Fatal Flaws and Opportunities in Gold Investing: Brent
Source: Brian Sylvester of
Brent Cook, editor of
describes the past 15 years of change in gold, copper and iron.
In this exclusive interview with
, he shares what he sees as the fatal flaws and opportunities in
this complex industry, details the most important factors he
looks for before investing, and names companies he believes have
the right stuff.
The Gold Report:
In the late 1990s, when the gold price was falling steadily
lower, you vetted companies for Rick Rule's company, Global
Resource Investments. Could you give us a comparison of what this
space was like then versus what it's like now?
During 1997-2002, we were probably in the most unloved sector in
the whole investment world. Gold had collapsed to less than
$250/ounce (oz), copper was under $0.85/pound (lb) and anything
that didn't have a dot-com to its name didn't get much respect.
The idea of blowing up rocks to make metal out of them was an
archaic concept clung to by the remnants of the industrial
revolution; it was a brave new world. By contrast, today gold is
over $1,600/oz, copper is $3.80/lb and iron ore has gone from
$12/ton (t), to $140/t; we're in the 10th year of a commodities
boom. Back then, it was very difficult for mining companies to
Working with Rick, I was fortunate. He'd put together two
funds of about $14 million (
), so we had some money. We were pretty much alone in the sector,
hence we were able to put some money into really good projects
and people. So in retrospect, that was one of the best times of
all to be investing, but at the time, it felt horrible in that
we'd invest in these companies that we thought were a good value
and see the share price continue to fall for a year or so. We
were able to buy a company like Virginia Gold Mines Inc. [now
Virginia Mines Inc. (VGQ:TSX)
] for nearly cash in the bank yet watch it fall to a 20% discount
to that cash, and this was a company run by one of the top guys
in the industry, Andre Gaumond. Today, however, you have a lot of
money chasing everything in this sector, and it's subsequently
tougher to get real bargains on projects or people. It's
important to recognize that because this is such a risky
investment sector that to make money at it consistently, you need
to buy companies when they are cheap based on legitimate
Is it more difficult for a retail investor to make money today in
small-cap mining equities or was it more difficult then?
Both time frames have their challenges. It's always been about
finding quality, high-margin mining projects at any stage and
buying those at less than what they're worth. A high-margin
deposit is one whose cost of production is in the bottom third of
the total production costs curve for that metal. Say the average
cash cost to produce one ounce of gold is $700-ideally you want
to own properties that can produce substantially below that
There have been periods in this sector where all the turkeys
flew and everybody made money, but we're back to a period where
it's going to be tougher for retail investors to make money if
they're not very selective and knowledgeable about what they're
buying. The big difference between the late 1990s to early 2000s
and now is there's so much more information immediately available
to anyone interested, therefore, investors have to research and
understand the details of a mineral project before they buy. They
need to know why they're buying it, what they expect, what it
could be worth and what the fatal flaws might be. This level of
due diligence is critical because we know that most mineral
projects are eventually going to fail. That's a fact of nature
and the Earth's evolution. So, in a way, it's a bit tougher now,
because you need to be so much more educated on what it is you're
actually buying. Following the stuff that comes in the mailbox
doesn't work anymore.
What are the most typical fatal, or tragic, flaws that are going
to lower a share price?
More often than not, it's the realization that after the first
few good drill holes into a project you start putting it together
and the geology or the continuity doesn't hang together. Bear in
mind that it costs money to mine waste and a mine is a terrible
thing to waste.
Another typical flaw is metallurgy or metal recovery. You want
to find out as much as you can about the metallurgy as soon as
you can because that factors heavily into what your production
costs are going to be. For instance, is the ore oxidize, sulfide,
carbonaceous, refractory etc.? If you're dealing with
Carlin-style sulfide gold mineralization, you immediately know
that somehow the sulfide has to be broken down to allow recovery
of the gold. That's going to take a roaster or an autoclave of
some sort, which is extremely expensive to build and consumes
considerable energy. If the project is in the Yukon, an investor
has to think about the cost of building an autoclave or roaster.
That means the grade has to be quite high to cover the capital
expenditures (capex) and power costs. However, in Nevada there is
excess capacity for refractory ores, you don't have to factor in
the cost of an autoclave.
