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Precious Metals Special Report:
The Cortez Story: Right
Right State, Right Country, Right Time?

By Bill Fox


Part Two



Exploration plays tend to be heavily focused on geological theory, specialized valuation techniques, and map studies.

First we need to understand the basic geological theory that has revolutionized the Cortez Trend. Exploration is about playing Sherlock Holmes with geological clues to make an intelligent bet about the size of potential deposits and the probability that they will become economic. In order to intelligently put the clues together, one must begin to grasp geological system concepts and the analytical processes utilized by competent geologists to identify exploration targets.

Secondly, we need to acquaint ourselves with some basic valuation methods. On the quantitative side, this includes basic "expected value analysis." On the qualitative side, I provide examples of evaluation methods used by sources such as Kaiser Bottom Fish.

In regard to map studies, I provide color-coded Intierra Resource Intelligence hot play maps of the Cortez Trend area in Part Five that you can minimize on your computer screen and refer to as you follow my discussion of particular companies elsewhere in this series.


As I mention in my article "The Dual Nature of Gold and a Mystery," gold remains one of the most difficult and costly metals to find and extract. Compared to iron, which must be concentrated in geological anomalies five times more than it is randomly found in the earth’s crust to be economically mined, gold must be at least 1,000 times more concentrated than its random natural occurrence. Only about one in five thousand gold mining claims results in a profitable mine. Most rich surface anomalies quickly fade out rather than form economic trends.

The gold mined in Nevada is microscopic, dispersed, and typically found in sedimentary rock. It is a true statement that gold can be found virtually everywhere in California, Nevada, and elsewhere along the Pacific Rim, except that it is normally extremely sub-microscopic and extremely dispersed. The question is where is it concentrated enough to be economic to separate it out from its surroundings.

For some reason gold tends to be much more concentrated in the earth's crust in northern Nevada than in certain adjoining Western states, such as Arizona which tends to be rich in copper but far less endowed with gold. Eastern Oregon may have gold-bearing structures running north from northern Nevada, but they have far more strata covering over them. This makes gold deposit both more expensive to mine and less likely to provide seepage clues regarding their whereabouts. Also, Oregon law prohibits the use of cyanide to leach the gold out of ore.

The best way I can simplify a lot of complex geological theory is to point out that gold tends to concentrate into economic deposits where nature performs mechanical actions somewhat analogous to what a prospector does when he pans for gold.

Gold is a heavy metal, so by swirling ore mixed with water in a pan, the prospector gradually washes away the lighter raw earth elements, while skillfully keeping reserved in the base corner of his pan a place to "trap" increasing concentrations of the heavier residual gold particles within the "black dirt" (or "pay dirt") that tends to surround it.

For the forces of nature to separate out gold from hot magma, it helps to have swirling magma and pools of underground swirling water working together. To trap and build up the gold deposits, we need to have gold-bearing fluids that rise off the magma seep into cracks and fissures in the earth. This is somewhat analogous to the way a miner sloshes increasing concentrations of "black dirt" carrying gold towards the bottom corner of a pan. It also helps to have types of rock whose molecular structures tend to grip and hold gold particles, which are typically sedimentary rocks. Lastly, it helps to have nice long channels of seepage where under various temperature and pressure conditions, the different elements within the gold bearing fluids start to condense (mineralize) and sort themselves out and form distinct deposits at different intervals. As an example, as gold bearing fluids simultaneously push up diagonal crevices and cool down, the base metals start to precipitate out first, starting with cobalt, and then followed by lead, zinc, and copper. Further up the crevice, we get arsenic, mercury, antimony, and gold. This is one reason why elevated arsenic, mercury, and antimony concentrations in soil can be a clue regarding nearby gold.

To be economically mineable, it helps greatly if the types of earth strata that are relatively good at trapping gold get thrust up close enough to the earth's surface to be highly accessible to miners. In order to find the gold deposits in the first place, it helps if surface soil conditions can provide various forms of "seepage" from major underlying deposits, such as through very tiny little veins or from geological surface upheavals. It also helps if faulting causes rocks to rub against each other, creating layers of rock fragments (referred to as brecciation) that make good traps to induce gold precipitation out of gold-bearing fluids.

Over the last five hundred million years, Nevada has experienced an unusual confluence of all the aforementioned factors. As mentioned earlier in this paper, some parts of the earth's crust just happen to be richer in gold particles than others, and the northern Nevada crust just happens to be lucky that way. You need deep cracks in the earth's crust to help bring magma closer to the surface. Interestingly enough, a geologist told me that the earth's continental crust is about half as thick in Nevada compared to elsewhere in the US. The Cortez Fault system may go down all the way through the crust. Most of its mountain ranges (which tend to run North to South, NE to SW, or NW to SE) are flanked by faults. You need continued agitation, and Nevada remains the third most seismically active state after California and Alaska. You need the swirling water, and Nevada is very active with underwater geothermal activity throughout the state. In fact, some geologists speculate that the "hot spot" that now produces the geysers in Yellowstone National Park once existed under north-central Nevada and helped concentrate gold. Lastly, for Carlin-style deposits, one needs sedimentary rock to trap the gold in its fissures.

Nevada actually has two layers of sedimentary rock. One is near the surface, and is so-so in hosting gold, but can do a reasonably good job of trapping gold-bearing fluids beneath it. There is a second layer much deeper down called the Lower Plate which has been much better at hosting gold deposits and has been correlated with the major gold deposits of the Carlin Trend. You need enough surface erosion and subterranean cracking, faulting, crustal stretching, and geological instability over tens of millions of years to allow blocks (called "horst blocks" in Nevada) of the deeper lower plate gold-bearing strata to get in range of open pit mining.

