Decoding Drill Results with Brent Cook

Mining for metals and information

Cook went on to say that the current market presents an “exceptional opportunity” because although metals prices are low right now, in the future the world won't be producing enough material to meet demand.

The economic geologist then explained a few financial terms that are commonplace in the mining sector.

The first two, "enterprise value" and "gross metal value," are important, but can be misleading if not weighed alongside other crucial data points. In relation to mining, enterprise value is the value the market thinks a project should have — excluding cash and debt — especially projects that are in pre-production with no revenue or earnings to measure. For its part, gross metal value is formulated by multiplying the total resource by the current price of the commodity in the deposit.

As Cook explained, without more information these numbers can paint an inaccurate picture.

He gave an example of calculating gross metal value by using a theoretical deposit with 18 million ounces of gold and 526 million ounces of silver. “If you just multiply that by the price of silver or gold, you are going to have US$33 billion in value sitting in this little deposit.” However, both enterprise value and gross metal value fail to account for any of the costs associated with mining.

"How much does it cost to get it out? That’s the key thing,” Cook said.

Digging into drill results

Investors often hear about the importance of jurisdiction in relation to government policy, geopolitical unrest and infrastructure, but location in terms of terrain, access and recovery techniques is equally crucial when looking at companies.

Paired with the resource grade, this information can let investors know if a project will be both mineable and profitable.

“If you've got a high enough grade, you can mess around with your recovery,” Cook said, prefacing that lower grades using complicated extraction methods are seldom worth it.

He went on to mention Vizsla Silver’s (TSXV:VZLA,NYSEAMERICAN:VZLA) Panuco project in Mexico as an example of a high-grade deposit that also benefits from existing infrastructure in the area and a “simple recovery” method.

“Those guys have a market cap of three bucks per ounce equivalent of silver,” he said. “So it's a very high-grade deposit — 300 grams a tonne — I think it's probably a reasonable price right now, and that's worth looking at.”

As a general rule of thumb, the trained geologist added, “The thicker the vein, the higher the grade, the cheaper it is to mine.”

In addition to that, Cook advised steering away from companies that appear to be drilling holes all over the place with no apparent focus or target. If the drill results look like a pin cushion, “that tells you they don't know what's going on,” he said.

He then displayed a slide that showed small clusters of drill holes close together. “This is very clear, they know what they are doing, they know what the structures are, they know where their gold is and they’re systematically drilling it.”

As they move past initial drilling, companies put out NI 43-101 reports to “show the economics behind their projects.” The three primary types are the preliminary economic assessment (PEA), the prefeasibility study (PFS) and the feasibility study (FS).

PEAs, or scoping studies, are the first stage in the economic analysis of a project and usually represent the lowest accuracy level in terms of total resource. The next step is a PFS, which provides a more detailed and nuanced economic analysis of the viability of a mining project. The PFS also looks at recovery methods, as well as ESG.

The final and most accurate assessment, the FS, gives a complete economic overview of the deposit and project, describing the geology, extraction, recovery and operation. The FS is often used in investor presentations and is key in getting financial backing.

When speaking about PEAs, Cook noted that they are 30 to 50 percent “customizable” and they “rarely overestimate the cost and underestimate the economics.”

6 factors that can kill a project

Cook then briefly outlined six reasons exploration companies go under.

The first is improper resource estimates based on insufficient drilling or misinterpreted data.

The second factor Cook called internal or external dilution, which he defined as bad geology and/or engineering. He described "(taking) a piece of drill core, assaying it down to a 30 gram sample and then extrapolating that over 10, 20, 50 meters.” Using the results of one hole to delineate the resource present over such a large area is not representative or accurate, according to Cook.

He named metallurgy as the third factor, which he said is difficult due to the often complex and refractory nature of deposits. Unrealistic CAPEX and OPEX numbers in NI 43-101 studies came in as Cook's fourth stumbling block.

ESG, specifically the social and environmental aspects, took the fifth spot. Cook chalked this up to companies failing to garner enough stakeholder input. For point six, he cautioned that easy money can also lead to the downfall of an explorer.

“If there is a bull market, the bank will (say) anything,” Cook said. “That’s their job.”

Watch Cook explain how site visits can help unearth "fatal flaws" in projects.

In addition to pointing out factors that could lead to a company’s demise, Cook advised investors to watch how a company manages its CAPEX and internal rate of return (IRR).

“If you can push your CAPEX further out, you can increase your IRR,” warned Cook of the “common ploy.”

Aside from the aforementioned red flags, Cook also explained that looking at the all-in sustaining costs of companies that are in production in the same area can help investors understand if economic evaluations are realistic or not.

As his time drew to a close, Cook told conference-goers, “I do honestly think this is a good time to be an investor … the time is going to come within the next six months when these (stocks) are going to be so cheap.”