Tag Archives: junior exploration

Sprott’s Thoughts: Rick Rule – I Remember My First Period of Catastrophic Losses

By Tekoa Da Silva, May 15, 2015


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Rick Rule, Chairman of Sprott US Holdings, sat down with Tekoa Da Silva to discuss his early experience investing in natural resources.

What lessons did he learn from those early days? What are some of the principles for investing in individual companies, not just commodities as a whole?

In this talk, Rick discusses entering the sector during the bull market of the 1970’s and how he endured the subsequent catastrophic collapse of the sector, leaving him deeply in debt and unable to repay in the early 1980’s.

Yet he did not resort to declaring bankruptcy. “I managed over the course of 3.5 or 4 years to pay back everybody,” he says, which earned him the trust of some of his former creditors, who “became the foundation of both [his] reputation and success.”

TD: Hi. I’m Tekoa Da Silva with Sprott Global Resource Investments and I’m sitting down here again today with Rick Rule, Chairman of Sprott US Holdings. Rick, good to see you again.

RR: Thanks for the opportunity Tekoa.

TD: I want to ask you a little bit about your experience being a stock broker, a money manager and what that has meant to you throughout your career. The first question I want to ask is, “Do you remember your first client?”

RR: Well, I’ve had several different incarnations in the finance business which means I’ve had several different first clients. There are certainly 10 or 20 early clients depending on which incarnation that you want to talk about that were very memorable people and interestingly, they share a lot of attributes. They were people who were attracted to me in that incarnation as a consequence of the experience with me in an earlier incarnation. In other words, in addition to being attracted to the resource sector, in one way, shape or form, they knew enough about me to be attracted to the way I think and the way I act.

TD: Do you remember your first big ‘win’?

RR: Yes, yes, very well. My first big win in the natural resource businesses came in the early 1970s and the truth is, Tekoa, and I’m embarrassed to say this, there was so much money to be made in the sector when the oil price ran from $3 a barrel to $301 a barrel and where the gold price ran from $352 an ounce to $8503 an ounce that I made the young man’s mistake of equating a bull-market with brains. In fact the successes came fast and furious for me in the 70s and while I’m delighted to say that I made some good decisions that contributed to my own success, the truth is in retrospect that I was accidentally in the right place at the right time.

TD: Could I ask you a little bit more about that in terms of your first big win?

RR: Well, one of the real instrumental wins in my life was being involved in the predecessor to what became Glamis Gold in a private business. Now, the things that speak well for me in that transaction were that I came to understand very early in 1975 the impact that cyanide leaching on oxidized gold deposits would have in the Western United States.

In other words, even as a young man, I understood the improvements that would accrue as a consequence of that technology and the money that could be made. The second good thing I did was identify two clearly-superior human beings; one, Adolf Lundin, who I knew about from the oil and gas business and the other, Chester Miller, who I had just met. The conjunction of Chester Miller and Adolf Lundin gave us a combination of business and technical skills to employ this technology on a grand scale and that success which was, I think, my second mining endeavor made me, and investors who were associated with me, a tremendous amount of money. That’s the good news.

The bad news is that as a consequence of that success, I thought, well, that I understood the mining business and that it was a fairly easy game. I later learned that wasn’t the case but I certainly remember that success and I remember it with some fondness because, in addition to the fact that the gold price went up, in that success, as a consequence of my ability to identify the value of process and my identification to good people, I had something to do with my success. There were other successes that were purely price-related.

TD: Is the concept there Rick that applying a new technology to what would otherwise be a marginal deposit would allow its NPV to expand?

RR: Yes, absolutely. That isn’t the only way you can make money in resources. There’s a truism in exploration that says you make money employing old technology in new places or new technology in old places, but you don’t make money applying old technology in old places because that assumes that you are smarter than all your predecessors, which is highly unlikely.

So we’ve seen very recently that a conjunction of three new technologies — at least three — three-dimensional seismic, measurement while drilling, multistage fracturing, that sort of thing, has unlocked all kinds of oil and gas wealth in the most over-drilled strata on the face of the earth, the United States. That’s new technology in an old place.

We have also seen recently as a firm, three years ago as an example, that you can make money applying old technology in new places. We followed the Lundin family into the East African rift sedimentary basins that are frontier to be sure but were identified 40 years ago.

The application of old technology in new places — having the guts to go to new places — also generated a lot of wealth and that’s analogous to the impact of cyanide leaching on oxidized ores that we talked about as being the genesis of the success that we had in Glamis Gold.

TD: Rick, do you remember your first big loss?

RR: No. I remember my first period of catastrophic losses. We’ve talked before about how markets work, that bull markets are the authors of bear markets and bear markets are the authors of bull markets.

The truth is that the decade of the 1970’s was extraordinarily good to me. I was a young man that worked very hard but I was in the right place at the right time. Commodities were on the ascent and I was in the commodities business.

