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-- Posted Friday, 2 April 2010 | | Source: GoldSeek.com
Size matters to renowned exploration analyst and geologist Brent Cook, not being a fan of small projects. He follows geology and discoveries worldwide and pays close attention to the teams involved. "Although scamsters, frauds or hucksters can make a discovery, you're much better off screening out all but the best people," he tells The Gold Report readers. Brent produces the weekly Exploration Insights newsletter.
The Gold Report: Rick Rule recently stated that for junior mining, we are just at the beginning of the period for discovery. The logic behind this is that a great deal of time and money have been spent in exploration over the past several years, and we should now start seeing some of the discoveries come through. However, statistically, most drilling will not produce a discovery—actually only a very small percentage of drilling results in discoveries. As a geologist, do you help improve those odds? How does your viewpoint of the mines reduce the risk of investing in a junior?
Brent Cook: I would guess, on a statistical basis, the odds of any single property producing a discovery that turns into a mine are worse than 1 in 1,000. The advantage I have, as a geologist with 30 years in exploration, is that I've seen enough and been to enough projects to know the difference between a project with potential and one with absolutely none. I can improve those odds a lot.
That said, I agree fully with what Rick said. For a number of years, we've raised tens of billions of dollars across the industry for exploration for all metals, and a lot of that is starting to come to fruition. We're seeing a lot more discoveries, or potential discoveries, with the drill bit than we've seen in a long time. That's a factor of two things.
One is the amount of money raised. The second is that, compared to the boom in 1997, when we were all young and making and spending money hand over fist, the people in the industry are much more serious this time around. That has to do with the overall fact that we're 13 years older, and most of us have had the opportunity to lose all our money that we made the first time around. That was a very expensive lesson. This time, there are a lot more good exploration programs and legitimate discoveries, or apparent discoveries, coming on line.
TGR: You stated, in one of your recent reports, that some of these people who were involved in 1997 are still around, and they're more sophisticated, including "the companies, the investors and the swindlers." Considering this, how are you picking companies that merit value?
BC: I know the sorts of deposits that make money versus those that really don't. I'm fairly focused on big discoveries. I'm not interested in small projects or mines. There are geologic environments that I tend to ignore, just because, for the most part, they don't produce large deposits. Knowing that, we can screen out half the deposits or projects right off the bat and immediately narrow the field of possibilities. Many of these properties get recycled and they may come up under a different name. I often know the property from five years ago, when somebody drilled it, and five years before that when somebody else drilled it. These things keep getting recycled and are usually a waste of time and money. Occasionally they work, but usually they don't. Again, you know the people as well. People are a big part of this junior exploration game. Although scamsters, frauds or hucksters can make a discovery, you're much better off screening out all but the best people. I'm referring to the legitimate, hardworking people who are aligned with your interests—meaning they own a lot of the same stock that you're looking to buy.
TGR: How important is management versus the geology itself in a junior for finding the kind of discovery that you would get involved in?
BC: I look at the geology first. If it passes, that's my biggest screen. Then I look at the people and make a decision based on what I know about them, discussions with them, their track record, and how involved they really are in the company. Is this their only job, or have they got three other jobs that they're working? I go through the balance sheets and see how they're actually making their money. The number-one factor, though, is what the rocks are actually saying.
TGR: What if the geology is incredible and the people are not?
BC: If the geology is great and it looks like a discovery, I'll go there, even if the people are questionable. However, you've got to keep that in the back of your mind and that tempers the target price you are willing to sell the stock at. You've got to watch very closely how they waste their money or how they conserve it. Management will ultimately add a discount or premium to the value of a discovery.
TGR: If management is questionable and the company eventually fails at making the property valuable, does that factor into future endeavors as far as you're concerned?
BC: Yes. We always keep track of what's happened to other projects, for example, a project that was a good project and was drilled improperly, or the guys went broke on it doing silly things somewhere else. I've got a list of properties I'd certainly like to get back to and see some work done on. I'm just waiting to see who does what on them. That's just part of the background you gain over the years.
TGR: Do you believe that there is currently any oversupply in commodities?
BC: I believe that we've had stockpiling and speculative money coming in the base metal sector and to some degree gold and silver as well. That's a direct result of all of the stimulus and such that's been pumped out by most countries around the world to try to get out of this recession they got us into. Not all of that money is going into legitimate, sensible business transactions. Much of that is going into speculative investments, metals in particular.
Until just recently, the copper inventories were at very high levels. If the price is going up as well, that's counterintuitive to what should be going on. I'm also a bit concerned about China in that we don't really know what's going on over there with the financial numbers they report. We've got no way of checking that and their measure of GDP is different than ours. They measure production not by what is being sold, but what is manufactured. That factors into their GDP, which can lead to somewhat of a misunderstanding as to what their market is.
