The Critical Eye Protects your Money - part 3.

Ah........finally got the water management under control. Waders on a sundeck isn't always the ideal way to get a tan, lol.

I am at the point where I would like to share some of what I have been taught to look at and some of what I have learned the hard way on the part of dd that deals with properties.

If I have done adequate dd on the management and am convinced that they are professionals, transparent and able to build a company and add shareholder value and preferably have done so before in the past, I move on to the property or prospect/project that they are looking to capitalize on. Often it consists of a group of properties, not always connected or in the same place.

I prefer to invest in exploration/ mining companies that have more than one property or prospect. This way, if one of the areas doesn’t quite pan out, they still have other options. Otherwise………it’s game over. No one will hang on unless there is ongoing potential for a find , a JV or a mine. With several properties, often you’ll see them define one, get a JV going on it, thereby creating cashflow to continue exploring the other regions or prospects that they may have. This does two things…….it reduces dilution, and builds a base for a stronger following. Once a major has gotten involved, it seems that an explorer is taken seriously by the markets. I look for JVs as opposed to full buyouts, unless I know that the same management team will immediately set out on a new adventure and repeat the achievement again. I love the fact that one property can create cash flow for continue exploration. It just rings nicely and gives an investor some comfort.

The property is a huge issue. A lot of things have to be looked at. I first look if this is a virgin property or if it has in the past been explored. If it has been explored in the past, it is often easy to find information through databases in the countries where the property is located. For example I use ARIS when looking in B.C. I find out everything I can about the past exploring or mining on the property. A lot of times, a property has been passed on because it was thought not to be an economically viable prospect, and turned out to be a great project after someone looked at it differently or used new technology to explore it. Case in point……..GoldCorp. Look up the story and don’t forget to see how they set out to find more gold. You’ll find out about creative managing. McEwen had a stroke of genius on that one.

Find out if the company owns the property outright or if it has to expend money to gain it over time. Check what the portion is that they own if not all, and verify that the permitting is not going to be a problem. Get all the details on the deal that was made for the property and make sure that they will be able to mine it or sell it when the time comes. This is an important issue, and I look into this with great care. There are sometimes percentages that we tend to forget when it comes to doing our calculations for the final resource value. (smelter royalties, etc..)

Another issue is the environmental one.........Be very vigilant in this. I actually check if there are any parks or beaches or other tourist areas nearby, or any specific developments that may increase the risk of a environmental group creating mayhem for the company. Check into Gabriel Resources if you want to see how detrimental this can be. Their Rosa Montana project is a perfect example of how much these issues can cost a company.

If its gold we are looking at the property will have to cough up at least 1.5M ounces as a minimum for any major to be looking at it, based on what I can see. The numbers are different for each metal or mineral. A mine cost minimum 1B to build and a lot of projects have been put on hold because of the rising costs of mining and a resource that just isn’t big enough even at today’s gold prices. In a few years when Gold hits 1500 or so…..they may become interesting.

The property I look for is located close to infrastructure, labor, transport, roads. Water has to be available, power.etc….all the things you need to make a property commercially viable. The more these variables are present near the property, the less it will cost to mine it. The major buying out or JV-ing with the junior will consider this when he makes an offer. If the junior explorer wishes to become a producer, he will also have to consider the increased costs if all these items have to be created to make for a suitable infrastructure to mine/mill.

A while back I got asked to go look at a company that had hit high grades of gold…….on a few holes. I was invited into a bullboard and saw that the shareholders were nearly having a celebration. The stock went up drastically…..it was total euphoria. Then I decided to go look at where this company was drilling. Oops……they were some 1500 meters up in the mountains, with the nearest decent road some kms away No infrastructure nearby and they had hit these huge grades at a 189M depth…talk about overburden in a place where it has to be blasted out. You get the idea. Although I was greatly impressed by the grades, I made the mistake of mentioning the issue of location on the board. Suffice it to say that I was immediately labeled a basher and became an instant outcast. The stock retreated to below where it was within a week when some shareholders actually started looking into what I had mentioned and realized that it just didn’t make economical sense to mine there, because the cost would have been prohibitive unless there was some 3 million ounces of gold to be mined. The company is still drilling there and I hope they find enough to make it viable. Time will be a factor though…..because this is a property that will require a lot of money and a lot of time to develop. Doesn’t mean they won’t succeed. It just means that the risk is higher and the time needed is longer. Tough job to find 1M ounces, even tougher to find 3M.

I look for properties that have good infrastructure or everything that is needed nearby. Make a list of questions to ask yourself and add that to your spreadsheet next to your management dd questions.

There are different types of systems. I know of porphyry and vein. Porphyry deposits are my favorite type. (That’s also because they easiest for me to understand). The market does not appreciate them as much and seems to value them lower than vein systems. I love a company that has properties that offer both types. Porphyry deposits have lower grades but can be elephants because of the sheer volume of ore they contain. Grasberg , Batu Hijau for example….Porphyry deposits are mined open pit………sometimes the ore starts at surface. The beauty of these is that the grades usually get better at depth, and this means that the deeper they go, the more the ore is worth. The costs are lower than underground mining. Vein systems often have high grades but I have noticed that they sometimes are quite deep as well. Costs are higher. What often happens is that when the price of gold is high, a company will use its low grade ore because that is easier to mine. When the price of the metal is low then they can mine the higher grade stuff. That’s where a company with several properties creates some long term value for itself.

