Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
Stock Maket Trading Lesson - How to REALLY Trade Markets - 26th Nov 21
SILVER Price Trend Analysis - 26th Nov 21
Federal Reserve Asks Americans to Eat Soy “Meat” for Thanksgiving - 26th Nov 21
Is the S&P 500 Topping or Just Consolidating? - 26th Nov 21
Is a Bigger Drop in Gold Price Just Around the Corner? - 26th Nov 21
Financial Stocks ETF Sector XLF Pullback Sets Up A New $43.60 Upside Target - 26th Nov 21
A Couple of Things to Think About Before Buying Shares - 25th Nov 21
UK Best Fixed Rate Tariff Deal is to NOT FIX Gas and Electric Energy Tariffs During Winter 2021-22 - 25th Nov 21
Stock Market Begins it's Year End Seasonal Santa Rally - 24th Nov 21
How Silver Can Conquer $50+ in 2022 - 24th Nov 21
Stock Market Betting on Hawkish Fed - 24th Nov 21
Stock Market Elliott Wave Trend Forecast - 24th Nov 21
Your once-a-year All-Access Financial Markets Analysis Pass - 24th Nov 21
Did Zillow’s $300 million flop prove me wrong? - 24th Nov 21
Now Malaysian Drivers Renew Their Kurnia Car Insurance Online With - 24th Nov 21
Gold / Silver Ratio - 23rd Nov 21
Stock Market Sentiment Speaks: Can We Get To 5500SPX In 2022? But 4440SPX Comes First - 23rd Nov 21
A Month-to-month breakdown of how Much Money Individuals are Spending on Stocks - 23rd Nov 21
S&P 500: Rallying Tech Stocks vs. Plummeting Oil Stocks - 23rd Nov 21
Like the Latest Bond Flick, the US Dollar Has No Time to Die - 23rd Nov 21
Cannabis ETF MJ Basing & Volatility Patterns - 22nd Nov 21
The Most Important Lesson Learned from this COVID Pandemic - 22nd Nov 21
Dow Stock Market Trend Analysis - 22nd Nov 21
UK Covid-19 Booster Jabs Moderna, Pfizer Are They Worth the Risk of Side effects, Illness? - 22nd Nov 21
US Dollar vs Yields vs Stock Market Trends - 20th Nov 21
Inflation Risk: Milton Friedman Would Buy Gold Right Now - 20th Nov 21
How to Determine if It’s Time for You to Outsource Your Packaging Requirements to a Contract Packer - 20th Nov 21
2 easy ways to play Facebook’s Metaverse Spending Spree - 20th Nov 21
Stock Market Margin Debt WARNING! - 19th Nov 21
Gold Mid-Tier Stocks Q3’21 Fundamentals - 19th Nov 21
Protect Your Wealth From PERMANENT Transitory Inflation - 19th Nov 21
Investors Expect High Inflation. Golden Inquisition Ahead? - 19th Nov 21
Will the Senate Confirm a Marxist to Oversee the U.S. Currency System? - 19th Nov 21
When Even Stock Market Bears Act Bullishly (What It May Mean) - 19th Nov 21
Chinese People do NOT Eat Dogs Newspeak - 18th Nov 21
CHINOBLE! Evergrande Reality Exposes China Fiction! - 18th Nov 21
Kondratieff Full-Season Stock Market Sector Rotation - 18th Nov 21
What Stock Market Trends Will Drive Through To 2022? - 18th Nov 21
How to Jump Start Your Motherboard Without a Power Button With Just a Screwdriver - 18th Nov 21
Bitcoin & Ethereum 2021 Trend - 18th Nov 21
FREE TRADE How to Get 2 FREE SHARES Fractional Investing Platform and ISA Specs - 18th Nov 21
Inflation Ain’t Transitory – But the Fed’s Credibility Is - 18th Nov 21
The real reason Facebook just went “all in” on the metaverse - 18th Nov 21
Biden Signs a Bill to Revive Infrastructure… and Gold! - 18th Nov 21
Silver vs US Dollar - 17th Nov 21
Silver Supply and Demand Balance - 17th Nov 21
Sentiment Speaks: This Stock Market Makes Absolutely No Sense - 17th Nov 21
Biden Spending to Build Back Stagflation - 17th Nov 21
Meshing Cryptocurrency Wealth Generation With Global Fiat Money Demise - 17th Nov 21
Dow Stock Market Trend Forecast Into Mid 2022 - 16th Nov 21
Stock Market Minor Cycle Correcting - 16th Nov 21
The INFLATION MEGA-TREND - Ripples of Deflation on an Ocean of Inflation! - 16th Nov 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Investing in Gold Explorers, Experience Matters

