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12/9/14

Thoughts on the SNL Metals & Mining study

I'm glad that Kitco picked up on the SNL Metals & Mining study out yesterday that points to the growing influence of majors in overall exploration budget, because a nice man sent me the PDF yesterday and it's an interesting read. Go read the Kitco riff on the report here (Letourneau does a good job), but I'm going with a slightly extended quote from the report, here:
"Conventional wisdom holds that the major companies leave grassroots exploration to the juniors. It may therefore be surprising that the larger players are contributing 40% of all greenfields allocations in 2014. A persistent financing drought has squeezed juniors’ budgeting to the point that the majors have become the biggest drivers of early-stage exploration. Similarly, the larger players traditionally dominate minesite spending; in 2014, however, they account for only 51% of the near mine work as their investors demand improved returns over growth. It is also interesting to note that the larger players are responsible for just 32% of late-stage exploration and feasibility work."
The whole subject, plus the use of that phrase "conventional wisdom", got me thinking and I wrote this back to the nice man who kindly forwarded me the report:

Supposition: I'm a major with a penchant for exploration. 

1) I look around, see all those conventional wisdom juniors in a sector that resembles The Somme 1916.
2) I pick out a couple that look prettiest/best value/suitably beaten to kingdom come.
3) Do i buy em out? No, don't think so...adding weight to the fixed assets in detriment to current assets isn't something my CFO wants to do.
4) Do i throw money at 'em and then let the junior burn it on salaries (Zijin and Pretium)? Not that one either, i'd want control.
5) So what if I went to my target junior and offered to take a 19.9% stake as long as they gave me two seats on the board and agreed (in principle should be enough) on a cost-cutting exercise that made it lean-mean-rock-banging machine? Yeah, that's what i'd do.

Long story short what I'm pointing to is nothing more nor less than the revaluation of mineral assets. Now we're at near-zero, up has more chances than down, right? Well, I don't know if I'm right, but a big fat clue would be if some major or even Tier 2 goldie started running with that plan (AEM, perhaps?). If so, it'd be the time to position again into what you believed to be great rocks at low prices before the real money gets there. Faites vos jeux, mesdames et messieurs.