The property I look for is also in a mining friendly area. As we all know, political risk is a major issue. Many countries are changing the rules and they all want to piece of the impending run on PMs. I make sure that if there is any political risk, I find out everything there is to know about the country where the property is located and the past history of how mining companies have been treated. I look into the current gov’t. I always……….stressing the word ALWAYS..make one or two acquaintances in the mining sector in that particular country that can feed me information. I usually am able to do so by going to investor sites in those countries and expressing my desire to know more about the situation and ongoing events in their markets and in the political arena. In return, I offer the same courtesy to assist anyone who may have questions relating to my country. I find that it is very easy to obtain information other than what one would read in the newspapers or business magazines. An added benefit is that with time, you actually build up a great database of people around the world who help each other and make sure that they are protecting each other’s interest in the best way they can.

Of course, the added luxury of having someone to visit if you are investing in exotic places is another great benefit. I hosted a fellow investor and his wife from Finland at my home for a few days last year, and it was a very enriching experience indeed. I speak several languages myself, but have noticed that English is sufficient in most places. Every country has a gov’t department that can offer you information on mining laws or you can read up on it on their websites. There are mining associations in most countries. Often, it is from these sites that I try to make contacts within the sector to gather my information. The exchange of information that one can obtain from a person within the community that the company is located is amazing sometimes. Do not discount the information that can be obtained un this manner. It is imperative for me to do this, because even though I set parameters of risk to a minimum, there are still countries that I want to invest in because the potential is huge, and the management is perfect. I am just not there to be able to see and get a feel for what the political and local situations are. For example…let’s say you have invested in a place where there are natural disasters. Consider that a lot of exploring and mining is done in places where there are volcanoes, as we all know. You may be able to get news of an eruption before it is on TV or on your favorite news channel on the internet. It may affect your investment or not. You have the news rapidly, and that’s what counts.

If the property that is being looked at is one that has already been handled by other companies, it is in my interest to find or ask for any available data from past exploration. Often the company will have purchase this information along with the property. If you can get your hands on it, by all means read up on it and don’t discard its importance. Ask the company if there are any maps, geological surveys available and see if the website contains this type of information the property. I know that we are not geologists, but ask yourself this question. Why did Warren Buffet never invest in tech? I read that it was because he didn’t understand it. It is important we have at least a working knowledge of how pms are formed and to really understand the news releases when it comes to drilling results. If we do not have some knowledge of what grades and intercepts mean and how they add up to ounces in the ground, then we might as well not read the releases at all. If the property is a porphry, then I go and read everything I can on that issue. I do not need to be a geologist to understand it. There is no better protection for you money than understanding exactly what you are investing in. You may even find it to be extremely interesting. I certainly have.

Look into the past…always. If the property is near another exploring company or a mining company, find out who they are and what they have managed to find or mine nearby. This does not guarantee that your company will find the same, but it does somewhat increase the chances. Also, it may indicate infrastructure that can be shared at a fraction of the cost of building new.

If there is resource data on the property I am careful not to confuse resources with reserves. Measured and Indicated resources are reliable. Inferred resources are very speculative inventories, so I am careful when inferred is used. A resource is not necessarily an economic deposit, as opposed to reserves which are deemed to be proven calculated by engineering and government rules. The 43-101 is the Canadian guideline regarding resources and reserves.

Make sure questions are asked and that you become very familiar with the property being mined or explored. This allows for a much better understanding of results when they are released and can make a big difference for you. I often see share prices rise immediately after a release, but when the information is properly scrutinized, I also see the price drop just as fast. Therefore the need to understand the property and what it is coughing up through the drillbit.

I have pasted a few links below that may be of help.

On porphyry deposits: http://www.britannica.com/eb/article-82179/mineral-deposit

On finding country risk factors: http://www.ducroiredelcredere.be/WebDucDel/Website.nsf/TRiskEn/?OpenView...

On vein systems: http://en.wikipedia.org/wiki/Vein_(geology)

If this was in any way helpful to at least one person, I’m a happy camper.

I realize that there may be some info missing and I welcome any addition to this section. I am writing all of this off the top of my head, so the structure is not totally inclusive of all variables I look at and all the questions I ask. It was designed to aid and assist in building your own database of questions to ask about properties. Feel free to add comments.

My next section will deal with drill results, understanding what they mean and doing a basic number crunch on them to find out how the company is adding value in its quest to achieve a viable resource. This one will be is fun because there are some cool tools available for that.

I re-iterate that I am just another investor, and write this blog to assist others if I can, in the hope that when I have trouble finding information or understanding a particular issue, I can count on the same courtesy.

Cheers,

Vwig.