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Brent Cook: Successful Exploration Investing
Source: Interviewed by Karen Roche, Publisher, The Gold Report (12/22/09)
No drill results? No worries. Good geology, management, cash position and stock price are enough to coax renowned exploration analyst (and geologist) Brent Cook into buying junior prospect generators and explorers. Brent's clearly hit a few homers with his strategy, but in this exclusive interview, he cautions Gold Report readers, "It's really, really critical to evaluate what a company's telling you."
The Gold Report: When we chatted in August, you were looking at a gold price in the $900 neighborhood, indicating that fear of another financial disaster was driving gold prices. Since then, gold broke through $1,200 and has now corrected down to about $1,120. Is fear still the driving factor or has the dynamic changed?
Brent Cook: I was probably wrong in my assessment at the time. I didn't take into account the amount of liquidity—money being pumped into the system. I think what is driving gold now and drove it up through $1,200 is greed much more than fear. In my view, gold has become part of the global asset bubble—which includes foreign real estate, stock markets and base metals. So it's actually greed that's been driving gold, at least over the past few months.
TGR: How long can greed support a rally?
BC: It's all tied to the dollar carry trade and the irrational actions of the crowds. You can borrow U.S. dollars at essentially negative rates and invest it in any other asset. Fund managers and bankers are just piling into whatever is hot, and that includes gold. The problem is that new participants in the gold market really don't view gold as an alternative to the U.S. dollar and don't fear fiat currencies as many of us do. They don't believe gold is money; it's just another asset to pile into with the crowd.
I am concerned about what happens if the dollar carry trade gets reversed and/or if the Fed jacks up interest rates. Then we'd see gold come crashing down and maybe the market as well. Except for the U.S. dollar, this has been an extremely positive year for almost anyone investing in the markets.
TGR: So you're looking at the asset managers piling into gold as the "flavor of the month" lately. Would the Fed have to raise interest rates for asset managers to tire of gold and just dump it on the market?
BC: Yes, and that—basically the carry trade unraveling—could really put a damper on the gold market. If economies really are on the mend, interest rates will go up. It's happening already in Australia.
TGR: But once interest rates rise, that's going to be the signal that inflation is starting, and gold is a good asset to hold in inflationary periods. So are you thinking the gold price is just coming down temporarily? Or is it a viable long-term investment?
BC: Tough question. I don't necessarily buy the line that rising interest rates mean rising inflation and therefore a rising gold price. We have seen gold's most dramatic rise in the face of falling interest rates and it may be a bit too optimistic to assume it goes up when the opposite happens. So, in the short term—coming into the first half of 2010—I believe we have a bubble in gold and other hard assets that could very well pop. Long term, given the amount of money being created by the government and pumped into the system, I think we're looking at an inflationary period in which gold could at least hold its value relative to the dollar, at least after the short-term players move on. So looking at two or three years down the road, I do believe gold will serve as a good investment.
Honestly though, I don't know what the gold price is going to do next year. But that doesn't really affect my investment strategy that much. I prefer to focus on things I do know and base investments on those while letting others debate about the direction of the gold price. So I do know that the major mining companies are unable to replace the gold they're producing. Knowing that, all I have to do is find the junior exploration companies that are set to discover the deposits that the majors need to replace their reserves and production.
TGR: With gold at $900, $1,000 or $1,200, would we see a lot of junior companies that really don't have viable projects get financed along with the ones that do?
BC: Yes, definitely. The market is indiscriminate and mostly run by people that can't differentiate between a good and bad gold property. Minerals exploration is a very tough business to understand, because you're dealing as much with information that you don't know as you do know. It's all subjective interpretations. No one really knows the geological setting beneath a particular project or what its economics will be. So lots of money will go into worthless exploration projects, for sure. That's a real danger. Something like 1,600 junior exploration companies are listed in Canada alone. I can guarantee you that not even 1% of them will find viable deposits.
TGR: Do you just use your smarts as a geologist to identify companies, or do you diversify across the whole range, expecting some to find nothing, some to find something, and some to hit home runs?
BC: Other people may have strategies to buy everything and talk about the ones that work. I am very focused in what I buy for the Exploration Insights portfolio. I have about 14 companies now, and I'll never have more than 20. Of the 14, nine are true exploration companies with projects scattered across the world, mostly looking for gold deposits. I distilled that group down from approximately 200 that I actually looked at in detail. So I am very focused on a small number of companies whose projects and people I know very well; for me, that's the way to play this game.
TGR: And your portfolio has done quite well this year.
