TORONTO (Kitco News) – The past two years have been very good to the mining sector, the junior miners in particular, as high metals prices have outpaced costs and new money has been plowed into commodities in general, but one veteran geologist and mining stock analyst said he’s become cautious.

Brent Cook, editor and geologist of the newsletter Exploration Insights, said in 2010 alone, $5.3 billion was invested in the Toronto Stock Exchange’s Venture Exchange, with 1,178 mining companies listed. All that money has lifted the valuation of many mining companies and now it’s difficult to find a firm whose shares have not moved up substantially. Most of those firms are completely overvalued, he said, pointing out that in the junior-mining space, the odds of finding an economically viable deposit are less than 1%. This year, he said, may not be the smooth sailing juniors have experienced for the past two years.

“Most of these companies don’t really have anything to substantiate their market valuation. If things really blow up in the Middle East and Northern Africa – I don’t think that’s going to end well - and oil prices start to go up and the general market starts falling, it’s going to really, really hurt the junior guys with high valuations and little more than moose pasture. So that’s the real risk this year,” Cook said.

Cook spoke to Kitco News on the sidelines of the Prospectors & Developers Association of Canada being held in Toronto.

He is invested in only 15 stocks and he explained that investors who are researching a company should understand what the company is looking for, such as grade and metallurgy characteristics, the costs to reach their goal – in this case to mine – and what the company discloses or doesn’t disclose.

“I’m cautious. Since the letter is about what I’m doing with my money, rule number one is don’t lose money. So yeah, I’m cautious. I’m only buying things I think have real fundamental value, a real chance of success by way of economic discovery,” he said.

High prices have allowed miners to explore areas that were otherwise economically unfeasible, and with better technology for exploration it puts some of these deposits in reach. So far prices have outpaced costs, but costs are rising and the easy-to-find deposits are gone. Costs across the board are mounting: mining costs, energy costs, people costs, he said. There are also the intangibles such political and social costs, too.

One major issue that worries him is the lack of experienced professionals in the mining industry, and that is ultimately going to hurt progress.

“There are not enough people to bring projects forward. The consulting firms that are doing feasibility studies, they flat out can’t keep up. The result of that is there’s a lot of sloppy work around. I look at a lot of 43-101s and there’s a lot of sloppy work going on,” he said, suggesting that firms need to start sourcing more from the countries they’re working in as students in the Western world seem to have little interest in mining. A 43-101 is Canada’s standard of public disclosure for mineral resource classification.

The lack of qualified people in the industry underscores his concerns about the amount of money entering the industry. Because commodities are such a hot sector, cash is coming from non-traditional sources. Deep-pocket funds of all types are investing without much knowledge.

“We’ve got all sorts of hedge funds, different funds pumping money into the sector. It’s not going to end well. I work with a number of funds; I deal with a lot of them. Most of these guys really don’t know what they’re buying. There are good ones, but the majority doesn’t know what they’re buying,” he said.

There are firms and areas of exploration he’s keen on, but he’s choosy. He told attendees of a seminar that he currently likes Lydian International and Almaden Resources.

Regionally, Colombia offers great potential because geologically it has bountiful gold and copper mineralization, but even there he is cautious. While there might be “some monsters” out there, most of what’s there won’t amount to much more than small, high-grade veins that are too tiny for a public company to mine. “With any decent deposit, a couple of guys with a shovel can make money off it. And good money. That’s not what company needs to be getting into. Ninety percent of those showing down there are going to be that. The same with the Yukon,” Cook said.

By Debbie Carlson of Kitco News dcarlson@kitco.com