A discovery announced yesterday caused the stock of the company that made it, Great Bear Resources (GBR.V), to close up 63.9%—after surging 104.2% in intra-day trading. This shows once again that even in a bearish market, investors love a discovery.
However—and no offense to the geologists who did solid work delivering this discovery—it also shows that a lot of investors don’t know the difference between speculation and gambling.
Let me explain.
Great Bear is exploring for gold on its Dixie project in the Red Lake district of Ontario, Canada. That’s “elephant country.” Goldcorp’s famous Red Lake Gold Mine is there, among others. This alone tends to get a lot of attention when a company working in the area delivers excellent drill results.
And GBR’s results are indeed excellent:
- DHZ-003 intersected 16.35 meters grading 26.91 g/t gold, including separate sub-intervals of 5.05m of 51.39 g/t, and 1.0m of 112.63 g/t gold.
- DHZ-004 hit 15 meters DHZ-003, intersecting 7.0m of 44.47 g/t gold, including 2.0m of 143.24 g/t gold.
We don’t know the true thicknesses of these intersections yet, but it seems likely that both will hold up to mechanized mining widths. That makes this a significant discovery that could lead to the delineation of a major, high-grade gold deposit. It’s certainly put the company on my radar.
But I’m not buying yet. Of course, I wouldn’t buy after such a huge leap anyway, but that’s not the main reason.
You see, the company’s press release describes DHZ 004 as being “vertically below” the hit in DHZ 003. The hole is so, but the high-grade hits look more sideways than down in the section diagram provided. That could mean that the company has drilled into two veins in close proximity, or possibly a flat-ish structure instead of a vertical one. Neither of those are bad things, but the two hits are just 15 meters apart, so there’s very little indication of the size of the discovery yet.
In other words, this could turn into a big, profitable mine—or nothing. It’s possible that the company hit an anomalous blob of mineralized rock and won’t find much more around it.
This happens when mineralizing fluids flow up structures in the earth’s crust and then deposit the metals they carry in a small, but permissive environment. It’s also possible that post-mineral fluids or faulting destroyed or removed other mineralization that might have been there in the past.
I’m not saying this is so. However, the company’s section diagram shows other drill holes in the area that didn’t hit anything. That’s not fatal—in fact, it’s common—but it is a good reason to be cautious about this discovery.
It would be different if the company had a pair of holes with good grades of disseminated mineralization over hundreds of meters. That rarely fails to amount to something more substantial. But failure in follow-up drilling does happen with narrow, high-grade discoveries. In fact, it’s common.
Please understand that I am not dismissing the discovery.
I congratulate management for the geological sleuthing that lead them to this discovery.
But I must also point out that the company does not yet have a deposit with visible economic value.
This same company has hit gold in its exploration before. These new hits are of more exciting grade and thickness, but the demonstrable value in the ground has not changed.
So, is it a rational speculation for some people to pay twice as much for the stock as it was selling the day before the news?
Or is it just a toss of the dice?
It’s true that if this discovery does turn into Red Lake’s next big, high-grade gold mine, then buying yesterday—even at twice the price of the day before—will likely become a highly profitable trade for those who did so.
But what are the odds?
I can’t give you a number, but I can certainly think of far more exciting discoveries that didn’t pan out than I can ones that did.
What’s even more glaring is that the stock retreated substantially from yesterday’s peak. With gold down this week, and possibly poised to go lower in the weeks ahead, that retreat could continue.
This is true even if the discovery does pan out.
I’m not at all saying that people should not speculate on this stock. I’m saying that chasing it yesterday when others were piling in was ignoring the high probability of better prices just ahead.
Personally, I’m going to want to see more drill holes. I want a better idea of just what the company has discovered before I consider investing. There will still be plenty of upside at that point. Yes, I may lose some of the early gains, but I’d be speculating with much less risk.
But even if I didn’t want to wait for that confirmation—if I wanted to bet on this discovery now—I would watch for it to retreat for several days, until it seems to have found a near-term bottom.
Caveat emptor.
