Cambridge House International Inc. holds annual resource and investment conferences for individual and professional investors to hear from leading industry experts, including newsletter editors, professional advisors, and analysts.
The recent resource show in Montreal included an advisory panel on the topic of exploration. The panel consisted of Lawrence Roulston, Resource Opportunities; Victor Gonçalves, Equities and Economics; John Kaiser, Kaiser Research; and Alex W. Knox, M.Sc., P.Geol.
Advisory Panel
Victor Goncalves has a background in economics at the University of Winnipeg. He has researched resource markets, including Uranium and Coal Markets, the Oil Industry, OPEC, and Macro Economic Indicators. Mr. Goncalves is an expert at cost benefit analysis, which comes in useful when assessing the valuations of companies in the resource markets.
Alex Knox is one of Canada's leading experts on rare earth geology with more than 35 years of experience in mineral exploration, including prospect generation, regional analysis and economic evaluation. Mr. Knox is currently on the rare earth advisory boards of 3 Canadian junior mineral exploration companies.
John Kaiser has over 25 years experience as a mining analyst. Mr. Kaiser operates Kaiser Research Online, an investment research portal that provides investors with information, commentaries and recommendations on the resource sector.
Lawrence Roulston is editor of Resource Opportunities, a publication dedicated to providing objective commentary on the resource industry. Mr. Roulston is a geologist with over 20 years experience in the resource industry.
Moderated by Chris Berry, President, House Mountain Partners, a research firm based in New York focused on junior metals and mining.
Currently, what jurisdictions do you favour for exploration?
Canada and the United States were predominant favourites among all panel members. Specifically, in Canada, British Columbia, Ontario and Quebec, and in the United States, Montana, Oregon, and Nevada, were at the top of their lists. Mr. Roulston adds Alaska to his list saying it has “enormous geological prospectivity that is only just being touched on.”
Mr. Goncalves listed Quebec as his number one pick as a safe mine jurisdiction with amazing infrastructure, and government rebates. “For every exploration dollar that you put in the ground, the government gives back around 42 cents on the dollar.”
Mr. Knox likes Canada and the United States for the available expertise. “The rare earth exploration field does require a certain level of technical expertise that may be lacking in other parts of the world.”
Mr. Kaiser mentioned that in the past, places like Argentina, Peru and Mongolia were top on his list; however, the panel members agreed that current political and economic factors play a big part in investors’ minds and direct them to safer places that carry less risk.
Mr. Roulston sums it up saying, “there’s so much financial uncertainty in the world right now globally that investors are really trying to pull back from risk.” He adds though, “there’s a risk-reward trade off. A company can be exploring in an area that is perceived as high risk, but if the reward potential is there it may be worth taking a shot on it.”
What criteria do you use to evaluate a junior exploration company?
Mr. Berry starts out saying geopolitics and jurisdiction are obvious factors before asking each panel member what other criteria they use to evaluate a junior company.
Again, the panel came to agreement on their top choices saying the people and the property were the two most important criteria.
Specifically, a well-rounded team, including a geological visionary to find the projects, and a strong person, who as Mr. Kaiser says, “is someone who can stand in front of an audience and present the story.“ Mr. Knox adds, “It’s the person who can communicate the geological potential and the economic potential to investors, clients, and the board.”
Mr. Roulston explains, “One of the challenges in the exploration business is raising money. That requires that management can instill a level of confidence in investors, so they need much more than just the technical skills to advance the project. They need to have the presence to instill that level of confidence in investors to raise the money to advance the project. You could have the greatest project in the world, but if you don’t have good people running the company, they’re not going to get it very far.”
“You also have to have the logistics people, the country managers who understand how to get things going. People on board who are sensitive to community relations,” adds Mr. Kaiser.
In addition to a good team, Mr. Roulston explains the scale of the project is also important. “From a geological perspective, does the project have the scope to evolve into a very large deposit that will be of interest to the larger companies?” As Mr. Goncalves points out, “The vast majority of junior companies will not go into production if they make a discovery. Most of these guys are exploration geologists.”
