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Brent Cook: How to Turn Rock into Money
The Gold Report www.TheAUReport.com
COMPANIES MENTIONED
Almaden Minerals Ltd.
Andina Minerals Inc.
Belo Sun Mining Corp.
Coeur d'Alene Mines
Corp.
Fresnillo Plc
Galway Resources Ltd.
Global Minerals Ltd.
Kaminak Gold Corp.
Lydian International Ltd.
MAG Silver Corp.
Mirasol Resources Ltd.
Rye Patch Gold Corp.
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01/04/2013
What if the shockingly low valuations of some junior mining companies are
really all they're worth? As the market shakes off years of exuberance, Brent
Cook, co-editor of the Exploration Insights newsletter, searches for the truly
undervalued—finds as rare as gold itself. In this interview with The Gold
Report , Cook talks about high-margin deposits that the rest of the market
can't see.
Source: Brian Sylvester of The Gold Report
The Gold Report : Brent, 2012 was difficult for many gold investors, and you paint
a pretty bleak picture for certain junior mining companies in 2013 as well.
Brent Cook: We've actually had two pretty tough years on the TSX Venture
Exchange. It is off about 30% from its peak in 2012 and around 20% for the year.
That comes on top of a 35% decline in 2011. I do think much of the froth is washed
out and we will see some opportunities in 2013.
During the most recent boom years, 2009
and 2010, roughly $11 billion ($11B) was
raised on the Venture Exchange. Most of
that has been spent without much success.
Going by John Kaiser's database of about
1,800 Venture Exchange listed companies,
there are around 600 that now have less than $200,000 in the bank and a full 62%
of the 1,800 companies have a median working capital of only $1.1 million ($1.1M)
or less. These companies are trading at less than $0.20/share, which means that
unless things improve dramatically in the next year, many of these companies are
going out of business or will push excessive dilution on current shareholders just to
stay alive. The Venture Exchange will truly be the land of the walking dead.
"Since about 1995, the
number of gold ounces
discovered has been
trending straight down."
This coming year will be a cleaning-out process that in the long run is good for the
sector.
TGR: The Exploration Insights portfolio was not immune to what happened in 2012.
It was up 4% from early January 2012 to late November. Are you convinced all of
the companies in your portfolio should remain there?
BC: We've got to go through a cleaning-out process as well. We've had some real
disasters, where the investment thesis didn't pan out. We've also had a couple of
big winners. The majority of the stocks that we own are undervalued, but they have
held up well compared to the indexes. I just finished reviewing our 2012
performance and we have so far done surprisingly well on stocks we bought and
sold in 2012, with an average gain of about 49%. Unfortunately, the stocks we have
held for over a year didn't do as well, taking our year over year average gain down
to about 13%. I'll have the final numbers out in our Jan. 6 issue.
TGR: What are you telling your readers to give them hope?
BC: The truth. Hope is the worst reason to own a stock. We're not going to see
$3,000/ounce (oz) gold, and we are not going to see junior stocks go to the moon
this next year. If an investment thesis doesn't pan out, we sell and take the loss. If,
however, the thesis continues to work, we hold onto the stock or buy more. This is
very speculative money in a very high-risk sector. Unless the risk trade comes back
into favor this next year, and I don't think it will, it's going to be another tough one for
the explorers and junior miners.
That's all negative, right? But this is the smart time to pick up selective companies
that have something of value. This is when investors can make money by buying
intelligently and patiently. We may not be at the bottom, but it certainly isn't the top.
TGR: What sort of trading range do you see for gold in 2013?
BC: What's more important to me than gold's trading range, at least with regard to
the junior explorers, is that the industry is not able to supply new deposits and
discoveries to replace what is being mined. This is a serious issue that in the long
run bodes well for this sector. Since about 1995, the number of ounces discovered
has been trending straight down. According to the Metals Economic Group, in 2011
approximately 10 million ounces (Moz) were discovered, but 83 Moz were mined.
That gap in production versus discovery is the opportunity, regardless of the gold
price, which I think is flat to marginally higher in 2013.
TGR: A lack of discoveries is hurting the industry?
BC: It's getting tougher and more costly to find gold. That is the real issue. A
company that raises $5M gets half as far as it did eight years ago.
