[Editor's note: Read Junior mining stock picks from Brent Cook: Part one, published Friday on Stockhouse.]
TGR: You suggested that when individual investor money comes back into the market, it probably will come back in to the large gold producing companies. Not long ago Kerry Smith, an analyst at Haywood Securities, basically recommended investing in large gold producers over the juniors because the seniors are trading at such low multiples. What’s your advice to our individual investors?
BC: I don’t see any problem buying majors and waiting for the market to turn and then moving down into the smaller companies. That’s a smart way to go about it. It’s not what I’m doing, because I believe I can select the few juniors’ stocks that have real assets that a major is going to buy. Right now it’s a matter of picking the few assets that are high enough quality that a major will want to buy—that will give me a lot more leverage than waiting for Barrick to go up 20% or 30%.
TGR: Then the thrust of your investment portfolio advice for the next several years is acquisitions.
BC: Yes. I’ve been following three investment scenarios. One is buying a few companies like Altius that are significantly capitalized, smart guys, trading less than cash value. The second is going for the acquisitions, the people drilling out or with deposits that are high enough margin and quality that a major would want to buy. And the third is going after a couple of very speculative companies that are pure exploration plays, but the risk-to-reward is huge if they’re successful.
For these very high-risk plays everything I’ve seen in the geology and results so far tells me they have a decent shot—a long shot but a decent long shot—at hitting. If they hit, we’re looking at a tenfold increase. So those are the three things I focus on. I’m not buying small companies selling for less than cash or that sort of thing. And definitely not any companies with what I perceive to be small targets. There are a lot of those out there and they’re very good at getting rid of that cash.
TGR: But if it’s less than cash and either an acquisition target or a high risk-reward given its geology and location, you’ll look at it?
BC: That’s right.
TGR: Does your view of the juniors change if the U.S. and then the world go into a recession?
BC: No. I’m assuming that happens anyway.
TGR: So you expect the resources sector to still be in demand.
BC: Selectively. I do believe we’re heading into a global recession and it’s going to be a damper on commodity prices. The credit crisis or liquidity crisis right now is going to severely limit money coming into the sector as well as money coming in to build new mines. At the same time, the major companies have to replace the resources we’re depleting—and they have to replace them with high-grade resources—regardless of what the metal prices do.
I’ll give you an example. We’re producing 15 million tons of copper a year; which is about the amount of copper ever mined from the Bingham copper deposit in Utah. This is one of the biggest in the world. So on a yearly basis we’re depleting one major copper deposit. Same with gold. We’re running through about 80 million ounces of gold a year. That’s all the gold ever produced from the Carlin Trend in Nevada. That’s the dichotomy here: Nobody wants resources but everybody wants them.
TGR: Would you comment on any specific companies? How about Miranda Gold Corp. (TSX: V.MAD, Stock Forum)?
BC: Great company. Great management. Great geologists. Selling for cash just about. Actually, I was just on their project in Nevada in mid-October. They’ve got a number of joint ventures with major and junior companies. I don’t know that they have a discovery in their hands, but they’re smart. This is one of these joint venture companies that come up with the ideas and then bring in the major companies to test them.
TGR: So they fit into your first investment scenario, selling for less than cash with the potential of a find?
BC: I would say so. I think they have about $11.5 million in the bank and their market cap’s about that too. They have Newcrest just finishing a drill program on Horse Mountain. Who knows what’s going to come out of it, but if they discover what they’re looking for, it’s huge.
TGR: That’s true of everybody, though.
BC: Not necessarily. Most people I run into are not really looking for big deposits. They may claim they are, but the geology isn’t right.
TGR: How about Virginia Mines Inc. (TSX: T.VGQ, Stock Forum)?
BC: Another great company. André Gaumond is one of the most honest, ethical guys in the business and he’s followed the joint venture model as well. He’s had a bit of problem because the discovery he has with Breakwater is a base metal deposit and base metals haven’t done too well. But in terms of a company, that’s a great one. You can definitely trust your money with them.
TGR:Rimfire Minerals Corp. (TSX: V.RFM, Stock Forum).
BC: Another great company. They’re selling for almost cash too. Same thing. Joint venture model. Very, very smart guys who understand not just geology, but the business of exploration. They’re involved in Western Canada and Australia and a bit in Nevada as well. Actually, I own all three of those you just mentioned—Miranda Gold, Virginia Gold and Rimfire.
TGR: How about AuEx Ventures Inc. (TSX: T.XAU, Stock Forum)?
BC: I was just on their project in Nevada as well. Long Canyon, which they joint-ventured out to Fronteer, is an interesting property. They may actually be on to a new legitimate gold discovery in Nevada. It’s in the eastern part of the state, off of the main Carlin and Cortez Trends, but similar style and mineralization to Carlin type deposits. Fronteer has done an excellent job of figuring out the geology. They have four drill rigs plugging away and they hope to have a resource estimate out by early next year. And AuEx, again, smart guys and another company that follows this joint venture model.
TGR: When you say legitimate new gold discovery, what makes it special?
BC: So I guess by “legitimate” I mean real. A lot of people claim to find a major discovery, but usually that’s not the case. This is really what I think could be a new gold trend.