In order to become a major gold producer, Nevada had to have the right geological sequence. Nevada had to first act as an ancient sea bed to form the sedimentary rock that acts as the "pan" to trap the gold, then later experience the cracking, magma swirling, and geothermal action that "swirls the gold in the pan."

At the January 2005 Vancouver Resource Investment Conference, Joe Kizis, President of Bravo Venture Group, summarized for me the three major variables that create economically mineable gold formations:

1) Source of fluid. Some kind of magma-related event creates gold-rich fluids that get pushed up through the earth's crust. One typically needs hydrogen and sulfur in solution to carry the gold.
2) Structure. The gold bearing fluids have to find cracks or permeable strata to rise towards the earth's surface. Sometimes gold-bearing fluids can pass through rock formations without precipitating out the gold. Sometimes the gold fluids will rise vertically through a crack, and then hit a horizontal strata of brecciated rocks ground into pebbles by faulting action and then fan out horizontally.
3) Host environment. Something has to precipitate out the highly dispersed gold in the gold-bearing fluids rapidly enough to create economic gold concentrations. The precipitation process is influenced by such variables as temperature, pressure, chemistry, and fluid mixing. The precipitated gold also has to precipitate against some kind of host rock that does a reasonably good job of acting like a gold particle "sponge."

Chemistry is relevant...

It helps to know something about chemistry to understand the clues geologists look for to find the deposits that can send your junior gold mining stocks skyward.

One type of chemical separation involves rocks that are rich in iron. The iron may bond with the sulfur in the gold-bearing fluids, forming pyrite ("fool's gold"), which in turn may strip away the sulfur as a carrier for gold in solution and cause the gold to precipitate out. The Roberts Mountain formation in the Cortez Trend consists of a "platy" silty limestone rich in a certain type of iron that tends to react with gold bearing fluids and fix the gold to itself and create deposits over a "platy" stratum rather than allow it to pass by.

Another chemical example involves the presence of water. It can also precipitate gold by changing the acidity, temperature, and salinity of the gold bearing fluids. The presence of hot water can suggest a heat pump system that helps circulate water and enhance the gold separation process. Hot water is found in deep drill holes throughout the Cortez Trend.

Finally, a third example may involve oil and natural gas, in which the same hosting structures that trap oil and gas can also trap gold-bearing fluids. Carbon molecules in the methane interact with the gold bearing fluids to separate out what becomes graphite, gold, and water. Most Carlin deposits have "carbon front" features, to include those found along the Cortez Trend.

Macro earth science is also very relevant...

Last, but not least, I would be remiss if I did not touch on plate tectonics, whose several hundred million year-long alternating compression-stretch cycles have played a huge role in Nevada's geological history, and help explain the age, direction, and magnitude of gold-bearing fracture zones that tend to run NNW, WNW, and NE. I describe all of this again with some more details in Part Five.

Roughly 700-900 million years ago the Australian continent may have rifted away from the western edge of the North American land mass. By one interpretation, the continental margin of North America ran through north central Nevada. As Australia drifted away, the oceanic area in-between started piling up marine sediments for several hundred million years which subsequently formed excellent host rock for gold deposits.

Then about 300-400 million years ago the rifting apart process changed 180 degrees. A new cycle of oceanic and continental plate collision began that would last roughly 350 million years. Geologists call these types of mountain-building collisions "orogenies." .Two Pacific tectonic plates (the Kula and Farallon plates, to be precise) and the North American Plate began to converge relative to each other.

This created enormous compressional forces that started folding up mountain ranges perpendicular to their principle stress direction. Western North America began to fold like an accord ian between its west coast all the way to where Denver, Colorado and the edge of the eastern Rocky Mountains stand today. Part of the Pacific plates dove underneath the earth's crust ("subduction"), but another part splayed off and thrust more horizontally into the earth's crust to create the folding action. Fifty different exotic terrains were sutured on to the West Coast during the Mesozoic era (248 to 71 million years ago), adding 25% to the continental crust of western North America.

Nevada's geology began to resemble a train wreck with strata getting cracked, scrunched, and folded up in many different directions. Parts of the oceanic plates subducted under the crust melted and formed magma "plutons" that rose towards the surface and formed intrusive features associated with gold-bearing structures that I show in diagrams in Part Five.

About 40 million years ago, the extreme compressional forces subsided as the bulk of the Kula and Farallon tectonic plates slipped underneath the North American continent for good. In fact, the relative compression shifted 180 degrees once again, and a new period of relative rifting began. In the last 20-30 million years, the Basin and Range area, which includes the mountains of Nevada, has seen a stretch process that geologists call an "extension." They claim that when the Farallon Plate completed its slide under North America about 40 million years ago (with the exception of a remnant called the Juan de Fuca Plate that still subducts off the Pacific Northwest to this very day), this coincided with the beginning of a rebound effect whereby the western US stretched out about 150 km. This continental stretching continues to this day, with California moving away from Colorado at about a centimeter a year. Some day an ocean will probably develop between the two areas, much like what once happened when Australia drifted away from North America.

When the tectonic plate rebound process began about 40 million years ago, the Pacific Plate that supports the Hawaiian islands executed a counterclockwise rotational shift and changed its thrust direction. The North American continental plate also changed direction, but not as much. A huge pulse of gold-bearing fluids surged from very deep in the earth towards the surface in Nevada, traveling through the myriad cracks created in the prior geological ages. This created most of the Carlin-style gold deposits found today.

