Highly prospective exploration company
Resource projects cover more than 1,713 km2 in three provinces at various stages, including the following: hematite magnetite iron formations, titaniferous magnetite & hematite, nickel/copper/PGM, chromite, Volcanogenic Massive and gold.
Message: "The Anatomy of an Area Play": posted on NOT board by truenorth99
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Recommended reading...click on link at bottom of this post for aritcle that was published back in 2006... analysis is very relevant for investors closely following surrounding companies that are chasing Noront... Original Agoracom post below can be found here: http://www.agoracom.com/ir/Noront/me... "The Anatomy of an Area Play"Posted by: truenorth99 on May 10, 2008 04:26PM
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HRA SUBSCRIBER’S SERVICESpecial Subscriber Report“THE ANATOMY OF AN AREA PLAY”Following and Trading one of the Most RewardingSituations in the Resource SectorERIC COFFIN & DAVID COFFINUpdated August 2006Page 2 of 10HRA Special Report – Anatomy of an Area PlayStockwork Consulting Ltd. www.hardrockanalyst.comAnyone who has been an activetrader in the past few years is morethan familiar with the concept ofMomentum stocks and Momentumplays. Indeed, it’s fair to say thatNASDAQ was simply a series of onemomentum play after another duringthe late 1990’s.These situations are attractiveto investors for several reasons. Theyhave the safely of numbers and theliquidity that a lot of market andmedia attention brings. They make iteasy for the investor to justify theirpurchases because “everyone’s doingit”. And, last but not least, they cangenerate good returns, even forotherwise mediocre companies, if theplay is strong enough and the sectorhot enough.Well. As you know well, theResource sector has been the hot onerecently. The Resources sectors, be itprecious metals, base metals,diamond or oil and gas also have aform of the momentum play, known inthe industry as the Area Play.Area Plays develop when acompany hits on a major discovery,one that dramatically boosts its shareprice. Just as companies reinventedthemselves to be part of the “flavor ofthe month” tech sector, juniorresource companies will rush in andstake claims near the discoveryhoping some of the attention will ruboff on them. If the Discovery isexciting enough a large group ofcompanies in the area can suddenlybe “in play” and there will be a seriesof profitable trading opportunities asexploration on the Discovery projectand the surrounding propertiesadvances.Before we go any farther, weshould point out that, curiously, thecurrent cycle has not really generatedmany of these plays. Why is that?Partially, it’s due to lack of large scaleexploration success, at least with thekind of project that allows others tofollow the lead company.The one notable example wehave seen is Virginia Gold’s Eleonorediscovery. There are a number ofcompanies, including “New Virginia”itself that are now exploring theEleonore area. Although Eleonore isthe first real area play of the cycle wedo not expect it to be the last. Withthe number of explorers fanning outaround the globe and the investmentbeing targeted at exploration therewill be more big discoveries.One thing that this cycle hasgenerated is “commodity” plays ratherthan “area” plays, with specific metalsgoing in and out of favor. Uraniumhas been a particularly strong one.Though we are dealing with area orgeographic plays in this article oneimportant aspect of them that appliesto commodity plays as well deservesmention. That is the added value thatcomes from a group play. While it’s anice bonus, don’t forget that thecommodity premium, like the areaplay premium, soon fades if thecompany does not come up with thegoods.It takes more than just a bigdiscovery, however. There are anumber of added factors (detailedbelow) which will determine howstrong the area play around aPage 3 of 10HRA Special Report – Anatomy of an Area PlayStockwork Consulting Ltd. www.hardrockanalyst.comparticular discovery might be, or if anarea play will happen at all. The restof this article will follow an idealizedArea Play (the sections in italics) withcomments and general tradingguidelines for each stage of the play.Of course, any investorexperienced with momentum playsknows that they are definitely doubleedged. It is almost inevitable thatcompanies in a strong momentumplay will become overvalued (absurdlyovervalued in the case of many Techsectors in the NASDAQ bull market).Momentum plays can be veryrewarding to those who trade themwell, but disastrous to those who donot.It’s critically important tounderstand that a strong momentumplay will lift almost all participants,and that the “favored few” in any playwill see some big price increasesbased on their similarity to the maindrivers of the play, not their ownmerits – at least at first. Because ofthis it’s important to “trade smart”which, first and foremost, meansTAKING PROFITS!If you are trading an area playyou are playing at the speculative endof the spectrum. You are alsocounting on the market’s enthusiasmfor the play to do a lot of the heavylifting, which, by definition, means