During the past six years, the major gold"This coming year is going
mining companies have spent the
to be a fantastic time to buy
equivalent of 40% of market capitalization
undervalued, high-margin
developing new deposits. It is projected that
deposits that the rest of the
they would spend another 60% of their
market doesn't recognize."
capitalization developing the new mines
they have on the books just to keep
production even. Moving reserves to production comes at a big cost. I've posted an
article on my website that goes into a lot more detail regarding the dismal state of
both the gold miners and explorers that should help readers understand the depth
of the problem and opportunity.
TGR: Let's get into your process. One phrase you use a lot is: "How much is it going
to take to turn this rock into money?" What calculations do you use to help
determine that?
BC: There aren't any easy numbers I can throw out there. Every deposit presents
different challenges and companies spend tens to hundreds of millions of dollars
figuring out how much it is going to cost to turn the rock into money.
Actually, one rule of thumb is the cutoff grade used in estimating the tonnes and
grade of a deposit. In theory, that cutoff grade should be what a company or
resource estimator projects is the break-even point between making money and
losing money. If the cutoff grade is, say, 0.5 grams per tonne (g/t), then I like to see
an average grade that is at least twice that, say, over 1 g/t, because above that is
where you really make the money, if the cutoff assumption is close.
Then you've got to look at metallurgy. This is probably the most important aspect of
any deposit once it has been found. For instance, an oxide deposit sitting on the
surface in Nevada with a cutoff grade 0.2 g/t can still make money, whereas another
deposit in Nevada at 5 g/t cutoff won't.
It is highly variable. All that the retail investor can do is guestimate if the grade and
tonnes are sufficient to cover the probable capital and mining costs.
TGR: It's pretty easy for the average retail investor to get lost in a feasibility study.
They are quite technical. I'm certainly guilty of this: It's easy to look at the internal
rate of return (IRR) and judge a deposit based on that. Is there a way to determine
whether the IRR number is realistic?
BC: IRR is a good metric to look at, especially if it is after taxes.
TGR: Is there a minimum threshold?
BC: I think 20% after tax, although it depends on where the project is located and
on the exploration upside. That upside is the intangible that often decides if a
deposit gets bought or not.
TGR: What are some practical ways a retail investor can do due diligence?
BC: Talk to management. Get comfortable with the team. There are a lot of good
people in this industry and they are not hard to recognize once you start talking to
them.
Go to the company's website. How
accessible it is? How much information
does it give in news releases? Does it back
up the data? Almaden Minerals Ltd.
(AMM:TSX; AAU:NYSE) and Mirasol
Resources Ltd. (MRZ:TSX.V) include
details, details, details. Be wary of a
company that puts out a news release with no maps, no sections and no data.
Watch for news releases that report high grades smeared over long intervals, and
always search for historical data from the property being promoted. Most properties
have a history that gives you some insight into possible tonnes and grade.
"The long-term prospects
for the exploration sector
look real good to me, but
you better know what you
are buying and why."
TGR: Almaden recently announced assays from four drill holes testing the eastern
limits of the main zone at its Ixtaca gold-silver discovery in Mexico. The company
has discovered gold-silver mineralization hosted in volcanic rocks versus
limestone, and shale host rock in the rest of the deposit. What do you make of that?
BC: I went down to Almaden's Ixtaca project two and a half years ago and bought
the company then. This is a very big hydrothermal system and, potentially, precious
metal deposit. The drilling to date has almost exclusively found gold and silver
mineralization in sediments. My take is it's just touching the edges of the mineral
system and the most recent drill holes are pretty encouraging. We'll see if Almaden
can extend it 50 meters to the southwest or not.
TGR: You don't believe that the company has found the heart of the deposit, but is
Almaden any closer to the promised land?
BC: The next drill hole will be either great or a bust, but is not the deciding factor for
this deposit. The important aspect to me is that this is a big system, and big systems
make big deposits.
TGR: Some pundits have suggested that the success Almaden is having at Ixtaca
has caused it to largely forgo the prospect generator model and focus on this
deposit. Do you agree?
BC: The company still has a number of projects ventured out, but you're right, it is
drilling Ixtaca and will be drilling El Cobre. With the prospect generator model, a
company generates ideas and vends them out when they get to be too high risk and
costly. Therefore, the company doesn't dilute the shareholders to drill every low
probability target it turns up. Most prospect generator companies are run by
geologists who are good enough to recognize something above average when they
stumble across it at which time they have the money and tight share structure that
benefits long-time shareholders. It takes a long time to work through projects and
find something worthwhile and this model addresses that problem.
