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Sprott’s Thoughts: Ruthlessly Cut ‘Hope’ Stocks and Those That “Have Nothing and Can’t Spend Money [to Create Value]”: Brent Cook

By Henry Bonner, Mar 30, 2015

Brent Cook worked with Rick Rule analyzing early-stage resource stocks back in the late 90’s and early 2000’s.

Brent spoke with Tekoa Da Silva at the Prospectors and Developers Association of Canada (PDAC), a major industry conference for mining and exploration companies.

Brent explained what he looks out for in the juniors and why you should never ‘buy the waterfront’ of resource stocks.

I followed up with him to find out what he really thought of the companies in the resource sector now.

He said many companies are just holding onto the hope that a recovery is imminent. They’re not trying to create value, but instead are counting on investors’ belief in a resource rebound to keep their projects alive, raising just enough money to pay bills and salaries each year. If the market turns around, “they will basically bring out their old dog properties once again,” Brent explained.

PDAC was full of companies presenting their projects, but light on people looking to invest. Brent recounts: “What I noticed was that investors were really missing as a group. There were still folks selling their companies, their properties, or their products. But there were very few people who were actually in a buying mood.”

Investor advantage

This market is “better than it has been in a long time” for small resource investors, says Brent. Investor interest – including from ‘sophisticated’ investors and industry players – is low, which could mean there are buying opportunities in this market.

He sees the individual investor’s advantage as being able to enter and exit positions easily, whereas institutional investors or larger mining and royalty companies are ‘locked in’ for the long haul when they take positions in small exploration and development companies.

Right now, as many past acquisitions and investments are still haunting major investors, they are less willing to put capital into exploration and development. Their reticence opens the field to individual investors.

Do-nothing companies

Remain cautious in small resource stocks, as many companies are practically out of cash, but haven’t closed up shop yet. They’re looking to scrape by on investors’ hopes, but lack either cash or an attractive exploration program that might create value.

The overall quality of companies remains mediocre, says Brent. The sector is still carrying a lot of ‘dead weight’ companies with non-viable projects and no money to do anything meaningful:

“I would say 60% of the companies on the venture exchange (where many small-cap resource stocks are listed) are not viable. They’ve got nothing and they can’t spend money on exploration.”

Abandon ‘hope’ stocks

Judge companies on their merits, not on your faith in the underlying commodities.

“My suspicion is this year is a good year to be acquiring projects, acquiring companies very selectively. What’s really important is to know what you’re buying, what the company’s target is, how much it’s going to cost them to advance that project and when they’re going to have to raise money again. Then follow it in detail and cut bait as soon as things go wrong.

“One of the hardest lessons I’ve learned is that once your investment thesis goes from, ‘This is what we need to see,’ to, ‘Well, that didn’t work. But I hope the next drill hole works,’ or ‘I hope something happens’ — when hope is your investment thesis — you have lost your money.

“Most of these projects aren’t going to work. So you got to find the fatal flaw as soon as possible. If you can’t find that fatal flaw, stay the trade.”

Sprott’s Thoughts: Brent Cook – “You Want To Identify The People And Properties That Can Last Through This Bottoming Period”

By Tekoa Da Silva, Mar 27, 2015

>>Interview with Brent Cook (MP3)

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?

BC: Exactly.

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.

Exploration Titans Brent Cook and David Broughton Talk Kaizen’s Discovery Trail (TSXV:KZD)

By Tommy Humphreys, CEO.ca, Mar 17, 2015

Billionaire mine developer Robert Friedland has said that real wealth in the mining sector is created by finding something.

Friedland would know this, having driven 5+ world-class mining discoveries in his career. He knows that to find a mine you have to spend a lot of money, and drill a lot of holes.

Another secret weapon of Friedland’s is people; he surrounds himself with impressive technical minds, and provides them with big budgets and plenty of autonomy to test their theories. Statistically speaking, explorationists who have already found mines are more likely to make future discoveries.

I first met Dave Broughton on an Ivanhoe Mines field trip to South Africa and D.R. Congo last year. Friedland stood beside Broughton at the site of Ivanhoe’s world-class Kamoa copper discovery. There, a Broughton led team had chased an exploration concept from stream and soil anomalies to drill targets and eventually, a world-class discovery. Kamoa was the first major copper discovery in the D.R.Congo in a hundred years.

At the 2015 PDAC conference in Toronto, Dr. Broughton and Mr. Friedland received the Thayer Lindsley International Discovery Award for their work finding Kamoa. This was the second time the Ivanhoe group had won the prestigious award at mining’s largest convention.

Just a few hours before Dr. Broughton received the award, he met up with Exploration Insights editor Brent Cook, CEO.ca cameraman Carter Smith and myself to talk a bit about his exploration methodology, as well as his plans for a next discovery.

David Broughton, Kaizen Discovery, Brent Cook, Exploration Insights, and Tommy Humphreys, CEO.ca discuss Kaizen’s Discovery Trail at the PDAC in Toronto, Mar 1, 2015:

Tommy Humphreys: I’m here with Dave Broughton who is the exploration boss at Kaizen Discovery as well as Ivanhoe Capital group, a very accomplished geologist, and my friend Brent Cook, editor of Exploration Insights. I wanted to introduce these guys because I think some of the work that Kaizen is doing is very fascinating and Brent hadn’t heard the story yet, and knows more than I do. To start off, what is the award that you’re receiving today and what brings you to PDAC?

