Early-stage explorers and prospect generators tapped for performance in 2014

20th January 2014 By: Henry Lazenby - Creamer Media Deputy Editor: North America

Early-stage explorers and prospect generators tapped for performance in 2014

Photo by: Bloomberg

VANCOUVER (miningweekly.com) – Despite the thorny down-market the junior exploration sector has been dealing with over the past 18 months, several companies have been rewarded for their performances. The problem was, however, that the industry has not delivered a lot of performance, Sprott US Holdings chairperson Rick Rule told investors on Sunday at the 2014 Vancouver Resource Investment Conference.

He pointed to examples during this period such as Reservoir Minerals, which is developing a portfolio of metals and mineral exploration projects in Europe and Africa, whose share price had risen from C$0.26 a share, to more than C$5 apiece in three years – that is a 625% gain; and Africa Oil, which is exploring for oil in the East African Rift Basin system, which had appreciated from C$0.80 a share, to more than $9 apiece.

“That’s performance,” Rule said.

He noted that during 2013, the global stock charts spelled an unmitigated disaster for the junior exploration sector, when graphs slanted from the top left corner to the bottom right. This year, the stock chart for the market as a whole was going sideways.

“Last year’s stock charts exhibited something that is called buyer exhaustion – the market could not find a bid. I would suggest that the overall TSX-V is now going through a period of a trade-off between buyer exhaustion and seller exhaustion.

“Certainly many of the companies would go to their intrinsic value, which is zero, but the best quartile of the companies has already put in a bottom,” he noted.

Rule moderated a panel examining where the ‘performance’ would come from in the next 24 months.

Founder of Goldseek.com Peter Spina observed that more money had gone into the ground than what had come out of the ground.

He said that the current environment had a lot of risk factors to take into account, but noted that one of the best investment opportunities lay with project generators, which provided a good way for investors to gain exposure to the exploration sector, as the risk was mitigated by large companies partnering with these firms. This resulted in easing fears of becoming diluted as an investor, while the partner usually pays for the exploration work.

Meanwhile, he held that while some companies with massive deposits would be able to survive the current markets and attract investment, most junior exploration companies could do more, and were only raising money to survive and pay salaries.

NEW THINKING

Head of Kaiser Research John Kaiser added that the ‘game’ in the last decade was for explorers to take existing systems, lower the cutoff grade, and demonstrate the deposits’ worth in substantially higher metals price scenarios.

“However, when you take into account cost escalation, especially in the mining sector, we have come completely full circle. We are at the start of where we were ten years ago in terms of the profitability of these existing deposits.

“I find it really hard to imagine that copper and gold will double or triple in real price terms from these levels. We are stuck with a modestly trending upward scenario, which means that most of the projects that looked like they were attractive when metals prices were ascending, are not so great anymore, and that will continue for some time,” he said.

The solution, Kaiser said, was to look for projects that would work really well at current prices, and to think anew about prospects. It means going deep, undercover, and using new techniques to find new workable deposits within the current scenario.

He suggested looking at polymetallic deposits, scarn systems and volcanic-massive sulphide systems as potential safeguards against volatile commodity price fluctuations, where one did not care about what the price of copper or gold was doing, owing to being covered across the range of resources.

Kaiser also suggested that discovery plays were the best bet to see performance in the next two years. “No one [investors] wants to give companies money for drilling anymore, but with so few companies drilling, the targets that they are going to drill are bound to be good,” he enthused.

Author of the Resource Opportunities newsletter, Lawrence Roulston, agrees that the biggest gains would come from the early-stage explorers and prospect generators. He noted that the best ones already have projects in hand, with the added bonus of adding more deposits as work progressed on new discoveries.

Roulston also said that another area that was in recent months getting attention was metal deposits that have been outlined and well defined, but where there was potential for satellite deposit discoveries, or potential deep below the existing orebody that could enhance projects through additional exploration.

VALUE RISING

“When selectively deployed over three years, almost [all of these themes] are going to work. I can tell you without fear of being wrong, owing to this being my fourth commodity cycle, that bear markets are the authors of bull markets. One’s success is almost guaranteed if you do the work, given from where you are starting from,” Sprott’s Rule said.

“The truth is that a good team, with good projects, that survives the next three years, is a likely triple [in share value]. They are going to have to finance this year. A likely triple [gainer in share value], with a full warrant, is a likely five-bagger,” he quipped.

“We are going to have to find things in the exploration scene that work. This idea that we take some [dismal] old prospects that have failed in the last three cycles and try to drill one or two new drill targets in hopes that it might move the share price incrementally, must end. What is going to work is to find a deposit that is actually going to make me acquire more money,” he said.

Kaiser noted that investors had these days become far too impatient with exploration drillers, expecting new discoveries from only a few holes, while the past had shown that many of the most significant discoveries were made by dogged determination, driven by an informed believe that there had to be something beneath the surface.

The panel pointed to some of the top prospective geographical areas around the world to find new economic prospects in the current milieu as being in British Columbia, Ontario, Utah, Nevada, West Africa, Portugal, Spain, Mongolia, Turkey and several areas in South America, including down the Andes.