The interview of Rick Rule, chairman of Sprott U.S. Holdings, in last week’s issue includes some observations on the nature of the junior exploration sector that I take issue with. The junior sector has always consumed a prodigious amount of capital but it is the very high-risk, very high-reward nature of the business that results in a success profile that is highly skewed.
Junior exploration can be compared to the various research and development arms of the pharmaceutical industry where large amounts of capital are used in pursuit of that one drug that will deliver a home run patent for the company. Much of the capital spent in Big Pharma R&D is spent in well executed programs that fail … but that is the nature of their business as well as ours.
Collectively the junior industry has become the outsourced and arm’s-length exploration department of the major mining companies who have largely disbanded their exploration teams over the last few decades.
Research by Richard Schodde suggests that, collectively, exploration companies are more successful at exploration than producers. His data indicates that juniors have made almost 60% of all discoveries around the world between 1975 and 2013. In Canada, between 2003 and 2012, the ratio of value discovered to expenditures was almost 270% greater for juniors than it was for majors.
We need all those junior companies and individuals to make it possible for the few that are successful — and in some instances phenomenally so. Rick is right in saying that the allure of investing in the industry is supported by a minority of successful or very successful teams.
However, without a vibrant junior sector populated by optimistic entrepreneurs there would be no customers for the exploration services sector and most importantly no pipeline of discoveries for the major companies to develop.
Juniors are still the most effective mechanism the world has to find the minerals and metals that make modern life possible. With apologies to Churchill, the junior exploration model is the worst way to look for a mine but better than all the others.
Rodney N. Thomas, P.Geo.,
President, Prospectors & Developers Association of Canada