Exploration Insightsby Brent Cookwww.explorationinsights.com
June 19, 2015
The Rant
What was it like, Dad?
It
was tough kid. We were just coming out of the most perfect spring. The
fruit trees were all in blossom, streams filled with fish, deer
abounded, and we were all feeling pretty right with the world—we owned
it and were the chosen ones.
Then
we headed out across the flats, believing the prophets that the next
paradise, just over the horizon, was even better. But the horizon never
came, the land turned to salt flats and dust; the temperature reached
110°, day after day after day. We burned and suffered. The roving
bandits knew we were doomed and had no interest in what little we had
left. Each promising oasis was a mirage and one by one we lost our way,
numbed and staggering in all directions. We lost nearly everyone on that
journey which began so optimistically—and naively.
It
was brutal and devastating kid; I hope to never go through that again.
But some of us did survive to carry on, and I’m here to tell you about
it.
Yeah, right, I’ve heard that, but like, what about the 1997 to 2002 mining bust?
Well,
that wasn't really much different kid. We had come off of a truly
remarkable mineral discovery boom from 1992 to 1997. The diamond
discoveries in the Northwest Territory were fabulous: Diamet went from $0.21 to $55. Aber Diamonds
(now Dominion) had a 40% interest in the Diavik discovery and went from
$0.50 to $50. In Labrador, another company looking for diamonds, Diamond Fields,
stumbled across a nickel showing (Voisey’s Bay) that was eventually
acquired by Inco for $164/per share. It had been a $5 stock.
You
see the world had suddenly been opened to modern exploration and all we
had to do was Go There: we could do no wrong. Huge area plays developed
around these discoveries, and the juniors with land on trend or close
by doubled and tripled in a matter of months-- regardless of the geology
or prospectivity.
Corriente Gold traded up to $18 on a project in Peru that it never had to drill. Arequipa Resources,
a copper explorer, put a bunch of holes and a tunnel into the Pierina
gold prospect in Peru and went from $0.60 to a buyout price of $30 in
nine months. Francisco Gold’s El Sauzal discovery in Mexico took the share price to $40. Queenstake went from $0.07 to $4.50, based on its Kilometer 88 projects in Venezuela.
What, you never heard of these companies? It figures.
I
fondly recall my first trip to the Prospectors and Developers (PDAC)
conference in March 1997: landing there after a field stint in Brazil
(for which I was stiffed) with little more than a windbreaker and a
couple of phone numbers. It was an amazing site to behold. Money was
flowing everywhere and to everyone—even the strippers were getting rich
on insider stock tips. I was literally stunned to see some geologist in
khakis working a booth raise $2 million in a matter of minutes, based on
a satellite color anomaly somewhere in Mongolia-- on a piece of ground I
don't think he even controlled.
It
was oysters and champagne at the Canoe Club, lavish parties thrown by
all the brokerage firms; even the geologists were invited—engineers, not
so much. Greed and speculation were rampant, risk unheard of, and
failure? Virtually impossible.
It all seemed so irrational, yet real.
That was the year John Felderhof received the Prospector of the Year award for the 70 million going-to-200 million ounces Bre-X
had found in Borneo. Bre-X went from $2.60 to $275 within a three-year
period. It was obvious that nearly every one of us was a genius and
sitting on millions in profits. We knew it as just going to get better.
Then things began to sour.
Metal
prices started to drop; then some guy “falls” out of a helicopter in
Indonesia. Bre-X is proven a massive scam and goes to zero. A company
that used to be into the garbage container removal business, Cart-away,
that had gone from $0.125 to $26 (based on reports of visible nickel
and copper in drill core from a property near Voisey’s Bay) went to
zero, when assays revealed it was all fool’s gold. Corriente, Francisco,
Queenstake, and all the tag-along companies collapsed, folded, or
changed their business plans.
I
joined Rick Rule at Global Resource Investments just after the Bre-X
bust. At that time brokers and clients were thrilled at how much cheaper
these highflying stocks had become by mid to late 1997. Companies they
had avoided because of the high prices were now affordable, and it was a
good time to start picking them up before the boom re-asserted itself.
The letter writers were all proclaiming we were getting a second
chance—“Don't waste it”.
We didn't.
The first stock I bought was Almaden Minerals
(AMM) at about $1.25 in late 1997. It had been $3.60 a little over a
year earlier. It had great properties, plenty of cash, and was run by a
successful and honest geologist, Duane Poliquin. “Better than half off”
was the sales pitch.
Well,
it went down by more than half again over the following year (1998) and
the refrain became “if you liked it at $1.25 you’ve gotta love it at
$0.60”. The share price continued to decline into 1999, 2000, and early
2001. At one point you could buy the stock for a little more than cash
in the bank: $0.25/share. I picked up a bit more at about $0.50 but
couldn't bear to keep adding to the position, or even look at it in my
portfolio. I loathed it.
