GOLD PRICES HAVE TREBLED IN RECENT YEARS. The big returns, however, have been in little gold stocks — exploration outfits known as “juniors.” These are the ever-hopeful speculations built upon the drill cores and inferences of a small number of hired geologists. During gold’s ascent to $1,218 an ounce, for example, shares of major producers like Newmont Mining (NEM) went nowhere. But the stocks of two of the biggest juniors, NovaGold Resources (NG) and Seabridge Gold (SA), rocketed tenfold to valuations of about $1 billion apiece, as the companies’ consultants expanded their estimates of the quantity of gold hidden underground.
Unburdened by gold sales or profits, the billion-dollar valuations of stocks like NovaGold and Seabridge depend mainly on how many million ounces of gold the companies think lie in their properties. And that tally comes from the technical experts who extrapolate from drilling samples to estimate the unseen gold resource and its recovery cost.
Seabridge and NovaGold have used some of the same key experts to support their estimates. When junior miners’ resource and cost estimates have proven overly optimistic in the past, they’ve buried shareholders. That’s the lesson NovaGold investors learned in November 2007, when the company lost half its share value in a day, as it retracted the experts’ estimates of what could be profitably mined at a gold project called Galore Creek. Two of the lead experts in that NovaGold disaster are now consulting for Seabridge.
Bulls argue that Seabridge and NovaGold look cheap at respective share prices of 25 and 6, which represent about $14 and $49 for each ounce of gold the companies claim they’ve got underground. Other junior gold explorers have been acquired by gold majors at upward of $100 an ounce.
But NovaGold and Seabridge are bargains only if the gold estimates prove out. The gold industry’s recent decades have featured many disappointments in ore grade, tonnage and processing cost. At Seabridge and NovaGold, the track records of important technical experts, managers and controlling shareholders raise worries about whether the mines will meet expectations.
“It is very difficult to make precise estimates,” concedes Michael J. Lechner, the geologist who certified the since-revised gold-ore estimate for NovaGold’s Galore Creek and who now oversees the audit of Seabridge’s gold estimates.
“It isn’t like counting washers in a jar,” allows Lechner, who has consulted for successful majors like Barrick Gold (ABX) as well as for disappointments like Esperanza Silver (ESPZF) and GLR Resources (GLRAF), which haven’t delivered the bonanzas suggested by his resource estimates. “It is subjective as all get-out,” he says.
Forecasting the costs of Seabridge’s mine is James H. Gray, the consultant who signed off on NovaGold’s disavowed estimates of Galore Creek gold reserves and mining costs. Gray’s firm has worked for big outfits like Teck Resources (TCK) and penny-stock juniors like Canarc Resource (CRCUF). In November, the British Columbia Securities Commission told Canarc that Gray’s economic assessment report failed to comply with Canadian disclosure standards. “The work that we do are estimates,” Gray says. “That’s it.”
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