You were recently at the annual Prospectors & Developers
Association of Canada mining conference in Toronto. More than 600
companies had booths at that event. What are some trends you
Companies are starting to recognize that it's not so much about
size as quality of mineral deposits. Grade, or more succinctly
margin, is getting more and more important. There are a lot of
very large, low-grade deposits out there, and the majors aren't
buying these. That's a real issue and you have to question why.
If the majors don't buy them, these junior companies with these
large, low-grade, low-margin deposits are then doomed to build. I
think it's going to be tough to raise the money, or at least the
debt portion, to do that. So I think one trend is toward smaller,
higher grade, higher margin deposits.
There are still people out there trying to raise money on new
deals, new projects as they move from one busted company to the
next one. Unfortunately, for companies with average properties,
the music has stopped and they are facing terrible share dilution
to fund the exploration on their average projects. As I said
earlier, average ain't going to cut it this year.
There is also a severe shortage of technically qualified
people-resource estimators, mining engineers, geologists-to do
the work. Company presidents and VPs of exploration are in strong
demand. Because there is more work than qualified people, I'm
seeing a lot of sloppy preliminary economic analysis (PEAs) and
resource reports. That's a serious and financially dangerous
trend. You can no longer blindly rely on a company's scoping
study or its PEA. You need to look at the details. I could tell
you some pretty scary stories in this regard.
What are some of the sloppy things that you're noticing?
In resource estimates, there is a tendency toward plugging it all
into a computer and generating a model without going through the
time and detail it takes to fit the model to the geology and
structural controls. So grade is being put out into an area of
the deposit where there isn't actually that grade. If these mines
eventually go into production or they get down to the very
detailed work, these resource estimates are going to be cut back
significantly because the model is not honoring the geology or
the geostatistics. That's a serious issue I'm seeing. To quote a
friend of mine who does resource estimates, these are
Do you think that sort of shoddy work is responsible for some of
these one-mine or two-mine operations not performing as well as
Definitely, although we have to bear in mind that they are called
estimates for a reason. It's rare these days that a company goes
into production and its production costs are what they were
supposed to be according to their PEA and the literature they
used to raise money. Nevsun Resources Ltd. (NSU:TSX; NSU:NYSE.A)
at its Bisha mine in Eritrea had to cut its gold reserves by
about one-third because of a mistake in the resource estimate
that related to how poor core recovery was handled in the
estimate. Remember, in a resource estimate we are extrapolating a
small amount of data, basically a 3-inch tube of core, across
hundreds of feet of complex rock and assuming that we can know
the grade of that rock. There's bound to be some uncertainty.
While you were in Toronto, you made an appearance on BNN where
you discussed the lack of big discoveries over the last 17 years.
One chart that you used showed that in 1992, the mining industry
discovered roughly 100 million ounces (Moz) gold in both
copper-gold and primary gold deposits but by 2009 that amount had
dropped to about 23 Moz in both types of deposits despite the
fact that the industry was spending almost $5 billion (
) annually on exploration. Tell us about that.
That data was put out by Barrick Gold Corp. (ABX:TSX; ABX:NYSE),
so it's pretty good data that pertains to economic deposits. It
shows that over time we are discovering fewer large deposits.
Basically, we are mining about 83 Moz gold annually yet only
finding in the order of 20-30 Moz a year. So there's a serious
gap between production and discovery that we're not filling.
It's getting harder and harder to find quality deposits-and
we're talking economic deposits here, not resources that will
never make it. Explorationists have pretty well explored most of
the Earth's surface and then some. Therefore, it's also getting
more expensive because we're going into blind areas and drilling
deeper into more complex geologic settings. That is why it's
getting tougher to find these big deposits. Then add to the
increased geological difficulty the fact that social, political
and environmental realities are pushing way out the time to
permit and build a mine and it becomes pretty easy to understand
the decreased discovery rate. I don't see that changing.
The net result of this discovery gap is that when a company,
let's hope it's a junior company, finds a legitimate, high-margin
economic deposit, it is going to be worth a lot more money than
you would normally expect. The dearth of new discoveries means
that those of us who invested early in a company that proves up
an economic deposit stand to make some serious change. So now I'm
focusing, as best I can, on high-margin deposits, or at least
mineral systems that show the potential to produce those deposits
and mostly avoiding geologic setting that don't offer that shot
at a home run.
Another reason for the lack of discoveries is the high cost of
mining, which has gone up dramatically over the last four or five
years, given fuel costs and labor costs.