The
Almaden story was mirrored by nearly every junior resource company, or
at least those that stayed in business. The only successes during this
period were the companies that switched to high tech, the Internet, or
biotech. That is where the money went to, and was made, during the 1997
to 2002 resource bust. There was virtually no money coming into the
resource sector. Bill Gates could have bought the entire gold industry
with half of his Microsoft shares.
Gold
had been exposed as a “barbaric relic of the past”—so said all the Wall
Street pundits, of little value except for dental fillings and jewelry.
Its price fell to $250 an ounce. Copper was at $0.60/lb and uranium
$10/lb—all virtually worthless in this new virtual economy.
Value
was now perceived as “eyeballs and clicks” on a company’s web site.
Profits and profitability became old-fashioned measures of a company’s
worth that ignored the limitless future of selling stuff to people all
over the world. Junior company promoters, although pretty good at
bullshit, could not compete with the New Age Internet Masters at this
level. Mining was dead and anyone associated with it abandoned and
forgotten on the salt flats.
Our
Global brokers would sit for days without a call or sell. Regardless of
how good a project was, or how cheap a company had become, there were
virtually no buyers. Clients didn't want to be reminded of their
portfolio, let alone add another losing idea to it. Liquidity dried up.
Good or bad news were both reasons to sell, and then the news stopped
coming at all. Offloading a small $10,000 or even $5,000 position could
crush a company’s price. There was no incentive or reason to step into a
position that had been declining for years and showed every sign of
continuing to do so forever.
The ’97 to ’02 bust dragged on and on and on. It was a lonely desolate space kid.
The
first year of the bust was a correction—a buying opportunity. The
second we were on bottom. The third, nearing an end: it couldn't get
much worse. By the fourth year I think nearly everyone had resigned him
or herself to the fact that gold and metals were indeed going the way of
the buggy whip. Gold, copper, uranium, virtually all metals were
selling for less than their cost of production. Mining professionals and
successful entrepreneurs --the people who knew the industry best--hated
it the most. They quit.
I
recall a Hard Assets Investment Conference held in some shabby hotel on
the outskirts of Miami in 1999. The headline speaker was some nut job
newsletter writer who had somehow gotten on NBC, ranting about the end
of Western civilization the very microsecond the computer clocks clicked
over to January 1, 2000. That, he claimed, was when all the gold and
guns stored in your backyard bunkers would become valuable. The
conference was absolutely devoid of investors. In desperation, the
conference organizers bussed in a load of folks from some nearby old
folks homes. They arrived with bags strapped to their walkers and
proceeded to steal anything not tied down to a booth. I think that was
the low point.
Honestly, it was a depressing period during which a lot of good people abandoned the industry and no new blood entered.
However,
in retrospect, it proved to be an exceptional time to buy real
companies, assets, and people at a steep discount to their potential or
the value represented by those assets.
Almaden
Minerals (AMM), which merged with sister company Fairfield, continued
its business through the bust, acquiring quality properties that no one
cared about, and advancing them to the drill stage. The share price
climbed from its low of about $0.25 in 2000 to $3.60 in 2006: a 1,340%
gain in six years, if one had bought the low (Fig. 1). As the chart
shows, AMM offered a second opportunity for a substantial gain (from the
2008 low) based on the Ixtaca discovery in Mexico. Good people keep
coming back.
(Fig.
1: Almaden share price 1994 to 2015. Note at least three separate
opportunities for substantial gains during this period. The chart has
some problems, but you get the point.)
Virginia Mines (VIA) was another company I purchased on the way down. A $3.75 stock in 1996 was a “steal” at $1.50 in 1998. Virginia was
Andre Gaumond: one of if not the best guys in the business, working in
the best province in the world (Quebec), getting money back from the
government, and fully funded for years. This was as good as an
exploration investment gets.
Yet
VIA continued to decline. I reluctantly added a bit later that year at
$0.75-- I mean the guy had $0.45 a share in cash! At one point in 1999
the stock was selling for $0.35: a 22% discount to cash. The stock
languished at under $1.00 until about 2002, eventually hitting $1.50 in
late 2003 (Fig. 2).
(Fig. 2: Virginia Gold 1993 to 2006, when it was acquired by Goldcorp.)
After
looking at the chart above you are probably expecting, since it’s my
tale, that I stayed the trade to the end. I didn't. Seventy-five cents
to $1.50 at that time was a big (and rather rare) win after years of
pain. I took the profits and bought you some shoes, kid.
Then
in 2004, Andre and his team exposed some gold mineralization in
trenches at the Eleónore prospect in Quebec. Over the next two years
successive drill campaigns showed Eleónore to be a very large,
high-grade gold deposit. Goldcorp acquired the deposit for shares, in a
deal that equated to ~$13 per VIA share. Goldcorp proceeded to double
after the acquisition. VIA shareholders also received half a share for
every VIA share in the Newco, Virginia Gold. Virginia Gold was recently
acquired by Osisko Royalties (OR) for ~$14.50.
