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.
"When the major companies are mining successfully, but not exploring successfully, acquisitions have to become part of the future."
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.
What has become apparent over the last two years is that the average individual commodities investor needs geology simplified. So, we are starting to morph the consultancy into an entity that interfaces more with public companies. Before we take on a job, we do our own internal review. We try to hedge our bets by taking jobs in companies that have projects of merit. Then we try to write the reports in a way that the people the report is intended for can actually understand it.
We want to leverage our years of experience, the input and knowledge from hundreds of geologists we have worked with and our familiarity with many types of deposits. If we can simplify that and get it right, that will be valuable for the investors and for companies with good projects. We think that is where our niche will be.
TGR: Do you specialize in looking for precious metals assets or all types of minerals?
CW: We specialize in gold, silver and base metals—copper, lead, zinc, etc.—as well as bulk commodities such as iron ore. We have coal experience but it is limited.
"There is a lot of positive sentiment for gold."
There is a lot of positive sentiment for gold. You can transport gold in a helicopter—fly it out of a property—without the massive capital expense and infrastructure you would have with a big copper porphyry project.
TGR: You are basically banking on the idea that demand for precious metals will continue to increase. Why are you so convinced that gold will increase in value?
CW: Gold is a finite resource. You've got to find 80 Moz a year to be ahead of current annual production. So, from a supply and demand perspective, each year we're spending more in exploration yet finding less. All things considered, that means that good discoveries will be increasingly valuable.
In addition, politics today works in gold's favor. Recent elections prove that people do not want to vote for austerity. People vote for an easier life. In some respects, this forces governments, if they want to be reelected, to print money to keep things humming along pretty much as they have been. That is going to lead to inflation and to paper money being devalued.
TGR: You have years of experience traveling the world, exploring for gold deposits. Some people believe all of the big deposits have been found. Do you agree?
CW: Not all, but a large number of the big gold deposits have been found. Professors Roger Taylor and Peter Pollard, consulting geologists and good friends, are fond of saying that big deposits generally stick out of the ground. That is because big deposits require very large fluid circulation cells capable of carrying the metal endowment, and these hot fluids generally alter the rocks around the deposit, resulting in large and obvious alteration systems. Moreover, large deposits are generally associated with major structures and may present large geophysical targets.
TGR: Based on your years with your boots on the ground, where do you think the remaining big discoveries might happen?
CW: You need both a discovery and a good environment to develop a project. There are countries where you clearly should not invest even if they have good geological potential. China, for instance, has excellent potential, but I have yet to see a mining company succeed. Many people are fans of the former Soviet Union republics. They are very difficult places to get ahead. There are a lot of insider deals and corruption.
Then you go to the other end of the spectrum to great mining jurisdictions where investments are safe: Canada, Australia, Peru and Chile to name a few. But, those countries have been through several cycles of exploration over the last 100 years, which means it is getting harder to find deposits there.
So, where do you go for new discoveries and what would those new discoveries be like? This is a personal choice, but I favor less explored countries with excellent geological potential that have a manageable degree of political risk. Colombia is an obvious choice, parts of northeastern South America fit the bill, as do countries in West Africa that are emerging from conflict.
"I favor less explored countries with excellent geological potential that have a manageable degree of political risk."
West Africa has some of the greatest mines on earth. For example, Obuasi has produced 30 Moz and probably has about 35 Moz left. To date there has been over 200 Moz of gold discovered in approximately 30 mines and the potential remains excellent.
West Africa was joined to northeastern South America for much of its history and shares the same geology. In comparison to West Africa, northeastern South America is significantly under-explored, so all things considered, countries such as Brazil, Suriname and Guyana have excellent potential. Venezuela also has excellent potential but the politics are problematic.
There also is potential in past-producing mines. There have been some very good discoveries recently. Azimuth Resources Ltd. (AZH:ASX; AZH:TSX) is exploring around the past-producing Omai mine of 4.5 Moz in Guyana. A few weeks ago, the company announced a resource of 1.22 Moz.
TGR: So, you are talking about a contiguous greenstone belt that existed millions of years ago that now extends from West Africa across the Atlantic and into South America.
CW: Correct, although it was actually formed 2.1 billion years ago. My point is that greenstone-hosted gold mineralization is well understood and has been the focus of successful exploration in West Africa, Canada and Australia.
Greenstone belts of the Amazon have not been explored to the same extent.
As long as you are prepared for the geopolitical risk of certain countries, you will probably get a lot of bang for your buck. There will be more world-class discoveries there than in some of the countries that have had more exploration.
TGR: What is Exploration Alliance doing to reach out directly to investors with your expansive knowledge base?
CW: A lot of people who invest in the junior exploration space, the midtier and to a degree in major producers have a fundamentally poor understanding of geology and key concepts. Too often, when I talk to investors, they have no idea of what a strike extension is or what makes for a great intercept. They do not know what the difference is in exploration potential between a porphyry and a narrow vein system.
It is amazing that billions of dollars in speculative money is invested every year by a retail market that really does not know the basics of simple geology. That is a huge issue that needs addressing.
That will become a focus of Exploration Alliance. We will keep the consultancy going because that is what keeps our edge. But, we see an opportunity to offer something along the lines of a one- or two-day course that takes people through basic geological concepts. We want to educate investors in terms of geology, as well as risk and reward.
TGR: Chris, thank you for your time.
Chris Wilson formed Exploration Alliance Ltd. in January 2007 and serves as its principal. He has been the chief executive officer of Hunter Bay Minerals Plc since May 2007. He is an established geologist with over 20 years of experience in the design, implementation and management of exploration projects from grassroots to feasibility. Wilson has worked in over 40 countries and holds a Bachelor of Science (Honors) in geology from University College of Wales, Aberystwyth, and a Ph.D. from the Flinders University of South Australia. He is a Chartered Professional Geologist, a Fellow of the Australian Institute of Mining and Metallurgy and a Fellow of the Society of Economic Geologists.
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DISCLOSURE:
1) Sally Lowder of The Gold Report conducted this interview. She personally and/or her family own shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Gold Report: None. Streetwise Reports does not accept stock in exchange for services. Interviews are edited for clarity.
3) Chris Wilson: I personally and/or my family own shares of the following companies mentioned in this interview: Hunter Bay Minerals Plc. I personally and/or my family am paid by the following companies mentioned in this interview: Hunter Bay Minerals Plc. I was not paid by Streetwise Reports for participating in this interview.
