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Exploration is Worthless

by Lobo Tiggre
Wednesday, October 31, 01:04pm, UTC, 2018

Recently a reader asked something along the lines of:

How do "Explorers" make money for investors? Are their stock prices only based on the "Greater Fool" theory? In your Casey Research days, you suggested that "Explorers" had the potential to become 10-baggers. Along the way, however, you discovered the Golden Runway, where companies typically were in line to double. From what I've learned over the years, the "Golden Runway" multiple seems to be based on more actual analysis, but the stock prices of "Explorers" still doesn't seem to be based on anything but sentiment. Am I missing something?

Yes and no. But the question brings up a very important issue, so let me explain…

My friend Doug Casey likes to say that exploration companies are “burning matches” and should never be treated like “family heirlooms.” Rick Rule likes to say that if you merged all exploration companies in the world into one giant one, it would, without fail, lose billions of dollars every year.

Investors must understand that these companies have no revenue. They literally pour money into holes in the ground hoping to do something the odds are vastly against—and that’s on a good day.

Geologists love exploration, of course. They get paid to hike around wild and beautiful places, sampling interesting rocks along the way. Whether they make a discovery or not, they gain experience. This is loads of fun for them, and it pays their bills.

But keeping geologists employed and amused does not make money for investors. The brutal truth investors must be clear on is this:

Exploration is worthless, only discovery matters!

Note that I’m breaking with tradition here, using bold text, underlining it, and even an exclamation point. I just can’t stress this point enough.

I’ll go further and give you a list of useful things I assign zero value to when I ask myself what a company is worth:

  • A large land package.
  • Previously fragmented mineral rights consolidated for the first time.
  • Successful management.
  • Property near a mine.
  • Old mine workings.
  • Buildings left behind.
  • Roads.
  • Mineral anomalies.
  • Drill targets.
  • Geophysical “maps”.
  • Infrastructure advantages.
  • Pro-mining government.
  • Decades of past work to draw upon.
  • Cash.

All of these things can help make a discovery. Many of them increase the value of an economic deposit once it’s discovered. But until that discovery is made, the dollar value of these things is zero. That’s because whatever $ they might seem to be worth, $ x 0 = 0.

That’s even true of the cash. Cash is an asset, of course, but when it’s raised for the purpose of exploration, it’s really an obligation to do work that usually results in nothing. If the cash is in the form of Canadian Flow Through funds, this obligation is legal, not just moral.

This brings us to the “greater fool” theory. Since exploration is worthless, it sure seems like the whole idea is to buy a worthless stock and hope a greater fool will come along and pay us more than we paid for it. Fancy valuation models applied to worthless companies are simply…silly.

But this overlooks the second part of my exclamation above: an economic discovery does add value.

While it’s a sad mathematical truth for investors that anything times zero is zero, the math also tells us that anything divided by zero approaches infinity.

In plain English, this means that when a company goes from being worthless to worth anything at all, the increase in value is huge. (As a ratio, it can be seen as infinite.) Happily, this doesn’t involve imaginary numbers or any whacky math like that. It’s common sense. If you discover a deposit that becomes a mine that cranks out billions of dollars in profits, you add value for shareholders.

In short, it’s a gambler who jumps on some investment fashion without even looking at what the stock might be worth. He hopes some greater fool will come along and make him rich. The odds of success doing this in resource markets are very long against him.

Rational speculators are different. We do everything in our power to stack the odds in our favor. In this context, we research the specifics of a particular opportunity to try to put the extraordinary value-adding power of a discovery to work on our behalf.

Of course, even then, the odds are not great. That’s why a basket approach to speculation on mineral exploration is essential. Even if it were the best project in the world, picking just one stock is an invitation to failure. It could truly be the perfect project—until an endangered mosquito flies onto it. A half dozen stocks or more gives us a shot at one or two big wins that more than make up for the losses on the other four or five.

And because I truly loathe losing money, I would even say the same thing of exploration advanced to the pre-production sweet spot (PPSS, aka “golden runway”). No matter how well studied a project is, you never know that a deposit is actually worth anything at all until the mine is built and the cash makes it to the bottom line. So I would never bet on just one PPSS play, any more than I would want all my eggs in one pure exploration basket.

As for how an independent speculator researches stocks to build the best basket…well, that’s what the Speculator’s Digest service is all about. It is my intention to give as much of my expertise away as I can. That’s not just good karma. If I succeed, the result will be a growing pool of people who understand and value what I do—and who can afford to hire me to help them take things to the next step via The Independent Speculator.

Diligentia praemio,

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