Exploring for minerals is a costly, risky business. For most juniors, it's a constant game of raising money to drill, then hoping to hit some high grades so they can raise more money.
The cycle is full of uncertainty, it's dilutive for shareholders, and does little to address the inherent risks of the mining industry. What it does offer is a big payoff if the company manages to hit the mother lode - but only if it's able to sustain itself until then.
A few exploration companies have, however, instead adopted what's known as the "prospect generator" model to address some of the challenges of being an explorer in this uncertain business.
Put simply, a prospect generator assembles a number of properties through low-cost early exploration, then partners or joint ventures with a deeper-pocketed company - which, in exchange for a large chunk of the project, pays for the pricey drilling and exploration work.
"What it does," says Brent Cook of the newsletter Exploration Insights, "is it recognizes the real low odds of success on any individual prospect and vends that risk off to somebody with more money, or at least balls, to spend it and see if there's something there."
The geologist adds: "It keeps shareholder dilution to a minimum, and eventually what happens is when a company does make a discovery - if they do - as shareholders, we get a bigger lift in share price, although we don't necessarily own all the deposit."
Mickey Fulp, a geologist and editor of The Mercenary Geologist, endorses and invests in prospect generator companies for similar reasons.
"I like the prospect generator model because it gives a company exposure to a multitude of projects that someone else is spending their money to explore," he says. "It allows a company to do relatively low-cost exploration, grassroots-style prospecting and reconnaissance exploration and preserve its capital without diluting."
In exchange for stability and a tight share structure, the prospect generator company loses a significant portion of the project, sometimes being reduced to just a royalty.
But the model also gives the prospect generator a longer life, and ultimately creates more opportunities to find that game-changing discovery.
While the model is popular among newsletter writers, it isn't all that common in exploration. There are only a handful of prospect generators in existence compared to the number of traditional junior companies.
And while there are many examples of successful prospect generators, three companies -- Almaden Minerals (AMM-T, AAU-X), Altius Minerals (ALS-T) and Atac Resources (ATC-V) - illustrate how the model can be tailored to individual companies. All three juniors chose a fairly contained geographic region and focused exploration there for years, gaining a deep knowledge and understanding of the area before making a significant find. But whereas Almaden is a classic prospect generator - around for decades and still true to its roots - Altius is transitioning to a hybrid prospect generator/royalty company. Atac, meanwhile, has abandoned the model after making a big discovery that has now become its focus.
Almaden had its inception back in 1972 when Duane Poliquin, now the company's chairman, was first looking for financing to advance the Santa Fe gold property in Nevada that he had identified.
As Morgan Poliquin, Duane's son and now president and CEO of Almaden, explains, back then there were few technical people running junior companies. Instead, it was dominated by promoters - something his father was not.
Finding it hard to raise money, Duane optioned the property on a 60-40 basis, keeping a minority interest while letting the richer partner develop the project, and an operating blueprint was formed.
"That experience is the foundation for how we've operated since," Morgan says.
Almaden was then formed in 1986 as a public company on the Vancouver Stock Exchange. Shortly after, Duane went on to discover and acquire the La Trinidad gold mine in Mexico's Sinaloa State, and later sold it to Eldorado Gold (ELD-T, EGO-N) while retaining a royalty.
In 2001 the company, then known as Almaden Resources, merged with Fairfield Minerals to become the current Almaden Minerals. The merger led Almaden to list on the Toronto Stock Exchange and left it with a sizeable portfolio of properties, including the Elk gold property in southern British Columbia.
Despite actively exploring for 25 years, Almaden has a tight 55.5 million shares outstanding, thanks in part to the prospect generator model.
"We're not looking for an existing asset to promote, we're looking to find something using our technical abilities - and we really believe in them and our ideas and that's our skill set," Morgan says. "It's not a lot of money to go around in a pickup truck or in a helicopter to go look for something. The intellectual capital is the bulk of the capital."
The company has roughly 40 properties in its portfolio with about a quarter joint ventured. By sticking to its model, the company has been able to advance multiple properties without having to raise money in the market.
"You have to dilute somewhere, and our preference is to dilute the property in preference to the shareholders," Morgan explains.
Almaden's model means it has to continually seek out new possibilities, not relying on existing projects.
With that need to find new projects in mind, the company has focused activities especially on Mexico, where management sees a welcoming combination of low political risk and high geological potential.