Western North America's geological formation stabilized enough 40 million years ago so that the general drainage pattern we now call the Colorado River began to form. New "fault-block" mountain ranges have been developing as the continual stretching (or continental "spreading" -somewhat analogous to "seafloor spreading" --by another geological interpretation) widens cracks between mountain ranges.

The mountainous areas of the continental crust continue to maintain their elevation since they rest on the earth's mantle. However, the valleys between them include cracks that are steadily widening. The rate in which valley floors drop depends on the rate in which they fill with eroded materials compared to the rate in which the widening cracks create new void to be filled. Death Valley, California, is an extreme example where a relatively low rate of erosion from less than 2 inches of rainfall a year compared to a high rate of valley widening has dropped the valley floor to 282 feet below sea level.

Amidst all this, exterior oceanic tectonic plate pressures continue to apply along the Pacific Rim at odd angles, one good example being the San Andreas fault. Nevada and California remain unstable, and still experience periods of volcanism, earthquakes, and rifting.

John Kaiser's commentary below provides some other interesting details regarding this history. It is contained in his article about Gateway Gold Corp, which operates NW of the Carlin Trend:

Key buzzwords associated with Carlin-style gold deposits in Nevada are "Upper Plate", "Lower Plate" and "Roberts Mountain Thrust". During Cambrian to Mississippian time [345 to 320 million years ago] northeastern Nevada had been a continental margin that shed sediments into an oceanic basin. The basin sediments graded westwards from silty carbonates (today known as Lower Plate) to siliciclastic rocks (Upper Plate). Starting in Late Devonian time [367 to 408 million years ago] as a result of "compressional tectonics related to the Antler Orogeny" the western sediments were thrust eastwards over the silty carbonates, like one plate sliding over another. The result is two distinct sedimentary sequences, one stacked on top of the other. The thrust plane, or the interface between the Upper and Lower Plates, is called the Roberts Mountain Thrust. The thrusting created highlands which eroded eastward to form a sequence of clastic rocks ["fragments of rocks that have been moved individually from their original place of formation"] called an "overlap assemblage". This was followed by additional periods of thrusting, folding and uplift which shoved more Upper Plate rocks on top and injected a high degree of complexity. Magmatism centred on the crustal zones of weakness today known as "Trends" in Nevada began in the Late Triassic (208+ million years ago) and continued periodically into the Late Tertiary (2 million years ago).

The extensional activity that created the familiar north-south trending "basin and range" topography began about 20 million years ago. The problem in Nevada is that the ideal Lower Plate host rocks are buried beneath thick layers of less favorable Upper Plate rocks, but thanks to extensive faulting and folding this spatial relationship is not uniform. An important regional exploration goal is the identification of Lower Plate "windows" within the gold trends. Lower Plate windows developed when giant blocks of rock bounded by faults, also known as horsts, underwent uplift. [Actually by another geological interpretation, the horsts stood still and valley areas adjacent to them drop]. Subsequent erosion of the uplifted horst would have shaved the topographically elevated Upper Plate rocks down, leaving the Lower Plate rocks exposed or much closer to the surface than the Lower Plate rocks outside the "window". The presence of Lower Plate rocks does not, of course, guarantee the presence of a major gold deposit; it merely offers better host rock conditions for the development of a major deposit. A plumbing system and structural preparation of the rock also need to be present, along with gold bearing solutions. Gold mineralization can occur in Upper Plate rocks, but generally does not form large gold deposits because the Upper Plate sediments lack the gold "sponge" characteristics of Lower Plate rocks. Upper Plate gold mineralization, however, can be viewed as leakage from a deeper plumbing system which may have caused big gold deposits to form in deeper Lower Plate rocks.

Below is a sample cross section illustration created by White Knight Resources regarding one of its current drilling projects in its Slaven Canyon project that illustrates some of the structures just described by John Kaiser.


[Source: White Knight Resources]

For another more detailed overview of Nevada geology, I would refer the reader to the article "Geology of Nevada" (Price, Henry, Castor, et al) that appeared in Nov 1999 Rocks and Minerals. The article states, "Most, but not all, ore deposits in Nevada are associated with igneous [volcanic] activity. In some cases, metals came from the magmas themselves, and in other cases, the magmas provided heat for circulation of hot water that deposited metals in veins and fractured sedimentary rocks. Some spectacular mineral specimens occur in ore deposits that formed when magmas intruded and metamorphosed sedimentary rocks. Even today, driven locally by deep circulation along faults and locally by igneous activity, hot water shows up in numerous geothermal areas."

As far as other references, Nevada Pacific Gold provides a good glossary of geological terms. I would also point the reader's attention to various geological age charts easily "Googleable" on the Internet.

Gold exploration summarized

In a very paradoxical way, finding gold seems to be both incredibly complicated and simple at the same time. Gold exploration may be a very uncertain science (in a statistical sense) if one tries to build a predictive model from scattered clues. As mentioned earlier, gold is so rare, and so many disparate geological variables have to interactively align themselves to produce economic gold deposits, that to really get this down to a science one would probably need a combination of a supercomputer with several thousand times more processing power than the Earth Simulator combined with a huge army of robotic devices that can systematically canvass vast geographic areas of interest and very cheaply perform both deep drilling and core sample analyses.

Conversely, using comparative logic, the process of finding gold might be incredibly simple. Because gold deposits are so anomalous and freakish, if one finds a rich gold deposit somewhere, it becomes intuitively obvious that the most likely areas that also bear rich gold deposits are the ones that are geographically the closest and are geologically the most similar. Hence, geologists typically model the factors behind economically successful deposits in order to make reasonable analogies in piecing together emerging evidence from new exploration areas.

