The Perfect Resource Exploration Stock Part 3: Anatomy of a Ten-Bagger

By Dr Russell McDougall

Do you know that ‘success’ in junior resource investing can bring rewards that are unimaginable to most people?

In the first two parts of this article, we looked at the start-up procedures, concepts, philosophies and modes of implementation of our nimble and efficient Canadian Juniors. And you have seen how the essential ingredient of ‘great people’ can add enormous value to a company.

The ultimate success for a junior explorer is “discovery”. And you may be astounded at the profit potential that can come your way when you own an exploration company that reaches this point.

Let’s first look at a particular Canadian Junior – Esperanza Silver – and track exactly how their recent key mineral discovery in Peru came about. This company’s story is particularly interesting and illuminating.

Esperanza was listed on the Toronto Stock Exchange (Venture section) in August of 2003 as a start-up company. Their mission was to focus on early-stage silver and mineral exploration and development projects. The company targeted opportunities in Mexico, Bolivia and Peru.

Esperanza came to my attention in late 2004, primarily because of the people involved in structuring the company. One of their directors was, at that time, Robert Quartermain of Silver Standard Resources (SSRI). Mr. Quartermain is simply the brightest and the best when it comes to building a silver company. John Prochnau and Paul Bartos were also directors with stellar reputations. William Pincus, an experienced geologist, was Esperanza’s CEO after being in the industry some 25 years.

This is exactly what you look for in resource exploration – highly experienced operators.

The share structure was also quite appealing around that time as there were less than 25 million shares outstanding and the stock could be purchased in the $0.40 to $0.50 range (Canadian). At a market cap of $13 million, this company was definitely in the ‘nano-cap’ category.

Esperanza subsequently entered into a joint venture agreement with Silver Standard “to prospect for new bulk mineable silver deposits in central Peru”. How they carried out this venture is quite the story.

Looking for land areas of particular interest, these savvy geologists first combed through historical archives dating back to the 1950’s. Old data can be worth a fortune, and is frequently purchased to be reviewed with new eyes and more modern technology.

Having found a particular area of interest they set about to explore it further. They drove as close as they could to this isolated area and then set up camp. They loaded their picks and supplies on donkeys and with a local farmer as a guide, they hiked to the area of interest near a lake.

They were not disappointed as they found a number of quartz outcrops that held a particular appeal with the silver-seeking geologists.

The farmer noticed that they liked the rocks. So he told them something to the effect of, “If you like these rocks, I know a canyon nearby which has a lot of them.” So they took a detour on the way back to camp. The geologists liked the look of these rocks as well and took more samples.

Back home, when the rocks were finally assayed, they showed a promising amount of gold within them, especially in the area the farmer pointed out. Esperanza then went about staking claims with the Peruvian government covering these areas.

Since that time Esperanza has done a lot of surface work on the property and found five large and rich gold/silver veins. It all looked extremely promising but it was totally unknown exactly how deep the veins extended. That question was partially answered in the last couple weeks as the results of four drill holes into the Ayelen vein showed that high-grade mineralization extends at least 50 meters deep on this particular vein.

Yes, it’s perfectly OK to find gold even though you set out to find silver. It’s called serendipity. But in this case, it is also called geological excellence.

What they have found to date is gold/silver mineralization in grades up to two ounces of ‘gold equivalent’ per ton. These are eye popping numbers and this is now a confirmed “discovery”. Still, this is early stage drilling with only four holes completed. Total depths have to be drilled. The other veins have to be drilled. The ground between the veins requires exploration. The entire area needs modern exploration as there is the distinct possibility that a new gold/silver district has been found.

Esperanza has recently traded as high as $3.90 Canadian and now has a market cap well north of $100 million. They do not own 100% of this discovery because they were in a joint venture with Silver Standard in this deal. They could end up with a carried interest of 20% in the end, if and when a mine is established. But even this 20% should prove to be a grand slam home run.

It’s now up to the drills (truth machines) to determine exactly how large this project will grow. I am not making a recommendation of this stock, rather I am just using it to illustrate how a junior resource company goes from start up to discovery.

Going from a market cap in the low teens to one at well above $100 million is a fantastic achievement for any start up company.

What will likely happen in the end to Esperanza and their shareholders? They should eventually be richly rewarded by cash or shares in another company as they become an acquisition target. What they won’t do is mine this project themselves! The gains will be taken and the company and or personnel will likely move on in one form or another to the next grassroots project.

Here are some other examples of tiny explorers reaching the pinnacle:

1. Argentina Gold was bought by Homestake Gold in a deal valued at $270 million.
2. Francisco Gold was bought by Glamis Gold in a deal valued at $284 million.
3. Virginia Gold was bought by Goldcorp in a deal valued at $444 million Canadian.
4. Sutton Resources was bought by Barrick Gold in a deal valued at $493 million.
5. Arequipa was bought by Barrick Gold in a deal valued at $940 million.
6. Diamond Fields was bought by Inco in a deal valued around $2 billion.

While these examples demonstrate extreme success in the industry, only the very best out of the thousands of global explorers reach these heights. Fortunately, there are many ways to profit from the most elite explorers short of these ideals.

The task at hand is to tap into the next nano-cap companies that will present a risk/reward ratio that is difficult for a seasoned speculator to pass up.

Invest Resourcefully,

Rusty 

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