The Gold Report: You recently wrote a piece in Exploration Insights reminiscing about the 1997 to 2002 resource market. What did we learn about investing in gold and silver in that five-year window?
Brent Cook: I first started working for Rick Rule in 1997, just as the last resource bull was dying. The market just kept going down, way below where people thought it could possibly go, and it continued to get worse in 1998, then 1999 and 2000. Eventually it did stop dropping; people started putting money into this sector, and it leveled off.
What I learned is that successful investing in a bear market takes patience and caution. When you do make an investment, make sure you're betting on good people.
TGR: One of the things Rick Rule always says is that he's waiting for capitulation. How can you tell if we've had capitulation, and what causes it?
BC: I don't think we're going to see a capitulation moment; I think it will be more gradual. I see it in my newsletter subscribers. Most of them have been around for a long time, but in the last few months, people who have been with me from the beginning have started falling by the wayside even though we had a 16% gain last year and we are not doing too awfully bad so far this year. They all say they will be back as soon as the market turns. This is what it starts to look like on the bottom.
I envision it as a band of pioneers walking across the salt flats in July, one by one dropping to the side. One day, we'll turn around, look back and notice the hills are starting to get greener. That's how we'll know capitulation happened, by looking behind us at the wasteland and desolation we crossed.
TGR: Rick also says that bear markets create bull markets. The years 2002 to 2010 were pretty good for the commodity markets and everyone started to look really smart. Are there lessons to be learned from a bull market?
BC: There always are. A big one is to take profits along the way and keep some sense of perspective with regards to what a project is actually worth. This is a cyclical business. We go up and down. This has been true going back to the salt traders in early Africa. Supply and demand drive markets. During the last boom, China was building infrastructure and the world was growing. That created a metal shortage, which drove prices way up. That has busted. China's growth is slowing. I don't know what's going to bring the bull market back in commodities this time, but it always comes back and is usually the result of something we were previously unaware of.
TGR: How is the wasteland you describe as our current market scenario different than what you went through in 1997 to 2002?
BC: There are actually more similarities than differences. In 1998 nearly every economist said gold was antiquated and of no value in the new age. Financial publications all said you would have to be a fool in a tin hat to buy gold. Today, investors and financial publications are shunning this market again, and to some degree with good reason. In the most recent boom, profits barely increased due to increased input costs and the shift to mining lower grade ore. That left a lot of investors who got the commodity price rise right disillusioned with the sector. The metal prices rose but profits didn't. It is going to take a fair bit of time for previous investors or new investors to see a reason to be in the natural resources market. But it will happen.
TGR: Does that hold true both for the retail and the institutional investors?
BC: Yes. Retail investors were hammered in the 1997 downturn. The Bre-X scam triggered the realization that everything was overvalued and much of what was being presented was not true. New NI 43-101 requirements were put in place in an effort to provide more transparency for investors. It certainly helped, but the reality is that a technical report is only as good as the data that goes into it and the persons doing the report.
I am afraid a lot of these reports are poorly done and do not reflect reality. People must still do their own due diligence and follow results closely. One of the most common problems I see in these reports relates to the resource estimates. A large number of those turned out to be inaccurate, making the financial models based on them wrong. So investors got burned again, this time believing the final mine economics in the report that may have been based on sloppy resource estimates. When a company spends hundreds of millions buying trucks, building mills and excavating rock only to find out the ore in the ground is not what was presented in the resource estimate, it usually loses money. There is a long list of mines that fall into that category.
TGR: Who are some of the trustworthy veterans still around putting their experience to work in the market now?
BC: Rick Rule, Ross Beaty, Lukas Lundin and Frank Holmes are people I would listen to when they speak. A number of experienced brokers in Vancouver have proved to be smart people. Those people have been through this before and recognize that now is the time to really make money by buying when the market is down. You just have to be patient.
TGR: You've traveled the world visiting projects. Do things look rosier in other countries? Has the impact of the strong dollar on projects in Canada and Mexico been good for the bottom line?
BC: Most certainly. The drop in oil and energy prices, as well as the drop in the Canadian dollar, the Australian dollar, and even the euro, has been an advantage to companies operating in those countries versus in the U.S. We have seen a decrease in operating costs. It is a real advantage to companies mining in Australia and Canada, especially.
We have also seen mining companies severely cut back on development, exploration, and even maintenance. This will lead to the next bull market when supply is eventually constrained due to these short-term cost cutting measures. The metal prices are going to have to move up because companies can't make money right now, and if it isn't profitable to mine, there will eventually be a shortage.
TGR: In your travels, what are some of the companies that are well positioned for a market rebound?
BC: I like companies that are fully funded and building a mine. That includes Asanko Gold Inc. (AKG:NYSE.MKT; AKG:TSX), Guyana Goldfields Inc. (GUY:TSX) and Torex Gold Resources Inc. (TXG:TSX). They're well positioned to be in production when the market turns.
TGR: Asanko just announced plans to combine two of its mines in Ghana. Is that about cutting costs?
BC: I think it was the plan all along. Because the two deposits are so close together, the cost savings in the capital expenditure (capex) on the second mine are substantial. It always made sense to bring that second deposit in as soon as possible to push up production and profitability without too much extra capex.
TGR: The market seemed to like it.
BC: Yes. There are very few companies out there building mines in stable places that people can invest in.
TGR: Continental just updated its resource estimate on the Buriticá project in Colombia. Did you like what you saw?
