At the best of times, investing in stocks can be a risky activity for many investors, and that's even truer when average investors invest in the resource sector. There are a lot of confusing numbers and industry terms, and the resource market is very volatile. But there is a lot of money to be made, which is what keeps attracting investors to the sector.
At the recent PDAC conference in Toronto (on March 4th through 7th), investors heard from a number of experts about how to understand the resource market and invest in a way that improves their potential returns.
One of those speakers was Brent Cook of Exploration Insights. Mr. Cook is a geologist and junior mining analyst with over 30 years of mining industry experience. He spoke to investors at the PDAC conference on Sunday, March 4th. We've provided highlights of his talk below. Where possible, quotations are used directly from his presentation but may have been slightly edited, for grammatical purposes.
He opened by telling investors what to expect from his half-hour speech: "We're going to zero in on turning rocks into money. That's where there's a lot of money to be made." And throughout his presentation, he kept pointing out that although there is a lot of money to be made, it needs to be made with an awareness of how to understand and evaluate potential resource investments.
To put the industry into perspective, he talked about the Bingham Copper Mine in Utah. "It was discovered in the 1800's. It became an open pit mine in about 1903. There has been about 19 million tons of production from this. On a global scale, we are burning through one of those every year. The industry as a whole has to replace the Bingham Copper Mine every year. That's a tough thing to do."
It's tough for a few reasons: "If Bingham was to be found today, the CapEx just to put it into production would be in excess of $5 million and the timeline is in 5 to 10 years to put it into production… but it couldn't actually go into production today because of what is nearby today. My point is: It is getting really tough to replace what we're mining."
To illustrate the challenge, he showed the following slide that compares current production versus discoveries.
The gold/copper-gold discoveries are in orange and yellow bars; notice that they are diminishing. Meanwhile, exploration spending is on the rise. The gap between exploration spending and new discoveries is huge. But that's not necessarily bad news for investors. "That gap is our opportunity," said Mr. Cook. "If we can find a junior company that fills the gap for the majors, there's a lot of money to be made. But it's not easy".
So, with exploration spending rising, why is it so hard to find a deposit? Mr. Cook explained with a lesson in geology. He talked about magma rising from the ocean floor and cooling and turning into granite. He discussed how a combination of geochemical anomalies turn into minable deposits but the odds are so low because not all anomalies turn into deposits, and not all deposits are actually minable.
He also provided some numbers for investors to understand the challenge of finding good deposits: "There are about 10,000 properties being explored globally right now. The probability of finding an economic gold deposit of any size is about 1 in 1,000. And the odds of finding something worthwhile – about 4 million ounces – is a 1 in 10,000 probability."
Then he looked at an example of a mine in Mexico. The deposit looked promising but simply by looking at a picture of the area, Mr. Cook asked, "How can you put a mine there? There's a river that will flood during the rainy season and there's a steep hill that you have to cart everything up."
And another company in Ontario Canada provides another example of the challenge of finding something minable and bringing it to market: "The target is 3.4 kilometers down. They're chasing a vein the size of a sidewalk. Someone gave them $4 million to do that. If they have a vein that links up to other veins, they still have to drill other holes and prove them out."
Then he gave investors a series of practical tips to help them invest more intelligently:
He talked about the importance of making sure you can resell your investment for a profit: "Never buy a stock without an exit strategy. [Ask yourself] why would someone buy the stock off of you?"
He talked about the value of historical success: "Good properties tend to put out good results," he said.
He also talked about the importance of doing due diligence and one way investors can profit even if the due diligence is putting up red flags: "If we know that 95% of stocks that start up the slope, based on encouraging results or hype, are going to end at the bottom and never go back up, it is imperative that we understand what the news is telling us. Look for the fatal flaw," he advised, referring to the missing data or overlooked issue that every failing junior resource stock will have. "If you can identify that before the crowd, you can make money on a company that does not end up with a discovery."
Lastly, Mr. Cook offered a couple of investing ideas that he is following.
Lydian International (TSX: LYD) is his first idea. "This is a company with a good deposit in Armenia. [In spite of investor worries,] the country is fine. They have a 3.2 million ounce resource at .95 grams per ton. That doesn't sound like much but it's oxidized." Based on some numbers and models Mr. Cook built, he said: "I calculate an excess of $1 billion value on $1500 gold. The current market cap is 270 million. I'm not waiting around for a billion dollar market cap but if I'm a mid-tier mining company looking for a low-cost operation, this is it. I think someone is going to buy… and they'll buy it at more than what the stock price is." The conclusion is: Investors who want to buy an investment that should eventually be acquired will want to take a closer look at Lydian.
His second pick was Eurasian Minerals (TSX-V: EMX). "This is the prospect generator model. They generate big concept targets around the world, they have top people doing this, and then the major mining companies come in and spend the money on their projects. They just bought a royalty stream that is going to generate in excess of $6.5 million to them each year. They'll never have to finance again. Very smart group." Investors will like Eurasian Minerals because they seem to be filling the gap that Mr. Cook discussed earlier.
The resource sector is murky and investors need to always do their due diligence before putting money into resource investment stock. And Mr. Cook's advice will help investors sort the opportunities from the duds.