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Back from New Orleans

With thoughts on the pros and cons of different kinds of gold companies

The New Orleans Investment Conference was once again a fantastic event. The conference offers a packed schedule of interesting speakers and companies, in a city that seems to always be celebrating.

I get three things out of shows like this. First, I get to spend time with investors and subscribers. Those conversations help me identify current concerns, interests, and curiosities among the resource-investing crowd. I also just get great pleasure in meeting subscribers.

Second, I get a chance to learn new stories and update on companies that I know are doing interesting things. Much as I try, it’s impossible to keep up with every company and to be aware of every new venture, but walking the floor of a good conference is a wonderfully efficient way to catch up. Chatting with folks at the show – geologists, executives, analysts, investors, and the like – is also really useful, as we all notice and track different stories so we all benefit by sharing what we know and like.

Third, good conferences have good speakers so I always walk away with at least a few new ideas. This time around I did not get to attend many talks – Brien keeps us busy! – but I did make note of a few points from the panel I was on.

Moderated by Rick Rule, the panel had Brien Lundin, Eric Coffin, Brent Cook, Nick Hodge, and me discussing mining: our gold predictions over the next 12 months, our ideas about what kind of companies will outperform, our commodity picks outside of gold, our people-to-watch lists, and our investment picks among exhibiting companies.

Among the group there was widespread agreement that current sideways action will likely continue for a few more months but that 2017 will be a good year for gold. It was the panel’s answers to the second question – what kinds of companies will outperform in the gold space – that made me think.

My answer had three parts. I think mid-tier gold miners with significant pending production growth will outperform, and in doing so will represent a low risk option for good gold leverage. I think companies with new mines or development-ready assets will outperform; this is a small group, because the bear market meant few mines got built and few projects made good strides towards production, and they will get rewarded for their perseverance with share price performance and/or takeout bids. Finally, I think real exploration success will attract attention.

Several of my peers on the panel focused exclusively on that third group: successful explorers. After, I mulled that over.

First and foremost: I understand the excitement over exploration. It is absolutely true that discoveries create the biggest share price gains. And there’s been such a dearth of exploration for years; the exploration speculation game has just not existed. Seeing drills turning again is exciting.

That said, exploration is also the highest risk part of the mining game. It’s amazing when it works…but there are zero guarantees.

By contrast, a mid-tier miner with a growing production profile is guaranteed to gain in a rising gold price environment. And substantially so: from its low in January to its high in August, B2Gold gained 411%.

BTO shares have since fallen some, reducing the year-to-date gain to 310%. No investment is certain; B2Gold faced the dual headwind of gold’s price slide and rising mining risk in the Philippines, where the company’s Masbate mine is located.

But BTO is already rising again and it will undoubtedly rise farther when gold strengthens. The company is already building the Fekola mine in Mali, a project it started only 18 months after pouring first gold at its Otkikoto mine in Namibia.

Both of these assets are large, low cost operations. By building them, BTO should be producing between 900,000 and 950,000 oz. gold annually by 2019 versus 550,000 annual ounces today, and its costs will fall as output rises.

Mid-tier miners aren’t sexy. A letter writer like me doesn’t get credit for picking a stock like BTO, at least not compared to the accolades for being the first to recommend an exciting new discovery. But given that so many exploration efforts fail, hedging risk with a ‘boring’ mid-tier miner makes sense to me.

With hedges like that in place, a portfolio can handle exploration risk. And you need exploration exposure if you want the multi-bagger gains that discovery can generate. We saw a few examples of that just last week.

Callinex Mines’ (TSXV: CNX) share price responded in a big way on news of a high-grade zinc, gold, silver, and copper intercept in Manitoba. The Pine Bay project is near HudBay’s operations in Flin Flon and has seen exploration efforts from Placer Dome, Inmet, Newmont, and HudBay over the decades.

In fact, Callinex’s hot hole last week was really Placer’s hole – the junior simply extended the historic effort by 38 metres, based on geophysical data suggesting the hole had stopped just short of the volcanogenic massive sulphide body it had been seeking.

Those extra 38 metres of core included 10.3 metres grading 6% zinc, 1.8 g/t gold, 60 g/t silver, and 0.7% copper. Very nice rock. And the geophysical target that encouraged the hole extends along strike for 700 metres and continues for 1 km to depth.

The lens of mineralization is deep, but mineralization in the Flin Flon camp often is. The nearby 777 mine taps into a deposit that is largely more than 1 km below surface. Importantly, HudBay has less than four years of reserve left at that mine and would be very interested in a VMS discovery in the area. Pine Bay is less than 16 km from the process plant.

Pine Bay is already home to four small VMS deposits. In general, Flin Flon deposits happen in clusters, with several clustered around an alteration system within a felsic volcanic center. Pine Bay has all of those characteristics covered. The historic deposits are small but suggestive of a rich environment.

The project spans three northeast-striking VMS-prospective horizons. Each horizon already hosts at least one deposit. Callinex’s intercept and the geophysical target that brought it there align with the Cabin horizon. And the hit just tags the top of the geophysical target.

The market realized the significance of Callinex’s hit immediately. CNX’s share price jumped from $0.36 to $0.55. Less than a week after the drilling news Callinex announced a $5-million private placement; Sprott is taking most of the deal.

The market and Sprott are excited because these kinds of VMS lenses can be lovely, continuous, and very high-grade deposits. Given that Pine Bay is so close to HudBay’s process plant, which will need a new ore source in a few years, the stars could be aligned for this discovery to achieve success quickly.

The market also liked drill results from Erdene Resources (TSX: ERD). Erdene’s results were not a brand new discovery but they did illuminate some of the size and grade potential at Bayan Khundii, Erdene’s year-old gold discovery.