BC: I did. In the past, I was a bit negative on the company, particularly on the resource estimate because I had some issues with it. The most recent underground sampling pulled together the high-grade center of the deposit. It looks to me that it has enough gold there to really kick off a mine. And the details of what's happening at depth and along strike will be much better worked out from underground rather than continued drilling. I think it looks pretty good.
TGR: Is Guyana Goldfields still on schedule to start production this year?
BC: Yes, as far as I know. It appears to be on schedule, on budget and moving ahead. It's funded, moving toward production. There are not many projects out there that are doing that these days. Funding is tough to come by.
TGR: What else have you visited recently?
BC: I just got back from Pilot Gold Inc.'s (PLG:TSX) TV Tower project in Turkey. This is a great place to explore. A lot of people have the wrong idea about the country because it is in the Middle East and its president is a bit of a wingnut. But overall, it's a functioning democracy. I've taken my family there on holiday and hope to again. It's a great place to visit. I also think it's a good place to work. Some 10 mines have been permitted in 10 years, so you can get things done.
Pilot Gold has a very prolific area of mineralization and alteration offering epithermal and porphyry-style gold and copper potential. This year, Pilot will spend a fair bit of money to drill some of these more interesting targets and Teck Resources Ltd. (TCK:TSX; TCK:NYSE) is contributing 40% to the effort. I'm looking for enough drilling to indicate it is actually on to something large. This is a huge alteration system and big deposits come from big systems. All the ingredients are there. We just need to see the drilling confirm it.
I was also just down in French Guiana visiting Columbus Gold Corp.'s (CGT:TSX.V; CBGDF:OTCQX) Paul Isnard project. It's a joint venture with Nordgold N.V. (NORD:LSE), a Russian company listed in London with very profitable gold mines in West Africa. The project has about 4 million ounces all in at about 1.4 grams per ton. There should be a preliminary economic assessment coming out shortly that will give us a ballpark idea of what the costs might be, but there's still a lot of work to do there. The advantage Columbus has is it's not spending a dime, and it's carried for 49% through a feasibility study. It also has a major drill program going at the Eastside project in Nevada. We'll be watching results on that as well.
Richmont Mines Inc. (RIC:NYSE.MKT; RIC:TSX) is an old company that recently discovered considerably more value beneath its Island Gold deposit in Ontario. It's been a decent mine, not great, but recent drilling and underground work have discovered mineralization that's twice as thick and about twice the grade. The advantage is that the mine is already operating. It has the plant. It has the infrastructure. It just needs to dig down and get it.
This is one of the companies that a major should be looking to take over. It's in a safe jurisdiction. It's built and running. We know what it looks like. This would be extremely profitable once it gets into the higher-grade zone at depth.
TGR: Based on what we have learned from the last few cycles, how should investors move forward?
BC: Mining and commodities are cyclical. The most money I ever made was from the stocks I bought in the bust between 1997 and 2002. It was extremely hard to do because it was scary. I would buy a stock and then it would drop by half again. You are all alone and the market gives you no encouragement at all. As I said earlier, we are walking across the wasteland in the heat of the day into a dust storm while nearly everyone you know is back at the ranch buying Apple and biotech stocks. I remember I bought Virginia Gold for $1.50, bought it again at $0.75. It had $0.50/share in cash, and at one point, it was selling for $0.35. Over the following decade or so the stock was acquired for $13 and we are still making money on that by way of Osisko Gold Royalties Ltd. (OR:TSX). In retrospect, that was a fantastic buy, but at the time, I was close to giving up all hope. I posted an article on my website titled "What was it like, Dad?" that relives that last bust.
We are in a similar situation now. People have given up all hope. I suspect most of your readers have no desire to buy another junior exploration company, but there are some companies out there that have the cash to survive, strong management that knows what a deposit looks like and the ability to make those discoveries. If you can buy them for near cash, that's a screaming deal.
TGR: You're speaking at the Sprott-Stansberry Vancouver Natural Resource Symposium at the end of July. What do you hope attendees will take away from that event?
BC: This bouncing along bottom could go for a long time, but this is the time to start identifying the groups, the managements and the projects that really have a chance at succeeding. You can buy them for a lot less now than you will be able to buy them somewhere in the future. My guess is next year things start to look better, but this takes patience.
TGR: Thank you for your time.
Brent Cook brings more than 30 years of experience to his role as a geologist, consultant and investment adviser. His knowledge spans all areas of the mining business, from the conceptual stage through detailed technical and financial modeling related to mine development and production. Cook's weekly Exploration Insights newsletter focuses on early discovery, high-reward opportunities, primarily among junior mining and exploration companies.
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1) JT Long conducted this interview for Streetwise Reports LLC, publisher of The Gold Report, The Energy Report and The Life Sciences Report, and provides services to Streetwise Reports as an employee. She owns, or her family owns, shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of Streetwise Reports: Richmont Mines Inc., Columbus Gold Corp., Pilot Gold Inc., Continental Gold Ltd., Asanko Gold Inc. and Guyana Goldfields Inc. The companies mentioned in this interview were not involved in any aspect of the interview preparation or post-interview editing so the expert could speak independently about the sector. Streetwise Reports does not accept stock in exchange for its services.
3) Brent Cook: I own, or my family owns, shares of the following companies mentioned in this interview: Dalradian Resources Inc., Richmont Mines Inc., Continental Gold Ltd. and Asanko Gold Inc. I personally am, or my family is, paid by the following companies mentioned in this interview: None. My company has a financial relationship with the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I determined and had final say over which companies would be included in the interview based on my research, understanding of the sector and interview theme. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.
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