Sprott Global Resource Investments

Sprott's Thoughts

Henry Bonner

“Why Juniors Stand to Beat Major Miners…:” Brent Cook

Brent Cook worked alongside Rick Rule from the late 90’s to the early 2000’s at Sprott Global Resource Investments Ltd. A respected geologist and speaker, he is now the author of Exploration Insights.

“The major miners were being slammed with a falling gold price at the beginning of 2013,” he told me earlier this year. “They wanted to mitigate the damage to their share price. ‘What can we do to attract investors?’ they asked.

“Their best idea was to lower expectations as much as possible. They felt that if they lowered expectations related to production, costs and profits, then at year end they could beat, or at least meet those expectations.”

How did that work out?

“Well, to a large extent, they managed to meet or beat the lowered guidance for 2013, and the analysts were able to brag about the new numbers.

“Sort of, that is. They know very well that this game can’t go on, because even with lowered expectations we are seeing additional write downs and decreased mine reserves. They are saying that these cuts are for the better anyway. This time they are ‘serious’ about bottom line earnings – yeah right!”

Since then, many major mining companies have published dismal returns for fourth quarter of 2013, and cut their reserves because many of their unmined reserves were uneconomic at their revised gold price estimates.

For instance, Goldcorp Inc. showed a $1 billion loss in the fourth quarter of 2013, and reduced its gold reserves by 15 percent because of a lower gold price assumption of $1,300 per ounce.1 Newcrest Mining Ltd. saw its profits decline by around a third from a year ago, and cut reserves by 11 percent with a gold price assumption of $1,250 per ounce.2 Barrick Gold Corp. had a $2.83-billion net loss for the fourth quarter of 2013.3 The heavyweight reduced the amount of reserves on its annual statement by 26 percent assuming gold would be around $1,100 instead of $1,500 going forward.

As bad as the majors’ performance has been, they must attempt to expand their existing operations – especially if higher metals prices offer some relief, Brent explained.

The problem is that reserves are becoming much harder to come by even if metals prices rise, he said. As the ‘best’ deposits, which are easy to access and have high grades, are mined out, the new deposits that are being discovered today tend to be more expensive and complicated to mine.

The following graph from Exploration Insights shows how new discoveries are getting deeper on average; the closer to surface, the more likely a deposit has already been found and mined out.

Ei Depth Discovery Pic

It takes more time, drilling, and money to find these new deposits. They are getting rarer. Majors will likely have to pay more to acquire these new mines that they need.

Right now they are still shell-shocked, but eventually they have no other choice if they wish to stay in business; so juniors that can prove up fresh economic deposits should fetch higher and higher prices in the market, says Brent.

These projects will also be more expensive to mine as open-pit projects because the ‘cover’ will be mostly waste. Underground mines are likewise becoming more costly to mine due to a number of factors. Thus, majors could struggle with higher costs and fewer available deposits to replace depleted reserves.

“There’s no technology out there that can drastically improve the odds of finding new deposits. It really comes down to a technical team’s ability to accurately interpret a limited amount of data and cost effectively find or kill their mineral project.

“I believe that the best place to invest in the mining space is in the companies that have recently made a discovery that has the potential to become bigger and be high grade. For this reason, new deposits that are currently being proven out offer some of the biggest upside, in my opinion.”

P.S.: Brent recently posted a ‘Rules of Thumb’ guide for interested speculators to his website that he says will help filter the legitimate explorers from the posers. Click here to read.

Upcoming conference: See Rick Rule and meet the Sprott team at the Oxford Club’s 16th Annual Investment U Conference at the exquisite Park Hyatt Aviara in Carlsbad, California from March 26-29, 2014. 

And come in early for our Sprott Open House on March 25th. For more details on the conference please take a look at the website or to register, please contact Opportunity Travel today by phone at 1.800.926.6575 or email at info@opportunity-travel.com.

Brent Cook currently authors Exploration Insights, where he analyzes specific companies in the small-cap natural resource sector and serves as an advisor in mining economics and exploration potential for funds and companies. He has worked in over 60 countries across a wide number of geological environments for major mining companies including Kennecott Mining, Rio Tinto Mining, Barrick Gold, and Freeport McMoran.

1 http://www.kitco.com/news/2014-02-13/Goldcorp-Posts-4QLoss-Cuts-Gold-Reserves.html

2 http://www.reuters.com/article/2014/02/14/australia-newcrest-earnings-idUSL3N0LI6GW20140214

3 http://www.bloomberg.com/news/2014-02-13/barrick-gold-earnings-trail-estimates-as-output-declines.html

 

This information is for information purposes only and is not intended to be an offer or solicitation for the sale of any financial product or service or a recommendation or determination by Sprott Global Resource Investments Ltd. that any investment strategy is suitable for a specific investor. Investors should seek financial advice regarding the suitability of any investment strategy based on the objectives of the investor, financial situation, investment horizon, and their particular needs. This information is not intended to provide financial, tax, legal, accounting or other professional advice since such advice always requires consideration of individual circumstances. The products discussed herein are not insured by the FDIC or any other governmental agency, are subject to risks, including a possible loss of the principal amount invested.

Generally, natural resources investments are more volatile on a daily basis and have higher headline risk than other sectors as they tend to be more sensitive to economic data, political and regulatory events as well as underlying commodity prices. Natural resource investments are influenced by the price of underlying commodities like oil, gas, metals, coal, etc.; several of which trade on various exchanges and have price fluctuations based on short-term dynamics partly driven by demand/supply and nowadays also by investment flows. Natural resource investments tend to react more sensitively to global events and economic data than other sectors, whether it is a natural disaster like an earthquake, political upheaval in the Middle East or release of employment data in the U.S. Low priced securities can be very risky and may result in the loss of part or all of your investment.  Because of significant volatility,  large dealer spreads and very limited market liquidity, typically you will  not be able to sell a low priced security immediately back to the dealer at the same price it sold the stock to you. In some cases, the stock may fall quickly in value. Investing in foreign markets may entail greater risks than those normally  associated with  domestic markets, such as political,  currency, economic and market risks. You should carefully consider whether trading in low priced and international securities is suitable for you in light of your circumstances and financial resources. Past performance is no guarantee of future returns. Sprott Global, entities that it controls, family, friends, employees, associates, and others may hold positions in the securities it recommends to clients, and may sell the same at any time.

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