As a consequence of never being hurt before, I was extremely aggressive and the fact that I was extremely aggressive made me a very good salesman. I confused the bull market with brains and I was able to convince others to do the same.

I also drank the Kool-Aid myself. One of the things that happens is that bull markets, like bear markets, are self-fulfilling prophecies and the whole narrative in the 1970’s was that the 1970’s was going to go on further which was a very convenient paradigm for me to assume.

They didn’t. In 1982, in oil and gas parlance, I took a $30-a-barrel pro forma into an $18-a-barrel world and that was extremely unpleasant. Having been an extraordinarily wealthy young man through some part of the decade of the 70’s, in 1982 or 1983 I guess, woke up to discover that my net worth, my total net worth was sub-zero.

That’s a combination of declining equity prices and debt, a mistake that I haven’t made in the past. So I certainly don’t remember my first individual loss but I remember as clearly as I can see you today the processes that led to my first catastrophic loss, which was a group of many losses.

TD: Is that usually the point, Rick, where many would-be great investors or entrepreneurs give up?

RR: I don’t know if that’s the case. It takes unique fortitude, or perhaps in my case stupidity, to work through a period like I worked through. I know for a fact that many of my competitors, having discovered that they had a negative net worth, declared bankruptcy, went broke, and failed to pay back their debts.

I didn’t do that. I managed over the course of 3.5 or 4 years to pay back everybody – principal, interest and, I’m sad to say, taxes. But the consequence of that was in the first instance, I felt better about myself. I didn’t agree to take on those loans if it was convenient. I agreed to take on those loans and in the second instance, the people who watched me persevere and who were the beneficiaries of the fact that I paid them off stuck with me in business for the next 20 years and became the foundation of both my reputation and success.

One of the jokes that I have now with younger people in our firm like you is that my role in the firm is to trade scar tissue for fees. I’ve been able to collect a lot of fees because I have a lot of scar tissue.

TD: Rick, do you remember why you got into the business?

RR: I’ve always been fascinated with the extractive industries. I grew up in California when it was a much different place than it is today. Oil and gas were an important part of the California economy. Agriculture and water, which still fascinate me, were important parts of the California economy and I grew up in a little tiny place called Almaden in South San Jose that happened to be the host of the largest mercury deposit in the United States. So I had mining right in my backyard.

The whole consequence of exploration, which, for a young man, equated to a treasure hunt, was fascinating to me and the science of geology was and is endlessly fascinating. I began to become academically — if that’s the right phrase — or intellectually interested in both the scientific process of exploration for oil and gas and mining, and the concept of risk and risk-adjusted net present value as a very young man, which probably explains or probably describes me as a very boring young guy. There probably should have been a whole bunch of other things I was interested in. But I wasn’t. I knew from a very early age that natural resources and in particular natural resource finance were what I was interested in.

TD: As a final question Rick, why are you still in the business today?

RR: I’m one of these lucky guys, Tekoa. I have so much fun doing this that if you describe work as something that you have to do to sustain your life, I’ve never worked a day in my life. My wife would tell you that my life is what I do to sustain my work. I get up every day. I can’t wait to be here. I joke that I would do this for free if it didn’t pay so well. That’s not, strictly speaking, true. I like to get paid, if for no other reason than as a measurement metric. But this is an endlessly fascinating business.

The other thing, Tekoa, for right now, this is a really, really cyclical business. As I have said many times before, bear markets are the authors of bull markets and we are in an epic bear market with the TSX-V (the Toronto Venture Exchange where many mineral exploration companies trade) off 83 percent.4 If somebody thinks that I am going to cash out in 2015 — in other words my epitaph is ‘the contrarian who sold out at the bottom,’ they got another thing coming.

TD: Rick Rule, Chairman of Sprott US Holdings. Thanks for sharing your comments with us.

RR: Pleasure.

For questions or comments regarding this article, or on identifying high-quality precious metals mining companies, you can reach the author, Tekoa Da Silva, by phone 800-477-7853  FREE or email tdasilva@sprottglobal.com.

1 http://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=F000000__3&f=A

2 http://www.federalreservehistory.org/Events/DetailView/33

3 http://www.cbsnews.com/news/is-golds-price-drop-just-the-beginning/

4 http://web.tmxmoney.com/pricehistory.php?qm_page=69004&qm_symbol=^JX


Gold Canyon: In scarcity – Large gold projects in Canada up for grabs

Gecko Research, May 15, 2015

M&A is hot and quality projects are scarce. If you are looking for a large gold project in Canada, not already in the hands of a major, your choices are very limited.

M&A activity stronger than ever
In the past we have written a fair bit on mergers and acquisitions in the mining space. Good companies are being acquired, as their share prices have fallen along with the prices of the bad ones in the last few years. It has become very difficult for these small companies to raise funds.