Conversely again, modeling can become complicated when geologists seek to understand how all the key geological formations in their area of interest were formed over time, as well as reconstruct a "mental movie" regarding how gold-bearing fluids went about their way forming economic deposits.

Finally, in the real world, what can make exploration geology extremely easy again is when a preponderance of evidence from drilling results and geological modeling makes the magnitude of a discover fairly obvious, yet such factors as market emotion, market manipulation, corporate bureaucratic politics, government intervention, and insider conflicts of interest work together to create distortions in free market pricing mechanisms and cause exploration properties to become grossly undervalued.




"Expected value" analysis is a very handy tool for business and investment decision-making. One determines the "expected value" of an outcome by multiplying the expected payoff by the probability of the payoff, and then by comparing alternatives.

As an example regarding how we can calculate expected value, suppose you have to choose between two bets, "A" and "B". For Bet "A" you have a 10% chance of making $100. You have a 90% chance of making zero. Your "expected value" of this bet is $10. For Bet "B" you have a 5% chance of making $500. You have a 95% chance of making zero. Your "expected value" of this bet is $25.

If you are not risk averse, and can spread your risks across over enough bets so that you tend to reap the expected value of all the bets, then a rational speculator would prefer bet "B" to bet "A" even though the odds of winning bet "B" are half of those for "A."

Of course in the real world most sane individuals shy away from playing purely by expected value calculations. The big difference between the individual of average means and an insurance company, is that the individual simply can not afford the catastrophic outcome of losing a particular bet, whereas the insurance company can spread its risks across enough bets so that it can reasonably rely on achieving the expected value of all of its gambles combined in order to make money.

If we are going try to make some kind of simplified, back of the envelope, cash on cash analysis regarding a junior mining company operating along the Cortez Trend, we need to know at least three things. First, what is a likely payoff. Secondly, what are likely odds of achieving such a payoff. Third, is the exploration company that we use as a vehicle to place our bet "for real"?


Let us imagine that discovering a five million ounce deposit along the Cortez Trend is entirely plausible for a hypothetical junior mining company given Placer Dome's discovery of 15 million ounces in proven and probable reserves in the Cortez Joint Venture area. Let us imagine we have ten really good drilling projects in different areas based on very competent geophysical studies. Suppose we assume the probability is 25% that at least one of these projects will hit a 5 million ounce target, even if it means drilling thousands of drill holes over a period of several years.

Imagine that the price of gold will likely be above $450 an ounce by the time our deposit gets mined, and that our junior mining can send its ore to a major gold mining company's production and processing facility in the area. Now we need to figure costs per ounce to determine net profit. This can get tricky, because our junior exploration company might strike a deal with a major to do the production rather than go into production itself, so the cost analysis may actually be done from the perspective of a low cost producer such as Placer Dome.

Regarding production cost comparables, in Part Three, I note that Placer Dome's reported cash and total costs at its Cortez Joint Venture facilities are $200 an ounce. BacTech, with a bio-leaching facility located close by within the Cortez Trend, claims low to mid-$200's. Newmont's total expected 2004 cash costs in Nevada are $250 an ounce. Queenstake, outside of the Cortez Trend, weighs in at $270 total per ounce in its 2003 Annual Report. Shall we say then $250 an ounce for mining and processing costs? Plus add another $75 an ounce as an intuitive guess for expensed capital investment (depreciation, depletion, and amortization) general and administration, and non-deferrable tax liabilities. That might bring us to $325 an ounce total. Incidentally, gold dipped to a low of $252.90 in June 1999, a price that threatened to put roughly half of all gold mining companies out of business, so if we bring this break-even number forward five and a half years at a 5% cost increase a year, we get something close to the $325 estimate.

Imagine that in order to finance continued drilling, the junior mining company has to continually give away 50% of its ownership of its various properties to various major gold mining companies, who earn their 50% interest by putting up all the capital required for continued drilling until all the properties eventually look like Swiss cheese.

Lastly, imagine that by the time the gold mining company either "hits" or has tied up all its properties with drilling deals, it has diluted its shares out to 75 million.

We might perform the following calculation to derive an expected value for the stock price. Of course if the current stock price is well below this expected value, we might have a bargain bet.

5 million ounces * 25% chance of discovery * $125 net profit per oz * 50% retained interest
75 million shares

The expected value = $1.04 a share. Quite a few of the junior mining companies mentioned in this article are trading at well under $1.00 a share. Maybe I am being too generous in my 5 million ounce target assumptions, $125 net profit per ounce, or 25% chance for a single big hit among all of our ten hypothetical project areas. But then again, maybe this time it is really different. This is the Cortez Trend. If we have very good geophysical data that puts us very close to very promising structures, maybe this is not too optimistic. Look at the Carlin Trend map in Part Five. It looks like about 30% of the property frontage along major fault areas has hit a major gold deposit. We also see gold along cross fault structures.

Let us try more aggressive assumptions. Imagine if we really believe that in a few years that gold will go over $750 an ounce (I am on record for stating my strong belief that it is going well over $1,000 an ounce in five years). Imagine that our total costs rise to $375 an ounce (let's add another $50 for extra non-deferrable taxes and inflationary cost increases) so that we now net $375 an ounce in profit. Also suppose in addition that there is still a 25% chance our brave little company can discover 15 million proven and probable ounces just like Placer Dome.

