Brent Cook is an independent exploration analyst with 30 years of experience in both property economics and geology evaluations.
Brent received a BSc in geology from Utah State University in 1978.
As a seasoned geologist, Brent's 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.
He has worked in over 60 countries and in virtually all geological environments, analyzing and providing commentary on proposed mine sites.
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Craig: Well, greetings again from Sprott Money News. This is your "Ask The Expert" segment for June 2016. I'm your host, Craig Hemke, and joining us this month is Brent Cook. Brent is an independent exploration analyst, with expertise in property economics and geology evaluations. He is the editor of the great website explorationinsights.com. He also has a newsletter, "Exploration Insights" as well. Brent, thank you so much for joining us this month, on "Ask The Expert."
Brent: Welcome, Craig. I always enjoy talking to you.
Craig: Well, it's a pleasure to have you on. And we've had a number of questions submitted by Sprott Money customers that, I think, will fit right into your wheelhouse and your expertise. If you're ready, we'll just dive right in.
Brent: Yeah, go for it.
Craig: The first question wants to know mainly about modern technology and how that has changed. The techniques, really, of prospecting and exploring for gold and silver here in the 21st century. And does modern technology make some of the old mines, old assets, potentially viable again?
Brent: Well, I think in terms of exploration, modern technology has certainly helped a lot. I would say probably the biggest technology that's come about is satellite imagery - ASTER imagery. And what that allows us to do, is it picks up certain wavelengths reflected back off the ground. And with those wavelengths you can get a sense of, sort of, what the rock type is, what the alteration is. You can see structure and that sort of thing. So that has been a big help in terms of exploration, where you can go in and know that there's some sort of alteration there.
The important thing to keep in mind though is that that only tells you, sort of, what the rock is doing, not if it's mineralized or not. So it gets you into an area. Most recently, drones. We started using drones and that is extremely helpful in getting out and seeing areas up close, mapping, and topography, that sort of thing. So drones are really coming into it now.
Another would be geophysical techniques, where you shoot electricity or measure something into the ground, and get back readings of what the rock down there is doing. And we'd been able to get deeper and deeper so we can see deeper. So those are probably the biggest helps that we've seen in terms of exploration.
But I think it's really important to realize that all those things do is tell you differences in rocks. They don't tell you mineralization. And bottom line and I'm a real proponent of this is that to really make a discovery, you need to get out there with a rock pick, your boots. And you need a geologist out there with the experience to recognize what is actually on the ground. So really, it's still about going out there just like the old timers, a rock pick and a shovel and your eyes. It's just a bit more modern.
Craig: It still comes down to the expertise and the experience of the individual, apparently.
Brent: Precisely, precisely. And I think that's never gonna change.
Craig: Yeah, I've heard that a lot. As we saw the mining shares turn in 2015, I've asked all kinds of experts, you know, what are the most important differentiating qualities from company to company? And how can you pick winners versus losers? And it's almost always the quality of the management team is one of the key factors. Do you agree with that too?
Brent: Indeed, indeed. I mean it takes more than just having a guy on the ground who knows what he's looking at. That to me is the most important one. But then you also need management that knows how to raise money, how to promote a stock, how to keep the share structure tight. All of those things come into it. The bottom line is the guy in that field has to recognize a viable versus an unviable prospect as rapidly as possible. That's probably where most of the money gets wasted, is you've got the guys out there who are, I guess, over enthusiastic and always seeing a gold pot at the end of the rainbow. And most of these projects, we know, aren't gonna work. So the key, and what we do in our newsletter is, we're always looking for the fatal flaw in a project. Because usually, there's gonna be one. If there's not, you keep buying it.
Craig: There you go. That's a perfect segue for the second question that was submitted from our customers. And that is, "What is a common warning sign or what are some of the common warning signs, that an asset or even an entire company, just simply isn't viable?"
Brent: That's a good question. That's a whole page in its own. I think what you look at is, you know, starting with if it is an asset, say it's in a resource. If it requires some sort of proprietary technology or unique technology to recover the metal, be it gold, copper, or whatever, that's always a big, warning flag. It means there's a problem there with the metallurgy. Likewise, if the resource report that they put out relies on a number of byproduct metals to make this thing work. Say you got a gold deposit, then there's silver and platinum and palladium, or whatever might be added to it, that may need to recover to make this work. That's always a red flag.
Take for instance zinc. If you got a zinc deposit and they're throwing in recovery to germanium, and stuff like that, there's probably a problem. What else? Market cap, versus, you know, and cash, versus what the capex of the company actually is. So you've got a capex or a market cap of 10 million and feasibility shows you need to raise 500 million, that's a problem. Yeah, as you can see.
Also when management, or the top engineers and mining guys start to leave the project, the company, that's usually a bad sign. And I guess finally, this is something that, you know, my business partner, Joe Mazumdar, worked on and put out was, how a project is financed tells you a lot about the quality of it.