youare expecting the stock to exceedreasonable levels of valuation(whether you admit this to yourself ornot). There’s nothing wrong with thisbut you need always keep the realityof the situation firmly in mind. If andwhen the market offers you a “freepass” in the form of a big gain beforethere is new exploration results orother data to back it up – TAKE IT.Trade your share cost down to zero orclose to it, then you can follow theplay in comfort rather than lyingawake worrying about how the nextset of Discovery Company drill resultswill stack up against the market’sexpectations.As a general guide to followinga successful Area Play you can followthe graph below which gives a visualrepresentation of the market value ofthe Discovery Company, the Area Playcompanies as a group and the numberof companies involved in the Play astime progresses.Note that this graph is basedon a successful Play by which wemean a Play where the DiscoveryCompany goes on to either put theDiscovery into production or to gettaken over by a competitor at amarket value that makes all itsshareholders money. It also assumesthere are “satellite” discoveries (seebelow), which are why there is asecond rise in Play Value and thenumber of companies, involved nearthe right side of the graphs.Note that most of the waythrough the play the DiscoveryCompany gets the lion’s share of themarket value, though that doesn’tmean it gets the best returns allthrough all periods. The DiscoveryCompany’s market value climbsrapidly in absolute terms then startsto level off as it enters the resourcedefinition and pre feasibility stage.The other companies in the playsee their biggest gains, as a group,while the Discovery Company is stillputting out lots of exciting new resultsand getting plenty of media attention.Note also how the number ofPage 4 of 10HRA Special Report – Anatomy of an Area PlayStockwork Consulting Ltd. www.hardrockanalyst.comMarket Value and Number of Companies Involved with the Area Play050100150200250300350400Time since DiscoveryMarket Value - MillionsDiscovery Market Cap.Area Play Market Cap.Number of Companiescompanies involved in the Play (thelowest line with the triangle markings)changes over time. As the DiscoveryCompany’s value is rising steadily thenumber of companies involvesmultiplies rapidly, only to start fallingas the companies with less valuableholdings start getting ignored anddrop out.Those of you who are notfamiliar with a classic Area Play canlook to the diamond play in theNorthwest Territories. At its height,there were over 150 companiesinvolved, tens of millions of acresstaked and a cumulative market valuein the billions. The NWT has hadsatellite discoveries, one of which justwent into production and there will bea couple more before it’s done, atleast.This play is now 15 years old,and though it’s relatively quiet, therehave been a few periods of stronggains based on new discoveries andthose who have traded it well haveseen a number of profit makingopportunities. It’s an extremeexample, because there are likely tobe four or fives mines come from it,but a trenchant one – Area Plays andthe methods of trading them can be avery worthwhile addition to yourarsenal of portfolio tools.The DiscoveryThe company had been quietlygoing about its business for sometime. Considering the scale of thediscovery it’s amazing that little or noword leaked out in advance. By thetime the market knew about the newDiscovery, the company had coveredall the ground they consideredprospective. Market reaction was bothdramatic and immediate when earlyresults began to come out. Almostimmediately the find was beingPage 5 of 10HRA Special Report – Anatomy of an Area PlayStockwork Consulting Ltd. www.hardrockanalyst.comreferred to as “world-class”. Expertsand analysts christen the find as “thebest of its kind in decades” andpredicted stratospheric price increasesfor the Discovery Company’s stock.The announcement of theDiscovery has two immediateconsequences. The DiscoveryCompany’s stock goes ballistic, andevery promoter worth his or her salttries to get a piece of the action. Asevery good promoter knows,involvement in a hot area play gets acompany over the first and toughesthurdle most junior explorers have toface: convincing investors of aproperty’s potential before significantexploration has been undertaken. Agood area play is the junior miner’sequivalent of a “brand name” product.It brings immediate name recognition,tons (or tonnes) of free press and aconcrete example of nearby success.The promoter can entice with lines like“Their market cap is 500 times oursright now - even a sniff and our stockis sure to go up 1,000%!”At this point the Area Play isstill a one-company show. Howquickly this will change depends onthe area of the find (i.e. howaccessible it is), the size of theDiscovery Company and the amountof favorable geology that’s “left over”for new entrants to acquire.The size of the Discovery Company iscritical. Large producers would nothave to report even a major find forsome time since it’s not a “material”change in their affairs. Indeed, mostMajors will put off reporting as long aspossible and usually won’t report on itat all until they