Despite the thorny down-market the junior exploration sector had been dealing with over the past 18 months, several companies had been rewarded for their performances. The problem was, however, that the industry had not delivered a lot of performance, Sprott US Holdings chairperson Rick Rule told investors last week at the 2014 Vancouver Resource Investment Conference.

He pointed to examples during this period such as Reservoir Minerals, which is devel-oping a portfolio of metals and mineral explor-ation projects in Europe and Africa, whose share price had risen from C$0.26 a share to more than C$5 apiece in three years – that is a 625% gain; and Africa Oil, which is exploring for oil in the East African Rift Basin system, which had appreciated from C$0.80 a share to more than $9 apiece.

“That’s performance,” Rule said.

He noted that, during 2013, the global stock charts spelled an unmitigated disaster for the junior exploration sector, when graphs slanted from the top left corner to the bottom right. This year, the stock chart for the market as a whole was going sideways.
“Last year’s stock charts exhibited some-thing that is called buyer exhaustion – the market could not find a bid. I would suggest that the overall TSX-V is now going through a period of a trade-off between buyer exhaustion and seller exhaustion.

“Certainly, many of the companies would go to their intrinsic value, which is zero, but the best quartile of the companies has already put in a bottom,” he noted.

Rule moderated a panel examining where the ‘performance’ would come from in the next 24 months.

Founder of Goldseek.com Peter Spina observed that more money had gone into the ground than what had come out of the ground.

He said that the current environment had a lot of risk factors to take into account, but noted that one of the best investment opportunities lay with project generators, which provided a good way for investors to gain exposure to the exploration sector, as the risk was mitigated by large companies partnering up with these firms. This resulted in easing fears of becoming diluted as an investor, while the partner usually paid for the exploration work.

Massive Deposits Meanwhile, he held that, while some com-panies with massive deposits would be able to survive the current markets and attract invest-ment, most junior exploration companies could not do more, and were only raising money to survive and pay salaries.

Head of Kaiser Research John Kaiser added that the ‘game’ in the last decade was for explorers to take existing systems, lower the cut-off grade, and demonstrate the deposits’ worth in substantially higher metals prices scenarios.

“However, when you take into account cost escalation, especially in the mining sector, we have come completely full circle. We are at the start of where we were ten years ago in terms of the profitability of these existing deposits.

“I find it really hard to imagine that copper and gold will double or triple in real price terms from these levels. “We are stuck with a modestly trending upward scenario, which means that most of the projects that looked like they were attractive when metals prices were ascending are not so great anymore, and that would continue for some time,” he said.

The solution, Kaiser said, was to look for projects that would work really well at current prices, and to think anew about prospects. It meant going deep, undercover, and using new techniques to find new workable deposits within the current scenario.

He suggested looking at polymetallic deposits, scarn systems and volcanic-massive sulphide systems as potential safeguards against volatile commodity price fluctuations, where one did not care about what the price of copper or gold was doing, as it was covered across the range of resources.

Kaizer also suggested that discovery plays were the best bet to see performance in the next two years. “No [investor] wants to give companies money for drilling anymore, but with so few companies drilling, the targets that they are going to drill are bound to be good,” he enthused.
Author of the Resource Opportunities newsletter Lawrence Roulston agreed that the biggest gains would come from the early-stage explorers and prospect generators. He noted that the best ones already had projects in hand, with the added bonus of adding more deposits as work progressed on new discoveries.
Roulston also said that another area that was getting attention in recent months was metal deposits that had been outlined and well defined, but where there was potential for satellite deposit discoveries, or potential deep below the existing orebody that could enhance projects through additional exploration.

Commodity Cycle

“When selectively deployed over three years, almost [all these themes] are going to work. I can tell you without fear of being wrong, owing to this being my fourth commodity cycle, that bear markets are the authors of bull markets. One’s success is almost guaranteed if you do the work, given where you are starting from,” Sprott’s Rule said.

“The truth is that a good team, with good projects, that survives the next three years, is a likely triple [in share value]. They are going to have to finance this year. A likely triple [gainer in share value], with a full warrant, is a likely five-bagger,” he quipped.