According to Matt Badiali, editor of S&A Oil Report, prospect generators represent the best opportunities in the mining sector. Instead of being cash-burning machines that dilute shareholder equity, they put up the initial investment on a property, "do the science," and then turn it over to a partner who puts up the money to drill the projects. He calls the power of the prospect-generating model "astonishing," and names some companies that he considers top-flight in the sector.
The Gold Report: Matt, even though you are the Editor of S&A Oil Report, you have said that as a geologist, you focus on other natural resources as well, including gold, silver, uranium, copper, natural gas, and water. Can you give us some insights into some of your favorites in the mining sector?
Matt Badiali: Right now juniors are my favorite group of the mining companies, and there are a couple of groups that I really like that have projects that are near-term, so a big mining company can swoop in and basically build the mine and start producing pretty quickly.
There have been about $3 to $4 billion raised in equity over the past couple of months among the big mining companies, and that to me is an astonishing amount. This is money that mining companies could not have borrowed; they couldn’t have gone to a bank and said, “I’d like to borrow a billion dollars to build a mine in Chile.” The bank would have said to them, “What are the risks? Go see somebody else.” So they went to the market, and the market said, “Sure. You’re going to build a gold mine? Here’s $4 billion.”
That’s pretty amazing. So, now they have cash, and it’s basically burning a hole in their pocket, and they’re looking around for something to do with it. And I think that the smart companies, the big companies, are going to look for projects that they can build that are actually 12 to 18 months away from pouring gold. And there are a couple in Africa that are interesting.
One is a company called Centamin Egypt Ltd. (CELTF.PK), which is in partnership with the Egyptian government. This is a beautiful giant gold mine. I have been following these guys for several years now because the story is so great. The geologist actually used a map from the Pharaohs to find this. And what’s even better, the project just keeps getting bigger and bigger.
Another one that I’m following is Eurasian Minerals Inc.; it’s a tiny, tiny little company. They have a project in Haiti, which is an astonishing place. I think the United Nations was there in the '70s and found all kinds of minerals. And then there was a coup, and a bunch of people were killed, and the UN left. Then, Newmont Mining Corp. (NEM) came in and they explored, and then there was another coup, and they killed a bunch of people, and Newmont left.
And nobody has been back, but this little company, Eurasian Minerals, went back. They hired the economic geology professor from the University of Port-au-Prince, a world-renowned authority on economic geology and on Haiti, and he brought his graduate students with him to work, and they made some tremendous discoveries. And Newmont agreed to partner up with this little tiny company. So, you have massive Newmont partnering up with this $23 million junior that’s listed on the Toronto Venture Exchange.
A gentleman named David Cole runs Eurasian Minerals. Cole worked for Newmont for years and years, and he knew he could do it better, and he is. And Newmont is now his partner down in Haiti. The business model is far different from your traditional junior mining company, because these guys do the groundwork. So, they go out and they do mapping, and they do fundamental geology—field sampling, staking the ground—which doesn’t cost a lot of money.
So, they’ll spend $500,000 to make a discovery, but there’s all these junior mining companies out there who are what we call drill bit plays who need a good project to raise money around, to put the drill in the ground. They want to sell the story to investors, and the odds of making a discovery that’s going to become a mine is about one in three thousand. Your odds of buying the next Barrick (ABX) in a drill bit play are really, really slim. So, what the prospect generators do is they make a discovery on the surface; they go into junior miners or in some cases they go into the majors, and they say, “Hey, look, this is the geology; this is the discovery; this is the geologic style. We’re looking for a partner to drill it.”
So, the partner company's role is they have to pay cash or shares to own half of the project, and then they have to fund the exploration work for the next couple of years. So for a prospect generator, he puts out $300,000 - $400,000 -$500,000 to make the initial discovery, and then does the science, basically. Then they turn it over to a partner who puts up the $1 million or $2 million a year to drill these projects for the chance to make a discovery.
It takes a lot of time to develop a project. So, for the prospect generators, the more they find of these projects and partner off, the more likely they are to make and participate in a big discovery.
TGR: Can you share with us the names of some other prospect generators you find interesting?
