies that, although they don’t have a compliant gold resource, they have released enough data that I can work up my own resource estimate, then what it will cost to build it, mine it, etc. and show they are selling for considerably less than that value. You can buy those sorts of companies right now really cheap, assuming a $700 or $800 gold price of course.
The juniors that don’t have a lot of cash in their pockets and no discoveries on the horizon are in serious trouble. I see this going on for a couple of years, to be honest. I see a serious shakeout coming. The first question you want to ask any company is “How much money do you have and how long is it going to last?” If they don’t have two years’ worth of cash and something seriously legitimate to work on, they have problems.
TGR: If gold sticks to $700, how difficult will it be to get projects joint ventured out?
BC: To a major mining company, $700 is not a bad price. A Barrick or Goldcorp that makes decent money at $700 gold can afford to do a joint venture with a company that has—and this is really key, Rule No. 3 if you will—a large target. So the project or concept being joint ventured has to offer a major discovery. It can’t be something small and I’m afraid from my experience most companies are really peddling small targets.
It also has to offer good margins with cash production costs of maybe $350 or $400 an ounce or less. That’s what the majors are looking for. Also, when evaluating the project you always have to view the economics using the gold price in local currency. Plus, I think we’re going to see capital and labor costs start coming down. In fact I am seeing it now virtually across the board.
TGR: We’re hearing a lot of money on the sideline is going to start coming back into the market selectively. As it does, will it go into the precious metals with the less-than-optimistic returns experienced over the last two years?
BC: I hear that as well, but I don’t know how much money there really is on the sidelines. I work with a number of funds in North America and Europe that really don’t have much cash to invest, particularly in illiquid juniors. About $400 billion has come into the resource sector since 2003, much of it in commodities. The $30 billion that came in to the Toronto Stock Exchange through private placements, which mostly came from funds, has been wiped out—and these guys are looking at redemptions coming again at the end of the year. So there’s not much money there that I see.
In terms of individuals, it’s tough. Net worth for most people I know has been halved or worse. I don’t see a lot of money on the sidelines. There’s some, certainly, and I suspect we’re going to see the first thing people migrate into is the large gold companies because they’re liquid. They’ve been decimated as well and that’s the intelligent thing to do. But on the junior side, it’s a long time before we see much come in. You see people putting out fantastic drill results with no effect.
TGR: You suggested that when individual investor money comes back into the market, it probably will come back in to the large gold producing companies. Not long ago Kerry Smith, an analyst at Haywood Securities, basically recommended investing in large gold producers over the juniors because the seniors are trading at such low multiples. What’s your advice to our individual investors?
BC: I don’t see any problem buying majors and waiting for the market to turn and then moving down into the smaller companies. That’s a smart way to go about it. It’s not what I’m doing, because I believe I can select the few juniors’ stocks that have real assets that a major is going to buy. Right now it’s a matter of picking the few assets that are high enough quality that a major will want to buy—that will give me a lot more leverage than waiting for Barrick to go up 20% or 30%.
TGR: Then the thrust of your investment portfolio advice for the next several years is acquisitions.
BC: Yes. I’ve been following three investment scenarios. One is buying a few companies that are significantly capitalized, smart guys, trading less than cash value. The second is going for the acquisitions, the people drilling out or with deposits that are high enough margin and quality that a major would want to buy. And the third is going after a couple of very speculative companies that are pure exploration plays, but the risk-to-reward is huge if they’re successful.
For these very high-risk plays everything I’ve seen in the geology and results so far tells me they have a decent shot—a long shot but a decent long shot—at hitting. If they hit, we’re looking at a tenfold increase. So those are the three things I focus on. I’m not buying small companies selling for less than cash or that sort of thing. And definitely not any companies with what I perceive to be small targets. There are a lot of those out there and they’re very good at getting rid of that cash.
TGR: But if it’s less than cash and either an acquisition target or a high risk-reward given its geology and location, you’ll look at it?
BC: That’s right.
TGR: Does your view of the juniors change if the U.S. and then the world go into a recession?
BC: No. I’m assuming that happens anyway.
TGR: So you expect the resources sector to still be in demand.
