There are mines where silver is dug;
There are places where gold is refined.
We dig iron out of the ground
And melt copper out of stones.
Miners explore the deepest darkness.
They search the depths of the earth
And dig for rocks in the darkness.
(Book of Job 28: 1-3)
Gold is gold is gold. Queen of Sheba, Tutankhamun, Aztecs, Jason and the Golden Fleece. Not quite an ephemeral digital currency. The price of gold is climbing. Negative interest rates are becoming the norm. The general political hysteria, trade wars and Brexit might mean that you should go out and buy a blast-proof safe.
But be careful if you want to invest in gold exploration. Between 2006 and 2017 Richard Schodde in Australia estimated that gold explorers spent $60 billion. This unlocked only $30 billion dollars’ worth of gold. That is not a sustainable business. Is it an expensive hobby? Maybe there is opportunity here? To think in a different time frame and maybe create a new way to finance the search. To take even more risk in these times may be your best safe. Have you a knack for turning complexity, which others run away from, to advantage? A talent for seeing opportunity in periods of extreme volatility? This was the investment strategy of the billionaire Koch brothers. David recently died at the age of 79.
Maybe risk is like fire. Sometimes you have to fight fire with fire. To take more risk rather than less risk in times of greater volatility. For the first time the relationship between mineral exploration spending and discovery rates has broken down. This means exploration is even higher risk and discoveries are costing much more. But the price of gold and other metals reflects a general view that they are still renewable resources rather than metals that are scarce and finite.
In the just-flown May I gave a talk on the Future Financing of Exploration in the Norman city of Kilkenny. My talk was at the annual conference of the Irish Association of Economic Geology.https://irusconsulting.com/wp-content/uploads/2019/08/Future-Financing-of-Mineral-Exploration.pdf. I returned to Kilkenny again in July to hear Neil Young and Bob Dylan at Nolan Park. Heart of Gold: City of Gold
At best, retail investors in the Junior exploration space think in quarters. They struggle with the complexity of mineral exploration. They get distracted. In these periods of volatility it is easy to fidget. Some flock to weeds and digital units of exchange for quick gains. But these are the investors who dabble at the margins, that drive or stifle liquidity, set the share price and determine market valuations.
Metal prices need to be much higher to incentivize pure exploration. Just for global gold exploration to break even during the 2006 to 2017 period we would have needed a doubling in the average gold price during that time. This is critical for the long term to generate the big reward for the high risk of exploration. It is as simple as that. Without exploration and discovery we must turn to what is found but did not make the grade. Majors shun exploration. They buy each other in the delusion that they are finding more gold. At best they limit exploration to the safe harbour and the shadow of the head-frame. They do not venture out into the roiling seas. From 1998 until 2011 M&A was the 2nd largest source of gold reserve growth at 42 per cent, about the same as for brownfield exploration. Greenfield exploration accounted for only 15 per cent of reserve growth or 158 million ounces of gold. What an indictment of the industry?
It is false logic that exploration in far green fields is riskier than near-mines . Jon Hronskysays that many confuse certainty with risk. Certainty is how much we know. Risk is the likelihood of a positive return on an investment. As a project nears depletion we know more but exploration becomes riskier than in greenfield settings. The largest deposits in a camp are usually found early. They have the strongest geochemical and geophysical signatures. We need greenfield exploration to discover the high-option-value Tier one deposits.
“Only those who will risk going too far can possibly find out how far one can go.”– T.S. Eliot. History shows us that all great fortunes are based on taking risk. But it must be skin-in-the-game or risk to the promoter as much to the investor.
Juniors rely on small IPOs and private placements to fund drilling programmes. Junior exploration strategies are often idiosyncratic. Due diligence is as much about the people and track records as about geology and prospectivity. Often the more micro the Junior the more macro the ego.