MB: Sure. Altius Minerals Corporation (ATUSF.PK) is the blueprint for the prospect-generating company. They invested $600,000 in a little uranium project that they joint-ventured with a partner. The partner made a massive discovery when they were drilling. Altius then liquidated its shares for $200 million. So they took a $600,000 investment and turned it into $200 million. That’s the power of the prospect-generating model. It’s astonishing.
Two other prospect generators I follow are Miranda Gold Corp. and Rimfire Minerals Corp. I spent several days in the field in Nevada with the Miranda team. They are among the finest geologists I've met. They don’t spend a lot of money keeping the lights on and they have just under $12 million in the bank. More importantly, CEO Ken Cunningham put together an experienced staff.
I traveled to Nevada because of the frequency of giant gold deposits all around Miranda's properties. This is a tiny company looking for elephants in elephant country. While I was there, the geologists showed me a conceptual model of a potential deposit on one of their projects. They showed me gravity surveys, a drill core, and assay results to support their hypothesis. They have the right people in the right area. One successful drill hole will make shareholders ten times their money, practically overnight.
Rimfire Minerals also follows the prospect generator model. (I need to disclose that I personally own shares of Rimfire.) Rimfire employs another fantastic group of exploration geologists. These are “boots on the ground” geologists. Teams are in the field looking for projects from scratch. That helps keep costs down and increases the company’s knowledge and understanding of the geology. That kind of preparation makes the projects highly desirable to partners.
Rimfire branched out into Australia while testing out a kind of “smart map.” A group of ex-Newmont geoscientists designed and developed a proprietary computerized exploration system, called a neural network. In simple terms this is many layers of geologic information—satellite imagery, land cover, geophysical data, geochemical data, and drilling information on one computerized map. Then, they used the computer to figure out what combination of data coincided with giant gold deposits.
Today, they are testing targets that the smart map found in the Lachlan Fold Belt of Australia. This is a prolific copper and gold region in New South Wales. It holds the Cadia Valley complex, which holds some 28.5 million ounces of gold and 3.8 million tons of copper.
The area holds giant deposit potential and Rimfire has a brand new technology to use there. That’s a popular technique in the oil industry—you bring new information to a proven oil region. As with Miranda, a multi-million ounce discovery would send Rimfire's shares into orbit.
In the last three years, Rimfire has spent more than $20 million on exploration—85% funded by its partners. That means for every dollar the company spent looking for gold it only used 15¢ of its own money. Over the life of the company, partners funded 84% of the exploration costs. That is the power of the joint venture model at work—funding exploration with other people's money. Today the company has 15 projects, 8 of which have partners working on them.
So, to contrast that to your standard junior mining company model, the junior miner has a project; they have something they want to drill. They have no income; they’re basically a cash-burning machine. These guys have to go out and raise more money to do the next round of drilling. The only thing they have to sell is part of your stake in the company. So, say their shares are 10 cents, they need to raise a million dollars, they have to double the amount of shares they have out. So your slice of the pie just got smaller by half. That’s the problem with being an early investor in these junior mining companies: you’re going to be diluted and diluted and diluted, as opposed to prospect generators, where they’re actually generating money. They’re not diluting their shareholders.
TGR: Any other comments on companies that you are following?
MB: I recently recommended a company called Northern Dynasty Minerals Ltd. (NAK). Northern Dynasty is a really interesting company because they’re one of the Hunter-Dickinson Group, and Hunter-Dickinson has this history of finding these projects, or buying these projects at an early stage, developing them, and selling them. And so the investors in Hunter-Dickinson projects often make 800% to 1500% on their investments.
And the interesting thing to me is these guys own half of the Pebble Project, which is a giant copper-gold project in Alaska, a mining friendly state. This is not up in the mountains far from anything. It is actually close to the tidewater, so it’s not going to be hard to build a road to get the ore out. And they have a partner that promised to spend $1.5 billion before Northern Dynasty has to spend another cent. Now, when I first started looking at Northern Dynasty, their share price was $4, and the market cap, I think, was $300 million, and they were going to own half an asset that another company had promised to spend $1.5 billion on. So, in terms of book value, the market said half of that project was worth the $750 million that the partnering company said it was worth. So these guys were going to own half of the cash spent on developing this project.