There is an ongoing quest for gold juniors in safe jurisdictions and we are seeing new acquisitions on a weekly basis. We have seen majors being very active in the past year (AEM/YRI bought Osisko, Goldcorp bought Probe Mines) with Agnico Eagle being perhaps the most active major out there. Agnico has also made strategic investments in juniors through private placements which has also been the strategy for our old top pick OceanaGold as they just took a 15% stake in Gold Standard this week.

Lately we have also seen juniors consolidating their assets, making the combination a stronger vehicle going forward, sort of a 1 + 1 = 3 if you will. NovaCopper merging with Sunward Resources is a great example how one company with a management and a project secures its financing by way of merger (NCQ bought SWD at >100% premium).

Our interest is to take positions in companies that are deeply undervalued and have attractive assets and undervaluation enables an acquirer a possibility to offer a premium. For example, Coastal Gold (COD) was trading at $0.015 about a month back. An announcement of a friendly acquisition by Sulliden Mining (SMC) resulted in a bidding war. It is now being acquired by First Mining (FF) for equivalent of $0.06. About 200% on what was invested a month back will been made, tripling your money. Of course, we did not see the acquisition of COD coming.

It’s obvious, isn’t it?
So, let’s have a quick look at why we think Gold Canyon is an obvious take-over target. All these are large, rare projects, and hence attractive to major and mid-sized mining companies. Their share prices, market capitalizations, and global gold resources are in parenthesis:

  • Gold Canyon ($0.25; $40 million; 5.1 million oz)
  • Pretium Resources ($7.40; $1,065 million; 7.5 million oz)
  • Detour Gold ($13.66; $2,335 million; 15 million oz)
  • Rubicon Minerals ($1.32; $520 million; 3.3 million oz)
  • Romarco Minerals ($0.45; $559 million; 4.8 million oz)

Now, the above are not really comparable numbers. In the first two companies capital has not yet been invested. The latter three are either fully financed for production, close to production or have recently started production. Moreover, grade and economics of these projects are different. Some of them even have liabilities on their balance sheets.

What we want to emphasise from our numbers is how difficult it will be for a major mining company (which are mostly struggling financially) to offer much of a premium to, say, Detour or Pretium, given their very high valuation. As a result, we just don’t see the kind of money made in the acquisition of COD by FF to be made in the latter three companies.

Gold Canyon has all the ingredients to attract
For the reasons described above, we have focused on Gold Canyon as they are holding a very large and attractive project, but is available to be picked up at a small fraction of valuation of other companies. That is why they offer a possibility of a high upside. Moreover, given that they are not yet in production, it is easier for an acquiring company to put them in hibernation, if gold price does not recover. You cannot do this easily with a project on which capital has been invested.

The junior sector is so risky that we either want to make a home-run (invest for a big upside) or go home (just stay in cash). We have in the past repeatedly mentioned that Gold Canyon’s Springpole project is one of the rare, large gold projects in Canada. Add to that it also has good economics even in today’s gold price environment which is very unusual. We also know that the rumor mill among institutional investors in Toronto is hot about what might be next for Gold Canyon. It has been brought to our attention that some funds have acquired meaningful positions.

The rumors surrounding GCU is all good for us, but it’s not the only reason for our investment. Gold Canyon is holding a large land package which is virtually very much unexplored (see earlier articles, links below) and the current 43-101 resource is based on a very small part of the overall project. With more than 5 Moz in resources, the potential huge upside is what attracts us the most and we feel this also protects our downside.

What the Springpole project need is for someone to take this project forward. Current management has done a tremendous job up until now and created a lot of value in the company. All that value in our view is not reflected in today’s share price, which is the reason why we haven’t sold a single share.

The point we are making is that the M&A activity is at full speed and we expect this to continue throughout 2015. Deals almost always include a junior company on one side and interestingly enough, both juniors and majors are on the hunt for new acquisitions on the other side as seen in the examples above.

Although there are several very low-grade projects available in Canada, many of them are not really economical projects and will never become mines. That is why Gold Canyon’s high grade open pit Springpole project stands out from the rest and should be on everybody’s radar (including companies looking at acquisitions).
Previous articles on Gold Canyon:
* Gold Canyon – What We Are Looking For As Investors
(http://blog.geckoresearch.com/content/8569, Apr 22, 2015)
* Why Gold Canyon is a keeper and should be held on to
(http://blog.geckoresearch.com/content/8510, Apr 18, 2015)
* Gold Canyon – Just How Cheap Is It?
(http://blog.geckoresearch.com/content/8364, Apr 7, 2015)
* Gold Canyon is Heating up – Institutional Buying is Evident
http://blog.geckoresearch.com/content/7964, March 6, 2015)
* Ripe for a Take-over – Gold Canyon Resources
http://blog.geckoresearch.com/content/7814, February 26, 2015)

Team Gecko Research


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Sprott’s Thoughts: Rick Rule – Mathematics of A Resource Portfolio

By Tekoa Da Silva, May 7, 2015

Tekoa Da Silva recently spoke with Rick Rule, Chairman of Sprott U.S. Holdings, on video for our readers.

