Geologist Brent Cook, editor of Exploration Insights newsletter, has earned a reputation for recognizing which juniors have the best chance of beating the odds and where rocks have the greatest potential for producing profit. In this exclusive interview with The Gold Report, Brent shares some of his insights about which juniors have upside potential in this volatile market. Brent has examined properties in more than 60 countries and learned the investment side of the business from master Rick Rule.

[Editor’s note: For Part I of this interview, please click here]

TGR: Do you have any companies that are both the pure gold plays and also have margins?

BC: I don’t spend a lot of time on the big cap mining companies. There’s too much to really understand to get an edge over the competition. You need an edge in this business and for me that is understanding the fine geologic details that will either show up a fatal flaw or indicate a true discovery. So I stick pretty much to the smaller cap gold companies and, in fact, mostly the exploration-stage companies. Not many people put the time in to figure these early stage companies out.

I was very, very cautious last year and I will be again this year. I think it’s going to be very tough out there. The problem we’ve got is that it’s no longer a market where someone’s going to buy your mistake. You’re going to live with your mistakes. There’s a lot I’m following, a lot of things I look at and keep on my radar screen and watch, but there’s not that many companies I actually buy. Over the whole of last year, we purchased 13 stocks in the portfolio and right now we own 10. Just to plug myself here, I was down 12% on the year.

One company that I have recommended in the newsletter is Sangold Corporation (TSX: V.SGR, Stock Forum). This is a small company in Manitoba. They’ve got a small reserve that doesn’t justify the market cap, and a good resource in the order of 1.2 million ounces. But most importantly from my perspective, a new discovery called the Hinge Zone #4 that is adjacent to the current operations—well, a kilometer away—and readily accessible. And this thing will run probably two to three times the average grade of the mine they’re currently working on. So we’ve got a small mining company that’s moving towards production with a lot of upside in terms of future discoveries. So I like that one.

TGR: If they’re moving towards production, do they have the capital to bring it into production or are they anticipating selling this?

BC: It’s in production right now but not up to speed. They’ve got the capital to improve production —I think they’re targeting 900 to 1,200 tons a day as things get going over the next few years. So it’s a small operation. These are underground veins. You can’t mine that much anyway without a lot more buildup of infrastructure.

The advantage is that they’re permitted, they’re in production, they’ve got a work force, they’re in Canada, and they’ve got fantastic potential to discover new higher grade bodies. If I’m a mid-tier to large producer, this is the sort of property I would want to buy. I think someone will look at this as an acquisition to add on to their current production because it’ll be high margin with lots of exploration upside.

TGR: How about a company like AuEx Ventures Inc. (TSX: T.XAU, Stock Forum)?

BC: That’s a pure exploration company. I visited their project a couple of months ago and, actually, I recommended buying that one subsequent to the visit. These are very, very smart guys with something like 10 to 12 projects ventured out to other people. That tells me the projects they turned up were good enough for someone else to spend their money on. So AuEx gets carried in the exploration without having to spend a dime.

Now the best property I looked at was Long Canyon in Eastern Nevada. This is a new discovery. It’s a Carlin-style deposit or system that they are now 49% participating partners on with Frontier Explorations. Frontier’s managing the project; they’re doing a fantastic job and, so far, they’ve delineated a northeasterly trend that covers over 1.5 kilometers and is up to 300 meters wide.

They do not have a resource estimate on this yet. They’ve got a lot of drill holes into it and hope to have one out by sometime in February and this’ll just be an initial resource in what could develop into a real gold system of merit. The mineralization is oxidized, near surface. It’s in a great location, permittable, eight miles off the freeway. There’s power, water, everything, so this looks like a low cost high margin deposit. I like this quite a bit but have not come to terms with the structural controls so am not willing to "guesstimate" a resource figure now.

TGR: How does that compare to the other projects they have? You mentioned they have 10 to 12 joint venture projects going right now.

BC: The others are much more early stage explorations. For example the West Pequop project, they’ve got in a joint venture with Agnico-Eagle Mines (TSX: T.AEM, Stock Forum). Agnico’s going ahead and earning 70%, and AuEx, I believe, is 30% carried through a feasibility study. They’ve had a lot of success drilling good mineralized holes. To my mind, they have not yet put it together so that they’ve got enough to claim or prove up a significant resource. But it’s an intriguing system; it’s a Carlin-style system, and Agnico’s going full steam ahead on that, trying to find where the deposit is if one exists. The other projects are more early stage exploration, where a partner is drilling a few holes or doing some work. They’ve got a strategic alliance with Agnico in Argentina and they’re also doing some work in Spain.