I am cautious, and probably won't do much in the base metals sector unless I see real value. In the gold sector, I'm reasonably active. It really comes down to valuations of what a company has, or may have, versus what you're paying to get in—basically, a risk-to-reward judgment. I'm concerned about some of the risk-to-reward valuations we're paying now for what amounts to really high-risk exploration plays. Gold is not at $1,100 an ounce because all the juniors who claim they have a deposit actually do.
TGR: Are you staying away from companies that are doing business in China as a whole, or will you risk that area?
BC: I don't think China is a good place for junior companies to be exploring. There's not one major mining company actively involved in China. The largest mid-tier is Eldorado Gold, which has one deposit there and is putting another one into production. Other than that, there are no majors in China. The juniors that have gone there have all come back with their tails between their legs. That's because of the difficulty doing business there. The properties that are made available are those that have problems. The mineralogy or the location is bad, etc. I don't think that's a place to be putting money in the junior exploration sector.
TGR: What part of the world do you favor right now?
BC: Certainly West Africa is a developing, improving area. I think most Latin American countries are OK, with the exception of Ecuador, Venezuela and Bolivia. And certainly Canada, some U.S. states, Mexico, and, of course, Australia, are good. That's probably where I'm focusing for the most part, although, I am headed off to Eurasia to look at a few projects next month.
TGR: What strategies do you employ when structuring your portfolio?
BC: I've got sort of a three-tiered portfolio in the letter. There's one portfolio I call a gambling portfolio. This is where we're just betting on a drill hole. The geology looks good, and the size of the system is large enough that if they find something, it's significant. Yet it's a very high-risk speculation.
The main portfolio is comprised of two types of companies. One is actual investments where we're able to buy the company at or near its net asset value. If a company has $200 million in the bank, we're buying it for a market cap of $200 million and there are some smart people running it. We have a few companies like that in the portfolio. The other side of it is more speculative, but again, we got in at better valuations. There are intelligent people running the company exploring for projects that, if successful, will be significant discoveries. It's not so much a gamble. I've got more confidence in the company, the property and the valuation. The valuations of these are better when we buy them than the gambling stocks.
TGR: How have you done overall? BC: In the main portfolio, we've obtained increases up to almost 900%, with many of them in the 100% range.
TGR: At what point do you decide the economic viability has been established to where you might get involved in a company?
BC: I've got to have a rough model built in the back of my head or in a spreadsheet. This applies to grassroots exploration as well as drilled-out resources. It gives me an idea of what it's going to cost to drill it out and mine it, what it's going to cost to build it and then how much the ore is worth, less recovery. I do a net present value calculation on almost all of these, to some degree. If that calculation comes out and shows that it's much higher than the current market capitalization, I'll buy it. If it shows there's not a lot in there, I don't buy it.
TGR: Do you confer with other geologists in the business? If you hear some excitement about a project, will you go early on and check it out on your own?
BC: Yes, I have worked in over 50 countries and have a good network of friends and geologists scattered all over the world. I also spend probably half the year going out and looking at projects. Most of what I look at is very early stage, pre-drill hole, or maybe a couple of drill holes into it. I want to get in early. I look forward to selling it to the funds that require the security of an official resource or feasibility study.
TGR: So, you're looking for big discoveries wherever you go, nothing small.
BC: I don't like anything small when it comes to mining.
TGR: Thank you very much for your time.
Brent Cook brings more than 25 years of experience to his role as a 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. He has worked in more than 60 countries on virtually every mineral deposit type. Brent's weekly Exploration Insights newsletter focuses on early-discovery, high-reward opportunities primarily among junior mining and exploration companies. Paul van Eeden, who produced Exploration Insights' predecessor publication, claims Brent "has always been my primary source of information and intelligence with respect to mineral exploration investments." Streetwise - The Gold Report is Copyright © 2010 by Streetwise Reports LLC. All rights are reserved. Streetwise Reports LLC hereby grants an unrestricted license to use or disseminate this copyrighted material (i) only in whole (and always including this disclaimer), but (ii) never in part. The GOLD Report does not render general or specific investment advice and does not endorse or recommend the business, products, services or securities of any industry or company mentioned in this report. From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles on the site, may have a long or short position in securities mentioned and may make purchases and/or sales of those securities in the open market or otherwise. Streetwise Reports LLC does not guarantee the accuracy or thoroughness of the information reported. Streetwise Reports LLC receives a fee from companies that are listed on the home page in the In This Issue section. Their sponsor pages may be considered advertising for the purposes of 18 U.S.C. 1734. Participating companies provide the logos used in The Gold Report. These logos are trademarks and are the property of the individual companies.
-- Posted Friday, 2 April 2010 | Digg This Article | Source: GoldSeek.com
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