Success or failure as a top-class rugby player hinges upon just three key areas that have relevance to the game. Who says so? British and Irish Lions coach Warren Gatland does, that’s who.
Given the recent performance of his team against the Wallabies, your scribe is not one to argue with him. But it gets even better. Gatland reckons that it only takes outperformance in just two out of the three things to make it at the highest level. Three out of three is merely icing on the cake.
So what are the factors?
They are simple. A top-class rugby player is a combination of speed, skill and size. Fast is good, so is skillful. And in the size department, a big one will generally beat a small one. So if you have all three you will be one of the first names on the team sheet. Two out of three gets you in the squad. One factor alone means that you don’t make the tour.
It all seems conceptually straightforward. So what are the equivalent factors when it comes to mineral exploration and mining?
The success factors in the mineral sector are equally straightforward at a high level. Just as rugby evolves over time in style of play, the emphasis upon success in the resources sector changes with time. Harking back to the rugby analogy, the importance of size has certainly grown over time (pun intended). When your scribe was failing to make the grade, you only had to be reasonably big to play in the forwards. Now, at the highest level at least, the backs often walk taller than those contesting the line-out.
Switching back to resources, in a hot market, the market may reward skill and flair (read those as sub-set of exploration capability). In a cooler equity market measures success more on the likes of towards cash reserves, notably their “size” once again.
Successful mineral explorers, in this context meaning those companies for which investors will continue to confer support in the challenging 2013 market, will be those who tick the boxes in the following areas:
1) Cash: The more the better. Most pure explorers now trade at a low enterprise value, EV – where EV means the market value minus the company’s cash reserves, or even in negative EV territory (meaning trading at below cash backing). The inference from this situation is obvious: cash is king at present.
2) High grade: The current market is unforgiving. One of the few things the market will still respond to is grade – and the higher the better. In the boom times “low grade was the new high grade”, most notably in gold for example. The market has now realised its error in conferring such elevated status. In 2013, it is all about high grade.
3) Sex appeal: Although not as prevalent as in a hot market, ‘sex appeal’ in the mineral exploration world still matters. ‘Appeal’ can originate from several angles – at asset, corporate and individual level. Nearology still has some value in the appeal stakes, so does a potential future corporate play that may eventuate from low valuations. And a previously successful explorer can help maintain positive market perception, too.
That’s it, simple really. As for the rugby analogy, having all of the three above exploration success factors certainly ticks the box, meaning that investor support will hold up even through tough times. That’s the good news. The bad news is that filling out a full exploration ‘rugby team’ of some 15 companies who possess all three of the above exploration success factors right now is a very tough ‘coaching role’ indeed.
Allan Trench is a professor at Curtin Graduate School of Business and research professor (value & risk) at the Centre for Exploration Targeting, University of Western Australia, a non-executive director of several resource sector companies - and the Perth representative for CRU Strategies, a division of independent metals & mining advisory CRU Group (firstname.lastname@example.org).