Towards a new strategy for the junior gold explorers
Posted on 13 May 2008 with no comments from readers
Managers of the junior gold explorers need a new strategy to win the hearts and wallets of the investment community. Raising capital has become far more difficult and drilling programs far more expensive. My argument is that too much investor attention has been focused on frenzied drilling activity and not enough on asset values.
Some business analysts draw a comparison between the dot-com boom and the proliferation of junior gold exploration companies, particularly in Vancouver. There has been a lot of capital raised to back some pretty whacky exploration projects, with investment often based on optimism about the rising gold price and not the specifics of individual companies.
In the dot-com days of the late 1990s you could IPO with a business plan drawn on the back of an envelope. It was a pure speculative bubble. Yet from the thousands of dot-com companies we got the giants of today like Google, EBay and Amazon. The rest just burned their investors’ cash and disappeared.
But the difference with the junior explorer explosion of recent years is that very few companies indeed have found any gold. You will not find the next Barrick Gold among the juniors. But what you do have is a whole bag of extremely valuable assets now owned by small companies. For they own the claims to land where future gold and silver supplies are most likely to be found, even if they are failing to do so.
Therefore if the management of a junior gold explorer wants to convince investors that it is worth more than its current beaten down share price – and junior stocks as a percentage of the gold price are at a historic low point which ought to be attracting investors – then they need to spend more money on getting their assets appraised than rushing off drilling more holes.
In fact, it is probably time to call a halt to drilling programs if the money is running out, and the survival of the company is at stake. What would happen then is a pitiful ‘fire-sale’ of those valuable assets. Of course, there will be juniors that do not actually have valuable assets or what is known as ‘Moose pasture’ in Canada. They are the firms that are really doomed like the dot-comers on a cash burn-out before their idea could be developed or sold or even turned into anything resembling a business.
Having launched a dot-com in 2000 during the crash and still managed to sell out in 2006 for a good profit I can appreciate the angst now being suffered by the junior gold exploration management teams.
Surely the main trick for 2008 is economic survival. Fire that overpaid geologist. Get rid of expensive offices and ancillary staff. Axe that drilling program! Instead invest in some serious due diligence work by reputed accountants and consultants. Get a serious view of what your assets are worth, and then publicize that research, perhaps on a smart, cheap website.
At the moment nobody knows much about what the juniors actually own, where it is and what its potential might be. And drilling results can be mighty confusing, not to say downright misleading. Get something investors can read and understand.
My guess is that the survivors of the juniors’ sector shake-out – which is what the current share prices are telling us is about to happen – will be those tightly run concerns with the lowest costs and the best assets.
The best assets to own are gold claims near to existing large mines or finds of a commercial size that are gearing up production. Companies that have these assets will become very valuable if they avoid excessive cash drain and can probably afford to sit back and watch the gold price rise. And if they do anything it should be publicizing the results of serious due diligence on the value of their existing assets, not spending cash on yet more drilling that will likely show no return.
