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