So, the second criteria is to try to determine what major companies are in a good position to take over the junior. Mr. Roulston looks for “the companies that are going to come along and pay cash to buy that deposit.”
Why have junior exploration share prices lagged over the last few months?
Mr. Goncalves starts the conversation pointing out that a junior company isn’t a copper company or a gold company, it’s a venture capitalist company. He continues, “That requires money constantly to make the discovery or once you’ve made the discovery develop it to a point that it’s economical.” Mr. Goncalves explains that the junior companies are issuing shares on a regular basis to raise money and this can have a negative effect on share prices.
Mr. Goncalves also points out, “If the financial markets are in rough shape, the first ones that are going to get hammered are the juniors, because that’s a risk capital.”
Mr. Knox sees opportunity in the lag. “There are companies in a particular sector that the current market conditions have dragged down unnecessarily and will emerge as the winners when things turn around.” This is where he points out that the current situation gives investors time to perform in-depth research to find these companies without recklessly chasing a stock on the rise.
The media is also to blame, suggests Mr. Kaiser. He says the stories from the media that “the world is going to end” have confused investors. With all the unresolved problems of debt and global imbalances with trade, people tend to believe the media reports that raw material demand is going to go down. If people believe we are going into a depression, they won’t want to give money to a junior exploration company that will increase the supply of materials that the world does not need.
Mr. Roulston doesn’t think the lag will last too much longer. He sees low interest from the public in the exploration sector, but the mining industry is being more objective and taking a longer term outlook for the industry. The mining industries realize they need more mines to meet future demand. Mr. Roulston mentions a number of recent takeovers are going to make investors take notice. He explains, “Companies that are nearer to production are getting a lot of attention from the major mining companies. So, we’re going to see more takeover bids and that’s going to establish a realistic value for these currently undervalued companies.”
What are senior companies looking for from juniors?
Mr. Goncalves sums it up when he says, “self perpetuation.”
It’s about economics. A large company won’t want to shut down a mill at the end of a mine’s life. They will look to acquire similar style deposits that they can easily transport to the mill. “You’re going to see majors doing that or purchasing deposits that are big enough to justify building an entire new mine, mill facility,” says Mr. Goncalves.
Mr. Knox adds, “The majors have abdicated exploration responsibilities to the juniors. They’re waiting for the juniors to generate projects with enormous visible scale and also potential scale.” Mr. Kaiser agrees, ““If [the majors] are going to grow they need to acquire.”
There is a limited number of deposits that are available to be developed continues Mr. Kaiser. “With a typical mine life of roughly 20 years, in a decade the mining industry needs to replace half of its productive capacity just to stay flat,” he clarifies. “When you add on top of that 2 or 3% compound annual growth in demand for the metals you can see that there’s huge need for the mining industry to be constantly building new mines. It highlights the urgency of acquiring these deposits that are held by the junior companies.”
Mr. Kaiser also mentions there is now increased interest and competition from manufacturers: “The other thing that’s different now is that end users want to secure a supply of raw materials to feed their industrial operations.”
This increased competition is where Mr. Roulston sees major companies are now taking on more risk. He points out, in the past, the majors would only acquire a project that was at a feasibility level. “And now they are moving much sooner than feasibility level in order to preempt the competition. They know that by the time that project gets to a feasibility study, other companies are going to be in there.”
He concludes, “So they’re going out and taking on much more risk and buying projects at earlier stages now. So we’re going to see a lot more of that takeover activity, especially when the juniors are priced as they are at this time.”
Conclusion
To summarize the panels discussion, the consensus seems to be that investing in junior companies in safe jurisdictions, Canada and the United States, is a good strategy for investors. When selecting a junior company, be sure it has a well-rounded management team with both technical and business expertise.
The panel members also agreed that although junior companies seem to have suffered recently in the markets, a few recent acquisitions by the larger mining companies are a good indication that things are going to turn around.