15 million ounces * 25% chance of discovery * $375 net profit per oz * 50% retained interest
75 million shares

Now we are up to an expected value of $9.37 per share. And this does not include the "growth premium" investors would likely pay for the company as a going concern with possible future projects besides our initial ten properties. Nor does it include the appreciated real estate value of its leasehold properties in hot play areas.

Of course we can and should tweak all of the aforementioned assumptions in different ways to perform a sensitivity analysis. Many of my assumptions were wild guesses for illustrative purposes and should be questioned in detail by anyone conducting an analysis for investment purposes. A real full blown financial analysis would involve a pro forma that scrupulously analyzes and makes projections of itemized cost elements on a line item by line item basis in absolute numbers, looking at after tax real cash flows, and would go beyond simply guesstimating "per ounce" numbers.

As another note, I skimmed over performing a standard net present value and detailed after tax cash flow analysis. This is because gold mining has some very peculiar characteristics compared to other businesses.

In a commodities bull market, gold price behavior mocks inflation rate and historical bond yield assumptions typically used to help derive discount rates to determine net present value (NPV). As mentioned in my article "General Market Characteristics of Gold," gold has historically always done best in a bond environment with negative real rates of return, such as what America experienced in the 1970's. During that "stagflationary" period, America experienced double digit inflation and continued negative real interest rates. Although gold had held below $50 an ounce throughout the 1960's until April 1972, it soared to $850 by Jan 1980.

As another historical aside, gold was increasingly suppressed throughout most of the 20th century as a form of money, but I believe that the cyclic wheel of history is now turning in the other direction for macro-political reasons that I have already alluded to in Part One of this series. Central bankers are increasingly losing their grip and gold is increasingly resuming its ancient role as money of last resort. I expect a long period of accelerating inflation in which we will continue to experience negative real bond yields under conditions more extreme than those of the 1970's.

In regard to taxes, I agree with the policy of Goldcorp which currently withholds a third of its production, awaiting higher prices. Since gold is money, from a purely cash conservation viewpoint, I do not see why a gold mining company should ever market any more of its production than what is required to meet expenses. A gold mining company may be able to borrow against the gold bars it accumulates in a vault without selling any of it on the open market, in this way financing acquisitions in a similar manner to real estate pyramiding without triggering a taxable even.

Interestingly enough, even though Iamgold has been forced by one of the African countries where it has some mines to sell its production to trigger a taxable event, it chose to buy back gold to hold in a vault as part of its liquid capital as part of an economic/political statement in favor of gold. If this approach becomes more widespread within the industry, figuring effective real tax rates will become even more difficult.

Using expected value analysis for value-oriented "speculative" investing

John Kaiser's "Rational Speculation Model" provides a chart that shows generalized industry odds that a company will "hit," based on its current phase of exploration.



Exploration Cycle Stages
Probability Ladder Chances
Valuation Channels ($ Millions)
Mineral Plays.
$100 UPV
$500 UPV
$2,000 UPV
M0 Grassroots.....................
M1 Target Drilling
M2 Discovery Delineation
M3 Infill Drilling
M4 Bulk Sample & Metallurgy
M5 Prefeasibility
M6 Permitting & Feasibility
M7 Construction
M8 Production

Source: Kaiser Bottom Fish © 2004 John Kaiser

Exploration is very risky, but can also be very lucrative. On the reward side, Rudi Fronk, President/CEO of Seabridge Gold pointed out in his Korelin interview that through exploration, with relatively little capital investment, he can reap 70% of the Ultimate Project Value (UPV) of a mine.

On the risk side, Miranda Gold observes, "Out of 1000 projects that may be available, 100 of them may have significant potential and require further exploration. Of these 100 projects with potential, 10 of them may have a discovery. Of those 10 with a discovery, one of them may become a mine." (For readers interested in an actual expected value case study analysis for an exploration play in Australia, please note "Measuring Exploration Success" by Lord, Etheridge, et al).


source: Financialsense.com

One way to substantially reduce risk, while retaining tremendous upside with junior mining companies, is to try to catch their stocks when their flagship projects are in the "gestation" phase, as noted in the chart above and discussion provided by James Puplava. Typically after a run-up following a discovery, junior mining stocks begin to fall off from a lack of news and excitement as reality sets in. The stock price consolidation period that comes just before a feasibility study provides visibility to future production.can be an excellent time to accumulate shares, particularly if the junior company also has plenty of other projects in the pre-discovery stage.

Lawrence Roulston summarized the junior mining investment case in his 4 Dec 2004 Korelin interview when he said:

I tend to focus on the smaller companies. Part of the reason for that is if you look at Newmont, a brand name in the gold market, you are effectively paying two times net asset value for Newmont right now. There is such an expectation of a rising gold price that a higher gold price has already been factored into the shares of Newmont. Now that is not to suggest that the price of Newmont will not increase with the gold price, because as the gold price moves up, people will expect a continually higher gold price, and Newmont will move up along with the gold price. I prefer to buy things at a discount rather than paying a premium. So I like looking at the smaller companies. Companies that have not yet been discovered, if you will.

I find that the best value is in companies that have an early stage gold deposit. I am not talking about a company putting its first hole in the ground hoping they are going to hit something, but there are a lot of situations out there where companies have put in tens or even hundreds of drill holes into something, but they do not yet have enough data so that they can call it a reserve. So these situations that we call an inferred resource are typically valued at about $10 an ounce in the ground. Now the benefit of buying a situation like that is number one you are getting way more exposure to gold than if you bought a major or if you bought bullion. For example a $10,000 investment in a company that has an inferred resource will give you an exposure to a thousand ounces of gold in the ground. If you bought bullion, you would have to invest $450,000 to get the same level of exposure to the upside in the gold market. And the second thing is, a reserve is valued at about $100 an ounce in the ground, and an inferred resource at $10. So you have the business upside as that project moves through the exploration development cycle. You have a ten for one upside potential from the company adding value to its deposit.