BC: We're up on the order of 80%. Early in the year I dumped a couple of losers and that hurt because they came back. It was a bad time to be dumping things but I didn't see how they were going to raise money to stay in business at the time. But overall we've done quite well. We have one that's up 600%. What's probably more important, though, is that since I started the portfolio—which takes in two and a half years of stock-picking and the disaster that 2008 was—we're still up a decent amount.
BC: I think it has to do with selectivity. Certainly, we've had some companies that failed to find what we were hoping for, but those have been in the minority.
TGR: Of the companies that have been in and out of your portfolio, what percentage just haven't produced—didn't get to the find that you were expecting? And how about those that surprised you to the upside, really producing and coming up with even more than you expected?
BC: Probably 20% failed to find what they were looking for, whether a diamond deposit or a gold deposit. Another 50% probably have done reasonably well, and the remaining 30% have done really well. We have stocks that are up 150%, 250% and, as I say, 600%. That's based on legitimate good work, good progress in delineating, defining and expanding the mineralization they've encountered.
TGR: Considering some incredible run-ups we've seen in 2009, as you look into 2010, do you anticipate opportunities for more of those the triple-digit increases?
BC: Definitely. A huge amount of money's been pumped into the exploration sector, and some of it's being spent on good projects. The real opportunity lies in finding the few companies out there with good projects and finding them early. I go out and look at projects when they first pick them up, when they do the initial soil and trench sampling and initial drill results. That's the sweet spot for me.
The rest of the market needs more drill holes and such to make an assessment. But if I can get in early, that's the place to be, and I think we're going to see a number of those opportunities over the course 2010. In fact, I know it. There are things I looked at in Colombia and Mexico, and although I am not buying them right now, I know the geology and I know the concept. If the results confirm what they think is there, I'll have a distinct advantage in buying in before the rest of the market understands what it means.
TGR: Can you give us an overview of what you saw on your trip to Colombia?
BC: Colombia is El Dorado. That's where a lot of the Inca civilization's gold came from. The geologic setting and evolution has been such that gold precipitated in the rocks in any number of geologic environments. Some recent major discoveries have been in the range of 10 million, 12 million, 13 million ounces. There's gold in epithermal environments, mesothermal, porphyries—you name it; there's gold. There are literally hundreds of gold prospects there, and I have no doubt there will be more major discoveries.
TGR: Aside from the attractive geology, doesn't Colombia have a reputation as a rather scary place to be?
BC: The country's come around; I just published a 14-page letter on the country and many of the companies working there. At one time, it was too dangerous to work there. On this trip, I drove out into the countryside on dirt roads and paved roads and went walking around at night in Medellín, and had no issues. It's really improved dramatically over the past four or five years. The homicide rate is down 45% and kidnappings 85%. Not to say it's not still dangerous; you've got to keep your head about you because there are still certain places in Colombia you wouldn't go. But I think we're seeing a country open up that hasn't really been explored for decades.
TGR: As you execute your investment strategy, you check out the business, you kick the rocks, you find some really good prospects, you identify the projects even before they're putting out drill results. Then what? Do you wait for the assays before investing?
BC: Oh, I much prefer to get in before the initial drill results, and then have those results confirm my thinking. Sometimes we buy a company before I can get to the rocks just because it's run by very intelligent, geologic people with good business sense at the right price.
TGR: So you'll buy based on management quality, track records and so on?
BC: Of course.
TGR: How do you determine if the price is right with no drill results?
BC: It comes down to the business strategy. I like prospect generators, companies with smart geologists who generate ideas and concepts that they can then joint-venture out to a company with the cash to take on the high risk and expense of actually drilling the property. That way, my position in the company is not diluted through equity financings, and I get a shot at many more possible discoveries with an intelligent group. Probably three or four companies in the portfolio fall into that category.
TGR: You've described yourself as fairly conservative, but you're going after junior miners before drill results are produced, which seems highly risky. How do you reconcile that?
BC: The selectivity helps a lot. By not getting too scattered around this investment sector, I can avoid most of the disasters. Yes, I have had some disasters, but I've managed to avoid most of the bogus companies with inadequate or unimportant mineral showings. That's one way. Also, the portfolio is hedged to some degree. We buy companies that are selling at or below their net asset value, usually cash, and are run by intelligent business people. If the market crashes they are in an ideal situation to employ their cash.
PhosCan Chemical Corp. (TSX:FOS) is one of those companies, and in fact it's still selling for less than its money in the bank and has essentially gone nowhere since we bought it. It has $69 million in the bank, and its market cap is somewhat less than that. They own a major phosphate project in Ontario that we should see a bankable feasibility study on soon. Until the phosphate market comes back it costs them nothing, you own it for free, and they are in a position to use their cash when intelligent opportunities come around.