are sure they haveacquired any surrounding projects thatmight contain similar occurrences. Forthis reason, big discoveries by majorcompanies rarely trigger area plays.The ideal candidate for theleadership position in an Area Play is asmall to medium sized explorer thatcan quickly assemble more propertyand raise funds to step up explorationonce a find is made. If the discoveryis truly “world class” the financing sideis rarely a problem. A company of thissize is small enough to have to reportnew results on a regular and timelybasis and (hopefully) smart enough toknow there are advantages to havingcompany in the area. The morecompanies that are touting an areathe better the original DiscoveryCompany is going to look.The Early AdoptersAnalysts dissect the earlyresults of the Discovery andpronounce them amazing. Evenbetter (here’s the key, folks) theypoint out that this type of occurrencetends to form in clusters over a largegeographic area. The “cluster theory”is the linchpin of the great area play.It’s not enough for the Discovery to beworld class. A large number ofcompanies have to be drawn into theplay and be able to argue,convincingly, that they have a realshot at success.By this time competingcompanies that have access bothmoney and technical expertise are inthe field, staking furiously as close tothe discovery as possible, coveringwhat they guess to be the rightgeological trend and rock types. The“technical” group is closely followed bylocal stakers, who may stake blindlybut have the advantage of localknowledge and very low access costs.Page 6 of 10HRA Special Report – Anatomy of an Area PlayStockwork Consulting Ltd. www.hardrockanalyst.comPrivate companies, often miningconsulting or contracting groups,come in at the same time. Theyrecognized the potential early andhave the resources to blanket stakelarge areas. Most of these groups willfarm-out their claims as soon as thegeneral market accepts the potentialof the area. In percentage terms atleast, these groups often see the bestreturn on investment, especially if theArea Play turns out to be one withoutmuch longevity.During this early period, theDiscovery Company presents the bestprofit opportunities, though it is likelyto be putting out the kind of resultsthat will lead to large moves on therelease of results that call for properlytimed trades. Buyers need to timetheir acquisitions for the quiet periodsbetween news releases and try andavoid getting caught up in thespeculative fever.The kind of results that get Area Playsstarted often lead to the DiscoveryCompany’s stock gapping upwardsand trading heavily on emotion. Ifyou aren’t lucky enough to own itbefore the results come out, be sureto let it settle if you want to buy itlater.It takes more than one hot drill holeto make an Area Play, and you willfind that there are several “stillbornplays” every year. A company will putout a set of spectacular results andthere will be a rush to stake adjoiningground until a set of disappointingnumbers deflates both the DiscoveryCompany’s stock and any hopes of aplay.It’s very tempting to jump on the firsthot set of results, especially when astock has a huge jump, but you’llusually regret doing it. If it’s a realplay in the making there will be othertrading opportunities either in theDiscovery Company or newcomers. Ifits not, you’re in for a rough ride.As this phase of the play unfolds, theEarly Adopters will get increasingattention and market values. If thereare still no geological clues to narrowdown the most prospective areas,investors will be gravitating tocompanies with the largest landpositions and the most crediblemanagement, or both. This goes notonly for retail investors butinstitutional investors and brokers aswell.It is during this period that the firstmajor financings for secondarycompanies start getting done, and thelargest ones tend to be completed bycompanies with strong, trustedtechnical management. Neither alarge land position nor strongmanagement guarantee success, butthey will often allow for good shorttermgains. Money is the lifeblood ofthe exploration business; a companythat can complete a large financing isat least in a position to pursueopportunities, within the Area Play orelsewhere.The Also Ran’sOnce the find starts gettingtalked about in the general financialpress the early entrant’s shares arerising rapidly. The Discovery Companyalready has the market capitalizationof a mid sized producer. Enviouspromoters start looking for propertiesto option. It is during this period thatthe number of companies involved inthe play increases very rapidly. Jointventure agreements are signed almostPage 7 of 10HRA Special Report – Anatomy of an Area PlayStockwork Consulting Ltd. www.hardrockanalyst.comdaily as early entrants farm-outproperty to decrease their holdingcosts, and weaker entrants option orstake properties which are farther andfarther from the discovery company’score holdings. The area covered byclaim maps sent out by promotersgets larger and larger until the newclaims reach tens of millions of acres,all of it declared “prospective” by itsowners.So far, everyone’s happy. Thediscovery company has moremillionaire shareholders than you