No Ounces are Created Equal

For a project to reach the critical threshold of becoming “mine worthy” is a long, hard and rare path. Yet, this is often not reflected when I look at relative valuations in the junior space. There are plenty of juniors who have run to $20M+ in Market Cap before a single drill hole has been released. Yet there are juniors with 1Moz+ deposits that can be seen trading lower than that. An ounce is not created equal and it’s going to take a lot for an ounce to realistically become worth more than zero. Gold in the ground is worthless unless it becomes a mine and an actual business. All else is sardine trading, in hind sight.

A good example of “expensive” ounces is Alamo’s acquisition of Richmont Mines and its Island Gold Mine. The Island Gold Mine “only” had P&P reserves around 1Moz and an additional 1Moz in inferred resources and yet was acquired for C$933M. That’s a lot of dough for 1Moz of reserves. The thing is that Alamos was very confident that the 1Moz of resources would be able to turn into reserves and the system was very much wide open as evidenced by Alamos’s exploration success after the acquisition.

Furthermore, there are junior producers around the world that produce more than Richmont Mines did but that have Market Caps less than half of the price tag of the Island Gold Mine.

This all goes to show that there can be extreme value differences between an ounce and another ounce.

Every ounce of gold in a given deposit gets exponentially more valuable as the prospect of a deposit being able to become a viable mine goes up. The odds of this is affected by thing such as a) size, b) grade (margins), c) infrastructure, d) jurisdiction and f) remoteness.

A decent 1Moz deposit near a major producing mine in the heart of Nevada is exponentially more probable to become a business than a similar 1Moz deposit in the middle of nowhere for example.

If a deposit never becomes a mine, that means that the ONLY way of profiting on said case is if you trade it, as in buy low and then sell high. If you HODL such a case, you will be left with nothing in the end, since a natural exit won’t be produced and you will be diluted down to nothing in due course. I bet 95%+ of the current juniors, in their current form, will be gone within 10 years. Something to think about.

If you are a bad trader like me, then the above scenario does not sound good at all. I want natural exits and thus I want ounces that have a relatively high chance of becoming worth something. In other words I put a lot of emphasis on the business/economic side of things. This is why I put a lot of focus on “Who cares?”, to quote Brent Cook. If a large BUSINESS such as a mining company shows interest in a project then you know that the odds of a natural exit is much higher relative to the average junior explorer. I’m no genius, geologist or mining engineer so I don’t feel like trying to be a hero and bet a lot of money on something without a stamp of approval from people who know more than me about mining. The only way to actually know that a large miner believes there is an above average chance of a junior’s project to potentially become an actual business (have any value) is to wait for a strategic investment or joint venture etc. Until then, you are speculating to a much higher degree.

How is this reflected in my portfolio when it comes to exploration juniors? Some examples…

• Novo Resources: Newmont, Kirkland Lake & Sumitomo Corporation
• Irving Resources: Newmont
• GFG Resources: Newcrest
• TriStar Gold: Royal Gold
• Manitou Gold (recent addition): Alamos Gold and O3 Mining
• Nulegacy Gold: Barrick Gold, OceanaGold

Now this is not a silver bullet since it takes a lot for especially a grass root explorer to find an economic deposit. A painful memory of this was my largest loser last year, which was Aloro Mining, that was funded by none other than Agnico Eagle. Still, I don’t regret the bet, just my oversized position.

In such a case that I want to invest in an explorer that does not (yet) have a large miner backing it I often make sure that it has a top notch management team, is not too remotely located and preferably also quite close to an existing mine run by a major. These requirements obviously goes up in importance if there is no vote of confidence from a large miner. An example of this would be Kalamazoo Resources which is an Australian junior that is drilling for “the next Fosterville” smack in the middle of Victoria. If they have success there should be plenty of potential buyers given the jurisdiction and proximity to major infrastructure and other mining operations.

To sum up I guess this semi-incoherent article was to press the point that if you are a bad trader then it’s probably a very good idea to focus on the often more expensive ounces even though it might not feel like you’re “stealing value”. High quality ounces in a high quality system can really warrant the relative premium.  The Island Gold Mine and Fosterville are good examples of that. Furthermore, the discovery rate of tier 2 and tier 1 deposits have fallen off a cliff, which should mean that the large miners would be prepare to pay more than ever for a long life, high margin asset (or a decent satellite deposit for their current mines that is seeing reserves dwindle every year). Lastly, I would like to point out that long life, high margin deposits can build empires, since for example Fosterville would be throwing of Free Cash Flow even at much lower gold prices when the competition might be trading at fire sale prices…

This is not investment advice. Always do your own due diligence!