If they can raise debt, that's generally a good sign, in that, you know, most of the people lending the money do their own due diligence. Or if you go through and it requires a lot of equity or a hedge or a streaming deal, that tells you that they couldn't get the best deal and they're working down the line of options in raising money. In fact, he put out a really good newsletter on that. That if your listeners are interested, send us an email and we'll send you that one newsletter, where he walks through the process of equity versus hedging versus a streaming royalty. And just send it to us, via our website.
Craig: Well, yeah. What's that email address real quick, Brent?
Brent: I would just...on the website, there's a contact us. Just contact us via that.
Craig: Got it.
Brent: You know, this explorationinsights.com and ask for Joe's report on streaming versus debt.
Craig: Yeah. That makes a lot of sense. That sounds like something I wanna read as well. All right, the next question, deals with this in general, the metals and the shares. Gold and silver are both up about 20% year to date. But the big move has been in the shares with the HUI index being up 120%, 125% year to date. Why the difference between the two and is that move in the shares sustainable?
Brent: Yeah, I think the big difference in the 20% versus 120% is twofold. The first is, that the sector as a whole, you look at the indices, the of GDX or GDXJ, they were down over 80% at the bottom, somewhat, you know, close to 90%. So in that respect, it was just such a beaten down battered sector. You had a lot of contrarian investors come in to play that. And I think that's probably, you know, the major reason it bounced up. The second being leverage. Most of these companies' producers, or even with deposits, it's the leverage that the increasing gold price provides to a mine. You know, if you're breaking even at 1,100 bucks, at 1,200 bucks, at 1,300 bucks, you're making $300, so that leverage is huge.
That's probably the second reason you see such a big move in the companies versus the actual price. Is this sustainable? I think so, yeah. I think we've seen a turn in the precious metal sector for sure and in sentiment towards it. So what we've seen is, basically, all boats are floated, if you will. But going forward though, I think it's gonna be more and more critical that you actually buy viable assets or viable companies. I think, you know, the rise in general, has now occurred and is gonna be a lot more about stock picking.
Craig: Right. Right. All right, you mentioned sentiment change. That's another excellent segue, Brent. You're doing a great job at this. You did...A reader wrote in and said, really appreciated the analysis that you've done in the last six or twelve months. And said, "You did an excellent job at anticipating the change in sentiment, in regard to the precious metals. Do you perhaps see a trend change coming in the industrial metals as well, like copper and palladium, things like that?"
Brent: Good question. I think, you know, what we saw in November of last year, I felt the sector was changing, at least the precious metals sector. And hired Joe Mazumdar to come on, who is actually smarter than me and has done a great job. And what turned it to me was just seeing zero and negative interest rates around the world actually made gold a reasonable investment, to the general investing public. So that's what's changed it.
With regards to the base metals, near term, meaning this year, I don't see a lot of positive out there. We're still looking at a weak global economy, a weak GDP, you know, across the globe. So I don't see that turning right now. I'm certainly looking at base metal projects. We own a copper, zinc company, a couple of those and a uranium company. But overall, I don't see any near-term catalyst that's gonna push those higher. And you look at inventories for most of the base metals, they're pretty high with exception of, possibly, zinc. So, no, near-term, I don't see a big change there.
Craig: Fair enough. We got one more specific question that was emailed in that I'd like to ask you about. And then we've got a couple of specific names, people wanted your, I guess, opinion on. But the final question is, it has to do with many miners had to, I guess we'll call it, high grade, their deposits in order to survive 2013, 2015. How has this affected current supply? How will that affect supply going forward? And then lastly, does this make exploration companies a better bet going forward?
Brent: Oh, that's another good question. Yes. Over the past few years, major mining companies, gold mining or all of them really, have had to start high grading their deposits because they're marginal at best. What that means is, you jump into a deposit and pull out the guts of it, the better part, and leave the remaining lower grade. What that often means is, that remaining resource that was on your books, as gold you had in the ground becomes uneconomic. So in effect, your resource for the company is declining, has declined, and that's gonna be a real problem.
I think that feeds right into the second part of that question about, is exploration the way to go? And I am a firm believer that it is. What we've seen is these companies have not only high graded, but they've cut their sustaining capital, they've cut their development capital. They've almost eliminated the exploration. And now they're faced with having to replace those reserves. And it's gonna be tough.
So, we've moved, in the letter. We picked up a bunch of companies early on this year and last year, four of which have been acquired. And we're moving more into the exploration stage companies, anticipating that the major minors are gonna have to start buying new discoveries.
Craig: Yeah, that makes sense.
Brett: And so I think that is the place to be. That is the place to be, in my opinion. We're focusing more and more of our efforts on it. In fact, Joe is just coming back from Turkey today, and I'm off to Mexico to look at some early stage things on Monday.