Commodities / Gold & Silver Stocks Sep 10, 2010 - 02:43 PM GMT

By: The_Gold_Report


Best Financial Markets Analysis ArticleWes Roberts, vice president of Toronto-based HB Global Advisors, has seen just about every type of mineral deposit on the planet. There is no substitute for that kind of experience. In this exclusive interview with The Gold Report, Wes shares some of that knowledge with you to help guide your investment decisions. He even talks about a couple of gold explorers that have interesting prospects.

The Gold Report: Wes, you work with Heenan Blaikie LLP, one of Toronto's most respected law firms, especially in the mining space. But you're not a lawyer. Please tell our readers a little bit about yourself and what you do.

Wes Roberts: I am vice president of HB Global Advisors Corp.'s mining group. HB Global Advisors is a consulting group and an affiliate company of Heenan Blaikie LLP. HB Global consists of a team of business professionals, industry specialists and government leaders that the firm can draw on for support in technical matters and other issues. We also help support the firm by generating more legal work and by giving our clients better advice.

Because I am not a lawyer—I am an engineer—I can only give engineering advice. They formed HB Global for people like myself, although lawyers do work within HB Global.

TGR: What do you do there?

WR: I provide technical support for various types of mining agreements, such as joint-venture agreements, concentrate/or off-take agreements and mineral royalty agreements. When these come up, there may be some technical issues that need to be addressed to make these agreements stronger in order to protect our clients' interests. For instance, I will make sure that an escalating parameter in a royalty agreement is reasonable and won't become an issue down the road.

I will also look at technical reports to see if they're compliant with NI-43101 regulations. I find ways to improve the report content and presentation so that when they go to the Toronto Stock Exchange (TSX), they will have the best chance of being cleared.

The more fun things are on the business development side where I review various mineral property opportunities that come to Heenan Blaikie LLP through clients and industry contacts. These may be properties with very little exploration history or properties at the feasibility stage in a variety of commodities and geographic locations. If I like what I see on paper, then I contact lawyers in the Heenan Blaikie Mining Group and ask, "Is there a fit for this project with a client you have?" If there is, then I will come back to the vendor and see what kind of a deal they're seeking. If things still look positive, I organize a due-diligence team and do a site visit and do all the technical and legal audits that are required to move a deal forward.

TGR: That's fascinating. You said you evaluate mineral deposits to determine whether or not they are economic. In layman's terms, outline your methodology for evaluating the mineral deposits.

WR: Well, every project is at a different stage and under a different set of conditions. I have found that since coming to Heenan Blaikie that I am exposed to a much wider variety of commodities. I spent perhaps the first 25 years of my life working in gold and base metals, and suddenly I am exposed to metallurgical coal, iron ore, diamonds, synthetic rutile and even iodine. I have to work quickly, obviously because people lose interest and the opportunity may disappear very quickly. One of the first things I do in my methodology now is I think about whom I worked with in the past, maybe someone who has experience with this particular commodity or the type of geology or metallurgy or mining method or area of the world, and I often contact them.

TGR: But for people who don't have the kind of connections that you do, what are some things that investors can look for in drill results and other things like that that can help guide their investment decisions?

WR: Well, you're certainly going to have to do a lot of your own research, and you're going to have to have time to do that.