"What we do first of all is choose geologically permissive parts of the world," Morgan says. "But then we feel that if you're going to look for something new, it has to be accessible, good logistics, good infrastructure and it has to be politically stable because there's enough risk out there."
Explaining that the company's current focus is on eastern Mexico, Morgan adds: "We started literally from the canvas of a continent and worked our way down to the local scale."
It's there that the company hit upon its flagship property: the Ixtaca gold-silver project in Puebla state.
In July 2010, Almaden decided to drill the Ixtaca portion of its wholly owned Tuligtic property to test several epithermal vein targets. In early August, the company released the results from its first hole from the zone, hole 10-1, which hit 302 metres grading 1.01 grams gold per tonne and 48 grams silver, including a 1.7-metre section of 60.66 grams gold and 2,112 grams silver.
Since that first hole, Almaden has continued to test the target, pulling several more long intercepts at reasonable grades as it expands the known size of the deposit.
Despite drilling 14 holes at Ixtaca last year, with plans to plug more money into it this year, Poliquin maintains that Almaden hasn't abandoned the prospect generator model.
Having already optioned out the project three times to partners looking for copper, Morgan says there were limited choices if the company wanted to explore the property further.
"When you've had three partners, that doesn't make it easily, cosmetically, to find a new partner," he notes. "So we decided to drill it ourselves."
Almaden drilled the blind targets and hit the long intercepts. Since then, the company's stock price has gone from lying flat around a dollar to a high of $5.25 in December, largely on the promise of Ixtaca.
"Having done (the drilling), we're now over a particular hurdle of risk; we've made a discovery," Morgan says. "For the time being, there's more upside to developing this. . . I don't think it (would be) a reduction of risk to form a joint venture at this stage."
Morgan continues to firmly put his faith in the prospect generator model. He argues that the projects that became available after the end of the Cold War have largely dried up and there is now a big demand from potential partners.
"There's been a pipeline of ready projects for twenty years, and now there just aren't things sitting on shelves anymore. So where are they going to come from? Nobody's been exploring in this manner," Morgan says.
"There are many more companies that are looking for a project to earn in through spending than there are companies like us that are looking for new things," he explains. "Whether they're juniors or majors, people have to be getting back to what we're doing."
While Almaden has been working away in Mexico, Altius has been busy establishing a string of successful discoveries using the prospect generator model in its native Newfoundland and Labrador.
Brian Dalton started Altius in 1996 while still a student at Memorial University in Newfoundland, explains Chad Wells, vice-president of corporate development. The Voisey's Bay rush was on and Dalton was doing a lot of prospecting work for Vancouver juniors, and noticing how vulnerable the companies were.
"The fuse on companies can be so short," Wells explains. "Raising money, raising equity - blowing up your share structure."
So Dalton took on the prospect generator model, with Altius carrying projects just as far as needed to make them attractive to a partner.
"Really it was about trying to have sustainability in your business," Wells says. "Keep your share structure tight so that in the case of discovery or profit making or whatever, it actually means something."
The Altius team knew the province well, both geologically and at the community level. Like Almaden, the company sees socio-political risk as at least as important as geological risk.
For a few years the company operated as a prospect generator, exploring and staking. But the company was still dependent on the market.
"Even though we were running on a burn rate of about a quarter million to four hundred grand a year, back in those days, we were still a slave to equity," Wells says. "It was just an uncomfortable way to operate."
Then, an opportunity came up to change that. Knowing the prospector who made the Voisey's Bay discovery, Altius was given the chance in 2003 to buy an effective 0.3% royalty on the mine. The company looked at it as a way to create a funding mechanism for its prospecting business, but with a market cap of between $15 and $20 million, the price was a stretch.
"We decided to basically bet the company, and raise 10 million dollars," Wells says. "(We thought) it would solve our equity slave status."
Production started at the end of 2005, and by the end of 2007, Altius had earned back its investment.
"In our case, to marry that project generator model with the royalty is what I think set the company on the foundation to where we are today," Wells says.
The company is still true to the prospect generator model, with 12 of 16 staff members being geologists.
As Wells puts it "They bang on rocks and come up with ideas."
Those geos have already established a very solid reputation at Altius, with three clear successes so far.