Craig: That would make sense. You know, I guess, as a follow-up, if you've depleted some of your primary sources as a major minor, what choice do you have but to look for acquisitions to replace some of that, those deposits?
Brent: Right. I think, I don't think they're gonna actually go and buy these marginal deposits, they did during the last bull market, because that was a disaster. Over the past two years, they've written off 50 billion in, you know, purchases, assets. So it really comes down to, they need high margin, high grade deposits, which are very few and far between. So what we wanna focus on is finding those projects as early as possible. Like the project I'm looking at in Mexico, basically, has got a few trenches, some rock chip sampling, and some mapping done, but it looks interesting. So that's as early stage as you wanna get into. If it turns out to work, we're looking at 10-baggers on something like that.
Craig: Yeah. All right, well finally Brent, just some individual names that customers of Sprott Money wanted you to comment on, if you can. And if you don't have any opinion, just go ahead and say so. The first one is Klondex and the specific question with Klondex is, I guess they have, what they call their tailings reprocessing project, and whether you know anything about that and what you think of it.
Brent: Actually, I do. I know Klondex fairly well. They've done a fantastic job in Nevada. Narrow, high-grade, underground miners, they know what they're doing. I been to their projects in Nevada and they've picked up the Rice Lake deposit, now they're calling it True North, that Sand Gold used to have. I was there awhile, well many years ago now and it is a narrow, high-grade vein deposit that the previous company couldn't get to work.
And so they've come in, and their initial program is to do some test stope mining and reprocess some tailings. The tailings in my view are just minim al. It's not a big deal, one way or another. They're looking at something like 8,000 ounces. So I don't think that really is something to focus on with this company. I think, watch the test stope mine to see if these guys can turn it around and mine the high-grade veins at True North. That's probably the more critical thing to watch.
Craig: Okay. The next name that was submitted is First Mining Finance, which is run primarily, by Keith Neumeyer, of First Majestic Silver. What do you think of that one?
Brent: It's not a play that I'm interested in. What they're doing is acquiring out-of-the-money, gold resources. Out of the money meaning marginal or uneconomic, in anticipation that as the gold price rises, people are gonna be interested in these, may become economic. I don't really think that's gonna happen.
But it may be a good play in terms of, just betting on the optionality that these resources in the ground offer. They've got in the order of, what now, 370 million shares out in the market cap, in the order of $250 million. The share price has doubled, I think. So, you know, if you wanna play an optionality play with Keith Neumeyer, that's the way to go. My personal preference is to look, you know, go back to what I said earlier. I'm after the real high margin discoveries or deposits that a major is gonna buy. That's my exit strategy.
Craig: Right. Right. All right and lastly, the other name was Callinex Mines. Do you know anything about that one?
Brent: You know, to be honest, I don't. I know a bit about it, but certainly not enough to make an informed comment on. So I'll have to pass on that one. Sorry.
Craig: Fair enough. Fair enough. Well, Brent, that brings us to a close. I think, though, you've made a spectacular case for where we might be going from here and the value of what you do. Tell everybody again where they can find Exploration Insights and explorationinsights.com. How they can get in touch with you and if they're interested in subscribing, what do they do?
Brent: Right, subscribing's real, really easy. At explorationinsights.com the top right-hand corner is a "subscribe now" button. We charge on a monthly basis. If you don't like it after a month, just quit. I will say that we are more expensive than most newsletters out there, but that's on purpose. You've got two qualified geologists out there working for you.
And again, if someone's interested in reading that report that Joe Mazumdar did on financing options and what it means to a project, send us a note. Contact us through the "contact mail" button, and mention that and we'll send it off to you.
Craig: Great stuff, Brent. I think, this has been extraordinarily valuable and I know everybody listening has garnered some quality information. I wanna thank you for coming on "Ask The Expert," and wish you a great rest of your day.
Brent: Well, thank you, Craig, I appreciate the opportunity. And then maybe, we'll see you at this research show in July.
Craig: I'm trying to somehow get that one on the calendar. It would be fun to get there. Brent, thank you so much. And from all of us here at Sprott Money News, thanks for listening. We'll talk to you again next month.
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Our Ask The Expert interviewer Craig Hemke began his career in financial services in 1990 but retired in 2008 to focus on family and entrepreneurial opportunities.
Since 2010, he has been the editor and publisher of the TF Metals Report found at TFMetalsReport.com, an online community for precious metal investors.
*The author is not affiliated with, endorsed or sponsored by Sprott Money Ltd. The views and opinions expressed in this material are those of the author or guest speaker, are subject to change and may not necessarily reflect the opinions of Sprott Money Ltd. Sprott Money does not guarantee the accuracy, completeness, timeliness and reliability of the information or any results from its use.