It looked like just an incredibly good opportunity for investors, and since then we bought it at $4, Northern Dynasty rode the rising gold price up to $7 and change recently. It’s come back down to $6.50 a share. So, we’ve already made pretty good money. But I still think that company’s going to be bought out at a premium, and we’re going to make at least double our money.
That’s one of several examples. I went out to visit another project in British Columbia, owned by Seabridge Gold Inc. (SA). They actually had a business model where they were buying gold projects that were not economic below $400/oz. gold, and they were willing to invest the time and money in pruning up a project and waiting for the price of gold to come up. Because that was always their thesis, that gold price had to come up.
And they were right in the gold price, and they were lucky in the projects. I think this was partly good geologic assessment and partly they really hit it big, but they have a project called Kerr-Sulphurets-Mitchell; they call it the KSM project. I’m a geologist by training, and from a geological perspective Mitchell is one of the coolest deposits I have ever visited because it was glaciated, and the glacier has retreated, but you haven’t had a chance for big trees to grow up and cover everything yet because the growing season up there is so short.
And so when you stand in the valley, you’re standing in the middle of a giant gold and copper deposit. It’s astonishing. I think they’ve come up with 30 million ounces of gold so far. It’s just an enormous deposit.
So, for me, for the investments that I’m looking at, these projects are interesting. I think there are some good values out there when you can get them very cheaply like we did with Northern Dynasty. But in terms of projects that are actually going to become a mine, I’m looking at smaller projects that have high grade, low infrastructure costs, and are going to be producing.
Another company I like is Royal Gold Inc. (RGLD), a fantastic company from an intellectual point of view because it’s basically a cash flow of gold from mine. This is a company where miners spend all the money; they blast the rock and muck it out. They run it through a big mill and crush it down into dust, and then they treat it with chemicals that pull out the gold. And when they go to pick up the gold from the smelters, there are the guys from Royal Gold with their hands out. And they have to give Royal Gold a percent or two of all of the gold that they just worked to get. Because Royal Gold is smart enough to go to mining companies when they’re desperate.
So, you’re a mining company, and your mine is almost built, and you just need that little extra $150 million or $300 million to get you over the hump, and you have nothing to sell but your own shares. And all you’ve done all along is sell shares and sell shares, and the market is finally looking at you with kind of a jaundice eye. “You’re going to come to us again and try to finance again?” And Royal Gold rolls up with a checkbook and says, “We’ll give you that money; you just have to agree to give us 2% or 3% of the gold that you make and 2% or 3% that you make on all the land that you own all around this mine.” And the mining companies say yes.
I love Royal Gold. But the great thing about Royal Gold is when you do a back-of-the-envelope calculation about how much gold they have rights to, you can value it using a combination of the share price and the price of gold. You can see when the market is really excited about gold, gold share prices go through the roof. They get a really high price for their gold, and then when the market sentiment is low on the gold price, then you see Royal Gold shares price fall. The amount of gold really doesn’t change that much, so it’s really a measure of sentiment.
In the last couple of weeks, Royal Gold prices soared up to $47 at one point, and came back down to under $40. And so it’s very easy to figure out what the fair price is to pay for Royal Gold shares and then to sell covered calls against it. I predicted to my readers we could make 88% this year doing nothing but selling short-term covered calls on Royal Gold because the market is so volatile right now.
TGR: Thanks Matt. This has been very insightful. Much appreciated.
Matt Badiali is the editor of the S&A Oil Report , a monthly investment advisory that focuses on natural resources—from small exploration outfits, to equipment companies, to the biggest commodity companies in the world. In Matt's own words, "as a geologist, I focus on all natural resources including silver, uranium, copper, natural gas, oil, water, and gold, just to name a few." He's also a regular contributor to Growth Stock Wire , a free pre-market briefing on the day's most profitable trading opportunities. Matt has real-world experience as a hydrologist, geologist, and a consultant to the oil industry and he holds a master's in geology from Florida Atlantic University.
Disclosure: Long Rimfire.