BC: Selectively. I do believe we’re heading into a global recession and it’s going to be a damper on commodity prices. The credit crisis or liquidity crisis right now is going to severely limit money coming into the sector as well as money coming in to build new mines. At the same time, the major companies have to replace the resources we’re depleting—and they have to replace them with high-grade resources—regardless of what the metal prices do.
I’ll give you an example. We’re producing 15 million tons of copper a year; which is about the amount of copper ever mined from the Bingham copper deposit in Utah. This is one of the biggest in the world. So on a yearly basis we’re depleting one major copper deposit. Same with gold. We’re running through about 80 million ounces of gold a year. That’s all the gold ever produced from the Carlin Trend in Nevada. That’s the dichotomy here: Nobody wants resources but everybody wants them.
TGR: Earlier you talked about the key being to find the companies that are about to find or announce a discovery, and as you pointed out, by no stretch of the imagination do all of the juniors have that potential.
BC: Right. I’ve been doing this for a long time and I look at most of these projects and see the ultimate potential—if they’re successful in drilling out what they think they’ve got—is not worth much. It doesn’t make any difference if you find something nobody cares about, which most of the several thousand junior companies are doing. There’s no point investing in any junior exploration company if you don’t see the chance for a 10-for-1 increase in your stock price.
TGR: Tell us a little bit about Exploration Insights.
BC: I’d been working with a number of the newsletter writers—Doug Casey, Brien Lundin, Bob Bishop, Paul van Eeden—and started contributing more and more to Paul’s newsletter. Over the previous two years I generally followed specific stocks while Paul covered the macroeconomic scenario. When he shut down his newsletter in February, I took it over. So it has changed to my newsletter and I basically talk about geology and stocks with an emphasis on what they are actually worth.
There is a Stock Talk section and a Rant section to the letter. In the stock talk section I specifically talk about stocks we own or are following. Most of my subscribers are fairly involved in doing their own analysis as well so I try to provide numbers, costs and geological interpretations from which they can draw their own conclusions. I also comment on stocks in the news or ones that I get a lot of emails from subscribers asking about. If a stock doesn’t make it into the Exploration Insights portfolio I am not afraid to say why. Generally, in the rant section I give people useful insights into what is happening in the mining and exploration sector as a whole. Also what to look for, how to value properties, mines, deposits, that sort of thing. And we sometimes cover some politics, economics and everything else, too.
TGR: This is a weekly letter?
BC: It comes out pretty much weekly. I’m on the road at least half the year but I still manage to get it out most weeks.
TGR: Your site visits. You get out there and kick the tires, meet management, the whole thing.
BC: That’s key. I’ve been doing this for 25-plus years and the only edge I’ve got over anyone is that I’ve seen so much that I can recognize a good versus a not-so-good project. The only way to do that is to really go on the ground. Things always look different on the ground, sometimes better but most often worse.
TGR: And you’re a trained geologist?
BC: Yes. It helps when you’re looking at geology.
TGR: Rick Rule speaks pretty highly of you. He says you are a “no nonsense ‘boots on the ground’ geo, not one of the ‘desk explorers’ who cost the investment community so many millions.”
BC: Yes, I worked with Rick for six years and made him a lot of money, I did OK too. He is probably the smartest investor I’ve come across. I learned a lot from him. I knew geology before I got into this, but I learned about investing from him and how to make money.
TGR: Rick says easily 80% of the juniors are not worth investing in. And with the other 20% you still have to look at the balance sheets and that will be the real key. He’s a big resource bug; in order for the world to keep going, you need the resources. He’s saying it’s going to be ugly here for the short term, but then the opportunities will start showing themselves.
BC: I believe he’s right. It seems to me there are a lot of problems to work out of the global financial system still and we could go way past ugly. But further out, the quality mineral deposits and exploration companies you can and will be able to buy now will certainly look like bargains in the rear view mirror.
Brent Cook, who launched his Exploration Insights newsletter in February 2008, brings more than 25 years of experience to his role as geologist, consultant and investment adviser. His knowledge spans all areas of the mining business from the conceptual stage through to detailed technical and financial modeling related to mine development and production. His hallmarks include applying rigorous factual analysis to the projects and companies he examines, and augmenting his analysis with on-site field evaluations.
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-- Posted Tuesday, 11 November 2008 | Digg This Article | Source: GoldSeek.com