Same is true of Altius Minerals Corporation (TSX-V:ALS). So, within the portfolio, those types of companies are sort of the hedge against things going wrong. Altius is now selling for a more than cash and liquid assets in the bank, but you're still getting smart people doing smart things. Altius has gone up recently because of its investment in IRC— International Royalty Corporation (NYSE/AMEX:ROY), which is being taken over by Franco Nevada Corp. (FNV.TO) or Royal Gold Inc. (TSX:RGL, Nasdaq:RGLD). Altius owned about 9% of IRC at $3.50 and are receiving about $7.45, so they're making good money on that trade.
TGR: You said that probably three or four companies in your portfolio are prospect generators. Would you highlight those for us?
BC: Sure. Altius is an obvious one, and I've already talked about it. We've had that for quite a while—smart people doing smart things. Altius explores; they do intelligent investments; they bring smart ideas to the table. AuEx Ventures Inc. (TSX:XAU)—another company active in Nevada, Argentina and Spain with a number of joint ventures and its flagship Long Canyon Project, a gold discovery in Nevada, with partner, Fronteer Development Group (TSX:FRG) (NYSE.A:FRG). Eurasian Minerals Inc. (TSX-V:EMX), another company I've been in quite a while, and is executing its business strategy all over the world.
TGR: Is that it?
BC: I guess the last one I'll mention would be Mirasol Resources Ltd. (TSX-V:MRZ), which is active in Patagonia and Chile. What pushed me over this line to add this to the portfolio was the geology and surface results I was seeing on their joint venture project with Coeur d'Alene Mines Corporation (NYSE:CDE) on the Joaquin properties in Patagonia early this year. A couple of weeks ago they drilled a hole, 25 meters of 1,600 grams per ton silver. That's over a kilo silver over 25 meters that really took the stock up. I'm watching carefully for what happens on trend from this drill hole. If they can duplicate those results with a 50- to 100-meter step-out, this is a significant discovery.
TGR: And you're happy with all these companies you just mentioned?
BC: Absolutely. They have all done well; all up 100% to 600% since we bought them.
TGR: That's a nice return. That's over what timeframe?
BC: That's just for this year, and we've done it with very minimal risk. Although these companies have raised money, it has been at much higher prices than we bought in at so we have not been overly diluted because of it.
TGR: You've said that you're basically buying these companies before the drill results come out because that's where you feel the real opportunity is. How does an investor begin to evaluate an opportunity pre-drill hole?
BC: What a good prospect looks like before a drill hole? Unfortunately, this isn't really something that most laypersons understand, but the geologic target or concept that the company puts forward has to make sense. Assuming you understand the context of the drill hole or surface samples, you can start to make sense of it and get a feel for what's going on. The company's method of testing it has to be intelligent, and they have to know when to quit. If they don't reach a goal, or don't see what they need to see, they stop and pull out right then. Too many companies continue with projects and spend millions of dollars exploring them when obviously the data shows there's nothing there of economic interest anyway. This is where most investors lose most of their money.
But in the earlier stage, it's all conceptual, and every geologist out there will tell you the property has the potential to be the next big thing—but the fact is, it doesn't.
TGR: But you're a geologist, too. What do you know about geology that those others don't?
BC: A lot of geologists in the private sector certainly know a lot more about certain projects and types of deposits than I do. Probably the number one difference is that my money is directly at stake. I've been in this business for 30 years now, and I've been consulting to major mining companies, banks, government-owned mining companies, that sort of thing. I've just seen so many different properties in over 60 countries and been in on everything from the very early stage to the actual mining that I've developed a good sense of what makes sense and what doesn't. It's just the experience I've gained. This is what I do. That's not saying that I think I know everything or am more of an expert than anyone else. But you would no more give me a knife and a scalpel than send a doctor into the jungle to look for gold.
TGR: So you bring a practicality to the geology excitement.
BC: I think so. I'm focused on turning the rocks into money. Being a geologist is a great job if you enjoy the outdoors, but to be in the exploration business, geologists have to be optimistic by nature and believe that this next property is going to be the big one. If they didn't believe that, they couldn't go to work in the morning. And the reward if they do find the big one—both financially and from a personal standpoint—is great.
TGR: Other than the prospect generators, what sorts of other companies do you keep in your portfolio?
BC: We do go after companies that are actually drilling and exploring, too, and that's based on what I see as a good risk-to-reward. These are higher risk, but it's worth the risk if I see the potential for a major discovery, something that a large mining company will buy. It's all price-sensitive, of course, and dependent on the market cap.
