Piggybacking on the hunt for massive oil discoveries

July 25, 2013 

Africa is becoming the top choice for North American oil companies looking to diversify, and the East African Rift is the hottest of the hot, with Kenya waiting on commercial viability, Angola and Ghana already on the road to rival Nigeria and two newcomers—Namibia and Zambia—where the doors have been thrown open for exploration. Getting in on Namibia and Zambia is an extremely expensive endeavour, but here's a way to de-risk this adventure, keep your shareholders calm and strategically position yourself to take advantage of the next big find without footing the massive drilling bill: Buy up a ton of acreage and sit back and let others do the expensive exploration and drilling on territory adjacent to yours. Then strike and watch offers come in.

In an interview with Oilprice.com, Alberta Oil Sands (AOS) CEO, Binh Vu … discusses:

  • How to get in elephant-sized plays in the East African Rift
  • How to save cash by piggy-backing on others' expensive exploration
  • Why Namibia could be a major oil monster
  • What makes Zambia such an attractive oil venue
  • Other African plays that are worth looking into
  • Why it's hard for juniors to compete in Africa
  • Why someone will always need Canadian oil sands
  • What heavy oil economics will look like over the coming years
  • Why Canada's Algar Lake is a major sleeper play
  • What qualities investors should look for when betting on juniors

James Stafford: With the oil discoveries in Kenya and a lot of optimism over other rifts and lake systems including those present in Uganda, Zambia, Tanzania, etc. the East African Rift System has become an emerging oil hot spot. What we want to know is how to make money here without spending a ton of cash in exploration and drilling? What's the smart way to stake a claim on the East African Rift Basin?

AOS: That is a great question. The truth is that this area has become quite expensive as it has been found to be increasingly prolific. Major signing bonuses, deposits, and commitments are required in spots like Kenya, Tanzania, and Uganda. There is very little opportunity for the junior explorers to compete.

We believe that Zambia is a fabulous jurisdiction because it shares the geology and rock age in certain large areas that have hosted the Lake Albert Discovery and the Block 10BB Kenya discovery. However, it is totally underexplored for hydrocarbons and thus provides much cheaper access to very prospective areas. Our company has successfully tied up ~18 million acres or what we believe covers about 33% of the attractive rift areas in Zambia - which equates to oil and gas rights over about 8% of the country.

James Stafford: How does an exploration company on a budget go about covering and "high-grading" targets over such a large area?

AOS: Without a doubt that is a highly important question for any company engaged in the pursuit of elephant-sized targets in new frontiers. One of the things that we do is first is aim for concession agreements that don't tie us to expensive immediate seismic commitments. Second we eschew large and expensive 2-D seismic programs in favor of a process of high grading using satellites, other remote sensing techniques, and 'ground truthing'.

We estimate that by using satellite data analysis over a number of criteria--gravity gradiometry, thermal emissivity analysis, geobotany analysis including vegetation anomalies and geo-microbial review over specific high-graded areas on our acreage--we can save millions of dollars and years of time. We then get to specific areas that are ready for smaller, focused electroseismic surveys / 3-D surveys, and that can then be attacked as drillable targets either to take on ourselves, or to farm down to majors who are looking for the next major rift discovery.

ames Stafford: What does the playing field look like right now in Zambia? Who's there, what are they doing, and how are you positioned to take advantage of all the money being spent there on exploration and drilling?

AOS: There are a number of companies there and we have focused on two lakes as well as two dry rifts that show very promising gravity responses from the most up to date databases. Our number one focus is on Lake Tanganyika. This lake spans through Burundi, Tanzania, DRC, and Zambia.

There are currently to our knowledge at least three major active seismic programs on Lake Tanganyika including one recently completed by Beach Energy, an Australian company with a $1.75 billion valuation. Beach is directly adjacent to AOS, on the Tanzania side of the Lake. It is likely that Lake Tanganyika will see at least 1 drill hole in 2014.

We like Lake Tanganyika as the right spot for the next Lake Albert (3.5 billion barrels reserves) discovery because of the almost identical geological setting and rock age as well as the size of the Lake and the major indications of an existing petroleum system. Lake Tanganyika has multiple oil slicks and natural oil seeps including one that is believed to be the largest natural oil seep in the world. You can see it from Google Earth.

James Stafford: You've also recently acquired acreage in Namibia, which just made its first-ever commercial oil discovery. What are the prospects here and what kind of timeframe are we looking at?

AOS: I'm glad that you asked that. Namibia to us is a potentially direct analogue to all of the major offshore discoveries in Brazil (plate tectonics theory) and Angola to the north. Offshore Namibia has the identical age and rock type as the discoveries in offshore Angola. Combined, those two countries have nearly 30 billion barrels in reserves.

Namibia itself, however, remains highly underexplored with only 16 wells drilled in 20 years--seven on Kudu Gas Field alone--and the majority of the rest were shallow shelf wells. People are starting to get the idea and now. BP, Petrobras, Repsol, Galp Energia, HRT, are all there.

HRT has had success there on their first well of this three-well campaign where they discovered light oil for the first time. Their second well was dry. The third well on which they will begin drilling in August in their PEL-24 block which borders directly on to AOS' 2.5 million acre land package in the Orange Basin - blocks 2712A and 2812A. We are at ground zero.

HRT rates their play chance there at 25% and to my knowledge it is their biggest target--a 30 billion barrel monster. If that one works, I would think that there will be companies knocking down our door. We will know likely in late September, maybe the beginning of October.

Regardless, there should be at least five more wells drilled and $500 million to $1 billion being spent offshore Namibia over the next 12-18 months, so it really fits well with our strategy of being in highly active basins where majors and big independents are spending lots of money around us to prove up major discoveries.

James Stafford: AOS' new Africa portfolio is an ambitious diversification of its original assets in Alberta oil sands. Why the need for diversification here?

AOS: It is indeed; however, I think that what shareholders need to understand (and many of ours do not) is that AOS has been traded for the last 24 months strictly on its balance sheet. It basically always trades at its cash per share. Why is that? Very simply there is or has been in recent times, very little capital market appetite or excitement for small companies developing SAGD oilsands plays.

Athabasca Oil was one bright spot, but that was a marvel of financial engineering that caught a window.

AOS has 500+ million barrels of oil sands resources which are getting no value. Combine a terrible junior market with complete apathy for this asset class, and the result is a share price that declines almost in lockstep with the treasury, and a total lack of response or enthusiasm to basically just about any kind of positive news.

We feel that while AOS is underpinned by its cash and by real assets on which the company has spent almost $65 million developing since 2007, it adds meaningfully to shareholder value by bringing into the fold, as cheaply as possible, blue sky scenarios with major lottery ticket potential and requiring little to no cost commitments over the next 12-18 months.

Ultimately, as we gain approval at our flagship Clearwater project in Alberta, part of our plan as we examine our options to unlock value in two distinct plays could be to dividend out our African assets to shareholders into a new company on a 1 for 1 basis, such that shareholders retain 1 pure play share of Oilsands in Alberta (Clearwater, Grand Rapids, Algar Lake), and one pure play share of our 21 million acre and growing high-impact African exploration portfolio (Zambia, Namibia, DRC).

Paladin Energy Posts Increased Production In Africa

Paladin Energy Posts Increased Production In Africa

Posted on July 18, 2013 02:30 pm 

VENTURES AFRICA – Uranium miner, Paladin Energy, on Wednesday said it had posted a “record production” in the full year to June this year, boosted by exceptional yield at its African operations.

Overall production surged 20 percent, touching 8.25 million pounds of uranium oxide (U3O8) during the period under review.

Namibia’s Langer Heinrich mine generated an unprecedented 20 percent increase to 1.35 million pounds of U3O8 in the quarter to June.

In Malawi’s Kayelekera mine, Paladin posted a 20 percent leap to an exceptional 789 439 lb of U3O8 during the same quarter.

The surge in annual yields at Langer Heinrich and Kayelekera follow Paladin’s change in strategy. The new strategy brought about new initiatives at the mines.

Paladin said its austerity measures had worked well for the company with more benefits likely in the next financial year.

Paladin added that in the 12 months to June, C1 expenses at Langer Heinrich were cut by about 9 percent when likened with the previous reporting period.

C1 expenses at Kayelekera were lessened by 24 percent compared to the previous reporting period.

Paladin is listed on the Australian Securities Exchange, Toronto Stock Exchange and Namibian Stock Exchange.

The firm also trades on the Munich, Berlin, Stuttgart, and Frankfurt Exchanges.

Paladin is a uranium production firm with mining projects in Australia and two mines in Africa. Its strategy aims to make the firm a major uranium mining company.