In this discussion, Tekoa and Rick get into the ‘nuts and bolts’ of speculating in exploration stocks. What’s the right amount to have in these stocks? What should a resource portfolio look like in different market cycles?

You need to be careful as an investor, but you don’t always have to be right, said Rick. In one of his greatest investment successes, owners of the stock turned out to be wrong about the merits of the company’s project.

It wasn’t an economic discovery after all, even after years of exploration. But it still made investors money along the way because the potential value creation was high.

TD: Hi. I’m Tekoa Da Silva with Sprott Global Resource Investments and I’m sitting down here again today with Rick Rule, Chairman of Sprott US Holdings. Rick, good to see you.

RR: Thanks for the opportunity Tekoa.

TD: What are the ‘mathematics’ of a resource portfolio starting with the math behind discovery probabilities?  How would you define a discovery and what are a few of the most significant discoveries that you have participated in throughout your career?

RR: Well, there are different definitions of discovery depending on whether you’re an investor or a speculator. There are some traders as an example who can make money on one drill hole, which of course does not make a mine.

Working with Sprott, with much larger accounts, my definition of the discovery would be the delineation of enough ore of sufficient quality that it could be put into commercial production.

Mercifully, we’ve participated in numerous of those in the last 30 years in Sprott’s predecessors. Some of the ones that come to mind is of course the famous Arequipa discovery in Peru. But there have been probably 20, 25 that we’ve participated in the last three decades in here.

TD: Rick, sometimes I speak with people on the phone and I’m sure you’ve been asked all throughout your career for advice for someone who has maybe $10,000 or $20,000 and wants to buy four or five exploration stocks and make a discovery. But I also heard you note that in one of the earlier partnerships you participated in 108 private placements but only six produced the type of stellar gains that newsletter writers talk about as a result of discovery. Can talk about the probability of success?

RR: Well, I think that’s accurate. That isn’t to say that I only made money on six stocks of 108 in that portfolio. I made money on more than that but it’s important to note that very large discoveries — the types of discoveries that make you 20 fold, 30 fold or even 100 fold returns are fairly scarce and speculators need to understand that they’re going to have to move through a lot of opportunities to make those types of discoveries. To put it in context Tekoa, economic geologists will tell you that somewhere between 1 in 1000 or 1 in 5000 mineralized anomalies becomes a mine.

You can shift the odds in your favor by participating in exploration efforts that are run by absolutely A-quality explorations or participating in exploration activities that take place in areas that are unpopular, like the Congo, and haven’t been studied much.

But the truth is that the odds are long against success. People need to understand that exploration speculation is a process. It can take a substantial amount of time.

TD: Is the process a ‘shotgun approach’ of buying a whole bunch of explorers or is it extremely diligent due diligence on each one of them?

RR: Very, very, very focused. The truth is that a limited number of people enjoy most of the success and so focusing on people who have enjoyed success in the past is important. Another thing that’s very important is focusing on potentially large discoveries. A small discovery has all the risk of a large discovery but yields a small gain.

The most difficult thing for most people who wrap their heads around is that most of the easy-to-find discoveries in places that we’re comfortable with like the United States, Canada and Australia have been made. You have to go farther afield to have the probability of large discoveries. Many speculators are uncomfortable with places they can’t find on a map or if they could, places that would scare them.

TD: Rick, you’ve been credited with coining a term in the mineral space, which is the “prospect generator model,” which from what I understand comes from the energy space. Can you talk about the prospect generator model and the sole risk exploration model? What are the differences between them?

RR: The prospect generator is the process of discovery that I favor. It involves a group of geoscientists and businesspeople who use their specific acumen to develop exploration theories and stake ground and then bring in third parties to do the heavy lifting of exploration — at least the heavy lifting of exploration funding.

The downside of this approach is that the prospect generator gives up some or most of the project in return for obtaining the funding. The upside is that most of the value in small exploration companies is actually in the human capital of the people that make up the company. Given that the chance of success on any one exploration property is small, maintaining your equity in the intellectual capital rather than having that diluted away to raise money to explore an individual property is the process of financing exploration which has worked for me.

An example of this Tekoa is to take the low range of the probabilities that I said with regards to exploration success, 1 in 1000, and you juxtapose that to the success that I’ve had backing prospect generators. We’ve had something over 20 discoveries in 55 or 56 attempts (of course, past experience is not necessarily predictive of future results). You will see that the probabilities of success, at least in my experience with prospect generators, are almost immeasurably greater than they are with sole-risk exploration.

That doesn’t mean sole-risk exploration can’t work. Sole-risk explorations speculation in bear markets like these can work fairly well because the competition that you face in trying to buy a company after they’ve made the initial discovery, after they’ve had a successful drill hole, can be very low.