TGR: Earlier you talked about the key being to find the companies that are about to find or announce a discovery, and as you pointed out, by no stretch of the imagination do all of the juniors have that potential.
BC: Right. I’ve been doing this for a long time and I look at most of these projects and see the ultimate potential—if they’re successful in drilling out what they think they’ve got—is not worth much. It doesn’t make any difference if you find something nobody cares about, which most of the several thousand junior companies are doing. There’s no point investing in any junior exploration company if you don’t see the chance for a 10-for-1 increase in your stock price.
TGR: The tenfold increase in the stock price is a little bit easier today than it was a year ago.
BC: Yeah, 20-to-1 is even better at this point. But let’s talk about 10-for-1 potential for a moment. Diamonds North Resources (TSX: V.DDN, Stock Forum) raised money at $1.08 and is now trading at about 30 cents. Very, very smart group. Intelligently explored up in Nunavut. Early analysis of the kimberlites showed a good diamond count, good quality diamonds, and now they’ve gone back in and taken some bulk samples. The results should be out within a month or so. If they show large diamonds, this is potentially a 10-bagger.
TGR: So there's real potential here to be the 10-bagger; in fact they may find large diamonds.
BC: They need to find the whole spectrum of diamonds. So far the samples they’ve taken have been mostly micro diamonds. It wasn’t a big enough sample to evaluate the diamond size distribution. Now they’ve taken large enough samples that if they have indications that the diamond size range goes up into the larger sizes, this is potentially a diamond mine. This is the sort of thing that BHP or DeBeers would be looking at.
TGR: Tell us a little bit about Exploration Insights.
BC: I’d been working with a number of the newsletter writers—Doug Casey, Brien Lundin, Bob Bishop, Paul van Eeden—and started contributing more and more to Paul’s newsletter. Over the previous two years I generally followed specific stocks while Paul covered the macroeconomic scenario. When he shut down his newsletter in February, I took it over. So it has changed to my newsletter and I basically talk about geology and stocks with an emphasis on what they are actually worth.
There is a Stock Talk section and a Rant section to the letter. In the stock talk section I specifically talk about stocks we own or are following. Most of my subscribers are fairly involved in doing their own analysis as well so I try to provide numbers, costs and geological interpretations from which they can draw their own conclusions. I also comment on stocks in the news or ones that I get a lot of emails from subscribers asking about. If a stock doesn’t make it into the Exploration Insights portfolio I am not afraid to say why. Generally, in the rant section I give people useful insights into what is happening in the mining and exploration sector as a whole. Also what to look for, how to value properties, mines, deposits, that sort of thing. And we sometimes cover some politics, economics and everything else, too.
TGR: This is a weekly letter?
BC: It comes out pretty much weekly. I’m on the road at least half the year but I still manage to get it out most weeks.
TGR: Your site visits. You get out there and kick the tires, meet management, the whole thing.
BC: That’s key. I’ve been doing this for 25-plus years and the only edge I’ve got over anyone is that I’ve seen so much that I can recognize a good versus a not-so-good project. The only way to do that is to really go on the ground. Things always look different on the ground, sometimes better but most often worse.
TGR: And you’re a trained geologist?
BC: Yes. It helps when you’re looking at geology.
TGR: Rick Rule speaks pretty highly of you. He says you are a “no nonsense ‘boots on the ground’ geo, not one of the ‘desk explorers’ who cost the investment community so many millions.”
BC: Yes, I worked with Rick for six years and made him a lot of money, I did OK too. He is probably the smartest investor I’ve come across. I learned a lot from him. I knew geology before I got into this, but I learned about investing from him and how to make money.
TGR: Rick says easily 80% of the juniors are not worth investing in. And with the other 20% you still have to look at the balance sheets and that will be the real key. He’s a big resource bug; in order for the world to keep going, you need the resources. He’s saying it’s going to be ugly here for the short term, but then the opportunities will start showing themselves.
BC: I believe he’s right. It seems to me there are a lot of problems to work out of the global financial system still and we could go way past ugly. But further out, the quality mineral deposits and exploration companies you can and will be able to buy now will certainly look like bargains in the rear view mirror.
For additional comments on Altius Minerals Corp. (TSX: V.ALS), MAG Silver Corp. (TSX: T.MAG) (NYSE:MVG), Hathor Exploration Ltd. (TSX: V.HAT), Miranda Gold Corp. (TSX: V.MAD), Virginia Mines Inc. (TSX: T.VGQ), Rimfire Minerals Corp. (TSX: V.RFM), AuEx Ventures Inc. (TSX: T.XAU) and Diamonds North Resources (TSX: V.DDN) from newsletter writers, money managers, and analysts, click on the respective links or visit The Gold Report.
Brent Cook, who launched his Exploration Insights newsletter in February 2008, brings more than 25 years of experience to his role as geologist, consultant and investment adviser. His knowledge spans all areas of the mining business from the conceptual stage through to detailed technical and financial modeling related to mine development and production. His hallmarks include applying rigorous factual analysis to the projects and companies he examines, and augmenting his analysis with on-site field evaluations.
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