On the downside, just because a project advances from a target drilling stage to pre-feasibility stage does not mean you are home free. Although the odds may have advanced from around 2% to 50%, things can still go wrong that prevent the project from ever becoming a mine, in which case the value of this portion of your investment may deteriorate back down towards zero. The potential to lose ones principal is what makes these exploration plays speculative, as opposed to holding a mining company that controls proven and probable reserves and/or has actual production, in which case there is underlying investment value.

Also on the downside, both Doug Casey and Rick Rule pointed out in their December 2004 San Francisco Gold Show panel discussion that owning a junior mining can be like holding a burning match, to the extent that many companies steadily dilute their stock while using it as currency to acquire properties or pay for overhead. Of course, adding more shares is not such a bad thing so long as management can steadily accrete quality resource ounces per share over the long run. The trick is to know which management teams can successfully parlay stock issues to acquire more resources to ultimately accrete quality ounces per share, and which ones are simply diluting the company out from under shareholders while blowing smoke.

Using the probabilities in John Kaiser's chart, you can run your analysis in two directions. You can start with a potential ore body, and then figure a rational price to pay per share given the current stage of exploration. Conversely, you can start with the current share price at a particular stage of exploration, and determine what size ore body that implies. In essence, that is what John Kaiser does visually in the chart below, using White Knight as an example.


The purple square for White Knight shows a $52 million market cap for the value of the whole company. It is listed in the target drilling column on a channel line that suggests that if Slaven Canyon is the only property that "hits" for White Knight, it would need to be around a $2.2 billion project to justify the odds. This chart does not factor in White Knight's 14 other properties or a growth rate for the company. It also leaves out the leasehold real estate property value of White Knight's other properties, which will probably go up in value purely as real estate speculations if the staking gold rush increases in the Cortez Trend area. At $450 an ounce gold, if we assume mining, processing, overhead, and non-deferrable tax costs to come to $325 an ounce, providing a net project value of $125 an ounce, this might suggest a risk-adjusted 17.6 million ounce discovery to produce $2.2 billion in Ultimate Project Value. At $750 gold, let us take the aforementioned $325 cost base, let us intuitively add $50 an ounce for extra non-deferrable taxes on extra profits, to get a $375 per ounce cost base. That leaves us $375 net profit an ounce. That implies a risk-adjusted 5.86 million ounce discovery.

Of course if White Knight did hit a 17.6 million ounce discovery tomorrow, at $450 an ounce gold, $2.2 billion in project value divided by 65.5 million fully diluted shares gives us a $33.58 stock price. White Knight (TSX-V, WKR) currently trades well below $1.00 a share. John Kaiser has placed the Slaven Canyon project on an upper expected value trend line, where it may be fully valued based on a risk adjusted share price, but not what the price would be if the company "hits" (in which case we have removed a huge part of the risk). In his June 16, 2005 article "Cortez Trend Catches Fire," John Kaiser discusses the Placer Dome news announcement that jumped White Knight's share price.

Please note that in Part Four, I also profile BacTech, Coral Gold, Klondex, Miranda, and Victoria Resources that are included in the chart above. I provide links in my miscellaneous section for Greencastle and J-Pacific.


In the Enron Age, this is a very important question. Ideally, in order to make a well-informed qualitative assessment of a company, the investor makes an on site visit, talks to expert geologists, meets the management in person, and reads all their financial and other public disclosure literature. We all nod our heads in agreement that this is a great idea, but in the real world most mutual fund managers and stock brokers are spread so thin even they can hardly find the time to take these prudent steps.

I think that John Kaiser has developed one of the best systems I have seen for screening and making an initial evaluation of junior mining companies. A number of industry insiders I have met at precious metals trade shows share this opinion. I provide his scoring system and summary comments regarding White Knight Resources below as an example that pertains to a Cortez Trend exploration company.