You mentioned drill results. The drill results that come with press releases are very difficult to interpret because companies don't often disclose where those drill holes are in a three-dimensional space. I like to see good, clear disclosure and then I can plot those results and get a sense of just how big the structure they're trying to define is. Is it a million tons? Is it 100 million tons?

I look for things like is it a true thickness that they're defining when they say they have a certain length of core with a certain grade, or are they playing tricks? Have they drilled down the structure instead of perpendicularly across the structure? Sometimes people need to have a good hole so they repeat one of their already good holes or historical holes. I am always looking for those kinds of tricks.

For my purposes, I look at these results to get an idea of whether or not I want to approach this company for some kind of financing or corporate transaction. I would never make an investment decision based on a drill hole press release; I would be digging much deeper into it and going to the site.

TGR: Is there a resource out there that you could point investors to that might help them decide which equity is a better investment?

WR: For people who are not as familiar with the mining industry, one of the things that I use to help me speed to the bottom of an evaluation is a book called the Hard Rock Miner's Handbook. It was written by a brilliant mining engineer named Jack de la Verne. I worked with him many years ago back in Thompson, Manitoba, while I was with Inco. He assembled all the known rules of thumb and basic engineering rules that various mining engineers have developed over time. An example is a quote from a fellow named Larry Smith, who also worked at Inco. He once said "total cash flow for a mining project must be sufficient to repeat the capital costs at least twice." Another fellow, Allan Provost, stated that the "operating cost should not exceed half the market value of the minerals recovered." These are kind of rough rules of thumb that are out there.

TGR: I realize that drill results are only part of the picture, but I think that a lot of our readers rely pretty heavily on those bits of information. Are there some red flags when it comes to drill results?

WR: Well, it goes back to what I just said. When I find confusion in the results, I try to plot it up and ask if they make sense. Sometimes it may be a mistake or maybe it's just information conveniently presented that way to confuse the reader.

TGR: Do you literally take a piece of paper and draw it out?

WR: Yes, I do. For example, a few years ago there was such excitement in a new exploration camp in northern Ontario for the nickel potential there. I was working for an intermediate producer and we wanted to understand what was going on. So I took those drill results and started plotting them to get a sense of whether or not we were talking about a 1 million ton deposit or a 100 million ton deposit. Often it is not that easy to plot it up, and you have to sort of read between the lines. If a company really has something good, they should want all the world to know and understand it perfectly. If you're not doing that, then the deposit must be not that great.

TGR: And what did you determine with this deposit? Was it worth looking at, or did you recommend that your company stay on the sidelines?

WR: I didn't understand the drill results. I had difficulty plotting it up. This is one of those areas where we have to be careful. I wouldn't really want to name names, but I had difficulty interpreting what the tonnage was. That was enough for me.

TGR: You stated in a recent article that "the economic relationship between deposit tonnage and grade boils down to three things: deposit location, commodity type and cost structure." Again, in simple terms, how do these things relate and how can investors tell whether a deposit is economic or not?

WR: What I'm saying is that location is very important; it defines how accessible a project is to infrastructure and things like electric power transmission. Just getting fuel to a site to power a generator is very expensive. The availability of fresh water is crucial. There are places in Chile where water is gold. Location also determines accessibility to a good labor force, transportation supplies and the shipping infrastructure for a finished product. If I'm producing diamonds or gold, well, those items are not very difficult to ship; I can fly those out. But the cost of shipping bulky commodities such as coal or iron ore or base metal concentrates can be a major barrier to production. For example, I've been to two very large multibillion-dollar iron ore deposits, but you need 1,000 kilometers of rail through a jungle to bring them to production. That means that only a select few clients can really take a look at those opportunities.

Cost structure is also very important in terms of labor costs. If you are operating in the Sudbury Basin, Val d'Or, Québec or other major mining camps in Canada, mining will be very expensive. It would be quite a bit cheaper if you were working in Chile or Brazil or China and for a similar deposit.

TGR: Moving onto the commodity aspect, are you mostly recommending gold projects, silver projects and lithium projects?