If you practice this technique in bull markets when you’re competing with tens of thousands of speculators, you’re almost certain to lose.

TD: Rick, I think I’ve heard you use the analogy of a ‘cover charge’ when it comes to investing in exploration companies (the cost of shares is an opportunity’s ‘cover charge’). Does paying attention to the cover charge help amortize investment mistakes or speculations that don’t result in discovery?

RR: Absolutely. It magnifies the upside. This morning I was negotiating an investment with a small Australian company that has a $700,000 Australian market cap. That’s about US $550,000. That same company would have had a $6 million or $7 million market capitalization in the bull market.

Two things. Your money can go further in markets where the market capitalizations are miniscule like this. But much more importantly, when the sector returns the favor, not only will the small company be worth more but a discovery will be more valuable.

So the idea that you would diversify your risk among small companies now and enjoy their return to favor is one that has worked for me in prior cycles.

TD: Rick, in the prospect generator model, do they apply the option approach to one or two or three properties? Do you define them generally having large volumes of properties?

RR: One company that we own a lot of here as an example, Eurasian Minerals, I think has probably put 120 properties in its life span through the exploration process. That’s 120 properties that were explored with other people’s money (money also came from investors in the prospect generators, but costs were shared with joint venture partners).

They have enjoyed merchant banking-style success where they have enjoyed some exploration success and sold it to one company, then sold it to another company, and driven on, which is the way that they have managed to continue to explore over time.

So I think what you’re looking for is to own a portfolio, sort of five to ten prospect generators, that originate four or five projects a year, farm out two or three projects a year and get two or three projects a year drilled.

The idea with that is that in your portfolio, you are exploring 15 to 20 projects a year mostly using other people’s money.

TD: Looking at your success in doing the 108 private placements while having great success with just six, can a person do that with two, three, four or five project generators?

RR: That’s the idea. We’ve discussed before, Tekoa, financing the prospect generators –taking private placements in prospect generators.

They don’t often need money. But they need money more often in poor markets where it’s tough to find joint venture partners than in good markets. So for accredited investors that have the opportunity to participate in prospect generators and can magnify their wins with warrants — particularly long term warrants — this is probably the best way to participate in exploration speculation statistically.

TD: Rick, I’ve also heard you speak about good starts or decent starts. When we move down the pyramid of speculation towards the advanced-stage development companies, how do the probabilities of success change there when you’re dealing with a company that looks like they have something decent in the ground?

RR: It gets much better. Again, this is a game that you have to play in bad markets because in good markets, the competition for successful efforts and exploration gets very high. But making money in exploration, Tekoa, involves speculating on the answers to unanswered questions.

It might be in the context of an exploration company that they have discovered, if you will, a surface expression of mineralization and they need to trench it down to a couple of meters to see if that expression continues at depth. It might be that having determined that it continues at depth, that they want to see that it extends along strike and find the widths, so they run a grid of trenches. That might be the second unanswered question.

Let’s assume that that’s successful too and now they have a legitimate drill-hole target. They have potentially economic exploration over potentially good widths with a lot of strike length. But they want to see the third dimension. They want to put a drill hole into it.

If you’re in a market where you get a discovery-grade drill hole, that is economic widths of potentially economic grade, one of the wonderful things that can happen in a bear market is that the discovery is greeted by the market with a yawn and you have the ability to analyze the information.

Think about the information in the context of the other geological information available to you. Peruse the management. Look at the income statement. Look at the balance sheet. You have the time to make up your mind as to whether you want to accept that speculation, a luxury that certainly isn’t available in good markets.

These are the market conditions where speculation on sole-risk exploration — particularly for more advanced projects, what I call “successful efforts” — works.

TD: Getting back to the idea of investing in the sole-risk explorers, what is the ideal portfolio size to play in that arena? Can you do that with $10,000, $20,000, $30,000 or do you really need a few hundred thousand?

RR: Again, in a market like this, you can do it with $10,000 or $20,000 or $30,000. One of the things that happens if you’re doing “successful efforts” exploration rather than generative or “grassroots” exploration (on prospective targets that have seen almost no prior exploration) is that you have a lower probability of failure. The magnitude of your win is also reduced though.

Employing $25,000 as an example, with five bets of $5000 each, is perfectly feasible in the type of market we’re in today. The upside that you’re going to enjoy with any individual success will be less than the upside that you would enjoy with a grassroots virgin discovery with a smaller market capitalization. But it’s a very viable speculative technique.

TD: In the advanced-stage project space, when you’re looking at companies that have  identified a few million ounces of gold or 50-100 million ounces of silver as an example, say we have 10 or 15 of those companies, are all 10 or 15 going to make it?

