Is There Gold In Them Thar Hills?
A company-led tour of a gold mine can yield useful information. But it can't answer the big questions: how much gold is in the ground, and how much value is in the miner's shares?
According to legend, Mark Twain once described a gold mine as a hole in the ground with a liar standing next to it. As the price of gold has skyrocketed, the number of holes has multiplied, as has the number of liars, and the government has increased its warnings about unscrupulous pitchmen and gold-stock scams. Sometimes there is no gold in a mine; other times, there isn't even a hole in the ground. Perhaps the only way to ascertain what's what in the world of junior gold-mining companies is to see it with your very own eyes.
Some gold-stock investors think so, and some mining companies are happy to oblige, with guided tours of properties in remote climes. Or sometimes young companies in search of investors arrange for five-star dog-and-pony shows on site. In either case, what can a first-time visitor really see? And is seeing believing? The search for answers found this reporter trekking through northern British Columbia one brilliant late-August morning, to Pretium Resources' Brucejack project in Canada's Boundary Range.
Pretium is a small Vancouver-based exploration company, whose shares (ticker: PVG.Canada) trade on the Toronto Stock Exchange. Founded last October, the company went public in December at six Canadian dollars per share, and now trades at C$12 (roughly $12). It doesn't actually produce gold yet, but CEO Robert Quartermain says that could happen by 2015 or 2016. According to Quartermain, Brucejack and the company's nearby Snowfield deposit constitute the fifth-largest undeveloped gold resource in the world. He calls the properties "the most exciting thing" he's been involved with in 35 years in the mining business. A preliminary economic assessment in early June estimated that Brucejack could produce an average of 173,200 ounces of gold a year.Angus MacGillivray for Barron's
In the course of a day-long visit to the region, a group made up mostly of Pretium shareholders toured mine sites, studied maps and rocks, and paid a visit to the "crack shack," where workers break core samples into smaller pieces to be sent to independent assayers for grading. The group saw some gorgeous scenery, met workers at the camp and heard about the company's drilling plans and early hits. But for all that, it was impossible to tell whether the Brucejack and Snowfield projects will produce any gold commercially, much less in the quantities that Pretium management has forecast.
THE BRUCEJACK TOUR BEGAN in Vancouver with Quartermain's dinner presentation about the property. The next day, the group donned company-issue fleece vests and climbed aboard a Central Mountain Air Beechcraft 1900D at the south terminal of the Vancouver Airport, the departure point for many adventurers into British Columbia's wilds and beyond. (Pretium arranged for all transportation to and from the site, but not to and from Vancouver.)
A fellow passenger and mine-tour veteran, Chen Lin, abandoned his doctoral studies in aeronautical engineering at Princeton in the late 1990s and now writes a newsletter with the no-nonsense title "What Is Chen Buying? What Is Chen Selling?" His rationale for flying to the middle of nowhere to look at rocks? "I was on a trip two weeks ago, where it was hard to imagine what the property was like just from the press release," he said. "You can't get a feel for the scale or the spacing of the holes."
The plane landed on an air strip in Stewart, British Columbia, the northernmost ice-free port in North America. From there we hopped a helicopter, which flew over the Salmon and Frank Mackie glaciers, with Quartermain playing tour guide. The 56-year-old geologist and former CEO of Silver Standard Resources (SSRI) came out of retirement in 2010 to run Pretium, which purchased Snowfield and Brucejack from Silver Standard for $450 million in cash and stock. Silver Standard owns 29% of Pretium.
Quartermain directed the group's attention to the Snowfield property, a reddish-gold mountainside to the north of Brucejack. A short time later, Brucejack came into view adjacent to a blue-green lake. The company says both properties have measured and indicated resources of 34 million ounces of gold and 98 million ounces of silver.
Helicopter service to Brucejack began only in 2006. Prior to that, visitors traveled up Canada's Highway 37, took a boat across Bowser Lake and followed a rugged access road to the site. Pretium is rebuilding the access road and extending it directly to the highway.
The chopper touched down at camp, where about 120 workers, including some from the Tahltan First Nations, a native tribe, are employed. Fred Lacy, an investor who says he made a fortune on technology stocks in the late 1990s, was "very pleased" to learn from a Brucejack worker that two of the local Tahltan chief's children work at the site, given that one of the biggest risks to mining projects in North America is local opposition. Lacy, of Newport Beach, Calif., said that was "a very big tell, and something you would never find out without visiting a site."
A Pretium investor, Lacy has been visiting mines since 1998, because he finds analysts' reports "beyond useless." Some mine visits, he says, convinced him that he should not buy shares of exploration companies. One mine was "too close to the town, and I could see the people would be upset." At another, "the drillers were all just green kids."
Infrastructure is one thing he must see. "If there is no water, there's no mine," he says. "The companies only tell you the best stuff, the minimum of what the law requires."
CHARLIE GREY, A GEOLOGIST, AND Ken McNaughton, Pretium's chief exploration officer, gave the group an overview of the project, which Grey called "a very well endowed belt." Pointing to a geological map, he identified a field that previously was developed by Newhawk Gold Mines from the mid-1980s to about 1994, when the price of gold made drilling unprofitable.
Grey, one of eight geologists working at the site, says drillers have been getting "lots of hits," some at five grams of gold per ton, at the Valley of the Kings, one of the claim sites. He then displayed a polished chunk of mineral from that site, with gold veins visibly running through it. "You don't see visible gold like that commonly," he said.
McNaughton discussed some other high-grade hits, and the construction of a 10,000-square-foot warehouse the company just completed building in Stewart. Laura Stein, the private investor in natural resources and precious metals who had first brought the Pretium tour to Barron's attention, asked whether she was correct to assume that the company is drilling an underground mine, which is more expensive than an open pit. She was. Stein, a regular visitor to gold mines, says that listening to questions from more experienced investors is one of the best reasons to make a site visit.
The Bottom Line
Gold-mine visits can yield useful information about geology, drilling prospects and management's plans. But seeing isn't always believing.
Pretium began drilling holes on the Brucejack property 200 meters apart, and gradually reduced the spacing. McNaughton said the gradient, or slope, was so consistent that the drillers were coming up with five-kilogram hits in "the basement," an area 600 meters below the surface. Holes 100 meters deep can be drilled in a day; those 500 meters deep take a week. Late last month, Pretium reported "bonanza-grade" intercepts that include 16,949 grams per ton of gold and 8,696 grams per ton of silver.
THE CANADIAN GOLD-EXPLORATION business was rocked in the late 1990s by a massive scandal involving Calgary-based Bre-X Minerals, whose claims to enormous gold deposits in Borneo proved fraudulent. Core samples at the site were found to have been salted with gold, but not before Bre-X, a one-time penny stock, had attained a stock-market value of C$6 billion. After the company collapsed, many investors appropriately grew more skeptical about small mining stocks and mining-company claims.
Some investors seek to assuage their skepticism by touring exploration prospects. For others, a site visit is a chance to learn more about geology, drilling technologies and management's plans, and meet fellow gold enthusiasts. What you won't learn, however, is whether drilling results will bear out the company's claims, or whether the company's shares are in fact a good investment.
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