Brent Cook: That is a tough call because companies use differentmethods to report their gold prices and gold costs. Cash costs are just onefactor. When you throw in exploration, general and administrative expenses,royalties and such, it goes up quite a bit.

Everything I have seen published byboth the companies and the analysts suggests that the all-in average cost ofproduction for larger mining companies is in the $1,300–1,500/ounce range. Thatis a tight margin at the current price. Companies are cutting back onexploration and capital expenses (capex). That may help in the short run, butit will not solve the problem.

I wrote an article called "MiningMeets the New Normal," in which I discuss the thesis that the miningcompanies are turning inward on their own little mines. Their expectation seemsto be that by tweaking the way they operate, they can cut costs and turn theirmines into slightly more profitable mines. They believe they can squeeze outthe last bit of blood from the rock, if you will.

TGR: While that kind of cutting back can help in the short term,what are the long-term implications? If companies are not exploring, where willthe new gold come from in 5 to 10 years?

BC: Precisely my point. Companies are concentrating on their currentdeposits, trying to add ounces at their operations. For me, that means theywill have to go deeper or bring in more low-grade rock. Both of those meanhigher costs—higher strip ratios for an open pit, and more development costsfor an underground mine. They may add more ounces, but in at least 80% of thedeposits the grades will probably decrease, unless they up the cutoff grade,which then puts them back in the same predicament. That actually means theircosts will increase and/or production will decrease.

In the next year and beyond, thelarge mining companies will realize this strategy is not making them money.They will have to find, acquire and develop new, high-margin deposits. Very fewof those are left, and they are hard to find. Once found, they take a long timeto develop. The large mining companies will have to buy the high-margindeposits that are being discovered and proven up by others.

That is my focus: the newdiscoveries that will be the best-of-the best deposits in the world thatsomeone will have to own. That is what Quinton Hennigh—an excellentgeologist working with me at Exploration Insights—and I are good at, andthere is less competition in that space right now.

TGR: Can geophysical surveys make it easier to find new sourcesor does it still take a drill bit and a smart geologist to interpret theresults?

BC: Technology can, and does, help. Geophysics helps us see deeper intothe earth. We are also using mobile metal elements for sampling, along withmore detailed and precise geochemical methods. Technology helps, but it doesnot solve the issue of actually finding these new deposits. Geophysics measuresthe geophysical difference between one rock type and another; it does not tellyou anything about grade.

It still comes down to drilling. Andit takes a good geologist with an imagination to interpret data and decidewhere to go. This is a very inexact science. In fact, it is half science, halfart and half luck.

TGR: How do you determine the difference between an anomaly andan economic deposit?

BC: That is the hard part. That takes tens of millions of dollars and iswhat a feasibility study is all about.

Explorers run around the world,finding and evaluating anomalies. The earth has been evolving and changing overits 4.6 billion year history. As it changes, those changes are reflected ingeochemical and geophysical anomalies. A volcano blows up and washes away, hotsprings come from a cooling magma and change a hard rock to clay; that processhappens all the time and creates geochemical anomalies. Maybe one in onethousand of those geochemical anomalies might reflect an economic deposit.

Determining which is a depositrequires going through the feasibility study process, looking at metallurgy,infrastructure, rock mechanics, at everything that goes into building a mine.We really try to turn an anomaly into an ore deposit through detailed studiesthat cost a lot of money.

TGR: As holes are drilled and press releases highlight the drillresults, share prices often drop, whether the results are good or bad. Why isthat? What should people look for in the announcement of drill results todetermine whether the price should go up or down?

BC: If you are going to invest in the explorer/speculative companies, itcomes down to knowing what a company is looking for. Is it looking for porphyrycopper, high sulphidation, whatever? You need to know what that looks like interms of size and grade. Then you need to understand what the results tell you,relative to the expectations. Are the grades sufficient to warrant mining orare they too low? If the mineralogy of the deposit tells you that it is, forexample, a high-sulfidation system with a lot of arsenic, antimony and mercury,you know it will be troublesome, if not impossible, to get the gold out of iteconomically.

You need to evaluate each drill holekeeping in mind what you expect the company to find.

