Precious Metals

The renowned exploration geologist offers some hope for junior gold investors who are willing to be patient.

Brent Cook, editor of Exploration Insights newsletter and a frequent guest speaker at mining investment shows, spoke recently with Kitco’s Alex Letourneau about the status of the mining industry and what investors can expect from gold mining majors and juniors. 

While Cook sees more pain for the industry and its investors in the short term, the veteran geologist is more sanguine looking forward one or two years, especially for juniors with good deposits that can weather the storm and set themselves up to be acquired by majors that are currently in no position to buy them.

Below are a few highlights from the interview.

On the terrible second-quarter results that saw large writedowns by major gold mining companies, including Barrick Gold (NYSE:ABX,TSX:ABX), Newcrest Mining (ASX:NCM,TSX:NM), Goldcorp (NYSE:GG,TSX:G) and Kinross Gold (NYSE:KGC,TSX:K):

“It’s a bit of a shock. What it’s telling us is their mines are a poorer quality than we actually thought they were and they’re having to write off a lot of recent purchases. Plus, their all-in costs are anywhere from $1,300 to $1,600 an ounce for the majors. That makes it hard to make money at $1,300 gold.”

On how a lower gold price is forcing the majors to “high-grade” their deposits:

“They’re going to start high-grading their deposits. What this means is they go after the higher-grade material and leave the lower grades on the side. Effectively that sterilizes the rest of the deposit and I think we’re going to see writedowns on reserves and resources as they start using a lower gold price to calculate those resources and they sterilize what they’ve got. It’s going to get interesting.”

On how cuts to exploration expenditures by gold majors will be good for certain juniors in one to two years:

“The first thing the majors cut is exploration expenditures, because that doesn’t bring any income in. I saw today that Eldorado Gold (NYSE:EGO,TSX:ELD) cut exploration by about $43 million, and all the companies are doing that. There’s no money going into new juniors, so discoveries are going to decline. This is setting us up for one, two years into the future, for a fantastic run in the juniors, particularly the ones who can survive this period. Those that have enough cash to last a few years and that have quality projects that are worth something. I’m convinced that going down the road, all we need to do is own the companies with the highest-margin deposits and just wait it out, because at some point, Barrick, Newcrest, Newmont Mining (NYSE:NEM,TSX:NMC), Goldcorp, they’re all going to have to buy these deposits that they’re throwing away right now.”

On whether now is a good time for mergers and acquisitions: 

“Certainly for the companies that are making money, now is the time to start to acquire the very few deposits that do make money. The real problem is that very few mineral deposits actually make much money. The brick wall we’re hitting right now is it’s getting increasingly hard to find new deposits that make money.”

On what a junior resource investor can do in these markets:

“We’ve got to just dump the stuff that is not going to work and focus on the few, the 10 or 15 percent of companies out there that have the cash, the management and the competence to move forward and make the discovery that the majors are going to buy. In a sense, it’s getting a lot simpler to select what you own because so much of it is going away.”

 

Securities Disclosure: I, Andrew Topf, own stock in Goldcorp. 

Related reading:

More Multi-billion Dollar Writedowns Among Gold Majors

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