Bear in mind, all this could be had for a price that valued the original Virginia Mines at less than the cash in its treasury.
Sidebar:
I re-acquired VIA in early 2004 after visiting the trenches at Eleónore
(when I was contributing to Paul van Eeden’s letter). We held through
the ensuing take-outs by Goldcorp and then Osisko: some face saved, and
lots of money made.
Not
to belabor a point on this walk down memory lane, but there were other
examples of truly stupendous profits that were made on purchases during
the ‘97-’02 bust, at a time when having teeth pulled seemed a more
enjoyable choice than coughing up the dough for a junior exploration
company story.
In
late 1997 some young kid named Brian Dalton and his mates who had
funded their way through university staking claims and renting trailers
during the Voisey’s Bay land rush IPO’d their company at ~$0.25. From
there Altius Minerals (ALS) traded as low as $0.18 and slowly
climbed to $0.70 over the next four years. ALS was a bet on some frugal
Newfies using other people’s money to explore for world-class deposits.
The wait was worth it. They attracted Barrick into a search for Carlin
gold deposits in Newfoundland, made a uranium discovery in Labrador
(Aurora), nearly closed a deal on an oil refinery, and bought a few
royalties along the way. The stock got as high as $30 in 2006 and now
sits at about $14 (Fig. 3). Buying smart, honest people running
companies with a tight share structure in a busted market is usually a
good idea—if one has the patience.
(Fig. 3: ALS 1997 to 2015. Note the four years of absolute boredom as the company executed its business plan.)
First Quantum
had built a small copper recovery operation in Zambia near a project I
was involved with (ZCCM). Nice little operation, very smart people that
we (mostly Rick Rule) financed at ~$0.75 in 1999 in a placement that
included a full warrant. The company managed to lever its success into
bigger and better African copper projects, hitting $4.50 in 2004 and $27
in 2011 (Fig. 4).
(Fig. 4: First Quantum, 1997 to 2015. Note the seven years of pain.)
I met Ewan Downie, President Wolfden Resources,
at the 2002 PDAC. He was an unknown then, with few friends and fewer
backers, yet it was clear he had some very good ideas on projects that
he had picked up for nothing in the Canadian north. Rick and I financed
him at $0.35 and were virtually alone in the deal. He subsequently made
the High Lake copper discovery, taking the share price to $8 in 2005. It
was eventually sold for $3.60 in 2006 and Premier Gold (PG) was spun out of it.
Nevsun Resources
(NSU) was another highflyer from the ‘92 to ’97 boom; it fell from $16
to $0.10 (Fig. 5). Then in January 2003 it discovered the Bisha deposit
in Eritrea, which took the share price from about $1 to over $8
(admittedly on some serious broker BS). Nonetheless, the company found a
legitimate deposit that is now in production and making good money.
(Fig. 5: Nevsun 1995 to 2004. Nearly flat-lined for four years)
Did you see it coming Dad?
On
the whole, no. There were certainly some people who understood the
cyclical nature of the metals market, and that we couldn't continue
producing copper, gold, etc., at below the cost of production (Ross
Beaty, Frank Holmes, and Rick Rule come to mind). But honestly, in 2000
few if any saw the China miracle, emerging markets’ boom, 9/11, Bush,
Greenspan, the Iraq debacle, the Taliban, etc., coming. No, the sector
was dead and there were few of us left with any optimism or belief.
I
don’t see the need to rehash the 2002 to 2010 commodities bull market
in any detail—you lived it. Suffice to say the Internet and real estate
bubbles burst; gold rose from about $300 to a peak of around $1,900;
copper $0.60 to a high of $4.50; uranium ran to ~$130; nickel to ~$23;
iron to ~$180: it was all about a billion Chinese buying refrigerators
and cars, while the US printed trillions of dollars. Big numbers that
attracted big dollars into a sector that had been demolished and was
perfectly positioned for a serious melt-up, if there were only a new narrative to bolt onto.
We
supplied the ratchet and did it again: nothing could go wrong, and
massive quantities of indiscriminate money flowed into mining. The
billion in China were soon to be followed by the billions in India and
the rest of the developing world. QE and currency debasement was an
endless treadmill that guaranteed gold would be the last man standing as
fiat currencies imploded around the world.
But then metal prices began to decline, economies slowed, profits disappeared and another crash began again.
What went wrong this time Dad? Is it all over? I mean, like, this time seems really bad.
Next week’s Exploration Insights, kid, I’m starting to get depressed. But there are still a few bright spots in the wasteland of junior mining to discuss.
That’s the way I see it.
Brent Cook
Brent owns shares in Lara, B2 Gold, Nevsun, Premier, and Osisko Royalties.
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