RR: Certainly not. Understand that all ounces aren’t created equal. A four-million-ounce gold deposit of very low grade in remote terrain with bad metallurgy is a science project. A one-million-ounce deposit that’s accessible, that’s fairly high-grade and is mineable might turn out to be extremely viable.

The truth is, again, you need to remember that most money is made in exploration through the answering of unanswered questions. In a circumstance like today where the expectation for the market is failure, the probability that a portfolio of 10 fairly advanced-stage projects is going to pay off for you is higher, simply because the probability of higher mineral prices and the better market is greater in bear market bottoms than it is in bull market tops.

You get to add in to this investment “stew,” if you will, optionality. That’s the idea that a deposit that isn’t economic in today’s prices could be economic at higher prices.

TD: And that type of bet has nothing to do with whether or not all those deposits will be put into production at some point down the road, correct?

RR: That’s true. You can make money with a deposit that returns to favor even though it’s uneconomic. I remember very well at the beginning of the last cycle being instrumental in spinning Allied Nevada out of Vista Gold. If my memory serves me correctly Vista Gold shareholders got their Allied Nevada shares for free.

Those people who participated in the first financing with us, I think paid $2.25 for those shares. As the gold price rose and as the exploration efforts of Allied Nevada proved the deposit to be larger and larger and larger, the share price ran from $2.25 to $45. At today’s gold price, that deposit is probably uneconomic.

But the move in gold that the original speculators enjoyed from the $300 price level1 to the $19002 price level made the effort successful in the context of the market that existed at the time. People, while ultimately wrong, made fortunes.

TD: Rick, I’ve thought about the exploration segment as having– with well-chosen options — a three to five percent success rate, whether it be with your prospect generator model companies or a big portfolio of the sole-risk exploration stocks.

When we look at a well-selected portfolio of advanced-stage projects, what could be the chances percentage-wise of those going into production and themselves being a success?

RR: Well, I certainly think that there are four or five opportunities that are in front of us today that have 75 or 80 percent chances each of going into production.

If you get me beyond four or five in the portfolio, then the portfolio becomes decidedly more speculative. But there are certainly deposits that are in our wheelhouse, if you will — deposits that our geologists have visited and where we’ve interviewed managements, where we know the companies fairly thoroughly — where I would suggest that there’s a 75 or 80 percent chance of each of them becoming a mine.

This again is a situation that only happens in very, very, very poor markets. Usually in a good market if you have a deposit that is likely to be a mine, the market capitalization of the company assumes that it already is a mine and all of the economic gain is taken out by the frothiness of the market. It’s only in markets like these where you can find high-probability advanced-stage exploration deposits that would appear to be reasonable economic speculations too.

TD: When you look around the world today, how many deposits like that are out there that have a 70, 80 percent chance of going into production worldwide?

RR: Very few at today’s mineral price points. There are probably 15 or 20 that in the course of exploration over the next five years will be upgraded to that status. But we of course don’t know which they are until they’ve accomplished it. But I would say that there are five or so in our wheelhouse now. These are junior companies that have done enough exploration that we believe they’re economic and they will be built in the upcoming cycle.

TD: Rick, what about the producing segments — the single or multi-source junior producer or the major? How do you view probability and success when you look at those groups?

RR: Well, there you’re less concerned with probability and more concerned with net present value and commodity price, adjusted for optionality and process. There are teams like the Rio Alto team or the Mandalay team that, while small, seem to have the ability to either discover or buy deposits and build them and operate them profitably.

It’s important that you buy those companies at reasonable valuations using reasonable commodity price assumptions because there’s a reasonable chance that you are wrong. You should get the icing on the cake from higher commodity prices for free for taking the risk associated in what is a risky sector.

TD: What in your mind represents a reasonable discount to net present value on a per share basis for those companies and what are some reasonable numbers that we should use for assumptions on these projects?

RR: Well, I think the assumption has to be the current gold price. If you want to be more aggressive, which I do, you use the forward strip: gold is about $1200 today and the forward strip three years out is $1300. The price assumption that you would use would be somewhere between $1200 and $1300.

The discount in today’s market that I would use personally is probably zero. This is a very, very, very un-frothy market and rather than being so concerned arithmetically with the discount, what I would be much more concerned with personally would be insider ownership — that is whether or not the people running the company acted as my partners or my ‘employees’ (because their only stake in the company was their salary). Parenthetically, I prefer partners.

I also look at their track record of success and what their undeveloped project pipeline is and what the brown field’s exploration potential around their existing deposit is. In other words, I’m fine not to get a spectacular bargain on their existing operations, but I want to get a fair bit of upside baked in the cake for free.

TD: When we look at those segments Rick, how many companies would you say are out there today that have those features?

RR: That’s an interesting question that I hadn’t thought of Tekoa. My suspicion is that there are 10 or 12 that are reasonably-priced junior producers or intermediate-sized producers where you get the upside for free.

