GoldEditor: Roundtable Discussion

What are biggest discoveries of this cycle so far?

It's easy to point to the big discoveries - Southwestern Resources (SWG.T), Nevsun (NSU.T/Amex), Linear Gold (LRR.T), IMA Exploration (IMR.V) and Virginia Gold (VIA.T) have all made tremendous discoveries.

Yes, the two big finds to date are IMA's Navidad silver discovery in Argentina, currently at 250 million ounces and growing; and Virginia Gold's Eleonore discovery. IMA is still adding ounces at Navidad and we continue to think that Eleonore will be considered one of the finds of the cycle before it's over with.

But it's interesting, this metals market is different in that few investors have made lots of money off of these finds. Southwestern and Linear were not widely held before their big discoveries. IMA and Nevsun have been hamstrung by a legal entanglement and country risk, respectively, while Virginia is still a story-in-the-making.

So, even with exploration success, not a lot of wealth has been created and spread around the resource stock market. So many people don't see the new discoveries, simply because their wallets haven't been thickened as a result.

In addition to the big discoveries that make the headlines, there have been tens of smaller, but still important discoveries. A lot of companies have outlined deposits that will surpass a million ounces and eventually make a lot of money for shareholders. It's similar on the base-metal side.

There also have been several "re-discoveries", projects that had been worked previously but were abandoned when the exploration business turned down after 1997. Investors lose track of the fact that discoveries are often made drill hole by drill hole. It is typical for that process to carry on from one season to the next before enough results define the scope of a discovery. I believe that several new discoveries have already been made, but it will take more drilling to get the confirmation that investors need.

Follow-up drilling, building on the early results - vectoring in, if you will - can lead to an important discovery at a time when there is a lot less risk than putting down the first exploration holes.

Importantly, given the amount of money that has been raised and put to work, there are more discoveries on the way.

What are criteria for finding companies with the best chance of success?

Lots, too many to talk about here. But some of the most important are finding the right people, plan, properties and timing.

The people in this business can be roughly divided into three camps: the good, the bad, and status undetermined. You want a management team that is both honest and competent. There may be degrees of competency, but to me honesty is an on/off switch. A person is, or isn't...and this is much more difficult for investors to judge. And stick with management teams who have demonstrated some level of success. They are the most likely to do so again. These people must also have the right plan. If their "big idea" is to find a small, high-grade, vein-hosted deposit and bring it into production themselves - run for the hills. Also, generally, I avoid situations where the exploration team plans to bring even large-scale deposits into production themselves, rather than sell it off to a major.

The job of exploration companies is to make discoveries, and reap the benefits. Time is money, and waiting around for a project to be developed and brought into production is overly costly for speculators. Properties can represent the most important factor -- so important that it can nullify all the other factors. For example, a world-class property can make a bad management team look good, while even a top-level team can't make a terrible property work.

You need to concentrate on projects with large-scale potential -- a million ounces or more for gold projects, and 50 million ounces or more for silver. Don't waste your time on any company or project with goals set lower than that, since the market will never accord them much attention.

I agree that million-ounce-plus targets can be the quickest way to a big payoff. However, the majors are much slower to react now than they once were. It may take a couple of years to get a project to where a major will pay several hundred million dollars of hard cash.

While my first choice is to own a company with prospects of being taken over by a major, I like several companies that could emerge as mid-tier producers. A company with a capable and experienced development/operating team and a plan to bring on a number of small or mid-size mines quickly could pay off in a big way. I believe that there's big appetite for emerging mid-tier producers, those companies that have the projects and the skill set to convince investors that they will one day be substantial mining companies.

When's the best season to accumulate exploration stories? When do you buy exploration companies?

It's important to get involved before the information flow really starts from the projects - during the seasonal lull between exploration campaigns. Two companies where you could have done very well by just buying in spring and holding through the season the past two years are Commander Resources (CMD-V) and Knight Resources (KNP-V). Commander's projects are concentrated in the far north so the news flow comes in July to December.

Knight is similar, with a relatively short season in the Raglan area of Quebec. The company is fully funded for this year and its joint venture partner Anglo American Exploration (Canada) will start spending its own money once this year's program is half done. Knight has a very large land package where it and Anglo have proven that they have the same rocks that enclose the deposits at Falconbridge's (FN-T) nearby Raglan mine.

Timing is crucial. You don't want to buy during the euphoria following outstanding drill results, when everyone and their mother is chasing a stock. Identify the right company, and then pick your spots carefully and patiently. Buy well in advance of major drill programs, before the rest of the market begins to jump onboard. And be prepared to buy again if, as often happens, profit-taking drives the price back down after good results are released.

And I would add that frankly, now is the time. Some of the best companies are on sale at this moment, right when they're on the verge of delivering news. For speculators who are able to see the big picture, it doesn't get much better than this.

This is a great time to go hunting for companies on the verge of big discoveries. The market's in a funk, no one's paying attention, and some great stocks are selling at fire-sale prices.

Buying a junior exploration company just before it puts that first hole into a new discovery is every speculators' dream. However, we all know what the odds are of that. And it is very rare for a company to hit the bull's eye of a new discovery on the first hole, or even the first few holes.

Starting with a few drill holes already in place greatly reduces the risk. Buying a company after the first drill results, in some cases, can be doubly advantageous. The lack of sizzle in the early results may lead investors to dump the stock, even if the results may be extremely significant geologically.

Often, the very best time to buy a company is just before the start of follow-up drilling. The share price may be down; and with the earlier results as a guide to where to put the next holes, the company has greatly reduced the exploration risk.

Which companies do you think have the best chance for a major discovery, or to increase a deposit - to add significant shareholder value in some way?