Since 1998, Paladin amassed a quality collection of cutting-edge uranium ventures each having production capability.

Minor miners face major headache from iron-ore giants

 By: Reuters
22nd July 2013 

SYDNEY – From Africa to Australia, opportunities to develop small iron mines are fast disappearing, as cash dries up and miners are unable to compete with the crushingly low production costs of the sector's heavyweights.

In Australia alone, a half a dozen or more projects pegged by prospectors in better times sit stranded in the outback with no timetable for development.

Most are running short on money and have stripped payrolls and equipment spending to a bare minimum, awaiting a turnaround that forecasters predict is a long way off at best.

Companies such as Aquila Resources, Flinders Mines and Iron Road, which a year ago were leading a wave of new investment in iron-ore, have had their stocks gutted as investors turned cold on their prospects.

"This is not the time to be developing a new iron-ore mine, the big boys are making sure of that," said Keith Goode, an analyst for Eagle Mining Research.

Global miners Vale, BHP Billiton and Rio Tinto are increasing their supply dominance in the world's second-biggest shipped commodity market after oil.

The three already control some 70% of seaborne trade and are spending billions of dollars on new mines to capture an even bigger share, just as the price outlook for the steel-making raw material deteriorates and a supply glut looms.

Iro-ore prices are forecast to reach a four-year low in 2013, according to a Reuters poll. In a few years, some analysts see prices under $100 a tonne.

The majors are cornering the market with costs of $30-$50 a tonne, compared with estimates of up to $100 for new entrants.

Add to that, expenses around rail lines that can stretch hundreds of kilometers across deserts or through jungles, limited port allocations and lower grade ores and it's little surprise new entrants are struggling.

Fortescue Metals Group, Australia third-biggest iron-ore miner, has told prospector Brockman Mining Ltd it could charge the company up to $576-million a year just to access part of its Australian rail line.

Another upstart, Aquila Resources, had no option other than to put its West Pilbara Iron Ore project in Australia on ice this year. It would have required billions to be spent on rail and ports, stretching funding too far.

Japan's Mitsubishi Corp has opted to suspend work on a port and rail line in Australia that promised to establish a new iron-ore export hub, 1 200 km from rail lines controlled by BHP, Rio Tinto and Fortescue, further diminishing the hopes of aspirants.


In West Africa, valuations for a number of iron-ore companies have fallen so low to suggest the market no longer believes these projects will see daylight, according to Hunter Hillcoat, an analyst at Investec.

"The view that the market is not ascribing value to these companies on the basis that their projects won't get developed has been really reinforced in the past few months," he said.

Zanaga, partnered with Glencore Xstrata on its project in Republic of Congo, has a market cap of $47-million compared to around $38-million in cash reserves.

The firm's stock has lost about 60 percent this year, while Guinea-focused miner Bellzone has had around 70 percent wiped off its market cap.

Bellzone was forced to sell its bulk-carrying ship after a cut in its iron-ore production forecasts at its Forecariah mine meant the vessel was no longer needed.

Another Africa iron-ore developer, Australian-listed Sundance Resources, has been unable to attract partners to back its Mbalam-Nabeba iron-ore mine straddling Cameroon and the Republic of Congo.

Shares in Sundance have lost about three quarters this year because its planned partner, China's Hanlong Group, failed to secure backing for $4-billion in development financing.

The plight of the juniors has not led to much consolidation either.

One of the few exceptions has been IMIC, which recently made an agreed bid for Afferro, which owns 100% of the Nkout iron-ore deposit in Cameroon.

That deal was unique because IMIC had already sealed a partnership with China to build transport links so the raw material can be exported.


Volatile trade in iron-ore has seen prices range between $110-$160 a tonne this year, joining a wide range of commodities hit by excess supply and slowing demand from China.

Oversupply of seaborne iron-ore will be about 155-million tonnes next year, according to analysts at UBS.

Almost all the new supply is coming from the big miners.

UBS, Goldman Sachs and other banks warn prices could dip as low as $80 a tonne versus today's price of $130.

Access to funds, particularly equity funding, has also dried up, further stretching developers.

"There is little appetite for debt funding for most of these projects and capital markets are closed too," which doesn't leave much choice," said Paul Adams, an analyst for DJ Carmichael, which specialises in small mining companies.

Even an iron-ore project being developed by Gina Rinehart, Australia's richest person, to mine 55-million tonnes a year is taking longer-than expected to fund.

After years in pre-development, her Roy Hill project is just now overcoming key hurdles holding up debt negotiations, sources familiar with the talks told Reuters.

However, if it starts producing by 2015 the project aiming to become Australia's fourth-largest iron-ore producer will make it even harder for smaller rivals.

The iron-ore market in Australia has been sliced in three by Rio Tinto, BHP and Fortescue mining an additional 100-million tonnes next year, equivalent to a fifth of China's imports.

Vale, the world's biggest producing company, is spending $19-billion to expand its footprint by nearly a third in its home country of Brazil.

The strategy relies on improving economies of scale to lower the cost of producing each tonne of ore to levels smaller players find it impossible to match.

That leaves little room for upstarts elsewhere in the world.

"The Rio's and BHP's are cushioned through every stage of the cycle, high and low," said Carmichael's Adams. "Unless, you are cycle-proof, it is going to be a very tough road."

Edited by: Reuters

The results are (almost) in for rare earth competitors
July 17, 2013 • Reprints
(Resource Investor)

Western rare earth companies are in a conditioning period, optimizing on every front to get the leanest capital costs possible. In the next six months, Geologist Alex Knox expects a big shakeout across the rare earth space as companies release amended PEAs and feasibility studies. "That," says Knox in this interview with The Metals Report, "is when smart investors will be able to look at the numbers and pick out the winners." Knox helps us jump the gun by identifying companies with lean, mean stats.

The Metals Report: Alex, what is your overview of the rare earth element (REE) space?

Alex Knox: The highlight is that two large deposits of light rare earth elements (LREEs) are coming into production: Molycorp Inc.'s (MCP:NYSE) Mountain Pass and Lynas Corp.'s (LYC:ASX) Mt. Weld deposit. The considerable increase in LREE production has eliminated the need for any market niche for these types of deposits, at least for the short-term.

I see a dramatic need for development of heavy rare earth element (HREE) deposits in the western world, now that China's crackdown on illegal mining has presumably cut into its production of HREEs. A number of companies have reached prefeasibility or preliminary economic assessment (PEA), and one already has a feasibility study. Overall, I believe this space offers the most potential growth and the most potential to add new deposits.

TMR: Can investors make money in REEs?

AK: Certainly. On the HREE side, the deposits coming on stream will be profitable. At the present prices of the companies that own these deposits, there is substantial upside. I think the market will pick two or three of these companies and make them the winners in the HREE space.

TMR: Rare earth expert Jack Lifton has written that, "non-Chinese sources of heavy rare earths must now be brought into production under all circumstances. Non-Chinese manufacturing centers and regions need to attain self-sufficiency as soon as possible." What's your view?

AK: I totally agree. The Chinese will protect their low-cost resources, the South China ionic clays. End users operating outside of China will need to secure supplies elsewhere. There is a good market opportunity for companies that can get these deposits to market in a profitable state.

TMR: Yet in 2012, half of China's export quota on REEs wasn't used. The 2013 quota is 5 tons higher than 2012. Doesn't that suggest there is less demand?

AK: Again, there is a distinction between LREEs and HREEs. Given China's crackdown on illegal mining and illegal export of HREEs, those exports are volumetrically small compared to the LREEs. There is not a lot of tonnage, but there is high value. The tonnage mainly comes from the LREEs.

The fact that the overall quota has risen doesn't mean that the output of HREEs will increase. I believe the supply of HREEs from China may actually decrease, while the overall quota for all REEs increases.

TMR: Can illegal Chinese exports meet the world's supply needs for HREEs?

AK: The South China clays are a finite resource. They lack vertical extent. Some are only 10 meters thick and are often fairly low grade. To extract significant quantities requires immense surface disturbance because you have to strip off a lot of land to take out the top 10 or so meters. This surface destruction is unsustainable. The Chinese recognize that and are trying to eliminate illegal mining to save these resources for themselves.

TMR: Lifton noted that, even if non-Chinese HREE costs become level or lower than prices in China, the cost of building new separation and alloy-making facilities would be in the billions. He argues that the problem can be solved by "central, regionally deployed tolling facilities for separation." How likely is that?

AK: These facilities are expensive to build. Also, the expertise to design and run them is very thin on the ground. The facilities largely depend on Chinese technology or Chinese expertise. For a western company to build its own rare earth separation plant seems to me inefficient.