I have to caution you that at least half of them are in the copper business. My own personal nervousness with regards to copper in the absence of any demonstrably sustainable economic recovery is that my bias for copper is to go lower rather than higher. I gave you my prior answer in the context of the gold price where I think the probability is higher as opposed to lower.

TD: Rick, in some of your earlier interview materials, video recordings and things, I’ve seen you label expected-return percentages for each of the different segments, with speculation being the highest and moving downwards as you move towards cash. Could you go through those here for the person watching?

RR: Yeah, I’ve done that primarily as a tool for prospective or existing customers to give themselves a risk-reward audit. What I’ve told customers is to look at the rate of return that you’re hoping to achieve and assign an arbitrary risk factor to the rate of return that you’re trying to achieve that’s 1.5 or 2 times greater.

So an example would be if you were going to buy 10-year US treasury bonds today that would yield you a 2.3 or 2.4 percent internal rate of return, I think it’s reasonable to assume that in the wrong side of circumstances, that you could lose at least five percent of your money.

By contrast, let’ say you’re looking at an S&P 500-style investment, like one of the big industrial companies in the United States, and you had an eight percent annual internal rate of return expectation. I’d say you ought to think in the context of prior bear markets and that it would be fairly easy for you to have a 15 percent loss if the market went in a different direction.

Say you were taking more risk than that, like if you wanted to buy the small-cap and mid-cap growth companies and your rate of return expectation was 15 percent, a number you got from the Wilshire Index perhaps. I think that you need to be prepared to lose in that set of circumstances 25 or 30 percent of your money if things don’t go your way.

It’s very important that you put your return expectations in the context of your capacity for risk. How much can you afford to lose both financially and psychologically? That will give you some idea of the orientation and distribution of assets by risk in your portfolio.

TD: Rick, is there anything else that you think that we may have missed?

RR: I think we’ve given it a pretty good go this time. I think it’s a useful instructional video for customers that have a life, or people who are thinking about investing but spending most of their time thinking about their family, or thinking about their jobs. These are the types of issues that one has to consider when thinking about investments or speculation.

TD: Rick Rule, Chairman of Sprott US Holdings, thanks for sharing your comments with us.

RR: Always a pleasure Tekoa. Thank you for facilitating this.

1 http://www.theguardian.com/business/2009/oct/06/gold-price-dollar-decline
2 http://www.theguardian.com/business/2012/jan/17/gold-to-hit-2000-dollars-an-ounce


Why Gold Canyon is a keeper and should be held on to

Gecko Research, Apr 18, 2015

The following was part of our ‘Weekly Update’ newsletter that we sent to subscribers today.


On April 10th we posted a short piece containing some technical analysis on GCU (Is Gold Canyon getting ready for a breakout?). Although technical analysis is useful to us, it’s not 100% reliable. This time it was though and we have just seen GCU breaking out on good volume. The stock gained 11% on Friday alone with more than 700,000 shares traded. Readers who bought on our Feb 25th investment idea are now enjoying a 47% gain.

Under normal circumstances we would be taking profits and start to trade a stock like GCU, but we won’t. Here are some reasons why:

1) M&A activity is strong and if we see other juniors taken out, that will increase the interest for GCU even more
2) Rumors of a possible take-over are still intense (consider that Gold Canyon’s Springpole deposit is one of the largest undeveloped gold resources in Canada in the hands of a junior)
3) We find the stock greatly undervalued
4) GCU can be thinly traded from time to time and to get back in could turn out to be a difficult task
5) The chart looks like a dream from a technical perspective

The chart above is self-explanatory but we’ll say a few words for those that are not so familiar looking at charts. A (positive) Golden Cross is when a shorter term moving average (MA50) is crossing the longer term moving average (MA200) to the upside. As you can see in the chart above, that is about to happen soon and is considered to be a very bullish sign as it confirms a new trend. There is a saying, “Let the trend be your friend”, and we feel this is very true for Gold Canyon. We can see that the stock has created an almost perfect V-shaped bottom and with a new up-trend being confirmed soon, we are holding on to our shares.

Even if “Golden crosses” aren’t 100% predictable to determine future price moves, it’s loved by many and seen as very bullish. The same is true for the “negative” golden cross as we point out in red which happened around Oct 1st, 2014.

(Technical Analysis is the forecasting of future financial price movements based on an examination of past price movements. Like weather forecasting, technical analysis does not result in absolute predictions about the future. Instead, technical analysis can help investors anticipate what is “likely” to happen to prices over time.)


Previous articles on Gold Canyon:
* Gold Canyon – Just How Cheap Is It?
(http://blog.geckoresearch.com/content/8364, Apr 7, 2015)
* Gold Canyon is Heating up – Institutional Buying is Evident
http://blog.geckoresearch.com/content/7964, March 6, 2015)
* Ripe for a Take-over – Gold Canyon Resources
http://blog.geckoresearch.com/content/7814, February 26, 2015)

Team Gecko Research

If you like our work, feel free to share this link with your friends for our free newsletter: www.geckoresearch.com/signup

We are not investment advisors and what we write is our own view only. Please read our disclaimer


Small Mining Companies Hibernate to Survive Industry Slump

Dow Jones Business News,  March 13, 2015

Gold Canyon Resources Inc. has 5.1 million ounces of gold and 26 million ounces of silver underground on property in Northern Ontario. It owns little else.