Yes. In 2004, the capex to build Cerro Casale was $1.4B. In 2011,
it's $6B. That's a huge increase in capital costs that throws a
lot of uncertainty onto any big capex project a company is
considering. That's happening across the board. Your average cash
cost to produce one ounce of gold 10 years ago was on the order
of $340/oz. Today, cash costs alone are closer to $740/oz and
your all-in costs, according to a Randgold Resources Ltd.
presentation (GOLD:NASDAQ), are closer to $1,200/oz. Cash costs
are just what it costs to produce at the mine. They don't include
exploration, depreciation, amortization, royalties, G&A etc.;
so it's gotten a lot more expensive to produce all metals.
How would you respond to someone who says it's easier said than
done to find early-stage companies with drill results that hint
at the potential for high-margin, multimillion-ounce deposits
that majors want to buy?
I agree 100%. It is hard to find projects in an early stage that
offer the potential of coming up with a major deposit that shows
the profit margins and the size that a major company needs to
buy. That's just a function of geology. As the Earth evolves it
changes and those changes are recorded as anomalies in the
earth's surface. A volcano forms, erupts a few times, cools down
and is covered by the next volcano, over and over again. This
process is responsible for millions of geochemical and
geophysical anomalies that provide the stories the Vancouver
resource market is founded upon. However, very few of these
anomalies combine the right geological, geochemical and
hydrological characteristics to produce a concentration of metal
that has the tons, grade and metallurgy located near surface in a
favorable jurisdiction to form an economic deposit.
If there aren't enough early-stage, potentially high-margin
deposits, won't companies take the large, low-grade deposits just
because that's what's available, and they'd bank on rising metal
prices to make those deposits worthwhile?
That's a valid point and investment strategy. It's a different
investment thesis than I go with, but certainly there are a lot
of these large, low-grade deposits that are marginally economic
at $1,500/oz gold. If your gold price assumption is $3,000/oz,
then these are the things to buy. In my personal portfolio, I
don't need 100 companies-I need 10 that have something that I
think is of a high enough margin to be economic today.
Lydian International Ltd. (LYD:TSX)
is a company that I've owned since I first visited the property.
At that time, it was $0.76/share. It's now about $2.45/share.
Lydian owns a nice, simple, high-margin deposit in Armenia. Once
the world starts to recognize that Armenia is a good place to do
business, then this gets bought by a midtier company. It has
about 3 Moz. I reckon its cash costs are about $500/oz. The capex
isn't too bad. So that's a deposit that I see out there that
offers the margin that a company needs to make money on, and it's
selling at a discount today.
Atna Resources Ltd. (ATN:TSX)
looks like an interesting company, as well. Its Pinson mine is a
good grade deposit, and it should be able to produce at a decent
price. So you have a decent, high-margin deposit there. Its
capital costs are virtually nil because the infrastructure is
there and there are a number of options to ship the ore to, so
its capex is minor.
Altius Minerals Corporation (ALS:TSX.V)
is a great prospect-generating company that's been incredibly
successful. It owns about 32% of
Alderon Iron Ore Corp. (ADV:TSX; AXX:NYSE.A; ALDFF:OTCQX)
; at a cost basis of about $2M, it's now worth about $100M.
Alderon owns an iron deposit in Newfoundland that is a good
high-margin deposit. Again, the infrastructure costs are low
because it is right in an iron-mining district. I think Alderon
has a deposit that somebody else will either buy one day or work
out a favorable offtake agreement. So you can buy Altius at a
slight discount to its cash, royalties and equity holdings and
get a management team that has grown a $20M micro-cap company to
about $340M with virtually no share dilution. You're paying
nothing for the upside in Altius, which sort of reminds me of the
good old days in the late '90s.
One way to better your odds at finding a true deposit is to
invest in the prospect-generator companies. These are tiny
exploration companies that recognize the long odds at success and
structure their business models accordingly. They're very good at
generating ideas for mineral deposits, but at the point it's time
to start spending big dollars on drilling, they bring in somebody
else to spend the money. So your financial risk is cut down quite
a bit, and the high-risk, high-dollar part of it is covered by
somebody else. These companies go on and generate new ideas and
new targets and bring in new partners, thereby providing
shareholders with many more shots at a discovery for your buck.