A number of companies have morphed out of that business model to the benefit of
shareholders, including Almaden, Mirasol and Kaminak Gold Corp. (KAM:TSX.V).
TGR: Have any other companies recently published important results?
BC: Belo Sun Mining Corp. (BSX:TSX.V) just came out with 4.1 Moz Measured and
Indicated and 2.8 Moz Inferred, or nearly 7 Moz at 1.7 g/t at its Volta Grande project
in Brazil. That's a really strong resource number. These are broad coherent zones
of mineralization. It'll be easy to mine. Yet, the stock's gone nowhere on the news.
We can buy this company at the same price we could before the announcement, but
it's got 2M more quality ounces.
TGR: Is it a lack of faith or did the news get lost in a mass of information?
BC: The sector has been so hammered that a lot of trading is now among a small
circle of friends and enemies who are basically picking each other's pockets. That
doesn't bode well for this next year. I don't know what it will take to bring new
money in. We've got nearly $1,700/oz gold, but nobody cares. Without new money
entering the sector we will struggle.
TGR: Would a company like Belo Sun, given its board and the merchant bank that
is behind it, have any trouble raising cash?
BC: It's got plenty of cash. And its deposit will likely get bought down the road by a
larger mining company.
TGR: It also has an exceptional board that has turned over a number of companies.
Can you mention another company?
BC: Lydian International Ltd. (LYD:TSX) has a 3 Moz deposit in Armenia. It's an
oxidized deposit that will have low processing and production costs. Capital
expenditures are relatively low. A recent feasibility study shows a net present value
at 5% with gold at $1,500/oz of just over $1B. That's a $1B valuation at $1,500/oz
for a market cap of $250M.
TGR: Is it falsely being priced as if Armenia were a risky country?
BC: Perhaps. Based on my visit to Armenia, I don't consider it a risky country.
Maybe it's such a new location that many investors are leery.
TGR: Lydian recently announced that it was going to modify its crusher design and
try to reduce the footprint of its Amulsar deposit. Is that a good plan?
BC: It is. It will increase production, make it a simpler operation and make Amulsar
more valuable.
TGR: Does Lydian have the money to build it?
BC: It has the money to move forward this year and will begin site development. It is
my understanding that the International Finance Corp. (IFC) and European
Development Bank want to put money into it.
TGR: What are some other companies that you find interesting right now?
BC: MAG Silver Corp.'s (MAG:TSX; MVG:NYSE) Juanicipio project in Zacatecas,
Mexico, is probably the best or second-best undeveloped silver deposit in the
world. MAG discovered the deposit with Fresnillo Plc (FRES:LSE). Fresnillo is
going to put it into production. Because the deposit is part of its namesake silver
district, and there are without a doubt more veins to be discovered, it would make
sense for Fresnillo to buy MAG Silver's 44% stake, eventually.
TGR: MAG also has silver at the Cinco de Mayo project. Will Fresnillo buy its
interest in Juanicipio or do an outright takeover?
BC: I don't know. Fresnillo is a rather secretive Mexican company and it is hard to
know what it actually thinks. Cinco de Mayo is a polymetallic deposit. It's got silver,
lead, zinc and copper. I'm not sure if that interests Fresnillo. My bet is that Fresnillo
will take Juanicipio and MAG Silver will spin out Cinco and the rest of its projects
into a separate company. I just don't know when.
TGR: Rye Patch Gold Corp. (RPM:TSX.V; RPMGF:OTCQX) is in a legal battle with
Coeur d'Alene Mines Corp. (CDM:TSX; CDE:NYSE) in Nevada. Is there any
update on that dispute?
BC: Rye Patch is making a bet that the mining law of 1872 holds up. I think it will,
but it's going to be a long legal battle. Coeur d'Alene has a plan of operation with
the Bureau of Land Management that it believes gives it priority over claims that it
failed to keep current. However, if a company does not keep its claims up to date in
the U.S., those claims are open to staking. It is clear to me what the end results
should be but we are dealing with a David and Goliath scenario.
TGR: Global Minerals Ltd. (CTG:TSX.V; DPF:FSE) hasn't done so well since you
put it in the portfolio in March 2011, yet you still own it. Why?
BC: Global Minerals has a good, easy-to-mine silver deposit in a Slovakian mining
town. The infrastructure is more or less there. The underground silver and copper
mineralization is there. I can show on paper that this project is considerably
undervalued for its silver resource, and that doesn't even account for the exploration
potential on trend. It is, however, a development story and these take time.