WR: I will recommend anything that has a good business case, good management, a good deposit and if I like the location, the logistics and these kinds of things. But certainly metallurgical coal is very strong now. You don't need that big of a deposit; if it's open-pittable, it can be a real winner. And iron ore is very strong now. It comes in waves. This is about the third time in the last couple of years that we're getting a lot of interest in iron ore.

Manganese is getting really popular now; there just aren't that many manganese deposits out there, certainly not at an advanced stage.

Lithium, of course, is very popular, but it's a difficult industry for people to understand. There are only a few producers, and they can really turn the spigot on when they want. So you have to be very careful with those projects. You have to be very cost competitive to have a really good lithium project.

And with gold at these prices, even low-grade, near-surface deposits can make a lot of money.

The only projects that I am always a little bit leery of are things like lead zinc projects. You have to be very careful with them because the smelters have so much power over you that you really only receive a small portion of the contained metal that you ship to them as a concentrate.

We like copper projects; again, they're very capital intensive. Copper is not easy to find and expensive to purchase, but there are some successful projects out there and you luck into them every now and then.

TGR: What back-of-the-napkin calculation will give investors a rough idea of a project's net asset value so they can judge that value versus the share price?

WR: I think that investors have to look at who is behind the project and who the management is. When it comes to early-stage projects, you have to be a skilled geologist to really understand the nature of the geology and the model that they're proposing for the deposit.

Unless there's already a resource, it is very difficult for the common guy to understand the geologic theory. But if there is a resource and you're given some dimensions, you can understand the competency of the ore or its lack of competency. You need a lot of information to do a proper evaluation on a property, and I get this information by using SEDAR.

Any company that's listed on the TSX must post all of its technical reports, management and discussions and analysis, financial reports and press releases on SEDAR. I really recommend that everyone go right to the technical reports and read them.

TGR: Where do you get your commodity prices when you're making your calculations?

WR: I like to use the Mining Analysts Consensus Forecast, but most people should find some sources online and divide by the number of sources to get your own set. But don't go too far out on a limb. I usually use a range of commodity prices to show management just how sensitive a project is to commodity price swings.

I would never suggest where prices are going. I always laugh when I hear people giving predictions on prices on commodities because I really think it's like predicting who's going to win the Super Bowl during preseason. There's just so much noise in the economy and unknown risks that are waiting to jump us from behind. It really comes down to the view of the board of directors on a commodity. If they're bullish on copper, then you don't care what the consensus price is because that's the way they feel about it.

One of the rules of thumb on metals price forecasts is that the long-term average price that you're using in your model should be about 1.5 times the average cost of production worldwide. In other words, if the average mine out there is producing copper for $2, you should probably have a $3 price in your model.

TGR: Wes, these days a lot of companies are looking at fast-producing properties because of higher commodity prices and the general expense of exploration. One area that is increasingly being looked at is Nevada because of its prolific gold-mining history. Are there some projects in that neck of the woods that you believe are noteworthy?

WR: Well, I am not doing too much in Nevada, but there are a couple of companies that I'm involved with that have projects there. One is Sparton Resources Inc. (TSX.V:SRI); I'm on the board of directors of Sparton and they have a project in Nevada.

There is another a company called La Quinta Resources Inc. (TSX.V:LAQ), and Heenan Blaikie LLP has been retained as legal counsel for La Quinta. La Quinta is a small-cap explorer with a gold project. It has announced a new drilling program at their recently acquired Easter Project, and you can go on SEDAR and see SRK's technical report on the property. In the report, they declared an indicated resource, which is a pretty good category, of 101,000 ounces of gold and a little over a million ounces of silver contained in about 2.6 million tons.

I can't really comment on the company's exploration projects, but I can give my opinion on what I think La Quinta's geological team needs to do to achieve what I think they should achieve in exploration.

The resource right now is greater than one gram per ton, and this indicates to me that it would have to be a heap-leach operation. This is a pretty good grade for heap-leaching, especially with gold at $1,260 an ounce right now. There are several operations out there that can make money at half this grade, but they require low stripping ratios and decent economies of scale.