One would hope that companies could agree to reduce their individual capital costs by creating a central, large-volume, efficient and well-managed separation plant as Lifton suggests. However, these companies are competitors. One wonders whether they could collaborate to bring this vision into reality.

TMR: Could a company with deep pockets and expertise take that on?

AK: It's a bit of a chicken-and-egg situation. A company would have to have secure sources of supply for a proposed processing plant before it had the economic justification to build it.

TMR: If there were steady supplies of REEs, especially HREEs, would manufacturers start changing the way they build high-tech devices, such as cars and lighting systems?

AK: This is another chicken-and-egg situation. Lack of reliable supplies of, say, dysprosium, terbium or lutetium inhibits research into their uses. As deposits come on stream and the supply becomes stable and predictable, people will do more research and find uses for these elements.

There are certain HREEs—holmium and lutetium, to name a couple—for which there are almost no known uses because the supply is virtually zero. If supplies could be found, people would research how to use them and they would gain in value.

TMR: Could governments get involved in building regional facilities or backing loans for their construction?

AK: The U.S. government might do it, because it takes a more strategic view of things. Some of these HREEs have military applications, and a secure source might be desirable. This might be an advantage to a company like Ucore Rare Metals Inc. (UCU:TSX.V; UURAF:OTCQX) whose HREE deposit is in the U.S. There are a number of HREE deposits in Québec, so the Québec government might fund something or offer tax advantages to the Québec producers to secure a supply.

TMR: The Tech Metals Research Advanced Rare-Earth Projects Index identifies 56 advanced-stage REE projects and almost that many companies. How many of these companies do you reckon will develop their projects into mines in the next 6 to 10 years?

AK: The REE space is microscopic compared to other metals markets. Market capacity can be satisfied by a handful of REE deposits coming into production. On the LREE side, many would argue that demand has already been more than met by the Mt. Weld and Mountain Pass deposits. There may be room for one or two more if they're very cost effective. On the HREE side, four or five deposits might saturate the market. Out of that list of 56, I suspect no more than 10 would find the market share to get into production. Anybody who enters the market after that will have to compete on price and knock out existing producers.

TMR: What's the name of the game now in this space? Part of the game has to be financing, but what else?

AK: Metallurgy. In many cases, the metallurgy is based on assumptions that may no longer be valid. Some of these companies have been working on the metallurgy of their deposits since 2009.

Looking at the HREE space, only Avalon Rare Metals Inc. (AVL:TSX; AVL:NYSE; AVARF:OTCQX) has done a feasibility study. That's on its Nechalacho deposit up in the Northwest Territories.

Another half dozen or so companies have released a PEA or are close to it and are working toward a feasibility study. Of note would be Tasman Metals Ltd. (TSM:TSX.V; TAS:NYSE.MKT; TASXF:OTCPK; T61:FSE) and Ucore. Matamec Explorations Inc. (MAT:TSX.V; MRHEF:OTCQX) plans to release a feasability study this month. Search Minerals Inc. (SMY:TSX.V) has a PEA out on its Fox River deposit in Labrador.

Since 2009, some companies have changed their processes to take advantage of advances in filtration technology. For example, Ucore has apparently completed successful trials on using X-ray technology to concentrate its ore and reject 50% of the material with virtually no loss of rare earths.

It's important to use the metallurgy to extract as much of the REES as you can and coproduce the byproducts that will add value to the bottom line. The more money you've got coming out of your process the better. For example, Quest Rare Minerals Ltd. (QRM:TSX; QRM:NYSE.MKT) recently announced a preliminary understanding with a ceramics company to buy Quest's zirconium offtake at the Strange Lake deposit.

TMR: Does that materially add to the economics for Strange Lake?

AK: I think it does. We don't yet know what price Quest is getting. The supply of high-purity zirconium that can be used in ceramics is limited. Most zirconium is produced as zircon concentrate and is made into paint. This is another example of uses being found for elements as the supply increase and becomes reliable.

TMR: Will other companies follow Quest's lead regarding byproducts?

AK: I would hope so. Granite-based HREE deposits can be quite treasure troves of other minerals: niobium, tantalum, uranium, even thorium. There are lots of little cash registers in these deposits. If they can be extracted and marketed profitably, they could add substantially to the revenue from the same amount of ore. That is nothing but great for the bottom line.

The idea of thorium reactors is getting a lot of play in the nuclear industry. To date, byproduct thorium has been a detriment. If it could be sold for use in a thorium reactor, it would be a real benefit.

TMR: If you were an investor with $100 million ($100M) to invest in the REE space, how would you deploy it among those equities and what company characteristics would you look for?

AK: I would certainly go toward the HREEs or look for an LREE producer with significant byproduct credits to ensure another revenue source.

Looking at the five principal deposits, Avalon and Quest are high-grade, but rather remote. Tasman is bigger than Ucore and Matamec. Ucore is right on tide water. Matamec has an ideal location and the metallurgy is good, but to fund the feasibility study, the company gave away half of the deposit in an offtake agreement.

There are substantial opportunities in the sector once you we see who has the upper hand in terms of metallurgy and who can keep costs down and revenues up. The prices of the HREE producers are so depressed now that the companies—maybe as many as three of them—that get into production will be profitable investments in the long run.

TMR: You plan to do some work in Québec this summer. Tell us about that.

AK: Commerce Resources Corp. (CCE:TSX.V; D7H:FSE; CMRZF:OTCQX) has a large carbonatite-hosted deposit in the Labrador Trough in northern Québec. The company is doing a low-cost drilling program this summer to upgrade its resources.

This carbonatite deposit contains substantial, separate showings of high-grade niobium and tantalum. The property could produce both elements from the same carbonatite, thus getting byproduct credits in through the back door. Even though this is an LREE deposit, it has zones enriched in the mediums and heavies. The potential production of niobium, tantalum and even other minerals makes this an attractive carbonatite deposit. My role this summer will be to help Commerce Resources explore and to work on the niobium and tantalum zones.

TMR: Orbite Aluminae Inc. (ORT:TSX; EORBF:OTXQX) is another Québec-based company you have worked with, yes?

AK: I helped Orbite with the REE part of its PEA last year. As I became familiar with the Orbite process, I realized it would have great potential for the metallurgical extraction of non-carbonatite-type, REE-bearing ores.

Most of the ore minerals in REE deposits are silicate minerals. Presently, producers bake the silicates with sulfuric acid to fix the silica, which affects the recoveries. The sulfuric acid bake also can consume large amounts of reagent.

Orbite developed a process to break down the silicate minerals and filter off the silica more effectively, making it possible to extract many or all of the byproducts, not just the REEs. Plus, the acid can be recycled.

Orbite is using its process to extract alumina, scandium and gallium from its deposit. If Orbite has actually solved the silicate mineral problem, its process could be used to extract REES in a very purified form that would be imminently suitable for separation technology. It would dramatically reduce the operating costs for all granite-based HREE deposits.

TMR: The Orbite process is used primarily to recover alumina from bauxite. Does that make Orbite a technology play or an aluminum play?

AK: In the short term, Orbite intends to make money from extracting aluminum from any aluminum-bearing rock, not just bauxite. That includes shale, red mud or fly ash, anything that doesn't have high carbonate content.

The potential for crossover into extracting REEs and other elements is a satellite to the main aluminum play. Orbite's ore contains 500 parts per million rare earth oxides, which the company has proved on a bench scale can be concentrated and extracted even at low levels as a byproduct of aluminum extraction. The technology seems to be applicable outside of the aluminum space and could, in the future, provide another source of revenue for Orbite.

TMR: Of the top-tier, advanced-stage rare earth projects, which deposits would be most amenable to Orbite's processing technology?

AK: Tasman and Matamec's deposits both have eudialyte, which is extremely acid soluble. It dissolves in vinegar at room temperature. These would be the ideal. The process also would be useful to Quest and Ucore. In fact, all of the granite-type, non-carbonate REE deposits could potentially benefit.

TMR: Are other companies developing similar recovery technologies?

AK: Yes, but not many details have been made public. Matamec intends to finish its feasibility study this month; it should give us a good look at what that company has accomplished. Tasman, with a similar metallurgy, has obtained decent recoveries from its processes.

Quest must be able to extract zirconium from its deposit or the ceramics company wouldn't be involved there. Ucore has an ore-sorting technology that appears to be applicable and successful in reducing the throughput to the mill with little or no loss of rare earth potential.

TMR: Let's look at Tasman. The company recently got a mining lease for its Norra Kärr project. Is that meaningful for investors?

AK: To me it is. It means that the Swedish government believes the company can operate safely and control emissions, in a relatively populated area. That is a major hurdle to get over.

TMR: What are the most dramatic changes investors should expect in this space over the next 6 to 10 years?