Avoid (0)
Bad (1)
So-So (2)
Good (3)
Excellent (4)
1 Story - Target Size 4 No Targets less than 500,000 500,000 -1,000,000 1M-5M more than 5,000,000
2 Story - Portfolio 3 0 1 2-4 5-10 more than 10
3 Story - Frontier Bluesky 2 None Well Explored Area New Model or Technology in Well Explored Area Under-explored Unexplored
4 Story - Geodiversity 2 None One Country/one property One country /several properties One Continent /several properties Several Continents /Several Properties
5 Story - Political Risk 4 No Project Focus Unstable Trending toward instability Trending toward stability Stable
6 Story - Title Risk 4 No Title Disputed or pending private vendor; Aboriginal land claim or environmental permitting issues Uninvested or vested in third world from private vendor or pending from third world government In N. America vested via private vendor or pending via government or granted by 3rd world government Acquired directly from non third world government by staking, permit, concession, etc.
7 Asset - Working Capital 2 Zero or less less than 10% 10-50% 50-100% more than 100%
8 Asset - Non - Cash 0 No Non - Cash Hard Assets less than 10% 10 -50% 50-100% more than 100%
9 Asset - Spec Premium 2 100% more than 90% 50-90% 10-50% less than 10%
10 Asset - Gold Oz Deficit 3 more than 20,000,000 5,000,000-20,000,000 1,000,000-5,000,000 500,000-1,000,000 less than 500,000
11 Structure-Distribution 3 Public owns more than 90% Insiders & institutions each less than 10% Insiders & institutions each less than 20% Insiders or institutions each more than 20% Insiders more than 30% & institutions less than 20%
12 Structure - Chart Pattern 2 Exponential Rocket Launch Long-term uptrend reversal or double top or head & shoulders Trough or long term downtrend or flags or pennants or plateau Long-term downtrend reversal or Long-term uptrend or Double bottom Emerging from lon g term bottom
13 Structure-Breakdown Risk 4 2 year Hi/Lo Ratio more than 10, price in upper 10% of range 2 year Hi/Lo ratio 5-10 , price in upper 20% of range 2 year Hi/Lo ratio 2-5, price in upper 20% of range Price in upper 50% of range but below upper 20% of range Price in lower half of range or high/low ratio less than 2
14 Structure -Shareholder Mood 3 Class Action Lawsuits Hangover-liquidation Drunken Exuberance, Sobering Up, or Smug Satisfaction Tipsy about potential or gearing for comeback Just getting started
15 Structure- Resale Timebombs 3 more than 50% restricted for 1 year plus more than 30% restricted for more than 6 months more than 30% restricted for 3-6 months more than 70% free within 3 months 100% free
16 People-Technical 4 Blackbox specialists No geological or geographical Average geological & limited geographical Average geological and geographical Top-notch geological & geographical
17 People-Funding strategy 2 Public Offerings Retail: brokered or private Institutional: brokered Farm-outs or sophisticated Deep-pocketed insiders
18 People - Funding History 4 Zero $ less than $1M $1-5M $5-10M more than $10M
19 People - Mgmt Priority 4 Rollback Plan Failed promotion On the shelf Second String Flagship
20 People - Stable Size 3 More than ten Six to ten Four-six Two-three One


Summary: White Knight has been focused on Nevada since the mid-nineties when John and Gordon Leask recruited Pat Cavanaugh to run the company. Cavanaugh was the geological brains behind the discovery of the Pipeline deposit in the Cortez Trend. He brought Robert Cuffney on board as vice president of exploration in 1997, but he himself departed in 2001 when the realities of the resource sector bear market caught up with White Knight. His business plan was to generate conceptual projects and use his vast network of industry contacts to farm the projects out to others. By 2001 the low gold price had annihilated the field of partners and the business model was dead. The gold bear market took a devastating toll of small producers, two of whom, Atlas Minerals Inc and Alta Gold Company, filed for bankruptcy. White Knight managed to acquire for $4,000 a database Atlas had spent $20 million to generate. Cuffney recruited Greg French, a refugee from bankrupt Atlas, and together they sifted through the data, particularly that which pertained to the Cortez Trend. The bear market caused much of the land to come open as landholders went bankrupt, and many prospectors and ranchers found their properties handed back to them. The enthusiasm by the majors for the Cortez Trend created by Pipeline also lost momentum when Placer made the ET Blue discovery, a property that Cavanaugh had at one stage optioned on behalf of White Knight, but had been unable to fund. The ET Blue discovery caused Placer to think in terms of east-west structures, and it was not until the 2003 discovery of Cortez Hills that Placer's thinking returned to the north-south structural model. During that period the USGS had released the results of a magnetotelluric survey of the region which the majors had ignored, but which was closely studied by White Knight in attempt to understand the structural controls of the Cortez Trend. White Knight realized that the Cortez Trend was the axis of an ancient deep-seated crustal fault that been reactivated many times. So while companies abandoned their claims and the majors snoozed White Knight started to acquire claims along the north-south Cortez fault where nothing had been available on reasonable terms during the nineties. White Knight's speculation was that the Cortez Trend was a 1-3 mile wide corridor of structural traps associated with horsted blocks very similar in manner to the Carlin Trend, which hosts nearly 200 million ounces of gold. As a result of its geological sleuthing and willingness to "bottom-fish" for land during the gold bear market, White Knight has ended up with a very strategic land position within the Cortez Trend. There is no discovery yet on any of the properties, but their potential is attracting a growing audience among both majors and speculators.


[Source for chart and commentary: Kaiser Bottom Fish © 2004 John Kaiser. Please go to www.kaiserbottomfish.com for additional information, to include a free trial subscription]


After the reader considers the descriptions of other junior mining companies involved in the Cortez Trend portrayed in Part Four, and considers various geological theories illustrated in Part Five, he will be able to draw some of his own conclusions regarding Mr. Kaiser's qualitative assessment of White Knight depicted above.


Just as the research and development process in high tech industries involves converting intangible theoretical insights into tangible prototypes ready for production, the junior mining company exploration process involves converting intangible geological concepts and sample drilling results into a producing mine.

Garbage in, garbage out applies here as well. Expected value analysis is a terrific tool, but it has to be applied with heavy doses of common sense and also combined with substantial background research on qualitative factors to be effective. I have seen spread sheet and expected value analyses abused in the real estate and oil and gas industries in addition to the mining industry. Just because something looks like it is very rational on the surface may not prevent it from generating foolishness if false assumptions are cranked into the model.

General market behavior can change state under certain circumstances similar to the way water turns into ice. A major Achilles Heel of rational models takes place if commodities prices start plummeting, as they did in the late 1990's. Then fear takes over, and investor behavior can radically shift. A junior mining company may no longer be worth the expected value of all of its many projects combined, but only the expected value of its strongest flagship project, and if that does not work out, then game over. An analogous fear factor, incidentally, caused the derivatives markets to go haywire following the Russian Default and Asian Crisis in 1998 and led to the melt down of the hedge fund Long Term Capital Management.

