Steve Todoruk | Investing in Discovery Plays: High Potential Reward with Minimized Risk
The following is a summary of an interview with Steve Todoruk of Sprott Global in which Steve shares his insights on investing in junior exploration companies. Steve’s particular focus and expertise is in investing in discovery plays, which are junior explorers that have just released the results of their initial discovery hole. As a professional geologist as well as a stock broker, Steve is able to analyze the initial drill results and assess whether he thinks a large resource will be defined through subsequent drilling before he invests. Over the years this discovery play approach to investing in junior explorers has produced high returns for Steve and his clients with minimized risk. Steve also shares his thoughts regarding the overall state of the junior exploration industry as well as investing in non-joint ventured explorers, prospect generators and uranium explorers.
Steve graduated with a Bachelor’s of Science in Geology from the University of British Columbia in 1985. Over the course of his extensive career he has worked as a field geologist for major and junior mining exploration companies, as an equipment operator in an underground mine, as the president of two junior exploration companies between 1993 and 2003, and also as the principal in a mineral exploration consulting and engineering firm. With this impressive and unique expertise, Steve was recruited by Rick Rule to come contribute as a stock broker and senior investment executive at Sprott Global (previously called Global Resource Investments) in 2003. Steve has been with Sprott Global for over 14 years, contributing his expertise to the clients he serves.
Regarding the general state of the junior mining exploration industry, Steve believes that investors now have more confidence investing in junior explorers and that the price of gold and silver is “reasonably good” after “the ugliest and most prolonged bear markets” he has seen (from 2011-2015).
When asked about the ideal profile of a junior exploration company that is primed for take-over by a major miner, Steve shared: “We are lucky to get two to maybe five good-looking discoveries in a year. And we certainly were not getting that or seeing that during the horrific four years of the bear market.”…“There are not a lot of new discoveries in the pipeline for the majors to acquire. But we are starting to see some new discoveries.”…“I want to have a pretty good feeling that a junior who makes a gold discovery is going to find at least one million ounces of good grade gold.”…“And when I say good grade, I like to think that if you got a million ounce gold deposit, could that mine make a profit at today’s gold price? And even better: if gold went a little lower, could it still make a profit?” Steve will look at a million ounce deposit of good grade gold but acknowledged that is not big enough for even the mid-tier size mining companies let alone the majors to take over. Therefore Steve likes to invest when there is a shot at a multi-million ounce gold deposit. Ideally Steve can get a sense if there is a shot at a multi-million ounce discovery by analyzing the initial discovery drill results.
Steve acknowledges that the most exciting thing in junior resource investing is when an unknown explorer makes a significant discovery and the share price begins to skyrocket. However, he points out the odds of discovery are so far against success that most who invest in explorers end up losing. Steve says the project generator model is less risky than the non joint-ventured explorer because its financing comes through joint-venturing projects rather than share dilution, but the odds of success are still against the investor here. Therefore it is best to buy a basket of prospect generators to increase your odds of success. Steve acknowledges that investing in prospect generators can be a “sensible approach for a lot of investors,” but with his experience and expertise he prefers to go down a different route by investing in discovery plays.
With Steve’s geological expertise and due to the fact that significant discoveries are so rare, he prefers to wait for the discovery drill hole announcement before investing. This minimizes much of the risk involved in speculating in junior explorers, yet still provides significant potential upside for the investor.
Steve says in order for a junior explorer to get taken over by the majors it must be a giant deposit: “Giant deposits consist of drill holes that are big drill holes. They’re giant drill holes which equate to really wide intervals. Big deposits have lots of really big drill holes or lots of really wide drill hole intervals in them. Big deposits don’t consist of small, narrow drill holes. That’s what makes a small deposit. Ideally I want to see a really wide interval of good grade mineralization.” The discovery drill holes should give some indications that the mineral deposit will be able to be profitably mined in the future: “You want to see a really big drill hole at good grades, again, if that was a mine today could that mine make a profit? And even better, if metal prices go lower, could you still make a profit? So if I see that drill hole that’s when I like to get in.”
After Steve analyzes the initial discovery drill hole results and speaks with the company’s management, and if he likes what he reads and hears, only then will he make a buying recommendation for his clients. This approach worked well a few years ago when Mariana Resources released the initial results of a discovery drill hole at its Hot Madan project in Turkey. Steve recommended Marianna’s stock to his clients and they took a position at around the equivalent of $.30C. In April of 2017, Sandstorm Gold acquired Mariana Resources with its Hot Madan project in Turkey. Steve and his clients were then able to exit their Marianna position between about $1.70-1.75C through the liquidity of the merger.
One of Steve’s biggest winners was Aurelian Resources about a decade ago. He recommended his clients buy a position around $3/share after the discovery drill hole announcement. The stock subsequently shot up to $42/share in the next couple of years before being bought out by Kinross Gold at around $34/share.
Steve estimates that investing in discovery plays after the initial discovery hole announcement has been successful for him between 60-80% of the time. He says, “I am thinking of a couple of the losses while employing this strategy and I can think of two that come to mind instantly. It is not a long list.” On his losers, he recalls about a 50% loss of capital invested.
Discovery play investors must have patience and the right timeframe expectations to see if the initial discovery holes will result in a large discovery. Steve says it takes 2-3 years on average to drill a large resource after the initial discovery hole. “If you have a really wide drill hole, I like to see, ideally say, 1,000 meters of 1% copper equivalent or 1.5g/t or higher grade [gold]. If you are drilling a hole that is 1,000 meters long, that is going to take you 1-3 weeks for each drill hole. So you’ve got to drill 100 drill holes. It is going to take you time and on average it is 2-3 years so you’ve got to be patient. When a company is actively drilling like that, you probably are going to get news releases coming out every 4-6 weeks and you’ve just got to evaluate it. If you keep getting good releases and it’s going in the right direction, you’ve got to be patient. All drill holes are not going to hit. You probably only need to have 60-70% of the holes that you drill that are good. That means that there is probably 30% are not so good or terrible or bad. In the middle of a good deposit you can drill a blank zone but then you move the drill over and you can get back into the good mineralization so you got to be able to stay on top of that. That is not easy for a lot of investors to do.” Some drill programs have those blanks, or as Steve says “dusters,” and then the exploration company continues drilling and gets back into the mineralization. Other times if the drills keep producing blanks, it may end up being a small deposit even though there were some initial big drill holes.
Regarding investing in uranium explorers, Steve points out that “we’ve seen [in Fission Uranium Corporation and NexGen Energy] that even in a horrific bear market you can make money as an investor in a good high-grade discovery. My own opinion on the uranium space right now: I agree with a number of people out there that I see no signs of uranium prices going up anytime soon. The catastrophe in Japan 5-6 yrs ago, as well as cheap, oil, coal, natural gas and alternative energy sources—I think a lot of western countries are gun shy about nuclear energy—I don’t see uranium prices going up anytime soon, so therefore I am very reluctant to invest in uranium stocks. One way I am playing it is if we can get full warrants for 5 years that gives us a chance for 5 years that hopefully uranium prices go up within that time frame but in the next 1-3 years I don’t think investing in uranium stocks is the place to be.” Steve concluded by saying though that if there is another high-grade discovery, especially in the Athabasca basin in Canada, he will readily invest, “but it’s got to be a really good looking discovery.”