AK: It is a given that you will start to see major western REE producers. If a consistent supply of rare earths causes a rise in demand, there will be space in the market for additional producers. That may spur exploration.

Exploration for rare earth deposits has been in the doldrums for the last couple of years. Many of the deposits we've been talking about are 30–40% HREEs. That leaves a substantial quantity of LREEs that will have to be gotten rid of. Neodymium is easy to sell because there's a demand. But the deposits will also produce substantial quantities of lanthanum and cerium, which are not in short supply at all.

A couple of recently announced deposits contain ore that more than 90% HREEs. If these get to production, they will be producing exactly what the marketplace wants and none of the stuff that's in oversupply.

For example, Namibia Rare Earths Inc. (NRE:TSX, NMREF:OTCQX) has a small NI-43-101-compliant resource in Namibia: Measured and Indicated and Inferred of about 2 million tons of a nice, HREE-rich deposit. The company is well financed, with something like $20M in the bank.

TMR: What did you make of Namibia's recent metallurgical tests?

AK: Namibia's mineral is called xenotime, a fairly heavy mineral that has the potential to be concentrated by gravity methods. Namibia also has some carbonate in its ore that can be removed by acid dissolution.

TMR: Could the fact that it's in Namibia be its biggest advantage?

AK: I would suspect the company won't have as many environmental hoops to jump through and that labor could be less expensive. Compared to the long lead times and permitting processes in North America, that can't hurt.

TMR: What do you know about Pro-Or Inc.'s (POI:TSX.V) chlorinator recovery technology?

AK: Right now, Pro-Or is targeting the platinum group elements. There is nothing to suggest the company is looking at the rare earth side, but certainly any new recovery technique is worth looking into.

TMR: Do you have a parting thought or two for our readers?

AK: There is very little news in the REE sector now because everybody's doing their metallurgical testing, their optimization. It's not a very exciting time in the rare earth space because there's not much exploration. Companies are hunkered down to boost the value of their products and lower their capital costs.

In the next six months, I expect to see a real shakeout as companies release amended PEAs, prefeasibility studies and feasibility studies across the REE space. That is when smart investors will be able to look at the numbers and pick out the winners. At these depressed prices, there will be substantial profit potential when the winners and losers emerge. This is a good time to keep your eyes open and sharpen your pencil to crunch some numbers.

TMR: Alex, thank you for your time and your insights.

Geologist Alex Knox has been involved in the mineral exploration industry since 1970. He served in the mineral exploration division at Unocal Canada Ltd., the exploration arm of Molycorp, where he was involved in the discovery of the Kipawa deposit in western Quebec. Knox has explored for uranium, gold, rare earths, niobium, diamonds, slate and limestone in Canada, the U.S., Mongolia, Bolivia, Peru and Argentina. Highlights include Matamec's Kipawa deposit, Commerce Resources' Eldor and Blue River properties and Quantum Rare Metal's Elk Creek deposit. Knox is on the REE Advisory Board of three publicly traded Canadian junior mineral exploration companies.

Low gold miner M&A shows signs of missed opportunity
M&A in the gold space has fallen significantly in the first half of this year but some believe that now is the time to be buying.

Author: Alex Williams
Posted: Tuesday , 16 Jul 2013

Mining executives seem to be in consensus that it is now cheaper to buy gold production than to build it. “It's an ideal market to pick assets up and build a mid-tier gold company,” said John McGloin, chairman of Amara Mining, following the publication of a feasibility study for its Baomahun project in Sierra Leone.
The sentiment has been repeated by many, but more often as an excuse for not building production, or for slashing exploration budgets, than for making acquisitions. Mergers and acquisitions have slackened to a painful degree: according to accountancy firm KPMG, mining deal flow in the first quarter of 2013 totalled $15bn (including streaming agreements and asset sales), versus $90bn in the first quarter of last year.
In situ valuations are meanwhile at marked lows. Australia's Newcrest, which has reserves of 87m gold ounces, trades at less than $96 per ounce. Barrick Gold, the world's largest gold miner by output, has reserves of 140m gold ounces and a market capitalisation below $15bn, leaving it on a similar ratio.
In the pre-production space, discounts are even steeper. ASX-listed gold explorer ABM Resources, which is valued at A$95m ($85m), sits on 3.5m ounces in Australia's Northern Territory, giving it an in situ valuation of $24 per ounce. ASX-peer Papillon Resources, which aims to advance its 3.1m ounce Fekola gold project in Mali, is valued at a slightly loftier A$287m ($260m).
"What happens with majors is they buy everything at the peak and sell it at the bottom,” said resources billionaire Lukas Lundin in a recent interview. “It happens over and over.” The herd mentality of corporates offers big rewards to those with the discipline to build up cash in rising markets, ready to deploy it when prices are cheapest, the restraint of the one being punitive without the conviction of the other.
Acquisitions in the gold mining market however this year over the $50m mark are few enough to mention. On Friday, Alamos Gold bid C$69m ($66m) for Toronto-listed peer Esperanza Resources, which boasts 1.5m gold ounces in Mexico, plus 16m ounces of silver. Earlier this year, Alamos was outbid for Quebec-focused Aurizon Mines by USlisted Hecla Mining, which paid roughly $750m in cash and shares.
Agnico-Eagle Mines has meanwhile followed a so-called “toehold” buying strategy, spending $66m on close to 10% equity stakes in ATAC Resources, Sulliden Gold, Kootenay Silver and Probe Mines. “We actually see this as a time where we should be active,” Agnico's president Sean Boyd said. “Opportunities are presenting themselves to us.”
Alamos' acquisition of Esperanza seems equally opportunistic. Whilst its friendly offer of C$0.85 per share is a 38% premium to its prior price, it is a 37% discount to the level of shares at the beginning of the year. “We have followed Esperanza's progress for some time,” said Alamos chief executive John McCluskey, “and see this as a truly compelling opportunity for our shareholders.” Pending closure, the deal is expected to add 100,000 ounces per annum to production at Alamos, with all-in sustaining costs below $900 per ounce.
Agnico, Alamos and Hecla are therefore amongst a small number of companies to date who have sought to capitalise on weak gold mining markets, rather than suffer by them. London-listed Randgold Resources' chief executive Mark Bristow has likewise been quoted as saying that those who buy into the current environment will emerge as the cycle's winners: in Mali, Randgold has struck an earn-in agreement with privately-owned Taurus Gold, following a similar deal with Kilo Goldmines late last year in the Democratic Republic of Congo. That acquisitions should seize up when valuations are lowest is perverse but not surprising: equity and debt markets are cyclical and are the engines behind acquisitions, as well as production growth. Those companies that can buck the trend however, via internally financed growth, are those that stand to both buck the cycle and benefit from it.

South African gold output continues to fall – how much further?

South Africa’s vitally important minerals sector saw further production falls in May with the once dominant gold sector declining by a further 14.6% year on year.

Author: Lawrence Williams
Posted: Friday , 12 Jul 2013 

How the mighty have fallen!  Not so long ago South Africa dominated global gold output with the rest coming nowhere in comparison, but the country’s gold output has been on the decline since the 1970s.   
It fell to fifth largest gold producer in 2012 when it was overtaken by Russia and on the latest output  figures the country has drifted downwards towards being now only the world’s sixth largest gold producer, having been overtaken by Peru as well – however that is on production so far this year.
In yesterday’s publication of minerals output and revenues, Statistics South Africa noted that the country’s gold output fell again in May commenting that  its ‘overall mining production decreased by 0.7% year-on-year in May.The largest negative growth rates were recorded  for ‘other’ metallic minerals (-32.3%), diamonds (-19.7%) and gold (-14,6%). The main contributor to the 0.7% decrease was gold (contributing -2.4 percentage points). Manganese ore (contributing 1.5 percentage points) was a significant positive contributor.’
But will there be any recovery in South African gold production ahead?  The short answer is that, barring a huge gold price increase, the country’s gold output will likely continue to decline at a rapid rate. 
South Africa has some of the world’s highest cost producing gold mines – a recent estimate has suggested that at current gold prices around half the industry is operating at a loss – and this would suggest that gold production could continue to decrease at an escalating rate as companies will no longer be able to afford to keep unprofitable mines and shafts open. 
Add to this the pressures on the companies from massive wage demands brought on by mining union competition for membership between the NUM and AMCU, and this is a recipe for the potential annihilation of the country’s gold mining sector in its current form. 
Some of the production fall may be mitigated, though, by selective mining of higher grade ore to try and maintain profitability at the expense of mine longevity.
South Africa’s gold sector though is not the only part of the country’s vitally important mining industry to be affected.  The platinum miners are facing many of the same problems as the gold sector although this year’s figures may end up being a little better than in 2012 given the levels of labour disruption that year.
South Africa’s gold sales have now for some time lost their dominant position in terms of revenue.  The country’s No.1 revenue earner nowadays, according to Statistics South Africa, is coal, followed by platinum group metals with gold languishing in third place – and could even be knocked into fourth place by iron ore sales if the production decline continues. 
The relative figures in terms of  unadjusted sales in April – the latest available – according to Statistics South Africa  are as follows:
Metal Mineral Sales Value (million ZAR) Sales Value (million US$) 
Coal8 506.6847.1
Platinum Group5 612.6558.9
Gold4 877.6485.6
Iron Ore4 875.3485.4
Between them these four accounted for almost 80% of the total value of South African metals and minerals sales in April. 
The South African government has to be particularly concerned about the fall off in the volume and value of the minerals produced, particularly with regard to gold and pgms, given that it is very much a resource economy and heavily dependent on the sector for its export earnings.  Both the gold and platinum sectors are in crisis and with the mining unions set on what the industry will see as untenable demands and prone to unacceptable militancy and inter-union rivalries, things may well get worse before they get better.

