pierpont: an ode to midnight oil

Ten final tips from Blue Sky Mines
Friday, December 2nd, 2005

The good news is that you won't have to read Pierpont for much longer. Next Friday will be his last weekly column and after that he will return only every Christmas - like Santa Claus - to bestow his annual Dubious Distinction Awards.As a parting gift, however, Pierpont will leave his faithful readers (both of them) with his tips (the distilled wisdom of one-third of a century writing this column) on how to run an exploration company.

1. Salt the deposit.This practice is sanctified by long tradition in the mining industry, but is not quite legal. Like adultery, it is tolerated if pursued with tact and moderation. So if a deposit contains only 3 grams of gold to the tonne, by all means grind up a few old watch chains and push the samples to 5 grams, but don't take them to half an ounce. The gap between the assays and the head grade will become too large to be explained.

That caused the downfall of Bre-X. When Michael de Guzman was chief geologist on site at the Busang mine in Kalimantan, he oversalted like crazy. The result was that Busang, which contained little or no gold, suddenly in 1995 had a resource estimated at 200 million ounces, which made it several times larger than any previously known mine in the world.

That did wonders for the Bre-X share price, but also made the company as prominent as a 12-foot man walking down Collins Street. So Busang was bound to attract attention and only the fact that it was buried in the middle of Borneo kept analysts from detecting the fraud much earlier.By great good fortune, Bre-X was headquartered in Canada, a country where Pierpont has yet to detect any semblance of company law.

So to this day nobody has ever been convicted in relation to the salting.Michael De Guzman reportedly died after jumping out of a helicopter in Kalimantan. A search of the forest discovered a corpse in the jungle that was identified as his despite the face having been eaten by wild animals.

This alleged suicide has always been treated with great scepticism at the Croesus Club. An Indonesian businessman and one of his wives have reportedly had contact with Michael since, and the chopper pilot has disappeared. Also, a corpse was bought from the local mortuary just before the helicopter started its trip.

Considering that the purported de Guzman corpse was found stuck under a tree root (a most unlikely final position for a skydiver) it did not look as though it had fallen from a chopper. Pierpont's hunch is that Michael's alive and in Brazil

.Australia's record of convicting salters is not much better than Canada's. Brian Cutler went to stone college for salting Leopold Minerals's North Pole mine in 1971, but again that was because the salting was too enthusiastic. It was never proved how a barren drill hole managed to assay 5.3 per cent nickel, but the Croesus Club word is that it was salted with nickel concentrate stolen from Western Mining.

The only other convictions Pierpont can recall related to Karpa Spring, near Mt Gibson in Western Australia. In 1990, three prospectors said they had struck rich gold, including 38 metres grading 34 grams per tonne (more than an ounce).

They sold Karpa Spring to a Kalgoorlie syndicate but a check hole drilled by the syndicate showed a complete absence of gold. Nor has any gold ever been found there since. The prospectors served prison sentences. All of which proves that salting has to be pretty dramatic before anyone notices, particularly regulators.

2. Minimise exploration costs.At Blue Sky Mines, Bottle the geologist starts his exploration campaign by taking a close-up photograph of a scrambled egg. He then puts the digitised photograph on computer and recolours it in dark greens and blues, plus large red splotches.

The resulting image then becomes a Power Point slide entitled "Aeromagnetic Survey of Mt Fuzzlewit".Bottle also runs a knife blade through the egg in parallel lines, which he recolours orange on the computer and calls fault lines. The large red splotches are relabelled magnetic highs. Where they are close to the faults they become contact zones and therefore drill targets.

This is faster and cheaper exploration than flying aeromagnetic surveys in aircraft for months and the shareholders will never know the difference.

3. Always assume.An alternative exploration method is to just make assumptions on the basis of previous exploration by other companies. Marathon Resources, for example, came up with a "World Class uranium REE Polymetallic Ore System" containing 33,200 tonnes of uranium last August without drilling a single hole.

Instead, its backroom boys sat down, analysed all the previous holes that had been drilled at Mt Gee and Mt Painter in the Flinders Ranges in South Australia, made a few assumptions about whether the mineralisation detected in some of the holes was connected and declared they had a resource. (REE, incidentally, means rare earth elements such as lanthanum, cerium, kryptonite and riboflavin.)

