In April 2001, NovaGold – then trading for a mere C$0.35 a share – completed a company-making move by taking control of a multi-million ounce gold deposit in exchange for a mere $10 million worth of work.
Major gold producer Placer Dome had invested millions of dollars in the deposit, and outlined some 13 million ounces of gold. However, in the gold price environment at that time, they saw the grade as too low. They cut a deal that gave NovaGold 10 years to complete $10 million worth of work on the property to earn a 70% interest.
The NovaGold geological team reckoned that the gold price would recover. They also believed that they would be able to unravel the geological complexity of the deposit and pinpoint areas with higher grades.
They were right on both counts – in fact more right than even they imagined. Almost immediately upon commencing drilling, NovaGold hit grades as high as 20 g/t gold, greatly boosting the average grade of that planned open pit deposit.
By November 2002, more than eight years ahead of their commitment, the company had spent the money to earn its interest. A new resource estimate for the deposit came in at nearly 25 million ounces – establishing Donlin Creek as one of the largest undeveloped gold deposits in the world. Not only big, but with a grade that promises a big payoff.
Placer Dome now likes the project enough that they have elected to earn-back to a 70% interest and are advancing toward development of a project with a planned production level of more than one million ounces a year. NovaGold will receive 30% of those ounces without the need to invest another penny in the project.
That impressive exploration success helped boost the share price as high as C$12.15 – a 35-fold gain from when NovaGold optioned Donlin Creek. That sensational gain in the share price was boosted by the acquisition of two other big projects from majors.
The NovaGold phenomenon – a junior company earning into a massive project for what ends up amounting to a pittance – has in fact happened a number of times over the last few years.
Another case in point, recently in the news, is the Pebble project, also located in Alaska. Hunter Dickinson-run Northern Dynasty optioned that project for $10 million. The seller was Teck Cominco, who auctioned off the copper-gold prospect in 2001, when prices for both metals were unimpressive. Northern Dynasty’s subsequent work has revealed that the property holds some 42 million ounces of gold and 24 billion pounds of copper, making it one of the largest undeveloped deposits in the world.
Why did two deposits, which now rank among the largest in the world, and dozens of other highly attractive deposits, end up in the hands of juniors?
Part of the answer lies in the low metal prices at the time that some of the deals were done. The majors simply didn’t have exploration budgets, and the deals with the juniors allowed the projects to be advanced. “I’m following a couple of dozen other situations where juniors acquired potentially very large deposits at the low point in the metals cycle.”
However, even with metal prices now at sky-high levels, juniors are still acquiring world-class exploration projects from the majors. Why?
A couple of reasons, according to Lawrence. The largest of the majors are looking for huge deposits and are willing to pass up anything that doesn’t meet their nearly impossibly high bench marks. The second factor is a fundamental shift in the concentration of geological expertise within the mining industry.
“A lot of the mine-finding talent left the majors after 1997,” said Lawrence. “There were major cuts in exploration spending when the metal prices plunged, which led to big cuts in exploration talent in the major companies. Some of the geologists with the best ability to find mines are now working with the junior exploration companies where they have a significant ownership.”
Once those highly talented people get a sense of the wealth they can generate for themselves by owning a piece of a successful exploration company, the majors are finding it difficult to lure those professionals back into a salaried position.
It’s more than just the ownership stake. In a junior company, geologists have more operational freedom, more of an entrepreneurial spirit. That makes it all the harder to return to being a little cog in a major miner’s machine.
Now, with the metal prices at sky-high levels, the majors are scrambling to rebuild reserves, but facing a shortage of talent.
“The majors don’t have the crews of geologists that they can send out,” according to Lawrence. “There’s been quite a number of projects where the majors have turned over deposits to the juniors and retained a back-in right. If the project evolves into a successful world-class deposit, the junior will be funded, in some cases right through to production.”
A more modest level of success would leave the junior with a control position in a deposit that could also have a huge impact on the value of the company.
The majors’ lack of good rock hounds has led them to effectively recruit talented geologists by partnering with the smaller, more nimble firms.
Lawrence pointed out, however, that, even though numerous juniors have acquired properties from the majors, these companies need more than just a big deposit to succeed. For starters, the company must be able to generate interest in the property by expanding on the work already completed. For this, they need a combination of geologic skill and blue sky geology with the potential to add significant ounces or pounds to the deposit’s overall resource. “There has to be some indication that there is potential for higher grades or for extensions or additional targets that could replicate the resource that’s currently in hand,” he noted.
This is exactly what NovaGold and Northern Dynasty did on their respective properties. Bell Resources, another of Lawrence’s picks, is also taking a similar approach at their recently-acquired Granduc Mine in northern British Columbia.
The mine was developed by Newmont and produced over 15 million tonnes of copper ore between 1968 and 1984, and is currently estimated to contain about the same amount in remaining resources. But Bell believes they can delineate a new zone of high-grade VMS mineralization near the mine that would significantly expand the resource. “The real value there is that by applying some modern geological thinking, they’re looking at multiples of the original deposit,” Lawrence said. “There’s huge upside if they’re successful in that exploration program.” Bell purchased the property last November for $284,000.
Another important consideration for a junior is the size of the deposit. “One of the most important criteria is that the property has to have the potential to be large enough to attract a take-over offer from a large mining company,” Lawrence told us. “It’s hard to get excited about a small company talking about bringing a small mine into production.”
In this regard, he sees a great deal of upside in Norsemont Mining’s Constancia project in southern Peru, in which they have an option to earn a 70% interest from Rio Tinto. The major had already outlined more than 6 billion pounds of copper, along with credits of gold, silver and molybdenum. Norsemont’s geological team believe they can expand that deposit and otherwise enhance its value.
Lawrence cautions that such deals with the majors are becoming less common as the metals bull market heats up and companies place a higher value on their properties. “Early in the cycle, those things were coming out left, right and center,” he said. “It’s getting harder to find that kind of model now that activity has picked up.”
However, he noted that there are still numerous companies that acquired cheap ground early on and are now bringing these prospects to the attention of the market. Such properties, in the hands of an adept junior, are likely to present significant investment opportunities as the commodities bull heats up and more investors are willing to invest in top-notch deposits in the hands of small-cap companies.
Lawrence Roulston is the editor and publisher of Resource Opportunities, a newsletter devoted to finding undervalued investments opportunities in the resource sector. Resource Opportunities has an impressive track record of providing unique and profitable investments. Drawing from his geological background and experience as president of a junior exploration company, Lawrence Roulston has established himself as a practical and objective Resource Analyst.
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For information on another company exploring a deposit acquired from the majors, check out: Keegan Resources.