However, when I use the word "melt down," I would like to restate my opinion that the days of serious gold price suppression are very likely behind us, and if anything, the coming general capital market disruptions, hyperinflation, and interest rate increases prophesied by such sources as James Puplava's Perfect Storm series will, if anything, tend to create an explosive gold price and junior mining company share price melt up.

Not all ounces are created equal. Another important issue, particularly in regard to my discussion of Cortez Trend companies in Parts Three and Four, involves making the distinction between "inferred and indicated" ounces and "proven and probable" ounces. These two categories are also known as "resource" as opposed to "reserve" ounces respectively.

When we go from "resource" to "reserve" ounces, we are moving along a scale of declining risk that the ounces in the ground do in fact exist as part of a continuous deposit and that they are economically mineable. Canada's National Instrument 43-101 requires Canadian companies to file technical reports and report "resource" as well as "reserve" ounces. In contrast the U.S. Securities and Exchange Commission (SEC) does not recognize "resource" ounces. The savvy investor needs to know the difference.

Placer Dome is a Canadian company based in Vancouver, B.C. Most of the junior mining companies active on the Cortez Trend are also Canadian. Hence, they all talk about "resource" ounces in addition to "reserve" ounces.

It is often best to go straight to the source. Going along the spectrum from the lowest to the highest levels of certainty, some definitions related to NI 43-101 are as follows:

Inferred Mineral Resource An ‘Inferred Mineral Resource’ is that part of a Mineral Resource for which quantity and grade or quality can be estimated on the basis of geological evidence and limited sampling and reasonably assumed, but not verified, geological and grade continuity.

Indicated Mineral Resource An ‘Indicated Mineral Resource’ is that part of a Mineral Resource for which quantity, grade or quality, densities, shape and physical characteristics, can be estimated with a level of confidence sufficient to allow the appropriate application of technical and economic parameters, to support mine planning and evaluation of the economic viability of the deposit.

Measured Mineral Resource A ‘Measured Mineral Resource’ is that part of a Mineral Resource for which quantity, grade or quality, densities, shape, and physical characteristics are so well established that they can be estimated with confidence sufficient to allow the appropriate application of technical and economic parameters, to support production planning and evaluation of the economic viability of the deposit.

A Mineral Reserve is the economically mineable part of a Measured or Indicated Mineral Resource demonstrated by at least a Preliminary Feasibility Study.

A ‘Probable Mineral Reserve’ is the economically mineable part of an Indicated, and in some circumstances a Measured Mineral Resource demonstrated by at least a Preliminary Feasibility Study.

A ‘Proven Mineral Reserve’ is the economically mineable part of a Measured Mineral Resource demonstrated by at least a Preliminary Feasibility Study.

We also see a category called 'historical ounces" frequently mentioned in mining literature, but not covered by NI 43-101. This usually means ounces once identified by an old abandoned mining operation whose methods are considered too loose or unscientific by modern standards to be officially acceptable today. Another interesting term is "contained" ounces" which typically means all ounces historically mined out of in an area plus remaining current reserves in the ground.

To summarize, "measured and indicated" or "inferred" or "resource" ounces, a) do not have enough drilling to be sufficiently defined as a continuous deposit or b) are not economically mineable at the current gold price, but may be economically mineable at an above market gold price. An advantage of stating "resource" ounces is that a mining company can peg them to a certain gold price and keep them there regardless of market fluctuations.

"Proven and probable" or "reserve" ounces means that the surmised ounces are "real" because a) there is overwhelming drilling evidence regarding a continuous and definable shape of the deposit and b) it is economically feasible to mine at current gold prices. If the price of gold slips significantly, this will usually force gold mining companies to recalculate a smaller reserve base.

At one extreme, "resource" ounces can be a complete joke when they are claimed by certain cash-desperate junior mining companies with shaky track records in exotic Third World locations where mining has never been performed before.

At the other extreme, Placer Dome's "measured and indicated" or "resource" ounces in the middle of the Cortez Trend are in my opinion very serious numbers. The deposits were found next door to major mining infrastructure with a long production history. The resource data was developed by some of the best professional geological talent in the gold mining industry. Lastly, Placer Dome is a financially solid major gold mining company that can easily survive disappointments and the truth.

Mining still suffers from an English-Metric multiple personality. As you look at land positions and assay data in Parts Three, Four, and Five, it helps to be aware of some conversion information. If you need to go beyond the information provided below, you can easily transition between the modern scientific community and medieval England by typing in "feet per meter" or "grams per ounce" and other desired conversion factors into Google.

"Bonanza" Gold: more than 34 grams of gold per tonne of ore or more than one troy ounce of gold per ton. (American Bonanza definition)
"High Grade" Gold:
About .3 ounce per tonne of ore and above.
Land size
: One claim is 600 feet by 1500 feet or 20.67 acres. There are 640 acres per square mile. One square mile = 2.59 square kilometers
Weights: 1 Ounce = 28.3495231 grams. 1 Troy ounce = 1.09714286 ounces or 31.1 grams
Length: 3.28 feet per meter. (The "Googled" answer)

Link to
... . .Part III of series

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...... Part Four...... Part Five

This report is for research/informational purposes only, and should not be construed as a recommendation of any security. Information contained herein has been compiled from sources believed to be reliable. There is however, no guarantee of its accuracy or completeness.

Bill Fox is VP/Investment Strategist, America First Trust. Bill welcomes phone calls and email responses to this article. His most current contact information is at his web site: www.amfir.com.



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© William Fox. Sometimes William Fox offers viewpoints that are not necessarily his own to provide additional perspectives.