By Henry Bonner (hbonner@sprottglobal.com)
Read online >
You might not realize it, but we’re living through an exceptionally slow period for exploration. The ‘junior’ resource sector simply is not making new discoveries.
The TSX-V, where most Canadian exploration stocks are traded, is down around 60% in four years. As a result, fewer investors are willing to put capital to work in exploration.
Steve Todoruk, a broker with Sprott Global Resource Investments Ltd., says that this bear market is drying up funds for exploration just as new discoveries are becoming harder to make.
Steve writes:
By my count, it’s been two and a half years since we have seen a significant new mineral discovery.
In ‘good’ years, the exploration industry found 2 to 4 new deposits. With ongoing drilling, they would attract the attention of major mining companies. The majors would take over the project from the juniors. The deposits would become mines. Global commodity markets would benefit from the added availability of the metals.
The last wave of discoveries yielded three major new discoveries.
Sirius Resources Ltd. (SIR-ASX) discovered a nickel deposit in Australia.1 Reservoir Minerals Inc. (RMC.CA) and Freeport McMoran (FCX.US) discovered a very high grade copper-gold deposit in Serbia.2Fission Uranium Corp. (FCU.CA) and Alpha Minerals Corp. (since merged into Fission) discovered a world-class uranium deposit in the Athabasca basin in central Canada3. The region hosts existing mines of major uranium producers Cameco4 and Areva5.
Since this last discovery wave, the mineral exploration sector has been in a dry spell.
Mining is a self-depleting industry. The ore body (the rock that contains the metal) has an inherently limited lifespan. Every day a mine operates, it is moving closer to its expiration date.
So the industry needs to find new deposits in order to replace these ever-depleting mines.
The discovery of new sources of metals has important consequences for the world economy. If supply interruptions occur, metals prices are likely to go up sharply. This will make it more profitable to mine marginal deposits, ensuring that there is a supply, but the costs to the end users will be dramatically higher.
The exploration industry has been actively searching since the last wave of discoveries occurred in around 2012.
Some drill results have even grabbed investors’ attention and garnered excitement in some circles. The work that has been done so far, however, has failed to turn up anything substantial and these stories may be fizzling out.
The two most high-profile discovery stories over the last couple of years have been Pilot Gold Inc. (PLG.CA) and Balmoral Resources Ltd. (BARC.CA). These were the “ones to keep your eye on,” but many observers (including me) doubt whether these companies will prove up a large enough resource.
Pilot Gold’s share price ran as high as C$2.30 at the height of the excitement for the story in late 2012, and is currently down around 50% from its high.6
Balmoral Resources was searching for gold along the Detour Gold Trend in Quebec. They hit nickel, copper, platinum and palladium instead in May 2012.7 The company has continued to drill the resource over the last two and a half years, but there is doubt about whether it will reach an adequate size. The stock ran up to C$1.90 last summer and currently sits below C$1.00.8
A bear market for resource stocks is not the only reason why discoveries are becoming less frequent. After all, in the bear market of the late 90’s, mining companies were finding new mineral resources all over South America.
Most likely, the explanation for this lack of new discoveries is simply that the easiest discoveries have already been made. It is unlikely today that new metals will be found at surface. Instead, exploration companies need to start drilling deeper, where discoveries are harder to make and cost more money to drill.
The bear market for resource stocks has drained the exploration sector of capital just as each new discovery is going to cost more to make.
Some analysts say that big miners will have to take up the torch from the junior exploration industry. Unless a bull market attracts more cash into the juniors, only the large miners will have the cash to spend exploring for deeper deposits.
This might occur in time, but I don’t see it happening now. Large miners are taking fewer risks and cutting back on costs wherever possible. Exploration budgets are an easy place to begin cutting back and are unlikely to expand in the near term. This leaves cash-strapped ‘juniors’ as the likely source for new discoveries.
How should we position ourselves in this environment?
My strategy is not to try and guess who might hit a bonanza-grade drill hole. In my opinion, the odds of being successful are just too slim to justify the risk. Instead, I’m looking carefully at existing deposits and companies that are putting out drill results. I am scanning for the signs of potential new discovery.
If someone breaks the industry’s streak of bad performance, I believe it will be our best chance at making money in today’s environment if we are able to enter at an attractive price.
Steve explained in Sprott’s Thoughts recently why ‘juniors’ should look for new discoveries by drilling into the unexplored depths near existing mines. There are two stories he’s currently watching in the discovery space.
P.S.: If you would like Steve to review your junior mining portfolio, please call him at 1.800.477.7853 or e-mail him at stodoruk@sprottglobal.com.
Sign up to receive more insights like these by subscribing to Sprott’s Thoughts here.
Steve Todoruk worked as a field geologist for major and junior mining exploration companies after he graduated with a B. Sc. in Geology from the University of British Columbia, in 1985. Steve joined Sprott Global Resource Investments Ltd. in 2003 as a Senior Investment Executive.
Companies discussed above are used for examples only and do not constitute an endorsement or recommendation. If you would like more information, please contact a Sprott Global Resource Investments Ltd. broker.
1 http://www.siriusresources.
2 http://www.reservoirminerals.
3 http://www.fissionuranium.com/
4 http://www.cameco.com/
5 http://us.areva.com/EN/home-
6 Bloomberg
8 Bloomberg
This information is for information purposes only and is not intended to be an offer or solicitation for the sale of any financial product or service or a recommendation or determination by Sprott Global Resource Investments Ltd. that any investment strategy is suitable for a specific investor. Investors should seek financial advice regarding the suitability of any investment strategy based on the objectives of the investor, financial situation, investment horizon, and their particular needs. This information is not intended to provide financial, tax, legal, accounting or other professional advice since such advice always requires consideration of individual circumstances. The products discussed herein are not insured by the FDIC or any other governmental agency, are subject to risks, including a possible loss of the principal amount invested.
Generally, natural resources investments are more volatile on a daily basis and have higher headline risk than other sectors as they tend to be more sensitive to economic data, political and regulatory events as well as underlying commodity prices. Natural resource investments are influenced by the price of underlying commodities like oil, gas, metals, coal, etc.; several of which trade on various exchanges and have price fluctuations based on short-term dynamics partly driven by demand/supply and nowadays also by investment flows. Natural resource investments tend to react more sensitively to global events and economic data than other sectors, whether it is a natural disaster like an earthquake, political upheaval in the Middle East or release of employment data in the U.S. Low priced securities can be very risky and may result in the loss of part or all of your investment. Because of significant volatility, large dealer spreads and very limited market liquidity, typically you will not be able to sell a low priced security immediately back to the dealer at the same price it sold the stock to you. In some cases, the stock may fall quickly in value. Investing in foreign markets may entail greater risks than those normally associated with domestic markets, such as political, currency, economic and market risks. You should carefully consider whether trading in low priced and international securities is suitable for you in light of your circumstances and financial resources. Past performance is no guarantee of future returns. Sprott Global, entities that it controls, family, friends, employees, associates, and others may hold positions in the securities it recommends to clients, and may sell the same at any time.