The Toronto-listed company is part of a generation of junior mining companies that has gone into hibernation. Rocked by a three-year-old mining downturn, these companies have reduced themselves to skeleton staff, locking up their properties and stripping out almost all costs.

Junior miners, which are companies that specialize in exploration or small-scale mining, are in a position to sit out a slump because they often have little debt, few big costs and the ability to hire out their machinery, such as drills. That is unlike the industry giants, from Freeport-McMoRan Inc. to Rio Tinto PLC, which have big debt piles and large, high-cost operations to maintain.

Those qualities have allowed the junior mining sector to defy predictions of widespread bankruptcies. Nonetheless, the downturn has stalled their exploration, historically a major contributor to new supply of metals, from gold to copper.

An industrywide pullback in exploring for nonferrous metals reflects in part the juniors’ dormancy. Globally, the sector’s exploration budget shrank to $11.4 billion in 2014, roughly halve of the $21.5 billion earmarked in 2012, according to a report by SNL Metals & Mining.

Gold Canyon, which was founded in 1985, had just completed its exploratory drilling when the downturn hit full stride in 2012, sending share prices tumbling and steering investors and banks away from many new mining projects. The next step for Gold Canyon was to be a study to determine how economical it would be dig out the gold and silver–but that was put on hold. Such feasibility studies can cost up to $15 million.

“We have cut to the core,” said Ron Schmitz, a director at Gold Canyon with more than 20 years of industry experience.

Gold Canyon, which had built a 60-plus person camp in northwest Ontario, now has just a “couple of guys” there to keep any intruders out, said Mr. Schmitz. The company recently raised money and has no debt, allowing it to ride out the downturn. But it still has costs.

“It’s about $150,000 a year just to exist,” Mr. Schmitz said.

Earlier this month in Toronto, Mr. Schmitz joined over 23,000 others in the mining industry, largely from the junior sector, for the annual Prospectors & Developers Association of Canada conference. Most were looking to raise money to restart their projects. Most would return home disappointed.

“There is no money walking the floor,” said Richard Cushing, who works in investor relations at Monument Mining Ltd, a Canadian gold miner.

Because mines typically take years to develop, skimping on exploration could translate into meager supply growth down the road. But if in the meantime demand picks up in a notoriously cyclical industry, miners may find themselves scrambling to boost production.

Among PDAC attendees, Everton Resources Inc. also is trying to hold out by shrinking operations and putting exploration on hold in the Dominican Republic. In 2012, the gold miner had up to 20 staff and hired teams of contractors to drill, explore and test samples. Now it has around eight employees and is doing little in the way of digging out its gold or exploring for new assets.

“We sit and wait till the markets allow us to raise money,” said Sabino Di Paola, the company’s finance chief.

Since its peak in April 2011, the Global X Junior Miners ETF index has fallen about 78%. From their price peak, gold is down 38%, copper off about 42% and iron ore down 70%, according to the Steel Index.

At the end of January, Toronto-based exchange TMX Group was home to 1,485 miners, of which 80% were listed on the TSX Venture junior exchange. All of these miners combined had a market capitalization of $266 billion, less than half of their peak value reached in February 2011.

Of miners’ total market capitalization on the TMX in 2015, only 3.7% represented companies listed on the junior exchange, underscoring how badly these miners have been hit.

For some, even a junior exchange listing–which for Gold Canyon runs about $35,000 a year–has become a luxury. Last year, 44 miners asked the TMX Group to delist them from Canada’s various exchanges. That was double 2013’s number and well over the 10 miners asking out in 2010 when the mining boom was in full stride.

Delisting can be a risk for investors, who already are holding portfolios of hibernating and illiquid miners, as it wipes out the remaining equity value of the holding.

For some ill-fated miners, their listing is all they have left.

Peter Cunningham is the founder of Lions Edge Capital, a Toronto-based corporate advisory firm that specializes in enlisting miners in so-called reverse takeovers. Last summer, Lions Edge brokered a deal in which tech company Smart Fleet bought Golden Virtue Resources Inc, a lithium exploration company, and reversed into its TSX Venture Exchange Listing.

Reverse takeovers have seen miners supplanted by tech companies, retailers and potential suppliers of medical marijuana, as companies in these sectors look for a cheaper way to get a listing.

“You have a public company that cost $200,000 a year to keep listed, with no money, drowning in debt, so it is easy to have a conversation” said Mr. Cunningham, who attended the PDAC conference this month.