Bayan Khundii is in southwest Mongolia. The main zone is called Striker and the most striking result was a new near-surface hit in a 170 metre step out to the northeast.

The stepout hole is the little black dot just under the yellow-circled 1. Note that it collared in different rocks; specifically, it collared in young Cretaceous cover rocks, as opposed to the altered tuff (blue) that Erdene had tracked on surface to this point. The cover rocks were only 20 metres thick, though, and the entire hole averaged 1.3 g/t gold over 123 metres. Whether mineralization continues under cover all the way to the Northeast zone, another area of exposed altered tuffs 750 metres away, is as yet unknown.

Erdene also announced some infill holes at Striker, including one of the most intensely mineralized holes at Striker to date: 90 metres of 2.5 g/t gold, including 26 g/t gold over 7 metres.

A few weeks earlier, the first set of results from the drill program included 24 metres of 7.5 g/t gold within 71 metres of 3.1 g/t gold from within Striker and 16.7 metres of 4.6 g/t gold in a new area to the southwest.

These are still early days at Bayan Khundii, which is why the drill program also included two scout holes 100 metres west of Striker. Both returned gold, including 33 metres of 0.39 g/t gold, 21 metres of 0.95 g/t gold, and 10 metres of 1.71 g/t gold. The presence of gold to the west and southwest bodes well for expanding Striker.

Erdene also punched two holes into the Northeast zone, the other area of altered tuff (blue blob) northeast of Striker, for which results are still pending. One of those holes looks nice, with altered and silicified volcanic tuffs.

Drilling continues apace, with another 2,000 metres to go at Bayan Khundii before Erdene shifts focus to its Altan Nar project about 20 km to the northwest.

These projects are all Erdene efforts through and through. It was regional recon in 2015 across the Khundii license that identified Bayan Khundii as a low sulphidation epithermal gold prospect. Over the last 18 months the company has identified gold over a 1.7-km long trend; only Striker has been drilled.

The deposit taking shape is ideal in that comprises a series of stacked structures dipping gently to the south.

The gentle dip means the zone looks very amenable to open pit mining. And the mineralization responds really well to basic processing, with a simple gravity concentration and cyanidation circuit recovering 99% of the gold.

At Altan Nar, the project to the north, Erdene has outlined 18 gold-silver-lead-zinc targets within a 5.6 by 1.5 km trend. Erdene advanced two of those targets to resource stage in 2015, simply because only companies with defined resources and the possibility of near-term production could raise capital in the bear market. The resource stands at 1.8 million indicated tonnes grading 1.7 g/t gold, 11 g/t silver, 0.6% zinc, and 0.5% lead, plus 1.5 million inferred tonnes of similar grade.

However, there is likely a lot more at Altan Nar, given that Erdene has not yet drill tested the other 16 targets. A few will see initial drilling before the end of this year.

Finally, Altan Arrow is between Altan Nar and Bayan Khundii, slightly to the east. Altan Arrow is similar to Bayan Khundii is offering high-grade gold in epithermal quartz veins within broad zones of low-grade gold.

Erdene is fully focused on Mongolia. Company management has extensive experience in the country and chose to explore there because of its strong potential for low-hanging fruit – the kind of high grade, near surface deposits with straightforward metallurgy that have been discovered, delineated, and mined in ‘easy’ parts of the world.

Looking at Erdene’s share price chart, you wouldn’t know that gold had a setback in October.

The third big drill announcement of late came from Mariana Resources (TSXV: MRA), where partner Lidya is infill drilling their Hot Maden gold-copper project in northeast Turkey. Hot Maden is a ridiculously impressive discovery, as one of these infill holes showcased: 69.6 metres of 62.7 g/t gold and 2.68% copper.

Yes, you read that right. It’s insane. It’s the highest-grade intercept from the project to date. Other results from that same section line and the one beside include 63 metres of 8.3 g/t gold and 1.65% copper and 34.5 metres of 19.4 g/t gold and 1.31% copper.

At the same time Mariana announced results from two holes testing for a deep, fault-offset block of the main zone, both of which carried grade in the right kind of brecciated andesites. Results of 19.7 g/t gold and 2.1% copper over 7 metres and 1.4 g/t gold and 0.99% copper over 33 metres bode well for this exploration effort.

The other results are all good, but they were seriously overshadowed by the headline result. Seriously, 70 metres of 60+ g/t gold and getting on for 3% copper?!? That is very valuable rock. The hit came as Lidya works to test the deposit on 25-metre centers, to inform mine development studies. The partners expect to produce a Hot Maden PEA in less than a month, though of course the study will be out of date by the time it arrives because the partners have had such drilling success of late.

Mariana owns 30% of Hot Maden; Lidya owns the rest. Even just 30% of Hot Maden is enough to give the company a market capitalization of $148 million - at least that’s the number now, after MRA gained 15% on the news.

The point of putting these three tales together is to agree with my peers – discoveries are the best. Gold had a terrible month but real exploration success makes that not matter in the slightest.

So to bring it all together: portfolios deserve a range of gold exposure. When gold is gaining, you want to make sure you have growing mid-tier producers, a couple new miners or companies on the cusp of development, and perhaps a good royalty co or two. These guys are guaranteed to give leverage as the yellow metal rises, and good leverage too – B2Gold’s 411% gain represented a 16-fold lever to gold’s 25% gain. That’s nothing to shrug at.

However, exploration offers two things that miners cannot: the potential to gain when gold is going the other way and the opportunity for huge upside fueled by a real discovery. Plus explorers are fun – the thrill of the hunt and all that.

So let the two camps hedge each other in your portfolio.