When Marathon's backroom boys were doing their homework, Pierpont hopes they realised that three of the best holes ever drilled at Mt Gee nearly intersected each other. Hole MG101 drilled by Exoil in 1970 and Hole 003 drilled by Goldstream in 1999 hit the same hot uranium intersection and Hole GE33 drilled by CRA in 1989 struck the same uranium a mere 10 metres away.

These were the hottest holes drilled by all three explorers and they all struck the same small patch of uranium oxide, which by now must be almost drilled hollow.

4. Keep the grades high.The best example is Windarra, which ran from $1 to $55 on a reported assay of 3.56 per cent nickel that was quite imaginary.That assay report (by Geoffrey Burril and not by an assay laboratory) drove Poseidon from $1 to $55 before any further assays were released.

Those more accurate assays were considerably lower, but nobody cared because they were still working on the emotion of the first one.

5. Feel free to take in more territory.Cambridge Gulf Exploration discovered diamonds under the waters of the Joseph Bonaparte Gulf in December 1993. However, it took another 17 months to reveal that the diamonds had been dredged from a neighbouring lease owned by Zephyr Minerals and Australian Kimberley diamonds - at least a mile from the border of Cambridge Gulf's lease.



In the interim, Cambridge Gulf managed to place 10 million shares at $2 each.

6. Never bother about location.In 1970, Tasminex staged the wildest run of the whole Poseidon boom, rising vertically from $3.30 to $96 in two days. Rumours that it had struck nickel at Mt Venn in Western Australia were followed by a statement from the chairman, Bill Singline, that it "could be bigger and better than Poseidon".

Not one hot-headed punter who bought Tasminex could have found Mt Venn on a map. If they had, they would have realised it was halfway between Kalgoorlie and Ayers Rock - a forbiddingly long way from anywhere for a nickel mine and any processing plant.

Mt Venn is now being explored by Helix Resources, which has found good long gossans and struck 1.2 per cent nickel and 1.3 per cent copper. Nice, but Mt Venn is so far out in the boondocks it will have to be particularly rich to become a mine.

A more recent example is offered by Range Resources, which announced it was exploring in Somalia. Somalia is rich in oil and minerals and underexplored: the only challenge is getting out of the country alive. Nevertheless, Range shares enjoyed a small run.

7. Size doesn't matter.Back in the 1980s, Joe Gutnick announced he had found a diamond at Nabberu in Western Australia. The diamond was the size of a flea's egg, which meant it couldn't be seen with the naked eye (or not by Pierpont's rheumy old eyes, anyway). The shares enjoyed a small run on the news.

8. Make a virtue of impurities.Antimony always sounds vaguely glamorous, although very few people know much about it. So it sounds good for a company to say its goldmine also has antimony values. In practice, the antimony and gold will still be locked together as they emerge from the carbon in pulp plant and the company will have to argue its head off with the smelter to get more than 70 per cent of the gold value in the concentrate.

Luckily, antimony (like several oddball minerals) is enjoying boom prices, so the problem may not be great. Just don't tell the punters.

As another example, molybdenum and scheelite are both valuable minerals, but are impurities when found in the presence of each other. When Minefields Ltd (an appropriately named company) was running the Mt Mulgine mine back in the 1970s, Rene Lipton used to describe it as either a scheelite mine or a molybdenum mine depending on which was enjoying the higher price.

9. Some words should be buried deeply in the ASX statement."Refractory ore" means the gold will be more expensive to extract. "Lateritic nickel" will arouse the spectre of another Murrin Murrin nickel plant, which will never, ever recover its cost of capital.

10. If all else fails, change the name of the deposit.At the Diggers and Dealers one year, Pierpont saw a presentation by Western Metals about a copper mine in western Queensland called Mt Gordon. Despite the glazed condition that customarily descends on Pierpont during the Diggers, he couldn't help feeling there seemed something familiar about the mine. It took fully 10 minutes before he realised it was the old Gunpowder mine worked by VAM back in the 1969 boom. The name had been changed to protect the guilty.

Armed with those 10 points, any reader should be able to float an exploration company and raise enough cash to buy a one-way ticket to Paraguay. That's why Pierpont has been referring to an exploration company throughout. We're never going to develop an actual mine, because that's hard work and costs more money.

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