Selecting Precious Metal Miners and Explorers

Searching for excellence

Precious metal explorers as investment vehicles have a long standing track record of extreme volatility. As Rick Rule of Sprot Asset Mgt. USA uses to formulate it: “We have known both the thrill of victory and the agony of defeat”.

It is obvious that the success of precious metal explorers goes together with both the exploration talent of a small team of geologists and with their broader management skills. Add just a grain of luck in picking among the promising geological anomalies the successful drilling locations. To end this introduction with another quote of Rick Rule: “Profitable miners ultimately will see their share price reflect increased cash flows from mining operations, but you can’t count on a gold bull market to bail you out of a dumb decision on an explorer investment.”

Major miners aren't replacing the reserves they are mining

At the Vancouver Resource Investment Conference (VRIC) Daniela Cambone of Kitco interviews Brent Cook of Exploration Insights. (Jan 2019)

Mega mergers on the scale of Newmont and Goldcorp are happening because miners can’t keep producing fast enough, and need to consolidate resources in order to meet demand, said Brent Cook of Exploration Insights. “We’re at a time and space where the amount of time it takes and money it takes to discover, prove up, and develop a mine, is longer than we are depleting reserves,” Cook told Kitco News on the sidelines of the VRIC.

Why mining majors don’t send their own explorer teams into the hills

Most major gold mining companies still have a few geologists on their payroll. So why don’t they devote their efforts to finding the next generation of promising locations for their companies to proceed in building new mines? 

The toll of the gold bear market has been paid cutting 'overhead' in mining. Overhead implicitly means anyone not directly involved in mining, which also applies to exploration activities. If any exploration still is on the table, it are a few (or just one) senior geologist scrutinizing the work that explorers are delivering. As a result we witness ever more mining companies taking a stake in successful explorers who are exploring some ore bearing layer or developing a resource which looks promising.

Geologists continuing any field work for major mining corporations often specialize in extending existing reserves. Especially with underground operations with known reserves for only few years of exploitation, they are most successful in finding the continuation of veins at geologic faults.

Some of the hurdles

Gold wouldn’t be quoting near $1300/Oz if it were easy to find. If a gold resource is identified, numerous holes will be drilled to quantify the resource (and getting a NI-43-101 compliant resource description). Resources will be upgraded from the inferred to the measured and indicated categories. Simultaneously, different aspects of potential mine construction will need to be studied. Those may lead to a preliminary economic assessment, proving the economic viability of the project. I’m just enumerating some essential phases of exploration and mine development, at each of which major problems may show up, putting the project at risk. Probably only one exploration team out of ten is successful at identifying a sizable resource that looks promising enough to continue with development. Among those successful projects, only a small fraction will eventually make it into an operating mine.

Generally the gold explorer having identified such a resource will be bought out by a major mining corporation. Size of the deposit and proximity to existing mining infrastructure are real triumph cards triggering the interest of mining majors.

Explorer-developers rarely turn to mining

Only on rare occasions, explorers proceed with a project throughout permitting and mine construction until operating the mine. Excellent geologists rarely are competent mining engineers: the expertise needed in mining being completely different from that in exploration, it is clear that the transition to a miner will demand sourcing in competent engineering and management staff. The financing necessary for mine construction will inevitable be a major challenge for an explorer developer considering to try it on their own.

Brent Cook formulates it like this. “When selecting explorers with viable projects in the stage of being permitted, I prefer a project which a mining major is likely to bid for, not the project an explorer is doomed to build into a mine.”

Stock picking dilemma

Writing something sensible on picking explorers doesn’t make me a stock-picking expert. Though I may find a good reason not to consider over half the stocks I come across, there will be enough failures among those I consider suitable picks… and the one real gem in there, I might take a profit on after it doubled…

Many of us junior mining investors have their list of stocks they follow and/or are invested in. Our aim is "keeping track of market tendencies and trying to figure out which juniors do better and why". This drove me to implement a new contributor driven explorer & junior mining spreadsheet.

The contributor driven explorer and (junior) mining spreadsheet

Pooling efforts with any cooperative peers out there, I started the “contributor driven explorer and junior mining spreadsheet”. The idea is to get a selection of explorers, junior or mid-tier producers of gold and/or silver. The first focus is on Canadian listed juniors, but I may take on board an explorer with main listing on the American markets, ASX or the LSE as well. With the Barrick-Randgold merger, we got on board of a mining major.

The selection should then be the basis of a discussion forum open for comments on and links to drilling results for the explorers, operational results for junior producers and investment plans with their financing conditions for both.

Included as a benchmark are some of ‘the classics’: PM mining ETF’s: Market Vectors GDX and GDXJ, the Global X Gold explorer ETF GLDX and silver mining ETF SIL, a few streamers or Royalty companies, the HUI and XAU mining index. Though I don't particularly like the leveraged plays NUGT and DUST, keeping them in the benchmark will show the viewer by how much these products underperform the market over any rally / swoon cycle. The flaw is not in a lack of compliance with their benchmark, but rather by design. 

The HUI and XAU both are focusing on large-cap miners, with Van Eck's GDX being the ETF mirroring the performance of precious metal mining majors. Van Eck's GDXJ and escpecially the Global X Gold Explorer ETF GLDX are somewhat better benchmarks for what we have in focus here.

The contributor driven explorer spreadsheet was started late October 2011. Only few of the initial stocks have remained on the list.

Currency

All initial picks were in CAD. Yet some more recent picks are in USD. It should be borne in mind that previous gains and/or losses incurred therefore are seen from a Canadian perspective. There would be a downward bias for a US investor.

Additional lists

The spreadsheet has a few additional lists:

1. The successful exits (any explorers taken over or divested taking profit) and
2. the ‘exile’, where I keep the explorers taken off the list. Weeding out laggards and taking a loss though painful, is essential in portfolio maintenance. Cutting losses is as much about swallowing your pride as about saving whatever is left.

Further discussion

During the early years, I used to post about list updates on the TF-metals forum on the thread: Selecting explorers and junior miners. After that website has been thoroughly reorganized, with all 'old topics' archived, a new thread was started in the 'Traders' section.
Because of the continuing miner bear market late 2014, that thread was called: Precious Metal Miners: Fathoming the Abyss. For Dutch speakers, the subject also is covered on the mining thread of the Freegold Forum. I'm a less avid poster on those forums than I used to be.

Further reading:

More similar papers are linked to in the top section of the list of blog articles.