To do that, you really almost haveto be an expert. Otherwise, you are looking at a drill result and saying,"Wow, that is fantastic" or "Wow, that is no good." Twentymeters of 2 grams per tonne (2 g/t) could be a fantastic result or a reallypoor result if you do not put it into context.

TGR: Do share prices go down on good drill results becausepeople are confused, or is something else going on?

BC: It varies. Right now, the market is so messed up that people arereacting without thinking. I have seen drill results that I think are good, andthe stock will go down because people were expecting better or were justlooking for an excuse to sell regardless of the results.

I have seen results that I think arereally poor, and the stock goes up because people do not recognize that thecompany has drilled right down a structure and it is not nearly as thick, aswide or as good as it appears to be in the press release. People are notinterpreting the results. They are being too reactive to market influencesinstead of analyzing what it really means.

TGR: What are some red flags in drill results press releasesthat make you look twice?

BC: One thing to look for is grade smearing. I have a tool thatCorebox and I developed called the DrillInterval Calculator that lets investors calculate how much grade is beingsmeared across how much drill core. For example, a company will drill a 1-meter(1m) high-grade interval, call it 30 g/t, and mathematically smear that across30m so it looks as though it has a 30m interval of 1 g/t. That is an extremeexample, but it happens. The significance is that it changes what the depositmight be. Thirty meters is a lot wider and may be better because it implies awhole different set of economics and possible tonnes. Using the Drill IntervalCalculator you can plug in the big interval and the little interval and seewhat the remaining rock really grades. Sometimes that can be quite interesting.

Investors also need to see if thepress release gives them all the information they need to interpret the data.Investors should expect a drill hole map—including all the past drill holes—anda drill section that shows what it looks like in sections. If a company is notreleasing those data, it says one of two things: It is either incompetent or istrying to hide something. In both instances, it is not a company you want toown.

There should be a real easy summarythat anyone can read, but you should also be able to dig into the details anddecipher what is going on.

The good companies do this well.They provide drill maps, sections and the entire drill hole assay database.That is the kind of company you want to be involved with.

TGR: Is your investment thesis changing given how hard it is forcompanies to find funding and how volatile the gold price has been? What areyou doing differently? What are you looking for now compared to six months or ayear ago?

BC: I remain focused on the economics and on grade. I am looking forwhat the larger mining companies are going to be buying. That is what I want toown and what I have bought.

TGR: Does that mean you are looking for companies that areacquisition targets?

BC: Exactly. I am looking for two things: real early-stage discoveriesand companies that offer high margins. There are not many out there.

TGR: You recently published a list of mid-size and largecompanies that fit your investment criteria. How did you compile that list?

BC: Quinton Hennigh and I went through all the deposits we were familiarwith and tried to get some sort of valuation on them before a feasibility studyand such had been done on the deposits. We came up with a list of large andmid-sized deposits that are high margin—deposits we think major miningcompanies will want to buy.

TGR: Any final words of wisdom for investors trying to preserve,if not grow, their wealth in this market?

BC: Gold is a good sector to be in, and the timing right now is good, inthat the key to selling high is buying low. I think we would all agree thatthings are getting pretty damn low right now. I expect this to continue forsome time and would be very conservative in what to buy. I see no urgency tobuy anything, unless it is a true discovery.

TGR: Is it at the bottom?

BC: I do not think so, although we are very low in the trench. Two orthree years from now, the deposits that are selling for pennies on the dollartoday will be worth $1 on the dollar. That is what you want to buy.

I think it is a good time to getinto the market, as long as you know what you are buying, why and what it isworth. As I said, however, I suspect things will stay rough for a while and forthe most part there is no urgency.

TGR: Brent, thank you for your time and insights.

BrentCook brings more than 30 years of experience to his role as a geologist,consultant and investment adviser. His knowledge spans all areas of the miningbusiness, from the conceptual stage through detailed technical and financialmodeling related to mine development and production. Brent's weekly Exploration Insights newsletter focuses on earlydiscovery, high-reward opportunities, primarily among junior mining andexploration companies.

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-- Posted Monday, 20 May 2013 | Digg This Article