One of the companies doing that quite well now is called
Riverside Resources Inc. (RRI:TSX)
It has an agreement with Chile's Antofagasta Plc (
) in British Columbia and one with a steelmaker, Cliffs Natural
Resources Inc. (CLF:NYSE) in Mexico.
Exactly. And it has other projects being worked by smaller
partners. It has on the order of $10M in the bank plus about
$2-3M in equities. Again, $12M has been spent on its properties
this year, and its market cap is on the order of $30M.
In those companies, you need above-average management teams
because you have to foster all these different relationships and
manage all these different relationships.
Eurasian Minerals Inc. (EMX:TSX.V)
is another company that has done an exceptional job with that. It
has on the order of $35M in the bank. It just bought a royalty
that's going to bring it $7M/year, and it has projects in Turkey,
Scandinavia, western U.S., Haiti and Australia that are being
worked by major companies, including Freeport-McMoRan Copper
& Gold Inc. (FCX:NYSE), Newmont Mining Corp. (NEM:NYSE) and
Centamin Plc (CEE:TSX; CEY:LSE)-companies that are looking for
Having a paying royalty often is key, too. When you were on BNN,
you talked about Virginia Mines Inc.; its royalty on the Eleanore
mine is being developed by
Goldcorp Inc. (G:TSX; GG:NYSE)
. Does Riverside have a royalty that could start paying in the
Virginia does have a callback to a royalty on its projects but,
at present, none of them is producing any money. The company
does, however, make money in many of the deals it structures by
way of shares and management contracts. This income covers a fair
portion of its general and administrative expenses. So it makes
money back on these deals by working the project. Really
Gold Standard Ventures Corp. (GV:TSX.V; GDVXF:OTCQX)
We're going back to high-margin deposits, or at least high-margin
potential. Gold Standard's property is on the Carlin Trend and is
a major, very large, Carlin-style gold system. The key to making
a big deposit is having a big system-a simple concept that is all
too often ignored. Gold Standard's most recent drill hole
intercepted potentially economic mineralization over 43 meters.
If it's successful, this is a deposit that is big enough and high
margin enough to attract the attention of Newmont Mining or
Barrick or anyone, for that matter.
This is the important part about why I bought Gold Standard.
It's not because of the next few drill holes. It's because we
recognize we're into a system that's large enough to produce a
mineral deposit, and we know now that this geologic system can
produce the grades we need to see. So, it's still going to be a
hit-and-miss exercise until the geologists can do the science
well enough to find the exact core of the deposit, if it's there.
The next results might be fantastic; they might be just
encouraging. But we know we're into a big system. You stick with
Do you have any parting thoughts for us, in terms of what retail
investors should be on the lookout for throughout the rest of
It's going to be, in general, a tough market to make money in if
you're just throwing darts. You really have to have a handle on
what a company's looking for in terms of deposit type and what
that deposit is worth in terms of a net present value on the
deposit, if it is successful. Too many companies are out there
exploring projects that even if they're successful, the real
values aren't worth the risk it took looking for it. So stick
with intelligent management looking for high-margin or large
deposits. The junior mining and exploration business is such a
technical and complex science and industry populated by paid
touts, scam artists and people of dubious character, that it is
well worth the effort to get good, honest advice. And be very
selective in what you buy.
That sounds like great advice. Thank you.
brings more than 30 years of experience to his role as a
geologist, consultant and investment adviser. His knowledge
spans all areas of the mining business, from the conceptual
stage through detailed technical and financial modeling related
to mine development and production. Cook's weekly
newsletter focuses on early discovery, high-reward
opportunities, primarily among junior mining and exploration
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1) Brian Sylvester of
The Gold Report
conducted this interview. He personally and/or his family own
shares of the following companies mentioned in this interview:
2) The following companies mentioned in the interview are
The Gold Report:
Lydian International Ltd., Alderon Iron Ore Corp., Riverside
Resources Inc., Goldcorp Inc., Gold Standard Ventures Corp.
Streetwise Reports does not accept stock in exchange for
3) Brent Cook: I personally and/or my family own shares of the
following companies mentioned in this interview: Lydian
International Ltd., Riverside Resources Inc., Virginia Mines
Inc., Gold Standard Venture Corp., Atna Resources Ltd., Eurasian
Minerals Inc., Altius Minerals Corp. Alderon Iron Ore Corp. I
personally and/or my family am paid by the following companies
mentioned in this interview: None. I was not paid by Streetwise
Reports for participating in this story.
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