Rob McLeod as a junior geologist in 1993 at the Red Mountain project, which his company, IDM Mining Ltd., is now exploring.

Rob McLeod as a junior geologist in 1993 at the Red Mountain project, which his company, IDM Mining Ltd., is now exploring.

From the world’s largest multi-commodity producers to the smallest, zombie junior exploreco, to the individual prospectors peddling their properties, the past four plus years have obviously been a disaster. Producers have cut back expenditures and sold assets to either achieve or sustain meager profitability; juniors have tried anything, generally with limited success: from ‘Hail Mary’ drill holes, praying for discovery, to cessation of all exploration work, to scouring for major JV partners…anything to maintain solvency.

What a change these four years have seen. The ‘darlings’ of a bear market, if there is such a thing, are the project generators. These are companies that rarely drill with their own funds, usually courting majors or promotional juniors with cash to finance risky exploration programs. Project generators are survivors; they are typically led by creative explorationists targeting limited niche jurisdictions. Juniors such as Almaden, Kiska, Strategic Metals and Teuton have been around for years or decades (the latter completing their first roll-back in over 25 years). These companies have been more recently joined by prominent generators including the likes of: Kaizen, Millrock and Riverside; all have been able to remain active, well financed and good shareholder bases. Arguably the most successful project generator has been Andre Gaumond led-Virginia Mines in Quebec. I modelled Full Metal Minerals, which had some decent success last decade in Alaska, after their business model. Surprisingly, Virginia has been one of the few genertors that have made a discovery that has turned into a successful mine, and have transformed recently with a rapidly growing royalty arm. Newfoundland focused Altius, making a similar transformation into royalties, is a similar success story.

The bread-and-butter targets for all of these project generators throughout the past 15 years or so, has been strategic alliances and joint venture exploration programs with major mining companies...The current major challenge for any project generator or junior explorer has been to market their exploration properties in a manner that will tick all of the boxes with a major. And for most majors, it is a long list of criteria: the right commodity, size potential, grade potential, possible long mine life, politically stable jurisdiction, environmental sensitivities, permitting timeline, indigenous people and community, access and infrastructure, metallurgy, property size and the list goes on and on. If junior’s project meets most or all of these minimums, such as a new discovery or growing resource, the property is likely not available for joint venture, only for sale as a takeover target if in the best interest of shareholders. Agnico’s recent acquisition of Cayden is an example of this.

In the current depressed mining market, the vast majority of major miners have focussed on reducing costs, with exploration budgets usually the first to be cut. Most of the deepest cuts in exploration occurred two or three years ago. Virtually all still have sizeable budgets, but most exploration dollars are focussed on near-mine and brownfield work. Maintaining a pipeline of exploration projects for future growth has certainly been a much reduced priority. Exploration staff for the majors have remained busy by reviewing (and usually declining) piles of property submittals from desparate juniors, signing CA’s and reviewing or monitoring those Companies with advanced projects.

The symbiotic relationship between juniors and majors throughout the four major cycles in the past 25 years is evident in all types of projects. In the 1980’s and 90’s, the vast majority of greenfields exploration was performed by producing companies. These majors or mid-tiers would stake or acquire early stage properties, complete surface geochem programs, do some geophysics, and maybe plunk in a few short drill holes. If they weren’t spectacular discoveries, the property was dropped. Next cycle, a major or junior picks up the property again, does more work and advances the geological understanding and increases the dataset. This often has to repeat several more times, until finally, the discovery is made. Some of these generative programs in the 90’s were doomed to fail from the start, but did provide great info to later explorers. BHP had a huge artic-Canada program for precious and base metals in the 1990’s. They discovered the Hope Bay Greenstone belt, currently being developed by T-Mac Resources; they are the fourth company to hold the asset, following Miramar and Newmont Mining. Several of my friends worked for BHP; one favorite story is that they were looking for ‘Kidd Creek’ sized-VMS deposits. When you are looking for the biggest deposit of any type on a grass roots level, you may find lots of prospects, but your goal will very rarely be met.

