Will 2015 Break this ‘Dry Spell’ for New Discoveries? -- Steve Todoruk
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.
S&P Venture Composite Index
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.
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.2 Fission 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 ew 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.