Dave Broughton (DB): We are receiving, on behalf of a whole lot of people, the Thayer Lindsley Discovery Award, which is given every year by the PDAC for a significant international discovery. It’s the second time Ivanhoe group has won this. They won it for OT [Oyu Tolgoi] at the inaugural event when they first awarded it a number of years ago.

Brent Cook (BC): So now you’re up in the Yukon for something different?

DB: Kaizen, late last year, picked up a package of land and took over a small company with an adjoining package of land up in the Western part of Nunavut, and its another stratiform copper play like the one we found at Kamoa [Ivanhoe Mines’ DR Congo copper discovery]. There’s copper everywhere you land, so there are good signs when you just get on the ground and wander around. That’s been appreciated for a long time, it was discovered initially in the 60’s and some work was done then, but really, nothing’s happened for about 20 years. The last group of people to be in there in a significant way on the play we’re really excited about was Cominco and that was in the early 90s.

There really are two plays, there’s a volcanic hosted copper play, that has a lot of very high grade copper, well known, lode copper, I guess you’d call it, in volcanic rocks, and there’s a more, less appreciated play, which is what we’re really excited about, and it’s in the sedimentary rocks overlying it. The rocks are similar in age to those in the copperbelt which is intriguing, and there’s mineralization that’s outcropping and in most places it’s covered, certainly 95% cover. 150 kilometre strike of these sedimentary rocks with copper showing here and there but it really hasn’t been tested.

BC: How many holes have been put into this?

DB: Well, Cominco put about a half a dozen holes at the far eastern end of the area and the rest is basically untouched.

BC: What did they find?

DB: They hit mineralization. They didn’t hit an ore grade intersection over ore grade widths, but there are lots of holes at Kamoa or Kupferschiefer, or anywhere you want to go in these systems, you don’t always hit ore on your first hole. The usual things right: persistent and all that.

BC: What sort of width and thickness are we talking in this horizon from the drilling you’ve got so far?

DB: You’ve got mineralization over metres in lenses and so on. There is some government geophysical data that gives up some idea as to what the big structures might be that might help control mineralization. We have some old prospecting that we know about. It’s really going to be getting on the ground and walking those contacts and making up our own mind of where we can find mineralization. And then we’re looking at doing a series of widely spaced stratigraphic holes, just like you would in other districts. You’ve really got to step back. These things go for kilometres, Kamoa is 50 square kilometres in area, so you really have to look at it at a base of scale and then narrow in on what you find. We’re going to take a big-scaled approach to start with and test as much of the strike length as we can, I think.

BC: What’s the access like?

DB: The access is actually excellent. We’re just south of the old town of Coppermine.

BC: Ah, the old famous Coppermine?

DB: It’s a short helicopter ride from there to the project. There’s an airstrip, regular air service. There’s an old air strip actually on one of the properties we’re going to use for direct access with a fixed wing aircraft, so it doesn’t get much better in that sense.

BC: Conceptually, what do you need to see, what do you need to find there to take it to the Kamoa stage, or up to a stage where it’s a world class deposit or something that’s really profitable.

DB: Like anywhere, you want to drill a discovery hole that’s got an ore grade and width and then you want to step out from that and build tonnes. That’s what it’s all about.

BC: What grade do you need?

DB: Up there, good question. Kamoa’s average grade is close to 3%, there are other deposits around the world that have that. If you get 3% copper of sufficient width, you’re in business.

BC: So that’s how we can judge your program. Although admittedly the first round is basic geology which I think is really smart. Get a handle on what’s going on and then zero in. If we’re going to watch this play, it’s about, first off, we get the concept, it’s coming together or it’s not coming together, here’s our targets, next round or two rounds after that, we’re getting low cost mineable widths over 3+% copper, okay.

DB: That’s the objective but like anything, you find what you find, and you go with it. They are mining the Kupferschiefer at under 2%. It really depends on all sorts of other factors, I’m not going to be able to predict that.

BC: You’re not that good yet?

DB: Not that good yet, sorry.

BC: What sort of shape is the company in? How much cash do you have and what’s your market cap?

DB: We’re in good shape. We’ve got a unique strategic relationship with the Japanese trading houses, they fund a number of our exploration projects, and we’ve got a long history of relationships with them, going back to the Ivanhoe group as well. That’s kind of our key strategic difference that we’ve got. In addition, we’ve got a treasury and no debt so that helps too.

BC: They are funding by way of placements, or getting a piece of the project, or an offtake agreement, what’s their relationship?

DB: It varies project to project. We have projects in BC where they are funding the exploration directly. They are interested in the offtake in the long term for Japan; that’s really what’s driving them. And we’re interested in the metals that work for that reason.

BC: That was Kaizen. They are looking for stratiform copper in Nunavut. Actually pretty interesting concept. If they can pull together a large enough volume of rock at 3%, which is what they’re after, it sounds like the infrastructure is not too bad, that could be quite significant. They’ve got a good deal structured with a number of Japanese groups, so it’s worth watching for sure.

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