By Tekoa Da Silva, Mar 27, 2015
During a time of stagnating interest in metals, mining, and resource equities, Brent Cook, geologist and publisher of Exploration Insights, was kind enough to share a few comments on the business of exploration.
Reflecting on over 30 years of exploration analysis, Brent noted that, “The biggest mistake I see in the junior sector, is that the guys who are exploring…are just treasure hunting—a bunch of scientists out there on a treasure hunt, drilling holes, [just] to see what’s down there.”
For the investor to properly begin mitigating his or her risk, one needs to “Make sure the company itself knows what it’s looking for…If the company doesn’t know what they’re looking for, [or what it] looks like—how can they know when to quit or when to keep going or how to adjust their exploration [strategy]?”
In this interview with Sprott Global Resource Investment’s Tekoa Da Silva, Brent further elaborates on the challenges facing exploration investors today, and what investors should look for to best position for success:
Tekoa Da Silva: Brent, your commentary in Exploration Insights is some of the best in the business when it comes to looking at things from a geological perspective. For the person reading, if they’re new to resources—can you tell us a little bit about yourself and your commentary that you produce?
Brent Cook: Sure. I would I call myself an economic geologist. I’ve been doing this for 30-odd years now. Up until I joined Rick Rule in 1997, I was a consultant and worked for most of the major mining companies, on anything from grassroots exploration, conceptual stuff, all the way through to bankable feasibility studies. I was involved in the privatization of ZCCM in Zambia and others as well.
I’ve lived in four countries, worked in 60 countries…so I have that background and then working with Rick was a whole new experience. It’s one thing to know geology, but to actually make money using it is a completely different thing. I learned the financial side of things from Rick.
So now what I do is write an investment letter covering what I’m doing with my money in the sector, why I’m doing it, what I’m expecting, and what I’m seeing in the bigger picture in terms of the mining business.
TD: Brent, you published an article a while back entitled “Insights into the Discovery Process.” In that article there is a passage that reads, “All one has to do to make serious money [in the resource sector] is to accumulate shares in the best deposits and most competent explorers and wait.”
With that statement you included a few questions investors need to ask themselves in reaching a similar conclusion. I’m wondering if you can explain that statement for the person reading.
BC: Well, it’s a lot easier said than done and that article is on my website for anyone that wants to read it. I think what you really need to do if you’re going to get involved in this sector (especially early stage exploration) is you need to understand what the company is actually looking for, what [the resource] looks like, the dimensions, the grade characteristics, the alteration features, and what the trace elements are.
More importantly you need to make sure the company itself knows what it’s looking for. That’s the biggest mistake I see in the junior sector, is that the guys who are exploring for the most part are just treasure hunting—a bunch of scientists out there on a treasure hunt, drilling holes, to see what’s down there. If the company doesn’t know what they’re looking for, looks like—how can they know when to quit or when to keep going or how to adjust their exploration?
That’s an important thing you’ve got to understand and that the company has to understand. We also know that 99 out of 100 prospects end up uneconomic—nothing of real value.
So our job as investors in this sector is to find the fatal flaw as quickly as possible and get out of the way. I’ve made good money on stocks where initial drill results looked good, and the stock ramped up. It continues looking good, and then you start recognizing as the news comes out that wait, there’s a problem here—be it metallurgy, size, strip ratio or whatever. We’ve made good money on things that ultimately just went back down.
So I think that’s the most important thing someone needs to do—is to understand what the company is looking for and make sure the company itself knows what they’re looking for.
TD: Could it be safe to say that in some instances when the fatal flaw begins to present itself, as it becomes obvious (if it does) that a management team may realize it themselves, and in the hopes of finding treasure buried somewhere underground—they continue pursuing it?
BC: That happens a lot. Geologists on the whole are very optimistic people and they’re dreamers. They have to be, because the odds of making a discovery are so poor. They continue to hope and don’t recognize when things are going wrong. I think on average, some 20% of discoveries are pure luck and on the other 80%, some luck is involved.
Another factor – and this is probably the worst thing about it, is that—they’re getting paid. This is a company’s business. They’re selling shares, getting paid to explore this project and they come to you and say, “We’ve got this real hot [gold] project in Nevada. Give us some money. We’re going to drill it.” If the results come back bad, they’re going to say, “Look, sorry, it didn’t work. We think [the gold is actually] over here. Can you send more money?” That’s a real issue and it happens a lot. I’m sure you see that often as well.
TD: That reminds me of that old saying of bacon and eggs; ‘The chicken was involved but the pig was committed.’ The management team takes home the salary guaranteed – but the investor may or may not ever see their money again.
BC: Yeah, those are what Rick calls “lifestyle companies.” There are far too many. But on the other hand there are some excellent people doing really good work in the sector.
TD: Brent, there have been few discoveries made over the last 10 to 15 years. It seems that according to industry data, discoveries peaked in the early 1990s and have been gradually declining, with a consistently high number of teams exploring. What are your thoughts?
BC: Yeah, that’s certainly the case in the gold sector and I think across the board. In the mid-1990s, ‘discovered ounces’ peaked. Since then it has been heading down. I think we’re now producing on average around 90 million ounces a year. The industry is not finding anywhere near 90 million ounces a year to replace it. So discoveries are down significantly. I think the reason is that in the late 1980s and early 1990s, the whole world opened up to us. Africa opened up. South America opened up. Eurasia opened up. So there were deposits basically sitting on the surface and it wasn’t that hard to find them.
But now with land-satellite data – we’ve looked at almost everything. Most of what we’re looking for now is blind, meaning it’s under land-cover. You can’t see it from above the surface, so you’ve got to use esoteric techniques; geophysics, trace element geochemistry, that sort of thing, to try and target where to explore and where to drill.
