by: Nick Hodge
Outsider Club

Building mines is hard work.

If it were easy to dig up valuable minerals out of the ground and exchange them for cash everyone would do it.

But it's not. So they don't.

But they want to. Humans have had the itch to strike it rich with mining for as long as we've been around. And it's no different today.

Yet what most don't realize is that less than 5% of mining projects actually get developed into producing mines.

Some never get drilled. Some turn up dry holes. Some run into regulatory hurdles. Some have issues with First Nations.

There are literally a million things that can go wrong.

It's why investing in mining upstarts is such a risky business.

But it's also why the companies that actually find success become so valuable.

What's more, mining companies today have a new obstacle to overcome: fewer deposits to find. Mineral-rich deposits take millions of years to form and — like with oil — once you harvest them they are gone forever.

That's one reason that despite exploration spending rising tenfold over the past decade the level of new economic discoveries has remained pretty much flat.

But unlike what happened to oil with fracking, there is no technology on the horizon that can improve the economics of mining to make more deposits economic.

It's the reason companies like Goldcorp — the largest gold miner in the world — are sounding the alarm for Peak Gold. Then President & CEO Chuck Jeannes started discussing the idea in late 2014/early 2015, telling the Wall Street Journal that:

Whether it is this year or next year, I don't think we will ever see the gold production reach these levels again. There are just not that many new mines being found and developed."

And as reported at the time:

Over the past 24 years, mining companies discovered 1.66 billion ounces of gold in 217 major gold discoveries, SNL Metals & Mining's 2014 edition of Strategies for Gold Reserves Replacement shows.

While that sounds like a significant amount of gold, it falls short of the 1.84 billion ounces produced over the same period. In addition, the amount of gold discovered and the number of major discoveries (defined as any deposit with a minimum of 2 million ounces of contained gold) have been trending downward over time, from 1.1 billion ounces in 124 deposits discovered during the 1990s to only 605 million ounces in 93 deposits discovered since 2000.

The amount of potential production from these major discoveries is particularly concerning when looking at the discoveries made in the past 15 years. Assuming a 75% rate for converting resources to economic reserves and a 90% recovery rate during ore processing, the 674 million ounces of gold discovered since 1999 could eventually replace just 50% of the gold produced during the same period.

However, considering that only a third of the discovered gold has been upgraded to reserves or has already been produced, and that many of these deposits face significant political, environmental or economic hurdles, the amount of gold becoming available for production in the near term is certainly much less.

From this we can draw a few conclusions...

First, major miners are going to start having to buy quality deposits at a much faster rate. We've seen some acquisitions already this year, but we will see more.

Second, quality deposits with robust economics are going to enjoy a premium in the market. Of course that sounds simple... the companies with better deposits will fetch higher prices. But it's not always so.

Take Midas Gold (TSX: MAX), for example. We've been telling people to buy that stock for the past two years. If put into production today it would be one of the largest and most high-grade gold mines in the country. No one wanted to hear it.

This year, as the gold sector came back into favor, shares have rocketed over 250% and it's left its peers, as evidenced by the junior mining sector ETF, in the dust. Midas was lagging its peers as recently as April.

Midas Gold Six Month Chart(Click to Enlarge)

The good deposits are out there. It's the research to find them that sets them apart.

Third, companies that have a better chance of making a discovery will also fetch higher prices. Some companies, dare I say it, have no intention of ever finding anything. They are content to take shareholder money without putting the drill to work.

The most successful prospectors aren't interested in mining their shareholders' pockets... Most often because they are large shareholders as well, so management isn't interested in frivolous spending or dilution. Not only is skin in the game important, but so is experience.

If the company you're investing in is looking for silver in eastern Mexico but the only person with mining experience on the team was part of a potash operation in Quebec... then you might have a problem.

And doing the diligence on all this isn't easy. It's damn near close to impossible. Again, that's why it's one of the riskiest sectors of the market.

But if you can do great research and weed out the 99% of companies that will never mine or sell anything... then you've got a good shot at harnessing some of the most explosive upside that stocks have to offer.

That's exactly what our new mining analyst Gerardo Del Real has done for you. He's put together the ultimate shopping list of gold and silver stocks — only those with top-notch management teams and assets that will either be put into production or sold for a premium.

You can get access to it here.

Call it like you see it, 

Nick Hodge

(Original article published at

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