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Investors Need to Understand Basic Geology: Chris Wilson
Source: Sally Lowder of The Gold Report (6/29/12)
Chris Wilson, president of Exploration Alliance, a niche consulting group, believes education is an investment basic. In this exclusive interview with The Gold Report, Wilson shares his guidelines for winnowing out the crowded junior mining sector to find the companies worth serious investigation and urges investors to know their porphyries from their narrow veins.
The Gold Report: Chris, you have described the junior mining industry as being "in disarray." Do you have any ideas for investors who might want to participate in the space, but may be a bit confused or discouraged?
Chris Wilson: Well, upfront I would say do not lose heart, but do not go throwing your money at just any junior at the moment.
We have to find 80 million ounces (Moz) of gold a year just to replace what is being mined. That is equivalent to the whole of the production from the Carlin Trend. Clearly, any company with a significant discovery will be extremely valuable. That value will grow exponentially moving forward because new discoveries are getting harder to find. The value most likely will be unlocked by the major companies buying the juniors out.
It is a big leap for a junior trying to be a miner. When the major companies are mining successfully, but not exploring successfully, acquisitions have to become part of the future. The trick will be finding juniors that have a commodity and a deposit style that are attractive to the majors.
There are probably 3,000 junior explorers on the Toronto, Australian and London stock exchanges. So, you have to do your homework. First, you discount the 20% that have managements with a reputation for pumping and dumping or that lack technical prowess. Next, you eliminate companies working in countries you do not like for reasons of geopolitical risk.
With a little bit of research you can see where mines are being built successfully and where potentially good mines are not being built. For example, take Gabriel Resources Ltd.'s (GBU:TSX) Rosia Montana mine in Romania. This mine has been in existence since Roman times. It is a 10 Moz deposit that would make a difference to the region. It would remediate the legacy of 2,000 years of mining history. But, it has been shut down by popular vote and sentiment on the Internet.
Once you discard management and geopolitical risk, you have 1,500 or 1,000 names left. Next, you have to look at deposit style. Irrespective of grade, major companies do not buy small vein deposits with often complex and discontinuous ore shoots. Such deposits will always remain the remit of Junior explorers who may struggle to stack together resources or commercialize production. Neither do major companies want small copper mines with difficult metallurgy. It may take $4 billion to put a big copper porphyry into production. As an investor, you have to target companies with the potential of finding a deposit in the commodity of choice, probably copper, silver or gold, that has the chance to get the attention of the majors.
Of course, you want to look at the number of shares a company has out there and how much cash it has in the bank. If a company is going to have to raise money in the near term, that will be dilutive and something you want to steer away from.
You can go on to the System of Electronic Disclosure by Insiders (SEDI) to see if management has been selling their shares and have a look at the stock curve. If it is a typical up and down parabolic curve, it probably does that for a reason. Juniors with good assets tend not to have that parabolic curve up and down. They may have come off 20% or even 50%, but they are holding steady. What percentage of the shares is held with management? Put that into the equation.
By now, the list of 3,000 companies is probably down to about 100, and that is a manageable number of companies to do your due diligence on.
The last thing I would say is go and talk to a geologist. Not necessarily the company geologist, who will sell you any story the company wants. If you are going to invest in this commodity and you do not understand geology, you need to find a geologist that can help you.
TGR: Is that what Exploration Alliance is? Are you essentially geologists for hire?
CW: Exploration Alliance is a practical, hands-on niche consultancy started by a group of us who had worked as geologists at Ivanhoe Mines and wanted a change, a bit of fresh air. We tailor our services to meet the needs of junior and midtier explorers. We are the kind of consultants who can sit on boards and present to the market. We know what it takes to raise money and spend it wisely. We are very discerning when it comes to project selection and ensuring that each project achieves a definable benchmark before progressing to the next stage. Exploration is a game of statistics and most projects never make it.
Over the last four or five years we have grown to a core group of 10 people. We could make it bigger, but the prerequisite to being an Exploration Alliance consultant geologist is practical, hands-on industry experience. The 10 of us have worked in over 90 countries.
Most of our work has been for private groups. For example, a large, well-funded Kazakh group and a Middle Eastern trust with considerable billions in firepower, as well as some European funds. When you consult for private money, the clients just want to know if they should invest. They want the hard facts, without any lipstick on them. That suits the Exploration Alliance mandate.