TGR: As a geologist, when you look at their projects in Argentina and Spain, is there a high probability they will produce high-yielding gold projects?

BC: Argentina, certainly. They’re down in the Patagonia area, which is a Jurassic-aged volcanic plateau, not too dissimilar from Nevada today. So there’s known deposits down there, some good ones and it’s relatively unexplored. They’re using good exploration techniques they developed in Nevada. So, certainly, Argentina is a good place to be exploring and politically I think it’s okay if you’re in the right province and they’re in the right province. Spain has some historical productions and I don’t know enough about their exploration to comment on what exactly they’re chasing over there.

TGR: You also follow Miranda Gold Corp. (TSX: V.MAD, Stock Forum), correct?

BC: Right. They’re a Nevada-focused group similar to AuEx. They follow the joint venture model, where they generate ideas and then get someone with money to come in and spend money on it while they’re carried through the high-risk exploration. Smart, smart business model, particularly in Nevada, where you’re usually drilling hundreds of meters blind looking for a deposit. These guys are intelligent enough to know that the only deposits of interest are mega deposits, so they focus their explorations on the major gold trends in Nevada that produce deposits of 2, 5, 10, 20 million ounces. Technically they’re amongst the best, if not the best in Nevada. I like what they’re doing. I own the stock.

TGR: You say technically they’re amongst the best. Are you talking about their geology team?

BC: Yes. For sure.

TGR: And they’re looking for mega deposits?

BC: Yes, they’re looking for mega deposits that someone will buy or at least carry their costs through based on the joint venture arrangement. Just as an aside, in my opinion, I have no interest in anyone looking for small deposits or developing a small deposit. Everyone says they’re looking for something big. In reality, the geologic setting or environment that most companies are working is not conducive to mega deposits.

TGR: Are there other gold companies that you’re following that you can share with us?

BC: MAG Silver Corp. (TSX: T.MAG, Stock Forum). This is one of the few companies that has a silver deposit that is not reliant on base metal credits. This is a very high grade silver deposit. Their Valdecañas Vein on the Jaunicipio project, Zacatecas, Mexico, is probably the best silver discovery in quite some time.

They and their partner have drilled out current resources of 231 million ounces of silver, about 500,000 ounces of gold with lead and zinc as well. It averages over 1,000 grams of silver per ton. If you just look at the gross metal value per ton, it’s nearly $500 a ton. So this is a fantastic deposit that they’ve found and within the property package they’ve got serious potential for additional discoveries. So I like MAG Silver and their partner, Fresnillo, is a Mexican silver company, probably the best silver company in the world. They’re 56% owners and they operate. They’ve made an offer to purchase MAG Silver for the equivalent of $4.54 U.S. MAG’s currently trading at $5.70, I believe, something in that order. From the beginning I expected a takeout offer from Fresnillo. I did not expect it to be lower than the actual price the stock was trading at, so I was half right.

I’ve got a model on the vein and I’ve used costs from the Fresnillo operations, which should be about the same—and I can come up with in the order of a discounted after tax net present value of a minimum $440 million up to $1.3 billion just for MAG’s 44% of the deposit. The offer from Fresnillo values the company at about $230 million.

TGR: Why such a low-ball bid?

BC: The markets were collapsing at the time and I think Fresnillo felt that they could pull it off. I don’t think they’re going to. I know most of the major shareholders and none of them has indicated they’re willing to sell the stock for that price. My subscribers, I think, if they believe what I say, are not going to sell it for that price either. Again, going back to who else might like it, Silver Wheaton should certainly take an interest in this. If I was Pan American Silver, I would be looking at it. If I was any major silver company, I’d be looking at this. This is a fantastic deposit that’s going to generate a higher profit margin than any other deposit they own and you’ve got Fresnillo as the operator.

If Fresnillo had offered something above the current price, they may have pulled it off, but I don’t think they’re going to pull it off. Now legally MAG Silver has to produce an independent valuation to give to give to their shareholders so the shareholders can make a considered opinion on whether to tender their shares or not, so this is going to be a fairly long process. I bet it takes two months. And what’s going to happen is an independent engineering firm and a financial group are going to go down and review all the data for this deposit plus all their other operations and come up with some sort of fair value for the deposit. And I suspect it’s going to be considerably more than $4.54 a share.

TGR: That’d be good for your investment then.

BC: Yes.

TGR: You have Sprott Resource Corp. (TSX: T.SCP, Stock Forum) on your list. That seems like it's completely different than most of your other investments.