First, the company spent $660,000 in an alliance with Fronteer Development Group, now Fronteer Gold (FRG-T, FRG-X) to advance the Aurora project in Labrador. Altius ended up with a 48% equity stake in spinout company Aurora Energy Resources, which it managed to liquidate for $208 million, while still keeping a 2% royalty on the project.
With Paladin Energy's (PDN-T, PDN-A) recent purchase of Aurora for $261 million, the chances are looking brighter that the royalty could be put into play.
The company then provided the foundation for Rambler Metals and Mining (RAB-V) with the Ming copper-gold project in Newfoundland. While on a much smaller scale for Altius than the Aurora deal, Ming is expected to go into production later this year. Altius received 12 million shares when it took Rambler public in 2007 and recently sold off its interest in the company.
Finally, Altius identified and staked the Kami iron project in Labrador. With the belief that drilling on the project made good risk-reward sense, Altius, for only the third time in its existence, drilled holes in one of its properties.
When Kami returned promising drill results, the company launched what it describes as a "merchant-banking like approach" to exploration. Altius restructured Alderon Resources (ADV-V) to develop the project. In late 2010, Alderon completed its earn-in of the Kami project and issued Altius 32.3 million shares, representing 37% of the company.
Having invested roughly $2 million in early drilling at Kami, Altius now has around $120 million in Alderon equity and still retains a 3% royalty. After all this, the company still has under 30 million shares issued and recently traded at around $13.50.
Looking forward, Wells explains that with significant capital on hand, the company will be looking to acquire more royalties to make them a more central part of its business model.
But the company still believes in generating projects, with several other prospects in the works as the company slowly expands outward from Newfoundland and Labrador.
For Wells, the prospect generator model may be perceived as being tougher and requiring more discipline, but it gives companies sustainability and more time to find the discoveries.
"It's almost boring - it takes a long time and a lot of partnerships and statistical odds to result in discovery," he says. "The Canadian junior way, and especially the Vancouver way, is just much more straightforward. It's purity. Just raise some money and drill some holes."
The discipline required with the prospect generator model helps explain why there are so few companies employing the approach.
As Wells explains: "What ends up happening is that a prospect generator is a prospect generator until they get a good project, and then they turn it into a flagship project, raise a bunch of money to drill a bunch of holes - and it either works out or you never hear from them again."
Atac Resources is one of those companies that found a champion project.
For years, Atac explored patiently in the Yukon in conjunction with consultants Archer Cathro, long before the recent Yukon gold rush.
The company optioned out some properties, and drilled others when it couldn't find a partner.
Then Atac started exploring the Rau gold project in the Keno Hill district of central Yukon, and everything changed.
In 2008, the company started pulling intercepts that showed a similarity to Carlin-type gold mineralization.
A year later, having pulled confidence-boosting results like 28 metres grading 24.07 grams gold and 16.8 metres carrying 15.64 grams gold, Atac decided to abandon the project generative business and focus entirely on Rau.
"It's just a great target," explains Graham Downs, president of Atac. "We want to focus on that."
Downs still believes in the prospect generation model, but for Atac it's already served its purpose.
"It's a vehicle to find that deposit that you want to develop," he says.
With the company developing what seems to be Canada's only Carlin-type gold discovery on a property that spans 1,600 sq. km and hosts two distinct trends, Atac seems to have found "that deposit."
Atac's share price had gone from a low of around 7¢ in late 2008 to roughly $2 in mid-2010 on a number of healthy hits from the Tiger target in 2009.
But it wasn't until August 2010, when the company released the first-ever results from the Osiris target, roughly 100 km east of Tiger, that investors truly took note of Rau's potential.
The company reported that Osiris looked like a second Carlin-style zone, intercepting 31.1 metres grading 9.26 grams gold within a 65.2-metre interval grading 4.65 grams gold. The company then saw a huge price swing, climbing to as high as $9 by November.
In 2011, Atac will be drilling 40,000 metres on the Rau project as it works to both establish an inferred resource and discover new zones.
For Brent Cook, it's by finding that big project that the prospect generator model finally pays off.
"The best thing that Almaden did, that AuEx (now Renaissance Gold) did, that Mirasol is doing and Virginia and Altius. . . is that they did this for years and years and years, ventured something out, never found anything and then finally they stumbled across a property that their geologist just recognized as being something really worthwhile," he says.
- The author is a staff writer in The Northern Miner's Vancouver office.
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