Throwing out bubble parasites - Junior survival series part I
In the first of a series of interviews about the sorry state of the junior market, Stan Bharti lays out his view on how bad things are.
Author: Kip Keen
Posted: Friday , 05 Jul 2013

How bad is it for the resource sector, juniors especially? How do the ongoing troubles for juniors - such as a moribund financing market forcing many against the wall - compare to those experienced in past down cycles? And how is this deepening rut going to shake out?
This is the basic line of questioning Mineweb's Kip Keen put to a range of industry leaders, with a focus on juniors, who have been through at least a couple downturns in the mining industry. They are to be published in no particular order in the coming week.
We begin with Stan Bharti, head of Forbes & Manhattan, which has incubated many juniors over the years. After that we will hear from the likes of Lukas Lundin, Chairman of the Lundin Group, Doug Eaton, who has long been at the forefront of Yukon exploration with Archer, Cathro & Associates, Brent Cook, of Exploration Insights, Bob Quartermain, president and CEO of Pretium Resources, among others who have scars from past downturns and valuable insight into now unfolding events.
Opinions vary. There is optimism and dejection. Hope that the market turns soon, fear that it will be years before it does. There are thoughts on changes evident within the funding landscape. There is criticism - lots of this - but also advice. This roundup on the state of the junior market is, as much as anything, about survival. Past and now present.
Stan Bharti, Chairman, Forbes & Manhattan
Kip Keen: What's your view of the downturn juniors are facing, which for some, in terms of lack of financing, started almost two years ago? How does what's going on now compare to cycles you've seen in the past?
Stan Bharti:  First of all let me put the whole thing in perspective. We've had, since 2002, even with the correction in 2008, one of the best bull markets I've ever seen in commodities that in my mind lasted up to the fall of last year. It wasn't two years ago. I mean the fall of last year things got really tough. Before that the market was fine.
So, 10 years of one of the best bull markets we've ever seen and the highest metal prices on record. Copper has never been to $4 a pound - ever. Nickel has never been to $20 a pound - ever. Oil, $100, $140 a barrel: those are phenomenal prices. And even if you look at gold. There has been a correction in the last week, but really gold was $1,400, $1,500 an ounce just two weeks or so ago.
So we've had a very good market reflected in both commodities and in the stock prices. If you go back historically the last bull cycle we saw, the real bull cycle, was '65 to 1981. And at that time there was - there still is - the Barron's gold mining index. BMGI. If you follow that '74 to '76 there was a huge correction in the market and then in '77 we had the next leg of the bull cycle which took gold to $1,000 an ounce. At that time copper was $1 a pound. Oil was $40 a barrel.
So what we're seeing is a correction - a fairly severe one - in a very strong bull market in commodities. Now, why do I say there is a very strong bull market in commodities? Because the prices of commodities haven't come off. I know the price of gold dropped from $1,500 to $1,250 or so but in big picture terms that's a very small correction. When you think of it, we were at $270 gold in 2002 and we went all the way to almost $2,000. And if you look at copper it's still over $3. That's still a phenomenal price for copper. Nickel is a little low, but it's still $6 a pound and oil is very strong. So, what I'm saying is commodity prices have not come off, which tells me that demand is still strong.
What I think the problem and the challenge we've had is that a lot of the junior companies were too speculative and so a lot of the money went into these speculative things that have not delivered. That's the problem.
But back to the cycles in the past. Basically '81 to '94 were ugly times. Ugly times. Every day when I was working at Falconbridge I had a meeting in the morning and I'd ask my team, “How are we going to improve productivity?” And the only way you can improve it is by cutting people. Nickel went from $3 in 1980 to a $1.44 and copper went from $1 to 60 cents. So every mine was teetering and having a tough time.
And then we had sort of a mini bull market 94 to 97 when gold went to $425 an ounce.
KK: We also had major discoveries in the 1990s, like Voisey's in Labrador.
SB: Yes, and there was the Arequipa discovery in Peru that Barrick bought. There was obviously the Bre-X scandal, that was also seen as a big discovery (which turned out to be a massive fraud). But also the price of gold upticked. Barrick went to almost $40 a share. Gold indices in the mid nineties were higher then they were today. Then of course by the mid nineties, 97, gold went through another correction.
In my mind the worst year was '99, 2000 for the resource sector. Because in those two years oil was at $8 a barrel. Copper went to below a dollar a pound. Gold went under $300 an ounce. Uranium was at $8 a pound. Iron ore prices were in the doldrums. They were sitting at like $30-$40-$50-$60 a tonne. It was a very tough time.
And this is most interesting. Almost all the big analysts kept saying the bull cycle is over in commodities. It's never coming back. This is it. We don't need gold anymore. We can recreate the value of gold through a basket of commodities. I believe that's not correct.
I see the same trend now. Gold is down. Guess what, next year every analyst has negative forecast for gold. So instead of thinking outside of the box, with all the brain power we have on Bay Street, Wall Street, we tend to think with a herd mentality. And I think when everything's down, they think, “It can only get worse.” When everything's up, “It can only go higher.” And I think we're going through a healthy correction. Very tough one for the junior sector. But a healthy correction.
I think it's going to throw out some of the companies that lived on the speculative bubble without having real assets. Unfortunately there are many junior companies that don't have great assets that really just rode the boom in the commodity cycle. And the fundamentals were just not there. Those are the companies that are going to suffer.
KK: Do you see say half or so of the juniors on the TSX Venture - some 1,800 all told - disappearing or crawling back into a shell of some sort?
SB: Listen, I don't have the numbers. But I can tell you what happened in '99 or 2000. A lot of the juniors basically disappeared or got into technology
At Forbes & Manhattan we always tell people, find good assets in emerging markets so you don't overpay for them. I mean any fool can go and pay a billion dollars and buy a world class asset. But then your rate of return is going to be limited. So our strength has been finding good undervalued assets that people may not see the value in and then over three to five years turning them around, putting in capital and a good management team.
So our juniors are always on a three to five year plan.
There's a quick flip mentality in some juniors. As in, “I'll find this little property and the stock will go higher and I'll sell it.” That is not real. It doesn't happen. It becomes speculative. And unfortunately a lot of that money went behind that speculation and is now frustrated.
The other thing we've got is that the hedge fund industry has really not recovered since 2008. It has really been devastated. If you look at redemptions and returns for the funds in Canada, the returns have been mostly negative in Canada. So it's very difficult for these guys to raise more capital. It's very difficult for these guys when they get redemptions to finance junior companies.
So what's the answer here again? It's a challenge for people like us to find new sources of capital. What are the new sources of capital? Lots of new money in Russia. Lots of money in the Middle East. Lots of money in China. Lots of money in India. Lots of money in Brazil. That's where we're going for our capital now. Right?
Traditional funds in Toronto and to some extent New York have disappeared but there's lots of money there. Private equity money is there. Individual private family wealth is there, but they need more work. You've got to have real assets. You've got to have real companies with good management teams. Then the capital comes. But it's a lot more work.
We got spoilt, don't forget, from 2005 to 2008 when you could lift the phone and get a bought deal in two minutes.
KK: Financing has dried up for early stage explorers. But there is value there, obviously, because sometimes the speculative money leads to an important economic deposit. Most of the time it doesn't work. These days, however, money has really dried up for early stage exploration. Do you see that continuing for some time or do you see higher risk money coming back? Is that game up?
SB: It's up until a couple really good discoveries. What we need are some genuine, real big discoveries. If you look over the last four or five years a lot of the operations that have done well are existing old mines.
Take our track record. Where have we made most of our money? Desert Sun. It was an existing mine in Brazil. Avion. Existing mine in Mali. Consolidated Thompson. Existing deposit in a well known camp.
So we haven't had the Voisey Bay, kind of big discoveries that we had in the mid 1990s that really helped the market. That's one thing. We need those discoveries. So we need to convince the market that all this exploration there's some results and the results are real.
And the second thing is, I think the speculative money will come back. But it's gonna take another six months to a year. I think there's a cleansing that's going on. After it the money will come back. Because listen, in a bull market in commodities such as we're seeing now, the opportunity to invest at very low level and see a 5x, 10x return - there's no other place where you can do that.
KK: Is Forbes & Manhattan focused on finding new money?
SB: Right now where we're spending most of our time is Russia. Moscow. Beijing. Middle East. London.
In the nineties, two thirds of the world's resource financings were done on the TSX. Now it's one third. Still the number one spot. But London has taken over a lot of that. Why is that? Because a lot of new money, the Nouveau Riche, are moving to London. Almost all the Russian oligarchs are now in London. The Chinese are now in London. The Middle East has always been there. The new Africa money is coming. All of that, the focal point is almost always London.
And China. Everyone talks about the downturn in China. But more new millionaires are being created in China than anywhere else. And these guys are sitting on trapped money. And they understand resources. They understand gold. So we set up mechanisms for the individual Chinese high worth investors to invest with us.
It's a very different focus.
KK: Do you see emerging markets investors - the new high worth individuals - as interested moreso in production, near term production or earlier stage projects.
SB: Well, listen it always starts with the majors, the lower risk, and then obviously near-term production. But eventually as those get more expensive it moves down to a lower tier. So my crystal ball tells me we'll see a big turn in the market in 2014, late 2013. A big upturn in the market. I'm talking commodities now.
First, money is going to go to seniors. But eventually it's going to trickle down to junior producers and eventually exploration companies. But listen, speculative exploration companies are always going to be a challenge. Because a lot of money was thrown at them and they did not deliver in terms of new discoveries.
This interview has been edited and condensed.