At a grade of about a gram, you could support a stripping ratio of 2-1 or 3-1, which I think probably is the case, given the geology of the current indicated resource at the Easter property. The minimum production rate for a heap-leach operation is about 30,000 ounces of gold a year, and that would mean that the Easter resource would support only two to three years at best. So you would like to see that resource double or tripled from its current base.

The capital required to get a small, 30,000-ounce operation going would be about $5 million in Nevada. But I think if management's exit strategy is to be taken over at some point down the road once the operation is up and running, they would need to operate at somewhere between 60,000 ounces of recovered gold to really get noticed by other parties that want to grow.

TGR: Could the 100,000 ounces already outlined provide some cash flow to do further exploration?

WR: That's exactly right, but I think that you would want to know that there's the double or triple the current resource there before you actually went into operation. I think you nail down what you have, chip away and expand the resource. They need to find about half a million ounces to really be a takeover candidate. That should be their goal.

TGR: Are there any other gold projects that you see as having potential?

WR: I mentioned Sparton; they've got an interesting project near Atikokan, Ontario in Canada. It's neighboring Brett Resources' Hammond Reef gold deposit, which has a resource of at least 6 million ounces (Brett was taken out by Osisko Mining Corp. (TSX:OSK) Spartan has an early-stage project near that deposit. We're quite excited about it, but it's going to take some time to understand the geology.

TGR: Do you have any thoughts on mineral exploration and evaluating mineral deposits for our investors?

WR: I have spent all of my career working in the minerals industry, and I've given projects the "thumbs down" based on technical analysis but the stock still went up. There are occasions like that. You never know how things are going to turn out. There are people out there who have a knack for picking stocks and others that really shouldn't be in it.

It's a risky business to invest in; you have to be well diversified. If you are picking junior mining stocks, you need to have a portfolio of them. Do your homework. Take profits. And the trend is your friend. But be prepared to take your losses.

TGR: Wes, this has been great. Thanks for your time.

Vice president of HB Global Advisors' Mining group, Wes Roberts is a professional engineer specializing in the economic evaluation and development of mineral deposits. He has more than 25 years of experience in mineral exploration, mining operations, project engineering and management, as well as diverse mining engineering experience that includes precious and base metals and industrial minerals. Previously, Mr. Roberts held numerous positions in mining operations as well as in mining engineering consulting services with Derry, Michener, Booth & Wahl, Davy International (Aker Kvaerner mining & metals) and BLM Bharti Engineering. Following completion of business school, he worked as project evaluation consultant to Inco Limited and also engaged in assignments for the EuroZinc Mining Corporation, SRK Consulting and Griffiths McBurney & Partners. Most recently, Mr. Roberts was vice president of corporate development at Breakwater Resources Ltd.

 Want to read more exclusive Gold Report interviews like this? Sign up for our free e-newsletter, and you'll learn when new articles have been published. To see a list of recent interviews with industry analysts and commentators, visit our Expert Insights page.

1) Brian Sylvester of The Gold Report conducted this interview. He personally and/or his family own the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Gold Report: Timmins.
3) Ian Gordon: I personally and/or my family own shares of the following companies mentioned in this interview:Timmins Gold, Golden Goliath, Millrock and Lincoln. My company, Long Wave Analytics is receiving payment from the following companies mentioned in this interview, for receiving mention on my website, Golden Goliath, Millrock and Lincoln Gold.

The GOLD Report is Copyright © 2010 by Streetwise Inc. All rights are reserved. Streetwise Inc. hereby grants an unrestricted license to use or disseminate this copyrighted material only in whole (and always including this disclaimer), but never in part. The GOLD Report does not render investment advice and does not endorse or recommend the business, products, services or securities of any company mentioned in this report. From time to time, Streetwise Inc. directors, officers, employees or members of their families, as well as persons interviewed for articles on the site, may have a long or short position in securities mentioned and may make purchases and/or sales of those securities in the open market or otherwise.

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in