Playing it like it was 1997 all over again - Junior survival series part IV

Brent Cook of Exploration Insights is pessimistic on juniors but still buying where he sees opportunity ahead of the turn - which could take years to come, he says.

Author: Kip Keen
Posted: Wednesday , 10 Jul 2013

HALIFAX, NS (MINEWEB) -

In the fourth part of the junior survival series Mineweb's Kip Keen speaks with Brent Cook of Exploration Insights. Links to earlier interviews are below.

Kip Keen: What do you make of the tough times juniors are facing now in context of past downturns?

Brent Cook: I think the 2008 downturn was an anomaly in that the whole financial sector was crashed. The Fed decided to save the banks and we got to ride along with the easy money, the speculative money. That's what took the junior mining sector back up so quickly. So that's something we can't compare to today because we're the only ones in trouble now. And nobody cares about our sector.

This reminds me a lot more of the '97 to 2002 bust where there's money going elsewhere. In that case it was the Internet/tech bubble. This time it's going into the major markets and that sort of thing. And the problem we really face is that the people that got into the mining sector for the right reasons - being they felt the price of gold was going up and the price of copper was going up; the smart investors, the funds and such - have been burned badly because margins, which is what they're really looking for, didn't go up near as much as they should of gone. So these mining companies have really shot themselves in the foot. And I don't know where the new money is going to come back in. I think we're in for a long, slow stretch where mines go bust, companies go bust and the sector consolidates.

KK: We've been hearing a fair bit about potential consolidation. Do you see a spurt of mergers and acquisitions coming as valuations hit rock bottom?

BC: Some. I don't think we're going to see near as much as a lot of people think because the reality is there are very few quality assets out there and that's something that is hard to wrap your head around. People think, “Well, XYZ company has got three million ounces and it's only selling for $10 bucks an ounce.” But the reality is: on most of these ounces you're going to lose money when you factor in capex and such.

So right now the major mining companies are becoming introverted. And one, two, three years down the road a big realisation is going to come: that they do not have the resources and reserves to continue as a viable business. That's when we're going to see the very few quality deposits in junior companies acquired. That's the positive news to all this. After the dust settles, there's going to be a few companies out there that are going to be extremely valuable.

KK: So you're not optimistic about a bounce back in the next year or so?

BC: I don't see it. Really what we're talking about is the gold price. And I don't see a lot out there in the near term that's going to jack up the gold price really high. We have to look at the gold price getting up to $1,600, $1,700 to be really important. Anything can happen. I don't see it. I guess you never see those things.

KK: One of those things that seems different this time around is that metal prices are relatively healthy versus say the downturn during the late '90s and early 2000s when gold lost its lustre. I suppose the current lack of interest comes back to the difficulty miners have had in making profits with skimpy margins.

BC: Exactly. That's the problem we still face. Prices are higher. But so are costs. Your average all-in average sustaining cost for major miners in gold deposits is in the $1,300 to $1,600 an ounce range.

And the difference now is back in the late '90s and early 2000s there was a lot more of the world just opening up to modern exploration. So there were deposits sitting at surface that were much easier to find and put into production. Now we're having to look deeper.

On top of that there are all the problems that come with jurisdictions all over the world: environmental, NGOs, etc. This sort of thing is doubling the timeline to production to at least to five, ten or more years. If you can do it at all. All these things are building up to a crescendo. And so there's not going to be enough metal to meet supply.

Again, that's the positive here.

KK: Do you think that in the recent boom years too much speculative money went into poorly conceived early-stage exploration projects or advanced-stage projects with already dim prospects?

BC: Obviously both. Up to 2008 all this speculative money was pumped into the system and it went into anything and everything. I think you had a lot of people who didn't understand the industry throwing money at anyone who claimed to be able to find a deposit.

Certainly way too much money gets wasted on old dog projects. That's what the Vancouver exchange (TSX-V) survives on. That's a function of the way people operate. Put it this way: I can come to you with a project and say I've got this fantastic idea to spend a $1 million exploring virgin ground in call it Ecuador. And it's going to take me two years and at the end of that all I'll have is some targets ready to drill. Or I can come to you and say, “I've picked up this project that's been drilled by everybody. But there's some good holes in it. We can twin those holes, jack the price up, you can get off your paper, if you want, and you keep your warrant.”

Money is pissed away on both.

KK: Do you think the money will come back for early stage exploration? How do you see it playing out it in the months and years to come? Do you subscribe to an extinction model, a sort of clearing out of the field and then a return of the market. Or is the model we have now broken and beyond repair?

BC: This is a cyclical industry. The dumb money will come back. But right now I think we're going to see major extinction in the junior sector and for some of the mid-tier and majors as well. And there's going to be fewer and fewer discoveries. But the companies that survive, the companies that have enough cash to last, and do some significant work and are willing to take the time to do the proper exploration, geology, conceptualization: they're the ones that are going to do well. There's not many of them.

KK: Is it going to be as bad as the downturn that began in 1997 and lasted for several years? You mentioned earlier it felt a bit like that period.

BC: That's how I'm playing it. I think we'll see some short rallies. But they're not going to go very far. It looks tough.

KK: For readers that still want to walk in the minefield, how do they not get blown up? You're still active. Are you highly selective on companies with near term results which could hold promise so you don't get crushed by what may continue to be a slowly descending market? Or do you hold?

One thing I'm holding and buying: solid deposits and projects that are selling for significantly less than what a realistic valuation is, be that from my own work, or a feasibility study net-present-value calculated at a sensible metal price. We don't know when this is going to turn. So my view is I buy something for less than it's worth with the idea that I'll be able to buy it for a third less within a few months. That's how I'm doing it.

KK: What about early stage exploration, those juniors that are making last ditch exploration efforts as they're treasuries threaten to run out. Would you go near those right now?

BC: That's my favourite thing. That's what I really like, getting in for a drillhole, a drill discovery. I'm certainly watching a bunch. But there's not a lot out there.

KK: Financings have dried up, especially from funds and institutions in North America. Do juniors in North America have to turn to alternative sources of cash, perhaps in emerging markets, away from the Toronto institutions that have played such a key role in the industry over the past couple decades?

BC: You mean where are we going to find the next batch of fools? I don't know. I ran into this fellow recently. I was in a meeting with this fund and I went through how the business works - junior exploration. And the guy from Brazil said, “I'm not getting something here. You mean you give these guys money. They go spend it all. They don't find anything and then you give them more money? How does this work?” It's not a concept everybody gets.

KK: What about new sources of wealth, say in China and India where demand for gold is already strong; do you see them playing an increasing role in junior financing?

BC: You'd think so. I've been over there to some of those meetings and also in Dubai and the Emirates. It's kinda a feeding frenzy. The ones who have money show up or they send their representatives and there's all these money grubbers there trying to get their money. So it's kind of off-putting to see it happen. I haven't seen a lot of it. There's some for sure. But not as much as you'd think, money coming into the junior sector. They're very nervous about how aggressive people are seeking them out. That's what I've noticed anyway.

This interview has been edited and condensed.

http://www.mineweb.com/mineweb/content/en/mineweb-junior-mining?oid=197305&sn=Detail