Persistence, profit and surprising ideas - Junior survival series part 2
Doug Eaton tells Mineweb that the downturns have been some of the mining sector’s most productive, most profitable periods, but you have to keep your optimism and your enthusiasm up.
Author: Kip Keen
Posted: Monday , 08 Jul 2013

Here in second installation of our junior survival series Mineweb's Kip Keen speaks with Yukon geologist Doug Eaton, who has been a principal with consultants Archer, Cathro & Associates since 1981 and is also president and CEO of a couple junior explorers, Silver Range Resources and Strategic Metals.
Kip Keen: We're talking with people who have been through past downturns, for example the terrible years juniors had in the late 1990s and early 2000s. What's your view of how the current downturn compares to previous ones?
Doug Eaton: I've been around long enough - unfortunately - to have been through a bunch of them. Or fortunately maybe. There was a very bad downturn in the early '70s. That was largely related to oil pricing, the Vietnam war and a bad recession that hit the American economy. Then there was a terrible recession in the 80s that in some ways was deeper and more frightening than this one. Inflation went out of control and that's when gold and silver spiked. More geologists left the industry at that time than in any of the other downturns - and they never came back.
What brought the industry back at the time were the flow through years in the mid 1980s (Canadian tax benefits on investment in mineral exploration), a boom that ended around 1988  with a lot of similarities to the current downturn. About halfway through 1988 a lot of investors realized they weren't getting liquidity. It was easy to buy stock to get the tax credits but there was no liquidity to be able to sell them, to get your capital back.
KK: The '87 crash didn't help things either, I don't suppose.
DE: No. But ironically it seemed to be more fuelled by lack of liquidity. There was a general malaise that settled in and lasted into the early '90s. Really what pulled us out was the nickel discoveries in Labrador (Voisey's). And Bre-X, unfortunately, and other gold promotions got everybody excited. We really paid the penalty for it (Bre-X fraud) with the downturn in the late '90s and into the early 2000s, which coincided with the incredible bubble in the Tech side.
KK: Terrible metals prices, too.
DE: So, the lack of liquidity now is very reminiscent of what happened at the end of the flow through years. And I would say the current love of investors for dividend paying stocks, has some similarity to the preoccupation with tech stocks that occurred in the late '90s and early 2000s. But the difference is: that was driven by optimism and this is driven by cynicism or fear.
So each crisis had its own drivers. Right now, clearly no one knows which way to go. Everybody's looking at the economy and government debt, saying “There's got to be inflation. There's got to be inflation.” But at the same time people aren't putting their bet on inflation. They're going for safe stocks, or what they perceive as safe stocks, that are going to pay them a good yield. They're not going into things like gold which would normally be a safe haven if you thought it was going to happen, largely because, as hard as the governments are trying to inflate things, it's not working.
KK: Stagnation is the word.
DE: Yes. It's very close to stagnation. They're pumping money into the economy which is supposed to have a multiplier effect as it works its way through the system. But it's not working. It's stopping in the financial system. And companies are hoarding there money, saying, “We're going to hold onto this cash because we don't know when the other shoe is going to fall.” They're not going to put it back in the economy again, hire extra workers or make investments in new equipment or whatever would drive the economy.
The financial sector is doing the same thing, saying, “We're going to play options and derivatives.” All sorts of things that aren't really making investments in the economy. It doesn't filter down to the practical level where real businesses are putting people's feet on the ground and getting things done.
KK: How bad is it for juniors right now?
It's dreadful. It's maybe not quite - not quite - down to the level of the early 2000s. And the only reason I would say it's not quite there yet is because there's enough fat in the system. There are enough companies with fairly good projects that went out and did fairly sizeable financings. So there is some money in the system. But obviously those companies that weren't able to finance, they're on death's door in most cases. Very desperate.
And the companies that have sizeable treasuries are being very cautious about whether or not to spend their money. But they're also looking for opportunities that can be accretive to them: the kind of things majors are often accused of, of being very predatory and picking up projects that are really undervalued, where there are ounces in the ground, pounds of metal in the ground, that are already defined. Very low risk stuff. You can buy them at major discounts to what's been spent to find them.
KK: Do you expect to see consolidation, spurred perhaps by cash considerations?
DE: I think you'll see it. Certainly it's something all the companies are going to have to look at to survive, especially if this goes on for more than another year.
And frankly it's hard to know what will break this cycle. It's going to have to take much stronger growth in multiple economies than is currently contemplated. Or something blows up that drives inflation and everybody says, “I've got to own gold.” Those are the only two things I can see turning it around quickly.
KK: I suppose it's hard to see discovery turning it around as major finds haven't been happening.
DE: The funny thing is in the past major discoveries like Voisey's Bay caught everybody's attention. Now it seems when the best discoveries are thrown out there, they're largely dismissed.
What I'm hoping is going to turn this around, eventually, is steady work where you get some of the more serious investors looking ahead and coming back to companies and saying: “Look that group has put together a really good story and in three or four years - it's going to take them that long to go through the exploration and development and planning stages to get a mine ready to go - but in three or four years, about the time things look really rosy again, they're going to be coming into production.” Those are the projects I'm hoping are going to pull us out of it.
The resources are still being depleted. Mines are still running out of ore. And there's shortfalls predicted in specific metals. So once you start seeing major M&A - not just desperation moves but deals where there's actually a bit of a premium - that's when I think this thing is going to turn around. But until the economies grow to a point where much higher demand is predicted or that attrition occurs within existing deposits, we're too close to balance, unfortunately, in terms of supply and demand.
KK: In describing juniors these days, a lot of people are turning to evolutionary terminology: extinction events, survival of the fittest and so forth. Appropriate?
DE. I genuinely believe the winners in this cycle are going to be people that are lucky enough to have good treasuries or wise enough to have strong treasuries. There are going to be groups that have got the experience to be flexible and recognize the opportunities that are there and capitalize on them when they occur. The winners in this cycle will be teams capable of taking projects from exploration to production. And not just to early stage feasibility where a project becomes attractive as a takeover. But winning teams will put projects into production and build midtier, or smaller mining companies. I just don't see the majors having enough appetite.
First of all there aren't enough majors left. And secondly they have to have world class deposits. There's been so much amalgamation at the top end that the only projects that make sense to majors are absolutely enormous projects.
In this, there's a real opportunity here for mid-range producers to develop, something that we haven't seen since the consolidation in the early eighties. Look back to 1982, '83, '84: More large companies left the sector than you imagine. There were mining companies merged with other mining companies. There were industrial companies that were worried about insuring they had a supply of a key resource. There were oil companies that saw great potential in mineral exploration. And coming out the backend of that downturn they all left the field.
KK: Right, when the likes of Shell, BP, had mineral exploration departments.
DE: Yes, yes. They all left and never came back. And think of all the mining companies that got merged to form the supergiants you have today. All the mid tier companies got wiped out. They were gradually merged to form larger companies and the large companies were combined to form giants. So a little bit of that has happened in the gold sector, but it really isn't there in other metals to any great degree.
Likewise, I just don't believe the majors have got the will right now to develop projects. They're going to see it is easier to buy projects that are in production than develop them. And they don't want the hassle. They've seen the situations where the locals say at the last minute “No, No. We don't want a mine at any cost.” Or they see a change in the taxation regime as a project looks like it is getting close to production; or environmental issues. They don't want those risks. They want it up and running, to know it will make money before they acquire it. That's my guess.
KK: How quiet is it up in the Yukon these days?
DE: We're still busier than most jurisdictions on balance. It's down notably from what it was. It's about a quarter of what it was at the peak. But then at the peak it was probably 50 percent busier than it ever was in history. I would describe it as quiet. You're getting very good value for your money. Everybody has sharpened their pencils. You can get services you need. Analyses are coming in as soon as samples come to site. All the contractors are very competitive in their pricing. There are some good sized projects that are still pretty active. But as always happens in these cycles, the serious money is going into the most advanced projects, the ones closer to development. The grass roots stuff just withers on the vine.
KK: Pity that, at a time with falling ore grades when early stage exploration is more crucial than ever.
DE: Yes. The funny thing is, we're still doing some of that. What would happen two years ago was that prospecting discoveries would be immediately advanced to the drill stage. There'd be holes put in it before the geology was properly mapped and things were systematically explored. But now we're taking advantage of the availability of really good people and also slightly cheaper pricing for analyses and things like helicopters, to get out there and fill those gaps in our knowledge on the best of the targets.
It's nice to be able to get back and do it. It's a very necessary step for a lot of the geos, because so many of them graduated and went straight out to drill programs. They missed that early stage evaluation that's really critical long term to their careers. I think it's probably healthy for the industry.
KK: A lot of exploration data and targets were developed during the recent boom years, 2005-2008, 2010-2011. As you say, the data may not have been properly assessed.
DE: Absolutely
KK: Now teams, looking back, may come up with some surprising ideas.
DE: I believe that's absolutely correct. For years and years and years we've made our mark by just doing research and acquiring projects. And some of them are new discoveries. But a lot of them are projects that other good groups had advanced to a point and either the group itself was disbanded because the company changed it's direction or there was a lot of information that was generated and because everyone was so busy it got delegated to people with too little experience that a lot of it wasn't appreciated for what it was.
We often go back in our research to 1982, because there was all that work done by all those companies. It stopped cold in '82 and most of those projects never got another lick of work and the claims lapsed. The flow through years were also a time when tonnes and tonnes of information was generated. But it all came to a stop before it was properly assessed.
Each cycle creates great opportunity. Fortunately as an industry, and as a group, we've always stuck it out through those periods. And the downturns have been some of the most productive, most profitable periods for us in terms of getting ready for the next cycle. But you have to keep your optimism and your enthusiasm up and be aggressive. Because if you completely sit back on your laurels and say, “I'll wait for it to turn around”, you're going to be competing for the same good projects with everybody else when it turns.
This interview has been edited and condensed.
Also see: Part I of the junior surival series with Forbes & Manhattan Chairman Stan Bharti: Throwing out bubble parasites