canshake a Porsche at. The earlyentrants are fielding calls from brokerswho have investors lined up to doprivate placements. Even the mostdismal also-rans have seen theirmarket cap increase by 20-50% justby hinting at option negotiations.Soon, however, cracks begin toappear. Investors are starting to getconcerned by the lack of news, or justplain bored. They start skipping fromstock to stock, briefly restingwherever the latest news release canbe found. Some early entrants, thinlydisguised “bucket shops” with moreoutgoing lines than a 900 numberphone-sex empire, are usually themost severely bruised. For weeksthey have called every one on theirlists. They promised huge short-termgains. The gains were delivered aslong as everyone followed the script,held their stock and believed in the“greater fool” theory. Inevitably,early buyers start telling themselvesto take the money and run. Morerecent investors begin to wonder whatthe promoter put in their coffee whenhe talked them into buying the stockat $8.00. All this and we haven’teven started exploration yet!During this period the numberof companies involved in a true AreaPlay will be increasing rapidly. Bynow, virtually all the available groundthat looks like it has even a remotechance of protecting an occurrencesimilar to the Discovery has beenstaked. Locals looking for a quick saleand consulting groups who will use theprojects to generate new clientscarried out most of the staking.During this phase late entrantswho feel they have to be involved inthe play will pick up the newproperties. They might not have thefinancial resources to do anything butoption a distal project and try andraise money with it. The DiscoveryCompany’s stock has probably startedto level out by this point and the earlyentrant’s shares have found newhigher price levels. The Also Rancompanies will get a lift too, though itwill be a smaller one.It often gets to the point with a verylarge Area Play that there is a real lawof diminishing returns for newentrants. There are simply too manycompanies involved for even theanalysts to keep track of so the focustends to stay with the moreestablished players and companies inclose proximity to the Discovery.Companies are cashed up and its timeto start actually getting crews on theground to explore. It is at this pointthat the play starts to really fragmentas the market passes judgment onexploration results (or the lackthereof) as they come out.The Weeding OutAll the action so far has beenrestricted to the secondary markets.Old warrants and options have beenexercised and promoters with goodPage 8 of 10HRA Special Report – Anatomy of an Area PlayStockwork Consulting Ltd. www.hardrockanalyst.comland positions and/or phone lists havebeen announcing ever-larger privateplacements and financings. Most ofthe stronger companies have filledtheir treasuries and are sending outexploration crews.The first exploration phasealmost always involves airbornesurveys. Most of the early entrantshave very large land packages. Anairborne survey is the quickest way tolocate favorable areas and narrow theareas picked for surface work to amanageable level. It is during thisperiod that many shares have asecond price spike. Some companiesannounce airborne geophysicalanomalies that appear to match thosefrom the discovery property. Newinvestors pile in and currentshareholders humbly admit that theypredicted this success all along.When the groundwork begins,many shares will see a second pricetrough; for some of them it will be thelast. Investors are gettingincreasingly impatient andexpectations are very high by thispoint. The market quickly discountsany results considered sub-standard.Companies unfortunate enoughto miss on the first few drill holes willsee its market cap rapidly plummet.These judgments will sometimes beunfair. Many investors expect toomuch of geophysical surveys. Theyare designed to highlight rocks withcertain physical properties; mines arebuilt on rocks with the right chemicalproperties. Investors who have cometo expect the extraordinary viewresults that would normally ignite acompany’s stock price dismissively.Many companies with above averageresults will already be, in the minds ofinvestors, “out of the play”.In most great area plays, theDiscovery is truly a new one and eventhe original company will be feeling itsway through the exploration process,building a model for the deposit as itgoes. As time passes and moreresults arrive there will be a string ofre-interpretations. You need to keeptrack of these interpretations or followthem through newsletters or analystsyou trust.It’s not uncommon during anArea Play to see a whole set ofcompanies revalued by the market(upwards and downwards) Today’s“on-trend” market darling will betomorrow’s also-ran. All this asidehowever, the real action is now on theproperties themselves. If theDiscovery is truly one related togeological events over a wide area(like a diamond-bearing craton or anickel “province”) many companiesshould receive encouraging results.This is especially true in areas thathad seen little recent exploration. Thevast amounts of funds being pouredinto the area will result in thediscovery of many good