There is still a lot of upside in Virginia, but many companies are funded and ready to drill. One is Radius Exploration (RDU-V) which has proven mine-finding management, a full treasury and strong projects. Even with all that it is near its lows for the year - even though it's JV partner in Nicaragua is drilling a huge program at their own cost. And Wolfden Resources (WLF-T) is also near its lows even with over $30 million in the bank and plans to be the most active driller in Canada this year. Another company just getting ready to drill is Bear Creek Mining (BCM-V) which has seen some gains from trenching results on is silver-gold projects in Peru but could get a lot more attention if those results are duplicated in drill holes.

Among the top values right now is Knight Resources (KNP.V). Geologically, they have all the information they need to confirm a likely twin of Falconbridge's legendary Raglan nickel deposit. But, because last season's drill results weren't blockbusters, and because the company wasn't going to be drilling again until the summer, investors dumped the stock last November.

But now, the company is set to start drilling again, and I think they're going to do everything possible to make sure the program yields assays that please not only the geologists, but the market as well. In other words, this is the perfect time to buy the stock.

We think there's a still lots of room for discovery at Knight's West Raglan project, and there's no discovery premium on the stock.

Other companies well-positioned to advance significantly in the short term include Portal Resources (PDO.V), Bear Creek Mining (BCM.V), Goldbelt Resources (GLD.V), Silvercorp Metals (SVM.V) and Linear Gold (LRR.T).

Linear Gold is another great value right now. The company's Campamento discovery in Mexico stole the headlines last winter. But sure enough, recent results haven't lived up to expectations, and the share price has dropped considerably from its highs. But Linear has already proven up a substantial high-grade resource at Campamento. This resource, and the company's other projects, are worth far more than its current market cap. Add in the likelihood that Campamento will continue to grow, and the other highly prospective targets nearby, and you get a rare value that won't last long.

Crosshair (CXX.V) will be drilling its Moran Lake uranium / IOCG target in Labrador over the summer. The shares got knocked back a bit after announcing results from another drill program that appear to have fallen short of investor expectations. Another high risk/high reward type exploration play is Full Metal Minerals (FMM.V). They will also be doing summer drilling on northern projects. They have a couple of projects in Alaska that could pay off in a big way with successful drill results.

There are many other companies that will continue to systematically add value over the coming months. But that success will come bit by bit, not in one spectacular headline.

Are we going to see the majors buy out any of these exploration companies, like they did 10 years ago?

Yes…but they will be slower in coming and the majors will be selective. Even mining company executives are just coming around to the belief that this is a secular bull market and they need to be in that comfort zone before they write the big cheques.

The Majors know that they need juniors to grow. We know of a number of majors that are trying to strike up regional or even global partnership with the "best in show" exploration groups. They still have to prove to those strong junior management groups that these deals are a better choice than just funding in the market.

Look at Knight and their JV partner Anglo. Anglo exploration personnel did investor meetings side by side with KNP's exploration people. Anglo was at pains to point out that they were going to focus in on areas they thought had the best chance of producing results that would increase Knight's market value. It used to be that a major like Anglo would not have given the management or the shareholders of a junior JV partner a second thought.

Majors know that they will have to shop for projects before long and they don't want to be seen as anything but an asset to those who invest in juniors. This really is a very different cycle to the last few, one with a long way to go and lots of gains to be had along the way.

In the last exploration cycle, the majors were primarily focused directly on projects. The early-stage deals were mostly options or joint ventures on a particular project. Takeovers were intended to get a specific project. This time around, a lot of the money from the majors is going into equity deals with juniors.

In effect, the takeovers are happening one step at a time. That's a smart approach. The majors are getting a stake at ground floor price levels, but leaving the companies free to get on with the job in an entrepreneurial way. When the time comes, they will already own a significant piece of a takeover target.

One of the objectives for the majors in doing deals with junior companies is to access exploration talent. For example, I believe that one of the reasons that Anglo-American approached Knight with their Raglan project was to gain access to a part of the exploration team that played such an important role in the exploration of the Voisey's Bay deposit.

We've covered a lot of material here. Is there anything else you would like to add?

There is another important topic that we have just touched on; that I believe is at the forefront of many investors' minds. That is: How much longer will this correction go on? The market for junior mining companies was pretty hot early this year and prices moved up too quickly. Once a few investors started to take profits, it was like a flock of birds after one of the birds in the flock panics and takes flight.

I expect the prices of the majority of exploration companies will trend sideways for some time yet - weeks not months - before there is a general turnaround in investor sentiment. The turnaround could be event driven - a discovery or a move by one of the majors, for example. Otherwise, there will simply come a time when enough investors realize that stocks of good companies won't get any cheaper and they should get on board before it's too late. Now's the best time that I've seen in a long time to be building a position in the junior mining market.

China just put out very strong growth numbers and most metals continue to defy predictions of their imminent demise. We do think some base metals will cool but it won't happen until there is a build in warehouse inventories. Most metals, particularly nickel, are still in very tight markets.

Most importantly, the major mining companies remain intent on finding new reserves to replace the metal they are mining each year.

For example, the mining industry needs to find 2.8 billion pounds of new nickel reserves each year just to offset the amount produced. Consumption of nickel is growing at 4% a year. To put that into perspective, Inco's Voisey's Bay mine, due to come on stream next year, will merely satisfy the growth in nickel demand for one year. The industry needs to bring a new Voisey's Bay into production each year just to keep up to demand, and it needs to find 2.8 billion pounds a year of new nickel reserves to offset depletion from annual production.

Prices for most metals are expected to stay high enough to generate great profits for producers and speculative upside for explorers for some time to come.

Gentlemen, thank you for your insights and your time today. One company's exploration success is a win for us all.