Friday, 15 August 2014

Brent Cook - Telling Right from Wrong in Exploration

Identifying Exploration Companies
Exploration is a tough business, making a discovery is much tougher, and advancing a real deposit through the hurdles of geology, politics, and the stock market is the hardest test and is rarely successful.
......We should move ‘down the food chain’ into companies with stellar, early-stage projects that have yet to be tested—a process also much easier said than done. You can always find a reason not to buy. 
Here are the initial filters I use before even considering serious due diligence:
  1. Data and Disclosure:
    This is one of the most common failures for exploration companies. Evaluating a project and making an investment decision requires an understanding of the results. Without drill locations and geologic context, I am lost. Longitudinal and cross sections showing all the drill data are also crucial to any interpretation. I figure that the company geologists need this information in a useable format to intelligently plan the next drill hole, hence that data should be available. If it’s not, there’s a problem.
  2. News releases:
    A news release should provide the non-technical reader with a simple but honest assessment of the results, followed by considerable detail for someone more interested in the specifics. “Highlights” are great, but as often as not the important clues are in less exciting results. Too many companies hide or ignore negative drill results, which are critical for serious investors.
  3. Past work:
    Most projects have been explored at some previous time, before the current group got involved. This information generated by previous work should at minimum be referenced and available via maps or technical reports. This information is necessary to either validate or kill the exploration concept.
  4. Share structure:
    Who owns the shares, how liquid are the shares, and how many warrants are outstanding? What was the price of the previous placement and when will that stock become free trading? If stock from a recent placement is about to become free-trading, it can negatively affect the short-term price movement.
  5. Market capitalization:
    What is the price you are paying for the company’s assets and management? A surprising number of companies don't even provide their share structure on their websites—it’s like walking into a store where nothing is priced.
  6. Deposit type:
    Some geologic settings and deposit types stand a very poor chance of hosting a significant deposit. While samples from a few holes may return excellent grades, certain types of deposit almost always produce small, marginal, or difficult deposits.
  7. Metallurgy:
    This is key: a legitimate company should address ballpark metal recovery from the rock as early as possible. Way too much money is wasted on drilling out resources that cannot be recovered economically.
  8. The deal:
    Excessive land payments, royalties, work commitments, clawback clauses, etc., can prove disastrous to a company, regardless of the property’s merits. Ditto for debt.
  9. People:
    Though it is possible to make money off of liars, crooks, cheats, and idiots, I prefer not to deal with them.

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