showings.At this stage the play will startto fragment geographically, as many“satellite” discoveries begin to attracttheir own followings. Many investorswill be distressed to find that theshares of companies with tie-onground to the original discovery areoften the hardest hit during thisphase, unless they continue to displayextraordinary potential. Companieswith the promising finds outside thecore area will rapidly appreciate asinvestors start comparing them to theDiscovery Company. When the drillsPage 9 of 10HRA Special Report – Anatomy of an Area PlayStockwork Consulting Ltd. www.hardrockanalyst.comstart turning, life gets lonely for apromoter. Until now, a rising tide ofinvestor sentiment has lifted all boats.From here on in results speak forthemselves and companies withoutthem start thinking about sharerollbacks.If the original discovery is beingdeveloped quickly enough (as atVoisey’s Bay) the success of thedeposit will, perversely, start to hurtthe shares of the surroundingcompanies. No matter how good orhow big a deposit is you eventuallyrun out of economies of scale and theNet Present Value curve for thedeposit starts flattening out. TheDiscovery Company will often find itsshares peaking, albeit at a very highprice.Reserve expansion is exciting.Mine development, for an outsider atleast, is pretty boring stuff. Contraryto popular belief, it is not unusual fora development company’s shares toslide a bit in price until productionbegins and it starts getting valued onits income, rather than its prospects.Some investors don’t expect this andsell shares in the surroundingcompanies because they thinksomething is fundamentally wrong.These phenomena will not affectcompanies pulling good drill holes.They will have their own following bythis point. The inactive companiesand those with small land holdings areusually hardest hit by thisdevelopment.Depending on the land areainvolved, the number of satellitediscoveries and the speed ofexploration, the play may go thoughseveral cycles of relative quiet, brokenup by frenzied activity surroundingnew finds in the area. As time passeshowever the number of activecompanies continues to decrease, asdoes the total market cap. of allcompanies involved in the play. Bythe time the Discovery company is inproduction there will be a fewsurrounding companies with advanceddeposits, usually smaller ones, and along list of companies with areaproperties still on their books thathave gone back to “pre-play” pricelevels.Here are some guidelines forchoosing shares to buy in an areaplay.1) Choose a portfolio of stocks.It’s still too early to tell who willbe successful. A selection ofstocks is much safer bet at thispoint. As exploration progresses,be prepared to shift these holdingaround and, probably narrow themdown.2) If possible, choose companiesthat are active on propertiesoutside of the play as well. Thisgives the stock a fallback position.This is especially important if youare jumping in early. There areseveral “stillborn” plays each year.If you pick companies that haveseveral “irons in the fire” you aremuch less like to get hurt by astring of substandard results fromthe Discovery Company.3) Look for experiencedmanagement. Many companiesthat jump on the bandwagon atthis point have no miningexperience and are just rolling thedice. This is the type of companyPage 10 of 10HRA Special Report – Anatomy of an Area PlayStockwork Consulting Ltd. www.hardrockanalyst.comthat usually crashes hardest ifthings don’t work out.4) Look for some confirmation ofthe company’s share price inthe form of private placements.There will be a lot of companiestrading at $2.50 who did theirlast financing at $0.25. Treatthis as a danger signal if thecompany doesn’t have concreteresults to back up the currentprice. Whenever a company’sshare price is seeing thesekinds of moves you want to seedistribution at higher levels,otherwise there is s hugeoverhang of cheap stock.5) All things being equal, thebigger the properties controlledthe better, especially if theyare spread throughout theplay. Companies with lots ofground won’t run out of storyas soon. A large land holdingis usually the sign of a strongfinancing group6) Many companies will see theirbest price increases in theproperty acquisition andreconnaissance phases. Takeprofits if you a re faced with a3-500% profit and the drillhasn’t even started turning yet.7) Each area play has a fewcompanies that investors andbrokers really focus on andthey can provide someexcellent gains. If this type ofcompany has some moderatesuccess during early surfacework and the play is still hotthe market will almost alwaysovervalue them. NO companyis worth $200-300 million whenit has nothing but a few surfaceresults in. If you own this typeof stock and the market isoffering this type of returnbefore the results are even in -take the money.8) Unless you are bound anddetermined to just follow areaplays, don’t’ blind yourself toeverything else in the market.Remember: almost all greatarea plays are started bycompanies working “off thebeaten track”. If you focus toomuch on this play you may
miss the start of the next one!
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