BC: Yes and no; it’s all about value. Sprott is run by a very financial savvy group of people. They understand markets, they understand market trends, and they’re able to do intelligent deals because of who they are. They currently have about $260 million in the bank and I come to that number based on my understanding of the tax treatment of the profits they made off a coal company they sold. So this is not for sure, but it’s close. I’m not a tax man. So they’ve got $260 million in the bank, which equates to about $3.15 a share vs. the current share price of $2.40 a share.

To me this is an intelligent actual real investment in a proven company at a discount to net asset value. I love those. There are a lot of junior companies out there that are trading at or below cash value. Most of those I wouldn’t throw into the league of this because they’ve got $5, $10, $20 million, maybe. Problem is they’re very capable of spending that money in no time at all on projects that don’t stand a chance of making any money. So just because a company is selling for less than cash in the bank doesn’t mean it’s a good buy. That money will go. I’ve seen it.

TGR: Why are they focusing in on the precious metals area?

BC: They’re wide open to anything; although I do notice that late last year they purchased a bunch of gold bullion and silver bullion, so I know they’re favorably disposed towards precious metals.

TGR: Brent, are there any other companies you’re following that have some interesting stories that you can share with our readers?

BC: Hathor Exploration Ltd. (TSX: V.HAT, Stock Forum) is interesting. I’ve been following Hathor for quite a while. That’s a company with a uranium discovery up in the Athabasca Basin of Canada. This is the richest uranium province in the world and last year they pulled some incredible drill holes at this little project called the Roughrider Zone. So I’m following that, have been for a while, and I’m favorably disposed towards it, although the stock has come up in price.

They certainly have some sort of deposit there. These deposits are very small and complex, so it’s difficult to put together a resource, but I suspect there is one there. And right now they have four rigs on the property drilling off, infilling drilling, and drilling some extensions and geophysical anomalies. If they hit the geophysical anomalies, this is very significant. We’ve got two companies up there with uranium mills, AREVA(CEI: FP) and Cameco Corp. (TSX: T.CCO, Stock Forum). Both of them are desperate for ore.

TGR: What can you tell me about Cardero Resources Corp. (TSX: T.CDU, Stock Forum)?

BC: That’s another one of these situations—and this is something I’m looking for a lot—where we have resources and a buyer sitting there. Cardero has a large iron deposit in Peru, great infrastructure, great location. A preliminary scoping study came out with a discounted NPV of about $4 billion. Iron prices have come off substantially since then but you can see it is a major asset. The company's market cap is about US$65 million and there’s a non-binding offer on the table from a Chinese group to buy this for US$200 million. What that means in share price is C$1.30 vs. the offer price of C$4.50. The deal hasn’t been clinched, the money hasn’t exchanged hands, but that, to me, is another one of these good risk-reward situations that you only get in these sorts of markets.

TGR: Let’s say the Chinese group doesn’t go through. What does Cardero look like on its own?

BC: Well, then we’ve got a company with less than $5 million in the bank, another few million in shares of other companies—not bad shares—a large iron deposit that’s got valuation of $4 billion, another iron sand deposit that looks like it could make decent money, although the iron market’s tanked. They also have number of prospects scattered around Peru, Mexico and one in Michigan. So your downside is not that much; your upside’s quite a bit, I think.

TGR: That’s interesting. It’s great little find.

BC: I like that one. Just hope the Chinese come through.

TGR: Brent, thank you so much for your time. 

For additional comments on Barrick Gold Corporation (NYSE: ABX), Sangold Corporation (TSX: V.SGR), AuEx Ventures Inc. (TSX: T.XAU), Agnico-Eagle Mines (TSX: T.AEM), Miranda Gold Corp. (TSX: V.MAD), MAG Silver Corp. (TSX: T.MAG), Sprott Resource Corp. (TSX: T.SCP), Hathor Exploration Ltd. (TSX: V.HAT) and Cardero Resources Corp. (TSX: T.CDU) from newsletter writers, money managers, and analysts, click on their respective links or visit The Gold Report.

Brent Cook inherited investor/analyst editor Paul van Eeden’s newsletter in February '08, which he then repurposed into Exploration Insights. Brent brings more than 25 years of experience to his role as geologist, consultant and investment adviser. His knowledge spans all areas of the mining business from the conceptual stage through to detailed technical and financial modeling related to mine development and production. His hallmarks include applying rigorous factual analysis to the projects and companies he examines, and augmenting his analysis with on-site field evaluations. The website is www.explorationinsights.com