Over the last five years Junior Exploration IPO’s have all but dried up. Only 40 IPOs raised US$389MM (average US$10 MM).Think of it this way. If you want the sea monster then you have to venture out from the harbour into the deeps. You need to have a much bigger boat and a much bigger net. You need to control the waters by staking large reconnaissance tracts of ground. It is a long way from the edge of the pier. In the relative shallows. In the small boat with a fishing rod quivering over the silvery schools of fish rippling the surface. You need a proper cash-stash. You need to pay your crew until you can find something you can sell. If you turn back half-way to the new fishing grounds then you have lost everything. You need to have a crew you can trust that has done it before and you need to share the plenty with your crew.
For a Junior start-up it is rare if there is more than three years and three rounds of equity risk-capital available. If a Junior does not find it in three years then it toast. This market for junior explorers requires quick input and result. There is no place for greenfield exploration. That is unless there is a convincing quick-step to discovery. It is no country for the retail investor. Strategic investment and private equity might have a little more patience. This focus on quick return does not lend itself to real exploration. To develop new ideas and build effective teams. To sustain the effort. To step closer to the doorway of discovery and up the steps of constructive failures.
The answer may lie in Sovereign wealth funds and the big end-users to provide pools of capital. Capital to divvy up across the Junior exploration investment-space. But it needs an expert group to winnow the wheat from the chaff. Jon Hronsky of Western Mining Services in Denver calls this filtering expert-group an Aggregator. To find out what an Aggregator is you will need to have a look at the slide-deck for the presentation I gave in Kilkenny – https://irusconsulting.com/wp-content/uploads/2019/08/Future-Financing-of-Mineral-Exploration.pdf
In my view Juniors explorers should know their business. They should be project generators for Tier I deposits. With focus on the early discovery-part of the project life-cycle. That is where discovery generates value the quickest with the least exposure. EMX-Royalty, Altius Strategies and Renaissance Gold are effective proponents of this strategy. If Juniors find small, even high-grade deposits then they will have to mine them on their own. They will have to swap the soft hat of the artist for the hard hat of the engineer. These are no transferrable skills. Investor beware.
James Hutton is regarded as the father of geology. He stated, in his uniformitarianism principle, that “the present is the key to the past”. It is new that increasing expenditure on exploration is not resulting in an increase in discoveries. It is a departure where the past is not the key to the present. As an industry we have become much more risk-averse. We are shying away from real and pure grassroots in greenfield exploration. Juniors increasingly focus on “retreads” because they are easier to finance.
It is arguable whether Junior explorers should be public companies at all. If they are the backbone of sustainable and ultimately successful exploration then financing must come from strategic long-term investors. There should be a place in this journey for the fidgety retail investor to hop on and off the train.
As a follow up to my last blog on Cobalt “A Cobalt-Blue Swan” I noted in the FT that the price of cobalt soared more than 30% when Glencore announced last month it would close the world’s largest mine for the battery metal.
John Ford collaborated with Thomas Edison on an EV over one hundred years ago. https://www.wired.com/2010/06/henry-ford-thomas-edison-ev/. Edison was looking at a nickel-iron combination for the battery. What is really new?
I found a reference to this nugget on one of John Ford’s ambitions in Neil Young’s autobiography – Waging Heavy Peace. I probably would not have picked up this book at my local library if I had not seen the great motorhead troubadour and Bob Dillon in Nolan Park Stadium over the summer. Serendipity is a wonderful thing. Young exceeded my high expectations but Bob has had better gigs and must rest on his legacy. Young’s Heart of Gold; Dylan’s City of Gold.
The Book of Job probably dates from the Persian rule over Israel, circa 540 BCE.
Chairman for the Board of the Centre for exploration Targeting.
An undeveloped mineral deposit. It is sub-economic now and in the past. Not economic even in previous mining booms and peaks in metal price
2 thoughts on “Risk and Faulty Logic”
Hi John, nice blog – disappointed Binno Tours International didn’t get a mention – gold-star performance.
Excellent piece, John, as always. John Hronsky came to visit us in Sumatra recently, had some great discussions. Rgds, Steve. PS….Who’s Bob Dillon?