After a reality check on Pilbara gold explorers, it’s “a time to be buying and not selling in my opinion”, says expert Mathew Walker, founder of the Cicero Group.

After flying high, some Pilbara Gold explorers have come back to earth this week. Should we be worried?

There has been a lot of negative sentiment in the conglomerate gold sector this week following a recent announcement from Novo Resources in respect of their bulk sampling results.

Despite being a Canadian-listed entity, they have a local joint venture partner on some of their Pilbara tenements in Artemis Resources (ASX:ARV) and together they are widely seen as the flagship of the Pilbara gold phenomenon. Every boom has a leader and Novo is it.

The bulk samples from trenching appear to work well for Novo — but they appear to be having difficulty landing on a suitable drilling method to collect a representative bulk sample from the covered material. The large diameter drill rig has been unable to provide a quality sample.

The concern is they may not be able to come up with a meaningful resource estimate and that the cost of collecting bulk samples will be high.

In a boom like this it is quite natural for the sector to get the wobbles if the leader gets the wobbles, but in my opinion nothing has changed in respect to the integrity of the geological thesis.

Will Novo’s update have any long-lasting effect on Pilbara gold exploration?

The reason why the area has been the source of so much excitement is its comparison to Witwatersrand gold in South Africa but it was always going to be a challenge to quantify and verify a resource.

[The Witwatersrand Basin is a South African geological formation that houses the world’s biggest known gold reserves, producing 2 billion ounces or about half of gold ever mined.]

Those who have become excited by the sector have pushed valuations higher and higher in the absence of this quantification and there are inherent risks in supporting that value.

Most definitely there are implications for others in the sector – but I like to think of it as more of a bad hair day. The leader of the pack has made a release to their respective exchange and they are saying “this is difficult to quantify”. But we always knew it would be.

The real implication will be for the smaller players, particularly those who didn’t cash up with the ducks were quacking. What we have clearly established this week is that this will be an expensive journey.

What’s next for Pilbara gold explorers?

If you look at the history of all booms, irrational exuberance is always followed by a reality check, and we are now entering the reality phase. As we transition there will be some wonderful buying opportunities.

There will be some investors that give up on the industry altogether today, but it is too early to do so.

If you look at a cashed up junior explorer like De Grey Mining (ASX:DEG), they were trading at 17c this morning — a 50 per cent discount to their highs early this month.

So, we have had a reality check this week, but there is a lot of merit in the sector. It is a time to be buying and not selling in my opinion.

Where should retail investors be looking for value now?

Times such as these favour those that have done their own research and formed their own views on the sector, those that can therefore ignore the noise and back their judgement.

If you are looking to buy I would choose a cashed-up junior that is further up the development curve. DeGrey Mining (ASX:DEG) is my pick in the sector at these prices.

Avoid those with little or no cash, this won’t be cheap.

 

Mathew Walker is a businessman and entrepreneur with extensive experience in the management of public and private companies, corporate governance and the provision of corporate advice. In a management career spanning three decades, Mr. Walker has served as executive Chairman or Managing Director for public companies with operations in North America, South America, Africa, Eastern Europe, Australia and Asia.

He is Co-Founder and Chairman of the Cicero Group (Cicero) www.cicerogroup.com.au, Co-Founder and General Partner of technology incubator Alchemy Venture Capital and Founder and Director of beef cattle enterprise the Stone Axe Pastoral Company.

This article does not constitute financial product advice. You should consider obtaining independent advice before making any financial decisions.

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