Fraser: Lawrence, you’ve spent the majority of your career in mineral exploration. Perhaps you could give us an overview of why investors should pay attention to mineral exploration companies. And, for anyone who doesn’t know you, a little about your background.
Lawrence: I’ve seen the mining industry from all sides. After a geology degree, I worked in the head office of one of the majors for 4 years. I then went to a mid-tier producer and then got into exploration. For 15 years, I wrote an independent investment newsletter focused on exploration. As a result of that newsletter, I was recruited by a big US private investment firm as President of their mining investment group. I left that to get back to what I love, which is mineral exploration. In the course of all that, I’ve walked all over literally hundreds of mines and exploration projects in more than 40 countries.
Fraser: You’ve certainly earned a reputation for knowing the mining industry. So, why are you interested in junior explorers and why should people invest in this sector?
Lawrence: Well, for one thing, investors have made – and will make – huge returns investing in exploration companies. Furthermore, these apparently insignificant little companies are vital to the world economy.
Fraser: That’s a bold statement. Can you give us a little color?
Lawrence: Everything in our modern world depends on metals. Metals are either part of the finished product or they are essential to the process of making and delivering every product on the planet. Metals come from mines. Mines have finite lives so there is a continual need to develop new mines. Those new mines are built on mineral deposits. The majority of those deposits are discovered by junior exploration companies.
Fraser: A lot of investors lose track of that basic reality. Can you give us some context here? How many new mines are needed?
Lawrence: If the average life of a mine is, roughly, 20 years on average, that implies that 5% of the global mining industry needs to be replaced each year… just to keep even. On top of that, demand for metals is continually increasing. For example, demand for copper has been increasing at about 2% a year over the last couple of decades. With the growing electrification, that rate of growth will accelerate. To replace depleting mines and keep up to demand growth, the mining industry needs to replace 7% of the total installed capacity each year to keep demand and supply in balance. It is getting harder for the industry to keep up with demand. That’s why we have seen big gains in the price of copper, nickel, lithium and numerous other metals.
Fraser: What are the impediments to the industry developing new mines?
Lawrence: When Elon Musk decided to build a giga factory, all he had to do was shop around for the jurisdiction that offered the best incentives. Manufacturing plants can be built pretty much anywhere. Not so for mines. Mines need to be built on mineral deposits.
Fraser: Okay I can understand the need for new mines, but where do the juniors fit into this? Don’t the big mining companies have exploration teams?
Lawrence: Yes, they do, and they spend a lot of money, but most of that is on “near-mine” exploration. That is, looking to prove up and extend known deposits. Even when they go looking for new discoveries, they often do it in partnership with juniors. Plain and simple, most of the new discoveries are made by juniors. It’s the same in many fields, where the small, entrepreneurial companies are the innovators, the ones that come up with new discoveries. Think of the huge tech companies. A lot of their innovations came from buying smaller companies that developed something new.
Fraser: You would think that the majors, with big budgets, would be miles ahead of poorly funded juniors.
Lawrence: There are several reasons why the juniors are far more successful than the majors. One is that the majors are risk-averse. Newmont, last year, spent $420 million to buy GT Gold after that junior discovered the Saddle deposit. Like all the majors, they would rather spend hundreds of millions for a known deposit than risk spending a few million where they might come up with nothing.
Fraser: Yes, we have seen that over and over again, where the majors spent hundreds of millions or even billions to buy juniors that invested a tiny fraction of that amount to make a discovery.
Lawrence: Another very important aspect is that geologists lay their lives on the line when they go to work. For example, a lot of exploration is helicopter supported. Geologists climb into helicopters on a daily basis to be dropped high in rugged mountains for their day’s work. There is no assurance on any given day that the helicopter will be able to get back to pick them up. In that sort of terrain, if the weather closes in, helicopters simply don’t fly. It is standard procedure for a geological team, when they are dropped off in the morning, to take survival kits in case the helicopter doesn’t make it back. In addition to the risk of falling off cliffs and wrestling with the infamous devil’s club, the geos share that terrain with mountain lions and grizzly bears. Rational people don’t lay their lives on the line for a salary. Geologists with the junior companies are owners of the company. They stand to get rich if they are successful, alongside the other shareholders. Over the years, many geos have become very rich indeed.
Fraser: That’s a very interesting insight. I doubt that many investors really appreciate the level of commitment required to make a mineral discovery.
Lawrence: Another contributor to the success of the juniors has to do with the decision-making process in the juniors compared to the majors. I spent the first four years of my career in the mining industry as an analyst in the head office of one of the majors. My reports disappeared into a nebulous cloud where nobody would take a stance or make a decision. I left that bureaucratic morass to join a small mining company. I cannot begin to describe the joy of seeing people making decisions and taking action. And then I discovered exploration: the excitement of a treasure hunt backed by sophisticated science.
Another aspect of geologists being owners is that they know it is effectively their money being spent on exploration. They won’t push a project unless they have a high level of confidence. They have put in the time and effort to get to a level where they truly believe it will be a success. I’m working, or at least on call, nearly 24/7. That’s just my nature. None of the people I work with have a 9 to 5 mentality. That is very different than the majors. We are owners and we work like we are owners.
Of course, the juniors aren’t always successful. But, they take a stance. They make decisions. They move forward. They give it everything they have. And, on that basis the juniors have come up with the majority of important new mineral discoveries over the past few decades. Those discoveries are the basis for the mines that are now providing the copper, silver, lithium and all the other metals that we rely on.
Fraser: Yes. I see now that junior mining companies really are essential to the world economy. But, there are so many juniors and it’s difficult to know which ones will be successful. In our next discussion, maybe you can give us some insights into picking the winning companies.