TGR: Kaminak Gold Corp. published the first resource estimate on its Coffee gold
project in the Yukon. It's 64 million tonnes at 1.56 g/t, which equates to roughly 3.2
Moz at a 0.5 g/t cutoff for the oxide and transitional material and 1 g/t cutoff for the
sulfide material. What are your thoughts?
BC: I was impressed. Kaminak came out with more ounces than I expected. The
grade is pretty good. The oxide material is positive from a processing perspective. I
was more surprised at how the market reacted, which was basically flat. Kaminak is
the market darling in Canada. Good guys, new all Canadian discovery; everybody
loves it. But it publishes a 3 Moz resource and the stock goes nowhere.
TGR: If it were 2007 and Kaminak had the same deposit and the same resource,
what do you think it would be valued at?
BC: It would be at least double what it is now. Back in 2007, everybody was happy
and smart. We were all making money. The hedge funds were pumping money into
the exploration sector. Now it's just about the opposite.
TGR: Maybe we never return to those days, but when will the market properly value
these types of deposits again?
BC: It may be properly valuing many of them now.
TGR: Oh my.
BC: There are a few deposits—Belo Sun, Lydian and a few others—that are
definitely undervalued. But when it comes to the resource and exploration stages,
the odds of making an economic gold discovery are about 1 in 1,000. How do you
properly value that?
Andina Minerals Inc. (ADM:TSX.V) was bought by Hochschild Mining Plc
(HOC:LSE). It had about 7M low-grade, tough ounces up in the high Andes in Chile.
It got about $10/oz and it may have overpaid. That's what it agreed to be paid, so
we have to assume that that is a proper valuation for those ounces.
TGR: Does a mine need to come into production and be successful before
valuations go up in areas like Colombia, where there's a lot of exploration but not
much coming up yet?
BC: I was looking at the share prices of a number of companies that jumped into
Colombia and put out initial results that many considered good. They excited
investors with spectacular surface samples, and even some drill results. The results
took many of the companies straight up and subsequently straight back down.
Reality has set in. A lot of those discoveries turned out to be small plugs or narrow,
high-grade veins that don't offer much size potential. For the most part, it was pretty
obvious what was being promoted but people wanted to believe. Now they don’t
seem to believe anything.
We only own one Colombian company: Galway Resources Ltd. (GWY:TSX.V),
which was acquired and will be spinning out two new companies.
TGR: Is there a company that could have a good 2013?
BC: Mirasol. I've spent a lot of time with this group of geologists. They find deposits.
They're good at it. They've made several discoveries in Argentina. Mirasol just sold
49% of one discovery to Coeur for $60M in cash and stock. It has another discovery
it will be putting out a resource report on, and another it might release some good
drill holes on. It has moved into Chile. You're paying $30M enterprise value for all of
that and I'm willing to bet that the company makes another discovery in the next
year or two.
TGR: Is there a parting thought you'd like to leave us with? A crumb or two of hope?
BC: This coming year is going to be a fantastic time to buy undervalued, highmargin deposits that the rest of the market doesn't recognize. The long-term
prospects for the exploration sector look real good to me, but you better know what
you are buying and why. I am afraid most of the fools have been washed out of the
market.
TGR: Thanks for that, Brent.
BC: My pleasure.
Brent Cook brings more than 30 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 detailed technical and financial
modeling related to mine development and production. Brent's weekly Exploration
Insights newsletter focuses on early-discovery, high-reward opportunities, primarily
among junior mining and exploration companies. Cook will be speaking at the
Cambridge House Vancouver Resource Investment Conference Jan. 20-21.
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IMPORTANT DISCLOSURES
1) Brian Sylvester of The Gold Report conducted this interview. He personally and/or his family own shares of the following companies mentioned
in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Gold Report: Rye Patch Gold Corp., MAG Silver Corp., Lydian
International Ltd., Almaden Minerals Ltd. and Global Minerals Ltd. Streetwise Reports does not accept stock in exchange for services. Interviews
are edited for clarity.
3) Brent Cook: I personally and/or my family own shares of the following companies mentioned in this interview: Global Minerals Ltd., MAG Silver
Corp., Rye Patch Gold Corp. I personally and/or my family am paid by the following companies mentioned in this interview: None. I was not paid by
Streetwise Reports for participating in this interview.
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