For instance, we put San Gold Corporation (TSX-V:SGR) in the portfolio about a year and a half ago. We bought a small miner—it's getting larger—for the exploration potential. Over the past year or so, they've shown that their geologic concepts work and they're finding more high-grade veins in the district that they control. San Gold's certainly not a prospect generator; it's an exploration company with a small mine. The exploration has been going well, they pulled 2.5 meters of more than 1,000 grams gold recently. That was a good hole.
TGR: Any other examples?
BC: There is a platinum-palladium explorer that I don't want to name right now. We bought in early and took profits on half the position at about a double. We are left with a nearly free position and still a chance at a 10-bagger. I am hoping the stock backs off some so we can do it again.
That's the sort of things I like to get into as well. But, again, it has to be something with the potential for a major discovery. I am not interested in small mines at all.
TGR: But you said San Gold has a small mine.
BC: It was the exploration potential that I bought into, not the mine—which I am looking at as getting bigger. When I went up there, I walked the ground and could see parallel structures that should amount to a lot more gold on the property. That turned out to be the case.
TGR: So you still see some upside potential on it?
BC: Yes, depending on the gold price. Keep in mind that everything I'm saying here is based on the context of $1,100 gold.
TGR: Are there any new up-and-coming projects that intrigue you?
BC: Lots of them. I spend half the year on the road looking at the properties. Nine times out of 10, I come back without buying anything, but I see things intriguing enough to keep watch on. If the results seem to confirm what might be there, I'll certainly add it to the portfolio. I'm obviously not going to talk about those stocks now, but I have my eye on a number of them.
Another one is Kiska Metals Corp. (TSX-V:KSK). Kiska is the result of a merger of Rimfire Minerals Corporation and Geoinformatics Exploration Inc. (TSX-V:GXL). I'd visited Geoinformatics' Whistler gold-copper porphyry project in Alaska. Quite honestly, it's too small for at this time to be worth a lot of money, but it's part of a series of similar intrusive mineralized systems that have never been tested before. Next year they will test a number of other targets that we don't know much about yet. But certainly they're highly prospective, and this is a company I'm watching very closely. I'll give you one that I own: Lara Exploration Ltd. (TSX-V:LRA). It's a prospect generator run by Miles Thompson. I've known Miles since we were involved with the World Bank valuation of CVRD (NYSE:RIO) in Brazil when it was privatized. He's done some very intelligent joint ventures in Brazil, Venezuela and Peru, and he recently acquired Maxy Gold Corp. (TSXV:MXD), a company with assets in China and Peru.
TGR: Any other insights you would like to give to our investors to wrap it up?
BC: I think next year's going to be good on the exploration side of things if you're in the right companies, the ones that are actually working on developing legitimate and viable deposits. I think it's really, really critical to evaluate what a company's telling you, and make sure they can back it up with hard data. That's probably the most important thing in the junior exploration sector. And again, you're all welcome to three free reports on my website that discuss geologists, drill holes and resource estimates.
Brent Cook brings 30 years' worth of experience to his role as geologist, consultant, investment adviser and newsletter editor. His knowledge spans all areas of the mining business from the conceptual stage through to detailed technical and financial modeling related to mine development and production. His hallmarks include applying rigorous factual analysis to the projects and companies he examines. Spending six months a year on the road doing on-site field evaluations to augment his analyses, he has worked in more than 60 countries on virtually every mineral deposit type. Brent's weekly Exploration Insights newsletter focuses on early-discovery, high-reward opportunities primarily among junior mining and exploration companies. Paul van Eeden, who produced Exploration Insights' predecessor publication, claims Brent "has always been my primary source of information and intelligence with respect to mineral exploration investments."
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1) Karen Roche, of The Gold Report, conducted this interview. She personally and/or her family own none of the companies mentioned in this interview.
2) The following companies mentioned in the interview are sponsors of The Gold Report: International Royalty Corporation (NYSE/AMEX:ROY), Franco-Nevada Corporation (TSX:FNV), Royal Gold (AMEX:RGLD), AuEx Ventures, Inc. (TSX: XAU), San Gold Corporation (TSX-V:SGR.V), Lara Exploration Ltd. (TSX-V:LRA).
3) Brent Cook—I personally and/or my family own the following companies mentioned in this interview: PhosCan Chemical Corp. (TSX:FOS), Altius Minerals Corporation (TSX-V:ALS). AuEx Ventures, Inc. (TSX: XAU), Fronteer Development Group (AMEX: FRG), Eurasian Minerals Inc. (TSX-V:EMX), Mirasol Resources Ltd. (TSX-V:MRZ), Lara Exploration Ltd. (TSX-V:LRA), San Gold Corporation (TSX-V:SGR.V).. I personally and/or my family am not paid by any of the companies mentioned in this interview.