Pyramid was first drilled in the 1970's (Ross Beatty's first job as a junior geo). Hit interesting 0.3% Cu and 0.03% Mo with no gold analysis. Property sat dormant until 2005 when we picked it up with Full Metal Minerals and optioned it to Metallica. Again to Antofagsta in 2010, drilled and made the 'discovery'. There is a leach cap overtop so you're lucky if you sample 0.1% Cu on surface. Reason why most companies ignored it over the years. Copperbank Resources Corp photo of the Pyramid Copper Project, Alaska

With the exception of the height of the last cycle, majors have vastly reduced or eliminated the grass roots, frontier-style exploration that has provided the base data for exploration projects that can deliver the drill results that allow juniors to finance. The direct result is the lack of world-class discoveries in new areas over the past decade (such as Voisey’s Bay, Lac de Gras, Eskay Creek). Most junior mining investors know the Eskay Creek story; it took the 109th hole to make the discovery, prompting a revival of a depressed junior market and a huge area play. I used to work for Homestake Mining, who bought the project, and heard varying stories of the discovery from different people. This ranged from strategic, visionary geologic interpretation, to dumbass luck. In the latter case, it was suggested they were targeting a stringer zone which underlies the massive sulphides, stepped up into the hangingwall and drilled straight through the massive mineralization that no-one anticipated. In the end, who really cares! As early as the 1940’s the Premier Mining Company, which operated a mine near Stewart had trenched Eskay Creek; trench 21 was tens of feet away from the 21 A, B or C zone (forget which). If they had made the discovery, the north would have been a much different place with a major mining town and probably a toxic mess, given the huge amounts of arsenic and mercury in the deposit. Homestake went on to have a worldwide exploration program exploring for Eskay-style deposits, sampling rhyolites in VMS districts searching for the primitive geochemistry of the volcanic rocks at one of the world’s richest mines. The program failed, but valuable geologic data was gained, contributing to the global pool of information.

With respects to long term strategy, a lot of the majors seem to have different philosophies. I know of one diversified miner that is exploring for precious metal deposits, with the purpose of selling them to juniors post-discovery. A bit backwards to the traditional approach, but advanced project sales have shown some amazing returns in the past for majors, particularly if royalties are involved. Many have taken the hybrid approach of investing in junior companies, with holdings ranging from 5 to 19.9%; de-risks sunk exploration dollars with the promise of a return on investment, as well as an advantage if the junior ever comes in to play for acquisition.

So how will the industry evolve in the years ahead? Mines around the world are continuously being depleted, particularly the highest grade areas of mines to boost profitability. Supply will have to come from somewhere. It is now generally expected that the timeline from exploration concept to mine production is about 10 years, particularly in the case of deposits with large footprints. When you apply a discount rate to the economic value of these deposits, NPV and IRR are negligible. It’s no wonder that grass-roots exploration by majors is rare. Conceptual targets also change; most gold majors are looking for high-grade, low capex deposits as a priority. At the height, it was >5 million ounce low-grade pittable deposits with the billion dollar plus Capex; there was no shortage of debt facilities to fund these projects. As a result, coupled with higher metal prices, the average grade of mined deposits in precious metals has dropped by half over the past decade. Looking 10 years out, I expect average grades to drop even further in the long term, unless a myriad of new discoveries take place over this time.

So if you are an investor in the sector, how do you play this?

  1. In the short to medium term, majors have little choice but to grow through acquisition. The few juniors with advanced projects progressing to feasibility or construction, including: Pretium, Sabina, Kaminak, Seabridge and Romarco (all in the gold space) are likely targets over the next couple of years.
  2. Play the strong project generators with JV’s or Strategic Alliances, such as Kaizen, Millrock and Kiska.
  3. Look at the juniors that have a major as an investor; it usually is a blessing for the management team and project, and a possible source for future financing. Kinross and Agnico-Eagle have been active investors in juniors over the past several years.

Most of us perpetual optimists in the junior sector, and our loyal investors, know that the worst is behind us and the cycle will come back, obviously the sooner the better. I expect the second half of 2015 to be the start of the resurgence. The majors have reduced costs as much as they can, and future supply reductions and increased demand for commodities will drive prices higher as the global economy continues to grow. Of course, the best hope is for ‘black swan’ style exploration discoveries coming from the end of the drill bit, and they often happen when you least expect it.

There are hundreds of great exploration properties out there; I see opportunities almost daily. I was fortunate to be at the forefront of the great Yukon rush of 2009 and 2010 with Underworld. Along with discoveries by Kaminak and ATAC, the area play spawned dozens of exploration programs from juniors and majors, as well as remarkable prospectors such as Shawn Ryan and the team at Archer Cathro. During these years, hundreds of thousands of soil samples were collected. New discoveries are waiting to happen in those datasets. Even dating back to the Eskay Creek rush in northwest BC, historic datasets compiled with modern GIS and 3D modelling tools have provided the base for excellent targets for junior miners; these will be drilled when markets return.

As a final thought, governments should recognize the dearth of grass-roots exploration through additional incentive programs. In this market, soil sampling or geophysical results rarely move markets. Establishing a program of premium or super flow through with better tax credits could be a way to stimulate juniors to embark on the early-stage exploration programs critical to future drilling discoveries. We need all the help we can get!

Follow Rob McLeod on Twitter @Goldfinder12 and find him casually in CEO Chat.