So because of that, the odds are tougher. It’s almost more expensive because you’re drilling blind and even worse, you’ve realized the fact that for every ten gold deposits grading 1 gram per ton, there’s only one deposit grading 2.5 grams per ton.
So as we’re drilling and exploring blindly, we’re going to find ten 1 gram deposits for every 2.5 gram deposit. Yet at 200 meters depth–1 gram per ton doesn’t make economic sense, which further decreases the success rate.
So discovery is a real, real issue and I don’t think it’s going to get better.
TD: What are your thoughts on exploration technology and the use of it, such as airborne surveys? I see a lot of maps with colored blobs in the middle where management teams say “We’re going to explore the blue area because the blue area has the gold.”
BC: Airborne surveys are certainly helpful, but you’ve got to realize those things don’t detect mineralization per se. They detect differences in rock; be it alteration, mineralization, or different rock types. So what you’re looking at is a contrast between two or three rock types, and then you’re interpreting that, “Okay, the blue blob represents magnetite destruction which indicates there is a hydrothermal system there that destroyed the magma, and so it might be porphyry copper.”
So it’s helpful in that sense, but it’s not a given. I mean, if you do geophysical survey—you’re guaranteed an anomaly—but you’re not guaranteed a deposit.
TD: You noted to me the other day that a lot of geologists today prefer desktop exploration, as opposed to going out into the field. That same day we talked I encountered a young geologist who noted to me that she prefers using a desktop mouse for exploration, and doesn’t really like going out into the field anymore. But that’s what geologists are paid to do. Can you talk to that concept?
BC: That’s a real problem as well. People have become much more reliant on technology and the computer, but bottom line is actually going out there, getting your boots on the ground, and thinking about what you’re seeing and mapping.
If you’re not out in the field thinking, you don’t find things for the most part. So that’s a real issue, and a lot of exploration companies operate that way.
As an example, when you’re out mapping as a geologist, you’re mapping outcrop. You put the data on the map; strike, dip, etc., and then there may be nothing for 100 meters, and then there’s another outcrop and you put that data on the map too. That’s what a map should consist of, with an interpretation on top of it.
What happens these days is that [aerial data] gets thrown into a computer and the computer spits out this map with just color and no supporting data. When an expert looks at that map, they have no insights into what the geologist is thinking. So that’s a pet peeve of mine and it’s a real issue.
TD: Brent, are there any anecdotes that come to mind of geos who went out and did some great groundwork, and as a result of that, were able to complete a discovery of some kind?
BC: Oh, there are lots. Most discoveries result from that. The Oyu Tolgoi discovery in Mongolia was about interpreting the surface and projecting what might be at depth based on what you see at surface. Most discoveries are found that way.
TD: Could you give any more detailed examples?
BC: Well, I think can think of a personal example. It was the 1980s and I was working in Honduras and the concept was going out looking at all these hot spring systems. We went throughout the country and checked them out. Put some claims on a few of them. One of them was a big hot spring, sinter (an alluvial sediment deposited by a mineral spring1 ) quartz thing. There wasn’t much geochemistry there so it was kind of a bummer, but then we drove around to the other side of the hot spring to think more about it. On the other side we saw some alteration and that turned out to be where the deposit was.
Now unfortunately, at that point, I didn’t have any more financial backing, so somebody else actually eventually staked and made a mine of that deposit. But that’s how those things work.
I’d also give the example of Mirasol in Argentina. They had all this land-satellite data they were working with, and they were thinking they had spent a lot of time on the field checking out what they were seeing from the satellite on the ground. But there was one area of the map that was under a cloud during the airborne survey. It turned out that under that cloud in the photo, there was this great big vein sticking out of the ground. That vein turned out to be a silver deposit.
TD: They wouldn’t have been able to discover that vein had they not gotten out, put their boots on and actually walked around and did the work, right?
TD: As a final question Brent—what are your thoughts here on the bottoming process of this market?
BC: In my 2014 year-end letter, I noted that I think this year is going to be better than last—but not a whole lot better. We still have lots of zombie companies out there that are going to go bust. The major mining companies are decreasing their costs, but what they’re really doing is increasing their future costs. They’re pushing costs out into the future. That has to be resolved but my sense is that we are in a bottoming process. I don’t think it’s going to get a lot worse and I think that two or three years out, these major mining companies are going to wake up to the fact that they’ve shut down exploration. They’ve shut down their development. They’ve got nothing in the pipeline and all of a sudden when they’re announcing their costs the analysts will start saying, “Yeah, but you don’t have any more ore.”
So you want to identify the properties and the people that can last through this bottoming period, as well as those companies that will come out the other end in possession of the very few quality discoveries that are out there. That’s all you’ve got to do—simple, right? Haha.
TD: So how many high-quality deposits are out there right now, development stage or otherwise?
BC: There are probably six gold projects in the world right now that are being developed that I think will probably work, held by junior companies. I’m not talking about majors.
In terms of companies that are competent, we’ve got something like 1500 listed on the Vancouver exchange. I would say probably – 20% percent of them are companies that I would consider putting money into [in the right circumstance].
TD: 20% out of the 1500?
BC: Maybe 25%. But I don’t buy everything. My portfolio, I try and keep it to 20 companies or less and I think that’s something investors should do as well. If you own too many stocks, you forget why you bought them. They go up, they go down…and then you start hoping they go back up for no reason at all. That’s my philosophy anyway.
TD: Brent Cook, geologist and publisher of Exploration Insights, thanks for sharing your comments with us.
BC: You’re welcome.