Lundin chairman calls bottom - Junior survival series part III
Lukas Lundin shows optimism - a rare thing these days - about the prospects for the resource sector. Juniors, though, still need to hold tight.
Author: Kip Keen
Posted: Tuesday , 09 Jul 2013
In the third part of our junior survival series, Mineweb's Kip Keen speaks with Lundin Group Chairman Lukas Lundin. For the first two parts of the series see links at the end of the interview. 
Kip Keen: It's not been great for juniors over the past year or so. I want to get your sense of how bad things are for juniors and where you think this downturn in juniors is going. In context of past downturns, how bad is this?
Lukas Lundin: The 2008 crash was just a bounce. It just went up and down. This time it's been so tough. It's been slow for two years now. What happened is the money is getting out of resources and is going into other stuff. Look at Proctor & Gamble and IBM - they're almost double in the last 18 months. So there's less money available for resources.
But, you know, everybody's complaining about the gold price (which had dipped below $1,200 near the time of the interview). But at $1,200 an ounce two years ago we were very excited. In that context gold miners have been a little mismanaged. They've been managed on growth of production, not quality of assets.
KK: Investors were looking for great margins but those margins disapeared and investors got burned.
LL: Yes. They disappear when costs go up with less quality assets put on stream and with leverage full of debt. But, you know, in general the prices are not that bad. Copper is $3. Nickel and zinc are a bit in the dumps. Met coal is in oversupply right now. Just a bit tough. But I think resources have been way oversold. You see this in the last week or so. The majors are moving a bit forward. You saw BHP, Rio up three or four percent (on Thursday, July 4).
My feeling is we've seen the bottom. I don't think the juniors will come out of it until we see more money going into the bigger cap companies. And that's going to take some time.
Everybody says it's going to last forever. Nothing lasts forever. I think we're at the bottom of it. I'm pretty optimistic we're going to see some more colour in the fall. It's going to be a bit better. But the big ones come back first, and the midcaps too. Then the money, maybe, flows back to the junior market, which is very, very dead. If you don't have a good management team and you're not well financed, you're non-existent. That can turn very quickly, though. When the money comes back to the market it has an amazing ability to revive companies very quickly.
KK: As you point out, one of the big differences in this downturn are the metals prices, which have remained fairly robust. Whereas in some of the past downturns, such as the early '80s, and late '90s falling metals prices preceded stampedes out of juniors. Not this time.
LL: No. And I think it would be very hard to be below $3 copper. And with all these cutbacks by the seniors; first they want to invest; and suddenly, now, they don't want to invest. And they're very scared about rate of return. It's going to have a severe effect on the metal price. I can't say when, but in the next 20, 30, 40 months it will, I would think. If you look at a short copper graph, it looks like it has been way oversold and they're going to have to come back in the market again. So I'm pretty optimistic, actually.
It creates opportunities. For Lundin Mining we were able to buy the Eagle Mine from Rio, on which they spent 10 years and $600 million, and we paid about $300 million.
KK: It's one of the recurring themes in these conversations about downturns: how they create opportunities. Meantime, some would suggest around half the juniors on the TSX-V are going to disappear. What do you think?
LL: It's quite possible. But maybe that's good.
KK: That's a recurring comment as well, that companies without great assets will get shaken out. Do you think smarter teams might make something of projects where others might have missed something? Through the recent boom years, a lot of exploration data and anomalies have been generated, if not major discoveries.
LL: Some of the stuff is not bad. There's an opportunity to build on some of this drilling, for sure. But you know right now it's not a good market for grass roots or even advanced stage exploration projects. Everybody's too scared to put all these things into production. And no majors will put them into production when they cost $3 to $5 billion. Many of them are too scared of capital. Even NGQ (NGEx Resources/Lundin Group) has some great projects, but I can't see moving them in this market.
KK: In your comments earlier, you mentioned optimism. Others who watch the sector closely, however, have expressed a forboding sense that it might just be 1997 again and we might have five more long years ahead of us to slog through before a turn back up. That's not how you're seeing it.
LL: No. I don't think so.
KK: Is the world a different place for resources?
LL: Yes. The world is a different place for resources. Don't forget the whole world has grown. We really need these resources nowadays. It's a very different world. We're consuming in this part of the world. Europe is slugging through its problems. They will get through it. There's a German election in September and Merkel won't do too much until she gets re-elected. And the U.S. has done a major recovery. And India, China: They're not going to go anywhere.
KK: Are you becoming more aggressive looking for opportunities?
LL: Yes. We can take advantage of situations.
KK: Are you looking at advanced stage assets or exploration assets.
LL: We are looking at advanced stage assets in the gold business. But it's surprisingly hard to find anything that seems to make sense. It's quite difficult to find what we're looking for; what we like.
KK: So the economics don't make sense for you on a lot of the gold projects floating around out there.
LL: That's right.
KK: We need to find better deposits then.
LL: Find better deposits. I'm sure there's some around. We're still looking.
KK: In that sense exploration is in a conundrum. We need more exploration, discoveries, but there's no financing. Do juniors need to turn to alternative sources of financing, and if so what are those.
LL: There's really no alternative. If you can't raise money and you can't JV, you really have to be careful. A lot of people are raising $100,000 but that's just to keep the office open. It's not going to get you anywhere. They're just surviving month to month. It's tough. If you have a really good project, you can always find money.
KK: What about new sources of wealth in places like Russia and China.
LL: No. I don't see it. Trying to drag the money out of the Russians or Chinese, would take me 10 years.
KK: Too much hassle.
LL: Too much hassle. And, you know, there's always money available.
KK: Is the Lundin Group pulling back on costs as the downturn unfolds?
LL: No. We are full steam ahead and we are pretty lean as it is. The exploration budget for Lundin Mining is about $50 million a year. We are going to keep it there. Our budget for NGQ is about $20 million and we're going to keep it there.
KK: Any hope discoveries drive us out of this downturn with smarter management working on exploration projects, albeit with more meagre funds?
LL: Discovery would definitely help. But I'm not sure it can drive the market as strong as before. But if we had a discovery in some area for sure it would help quite a lot.
And, again, there's still money around. What happens now is you get very experienced teams that can raise money, but at a pretty cheap level. We've been backing people like that. Before it was very hard to back them because everybody wanted to give them money. Now not that many people want to give out money. So it's a good time to back people like that.
This interview has been edited and condensed.
Previous interviews in the junior survival series: 
Part I with Forbes & Manhattan Chairman Stan Bharti: Throwing out bubble parasites
Part II with Archer, Cathro & Associates' Doug Eaton: Persistence, profit and surprising ideas

