The best opportunity to find outsized returns in the gold and silver space is on the discovery and exploration side of the market because that's where you can accurately time the macro cycle for gold, says Crescat Capital Chief Investment Officer Kevin Smith.
“If (large-cap gold producers) are going to replace their depleting reserves, they are going to have to come in and buy up the new deposits or the companies that control the new deposits,” Smith explains. “Not the leftover low-grade deposits that are never going to become a mine in any environment but the truly big new discoveries. So, that's where we've been working with Quinton.”
Dr. Quinton Hennigh is a geologist who Smith first met 26 years ago when he moved to Colorado while Hennigh was busy finishing his PhD in geology/geochemistry at the Colorado School of Mines.
“And that's when the light really went on that the opportunity in gold and silver exploration is on the left-hand side of the Lassonde Curve.”
Smith followed Hennigh’s career as he started with Homestake Mining.
Homestake was later acquired by Barrick Gold Corp. (ABX:TSX; GOLD:NYSE). Hennigh also worked for Newcrest, Australia’s largest gold miner, and Newmont Corp. (NEM:NYSE), now the world’s largest gold miner.
He left Newmont, Smith says, due to a lack of grassroots exploration funding.
That’s when Hennigh decided to work with smaller precious metals companies.
Hennigh was a geologist with Kirkland Lake Gold Inc. (KL:TSX; KL:NYSE) when the company decided to merge with Newmarket Gold Inc. and its high-grade Fosterville gold mine in Australia, which has proven to be one of the most profitable gold mines in the world. Kirkland Lake now has a US$11.3 billion market cap, up from about US$90 million when the deal was signed.
"The Lassonde Curve is essentially an arc that tracks the three lifecycle stages of a junior mining company: the exploration and discovery phase, development phase, and production phase."
In August, Hennigh was appointed as Crescat’s full-time Geologic and Technical Director.
“I invited him in two years ago (as a consultant) to help advise us on our portfolio,” Smith tells Streetwise. “And that's when the light really went on that the opportunity in gold and silver exploration is on the left-hand side of the Lassonde Curve.”
The Lassonde Curve is essentially an arc that tracks the three lifecycle stages of a junior mining company: the exploration and discovery phase, development phase, and production phase.
The Y axis is the stock prices, while the X axis is time. A company goes steeply up the curve during the exploration and discovery phase if there are successful drill results and proof of a significant discovery.
Smith says that phase is followed by the “Valley of Death,” or the development phase where a company must do the hard yards of mine permitting and raise the necessary capital to reach production before getting to the production phase, when the stock price usually starts to move up again.
“That's the right-hand side of the Lassonde Curve where a lot of money is made, again, as a company transitions from development to production. And in the early years as (the company) starts producing,” Smith tells Streetwise. “But I think a lot of people in the gold and silver mining investment business tend to focus on either the development phase (value) or production phase, while the discovery and exploration phase is forgotten. But for a mining company, that is the phase where, if the company is successful, a lot of value is created.”
Crescat’s approach goes something like this: Take a position in a company at a low valuation and essentially buy gold and silver ounces in the ground for a few pennies on the dollar. Crescat rides those companies up the left-hand side of the Lassonde Curve and sells them for around 20 cents on the dollar as they prove up those new deposits with drill results.
Smith says two such investments were 15 baggers.
He considers some other factors, too.
Smith scores potential investments on different dimensions. Management is a key factor, but Smith says the number one factor is grade.
“We have a management score, a technical team score; we have a target for the number of gold-equivalent ounces that the company is on to through its initial geophysics and geochemistry data,” Smith explains.
“Our portfolio has over 300 million gold-equivalent ounces in our targets. And we score when we think they're going to hit the peak of that left-hand side of the Lassonde Curve.”
Jurisdiction is also important.
In the U.S., Smith likes Nevada, Alaska, and Arizona, while Australia and Finland top his list outside of North America. He also likes most Canadian provinces, but British Columbia in particular.
One company in which Crescat has a position is Eskay Mining Corp. (ESK:TSX.V), where Hennigh is also a director. Eskay controls more than 52,000 hectares in the Golden Triangle region in north-central British Columbia.
So far Crescat has participated in three rounds of financing in Eskay and, if it exercised all of its warrants, it would own about 14.3% — its largest position in any junior.
To date, Eskay has finished more than 19,000 meters of diamond drilling in 86 holes, and the junior will drill roughly 30,000 meters this year.
“There's going to be a lot of drill results coming out over the next four or five months on this one,” Smith says.
“We really believe that Quinton, DeDecker, and Tom Weis have found the extension of the original Eskay Creek high-grade deposit ... on Eskay Mining’s ground."
“We want to be with this one for the long term. It's one we score with the highest probability that they are going to be on to a major high-grade discovery,” he adds.
John DeDecker, Eskay’s lead exploration geologist, did his post-doctorate work under Thomas Monecke, an economic geologist on Eskay’s geological advisory team, who is largely credited with the discovery and deep understanding of volcanogenic massive sulphide deposits (VMS) — basically high-grade, multi-metallic gold systems.
The now defunct Eskay Creek gold-silver mine, which sits just north of Eskay Mining’s land package, was a VMS deposit and the most profitable gold mine ever mined in North America. It’s the reason Barrick bought Homestake and remained profitable in a low gold price environment at the turn of the century.
“We really believe that Quinton, DeDecker, and Tom Weis, former head geophysicist for Newmont, have found the extension of the original Eskay Creek high-grade deposit and we think it's on Eskay Mining’s ground. Our goal is to prove that.”
Goliath Resources Ltd. (GOT:TSX.V; GOTRF:OTCQB; B4IF;FSE) is another company that Crescat has supported in the Golden Triangle through two rounds of private investments in public equity (PIPE) investments.
It’s not a VMS deposit but rather a porphyry sheet of gold mineralization that was discovered in an outcrop near the edge of a cliff.
“Quinton said you guys need to take a position in this company and help fund the drill program,” Smith recalls “You can look at pictures of the drill hanging out over the edge of this cliff. They're drilling it, and the results have been very encouraging so far.”
“Blackwolf is onto a big, high-grade copper, silver gold VMS system."
Crescat’s other position near the Golden Triangle is Blackwolf Copper & Gold Ltd. (BWCG:TSX).
The Robert McLeod-led junior is exploring a high-grade copper, silver-gold VMS deposit on the northwestern edge of the Golden Triangle.
McLeod was the vice-president of exploration with Underworld Resources when it was acquired by Kinross Gold Corp. (K:TSX; KGC:NYSE) and President and CEO of IDM Mining, which was acquired by Ascot Resources Ltd. (AOT:TSX.V).
“(McLeod) comes from a famous mining family and is one of the CEOs that we really like because of his experience, and he’s someone that Quinton really gets along with,” Smith says.
“Blackwolf is onto a big, high-grade copper, silver gold VMS system. It's a super high-grade multi metallic mine,” he added.
He concluded: “It's another exciting name that we think is really undervalued, and we’ve got a significant position in this in this company.”
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Disclosures:
1) Brian Sylvester compiled this article for Streetwise Reports LLC and provides services to Streetwise Reports as an independent contractor. He or members of his household own securities of the following companies mentioned in the article: None. He and members of his household are paid by the following companies mentioned in this article: None. His company has a financial relationship with the following companies referred to in this article: None
2) Dr. Quinton Hennigh is Crescat Capital’s full-time Geologic and Technical Director. Kevin Smith is Crescat’s Chief Investment Officer. You should assume that as of the publication date, Kevin Smith and Dr. Quinton Hennigh have a position in the securities discussed and therefore stands to realize significant gains in the event the price of security moves.
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