Playing it like it was 1997 all over again - Junior survival series part IV
Brent Cook of Exploration Insights is pessimistic on juniors but still buying where he sees opportunity ahead of the turn - which could take years to come, he says.
Author: Kip Keen
Posted: Wednesday , 10 Jul 2013

In the fourth part of the junior survival series Mineweb's Kip Keen speaks with Brent Cook of Exploration Insights. Links to earlier interviews are below.
Kip Keen: What do you make of the tough times juniors are facing now in context of past downturns?
Brent Cook: I think the 2008 downturn was an anomaly in that the whole financial sector was crashed. The Fed decided to save the banks and we got to ride along with the easy money, the speculative money. That's what took the junior mining sector back up so quickly. So that's something we can't compare to today because we're the only ones in trouble now. And nobody cares about our sector.
This reminds me a lot more of the '97 to 2002 bust where there's money going elsewhere. In that case it was the Internet/tech bubble. This time it's going into the major markets and that sort of thing. And the problem we really face is that the people that got into the mining sector for the right reasons - being they felt the price of gold was going up and the price of copper was going up; the smart investors, the funds and such - have been burned badly because margins, which is what they're really looking for, didn't go up near as much as they should of gone. So these mining companies have really shot themselves in the foot. And I don't know where the new money is going to come back in. I think we're in for a long, slow stretch where mines go bust, companies go bust and the sector consolidates.
KK: We've been hearing a fair bit about potential consolidation. Do you see a spurt of mergers and acquisitions coming as valuations hit rock bottom?
BC: Some. I don't think we're going to see near as much as a lot of people think because the reality is there are very few quality assets out there and that's something that is hard to wrap your head around. People think, “Well, XYZ company has got three million ounces and it's only selling for $10 bucks an ounce.” But the reality is: on most of these ounces you're going to lose money when you factor in capex and such.
So right now the major mining companies are becoming introverted. And one, two, three years down the road a big realisation is going to come: that they do not have the resources and reserves to continue as a viable business. That's when we're going to see the very few quality deposits in junior companies acquired. That's the positive news to all this. After the dust settles, there's going to be a few companies out there that are going to be extremely valuable.
KK: So you're not optimistic about a bounce back in the next year or so?
BC: I don't see it. Really what we're talking about is the gold price. And I don't see a lot out there in the near term that's going to jack up the gold price really high. We have to look at the gold price getting up to $1,600, $1,700 to be really important. Anything can happen. I don't see it. I guess you never see those things.
KK: One of those things that seems different this time around is that metal prices are relatively healthy versus say the downturn during the late '90s and early 2000s when gold lost its lustre. I suppose the current lack of interest comes back to the difficulty miners have had in making profits with skimpy margins.
BC: Exactly. That's the problem we still face. Prices are higher. But so are costs. Your average all-in average sustaining cost for major miners in gold deposits is in the $1,300 to $1,600 an ounce range.
And the difference now is back in the late '90s and early 2000s there was a lot more of the world just opening up to modern exploration. So there were deposits sitting at surface that were much easier to find and put into production. Now we're having to look deeper.
On top of that there are all the problems that come with jurisdictions all over the world: environmental, NGOs, etc. This sort of thing is doubling the timeline to production to at least to five, ten or more years. If you can do it at all. All these things are building up to a crescendo. And so there's not going to be enough metal to meet supply.
Again, that's the positive here.
KK: Do you think that in the recent boom years too much speculative money went into poorly conceived early-stage exploration projects or advanced-stage projects with already dim prospects?
BC: Obviously both. Up to 2008 all this speculative money was pumped into the system and it went into anything and everything. I think you had a lot of people who didn't understand the industry throwing money at anyone who claimed to be able to find a deposit.
Certainly way too much money gets wasted on old dog projects. That's what the Vancouver exchange (TSX-V) survives on. That's a function of the way people operate. Put it this way: I can come to you with a project and say I've got this fantastic idea to spend a $1 million exploring virgin ground in call it Ecuador. And it's going to take me two years and at the end of that all I'll have is some targets ready to drill. Or I can come to you and say, “I've picked up this project that's been drilled by everybody. But there's some good holes in it. We can twin those holes, jack the price up, you can get off your paper, if you want, and you keep your warrant.”
Money is pissed away on both.
KK: Do you think the money will come back for early stage exploration? How do you see it playing out it in the months and years to come? Do you subscribe to an extinction model, a sort of clearing out of the field and then a return of the market. Or is the model we have now broken and beyond repair?
BC: This is a cyclical industry. The dumb money will come back. But right now I think we're going to see major extinction in the junior sector and for some of the mid-tier and majors as well. And there's going to be fewer and fewer discoveries. But the companies that survive, the companies that have enough cash to last, and do some significant work and are willing to take the time to do the proper exploration, geology, conceptualization: they're the ones that are going to do well. There's not many of them.
KK: Is it going to be as bad as the downturn that began in 1997 and lasted for several years? You mentioned earlier it felt a bit like that period.
BC: That's how I'm playing it. I think we'll see some short rallies. But they're not going to go very far. It looks tough.
KK: For readers that still want to walk in the minefield, how do they not get blown up? You're still active. Are you highly selective on companies with near term results which could hold promise so you don't get crushed by what may continue to be a slowly descending market? Or do you hold?
One thing I'm holding and buying: solid deposits and projects that are selling for significantly less than what a realistic valuation is, be that from my own work, or a feasibility study net-present-value calculated at a sensible metal price. We don't know when this is going to turn. So my view is I buy something for less than it's worth with the idea that I'll be able to buy it for a third less within a few months. That's how I'm doing it.
KK: What about early stage exploration, those juniors that are making last ditch exploration efforts as they're treasuries threaten to run out. Would you go near those right now?
BC: That's my favourite thing. That's what I really like, getting in for a drillhole, a drill discovery. I'm certainly watching a bunch. But there's not a lot out there.
KK: Financings have dried up, especially from funds and institutions in North America. Do juniors in North America have to turn to alternative sources of cash, perhaps in emerging markets, away from the Toronto institutions that have played such a key role in the industry over the past couple decades?
BC: You mean where are we going to find the next batch of fools? I don't know. I ran into this fellow recently. I was in a meeting with this fund and I went through how the business works - junior exploration. And the guy from Brazil said, “I'm not getting something here. You mean you give these guys money. They go spend it all. They don't find anything and then you give them more money? How does this work?” It's not a concept everybody gets.
KK: What about new sources of wealth, say in China and India where demand for gold is already strong; do you see them playing an increasing role in junior financing?
BC: You'd think so. I've been over there to some of those meetings and also in Dubai and the Emirates. It's kinda a feeding frenzy. The ones who have money show up or they send their representatives and there's all these money grubbers there trying to get their money. So it's kind of off-putting to see it happen. I haven't seen a lot of it. There's some for sure. But not as much as you'd think, money coming into the junior sector. They're very nervous about how aggressive people are seeking them out. That's what I've noticed anyway.
This interview has been edited and condensed.
Previous interviews in the junior survival series:
Part I with Forbes & Manhattan Chairman Stan Bharti: Throwing out bubble parasites
Part II with Archer, Cathro & Associates' Doug Eaton: Persistence, profit and surprising ideas
Part III with Lukas Lundin, Chairman of the Lundin Group: Lundin chairman calls bottom