Despite the growing number of investors joining the hunt for extreme profits with precious metals exploration stocks, arguably the best way to play the burgeoning bull market in gold and silver, the reality is that not 1 in 30 actually understands the exploration process.

To help fill in the blank spots, we recently caught up with famed Nevada mine finder, Ron Parratt, the president of AuEx Ventures (V.XAU). During his long career with Santa Fe Pacific Gold and Homestake, Ron led teams credited with a number of discoveries, involving over 20 million of ounces of gold. His successes qualified him for induction into the Explorers’ League, the unique membership organization dedicated to following the careers of the world’s most successful mineral explorers.

(Ed. Note: At the upcoming Casey Gold & Silver Stock Summit in Chicago, May 30 & 31, Ron will be updating the audience on where we are in the all-important exploration cycle, and participating in a panel of other Explorers’ League Honorees on where the next major discovery now appears most likely to occur. For more information on this very special event, click here.)

CG: Let’s start with the basics on exploration. I’ve got a few bucks in my pocket. Now, how do I go about finding a gold or silver mine?

RP: Well, obviously the topic of exploration is fairly broad. Although we’re all as an industry doing the same thing, when you get down to the detailed level, we do it differently. A major producer such as Barrick or Newmont, with a lot more than pocket change, will have the same goals, an economic discovery, but the process they use to get to that discovery will be different than that used, say, by an early-stage junior. The latter companies may have little more than questions. Where do we explore? And why? How do we go about establishing projects? What do we do once we have projects? What is the exploration path for a project to become a mine? Why does all of this seem to take so long? Which I’m sure is what a lot of investors wonder about.

CG: Why does it take so long to find a gold mine?

RP: Well, take this for what it’s worth, finding gold is not hard. At the same time, finding gold that can be developed into an economic mine of some merit is incredibly hard. Every project we work on we usually find some gold, in outcrop sampling, for example, but finding some gold and finding enough gold to be exploited commercially are two entirely different things. Typically, you have to explore a lot of projects, and have a lot of failures along the way, before you are finally “lucky” enough to identify a commercially viable project. And all during that process you have to deal with any number of issues and challenges, including permitting, finding available rigs and skilled people, squeezing your exploration programs into limited field seasons which are hampered by weather and problems with access… any number of different things, all of which take their toll.

CG: As an investor, one thing I struggle with is how to handicap the political risk for the area in which the exploration program is focused. Given that you also don’t want to waste time and money exploring in dicey areas, how do you accurately assess that risk?

RP: The annual Fraser Institute study probably offers the best overall political risk evaluation on a country and even regional basis. I don’t know everything involved in producing the study, but according to the Institute, some number of the major, mid-tier and junior companies complete a form and submit it to them. That data is then compiled and used in ranking most of the areas in the world where exploration is, or has been, occurring, including the provinces in Canada, many of the states in the U.S., countries in Central and South America, Africa and so on. This tends to serve as at least a proxy of what areas are deemed to be favorable for a whole bunch of factors, not just endowment—which is ultimately the most critical—but also political issues. How long does it take to permit? How secure is your land tenure? Do you have a good workforce? What’s the infrastructure like? All of these have a bearing on your ability to be effective in an area, not just with exploration but also development. A gold project that requires the development of an autoclave* probably isn’t as much a problem in Nevada as it would be in the Andes or the Congo, places where you just don’t have the infrastructure or the skilled labor force needed to put an autoclave into operation. All things have an impact on what you look for and whether or not it’s likely to be developable economically.

(*Ed. Note: an autoclave allows for pressure oxidation, a highly energy-intensive chemical process whereby you oxidize a refractory ore in order to make it treatable)

CG: In this recent bull market, where we’re seeing more and more dollars being spent on exploration, what are the chances of a really big discovery being made?

RP: I’d go as far as to say that it’s virtually assured that one will be made. Last year, Aurelian made its Fruta Del Norte discovery in Ecuador, a world-class deposit in every sense. It’s enormous, with 10 million plus ounces. Only time will tell what else will be discovered in that district. I think it’s almost certain there will be other deposits of that size found going forward—probably another one this year, and maybe more. In my mind there is no doubt new discoveries will be made.

CG: What’s the biggest factor in large discoveries being made?

RP: Like many things, it comes down to money. If companies are not out there spending money, mostly the case during gold’s long bear market, then discoveries are not going to be made. When commodity prices are low and times real lean, money being spent for new exploration on greenfields (previously unexplored areas) is reduced, more so than for mine site work. Companies like Newmont and Barrick are going to focus more of their work in higher probability areas for success and that means within an existing mine site, or in the immediate vicinity of one. They’ll find ounces when they do that. That strategy can clearly pay off. Consider Cortez Hills, obviously a whopping discovery, the extent of which is still unfolding. It’s within eyesight of the original Cortez, it’s within eyesight of Pipeline. Some don’t view mine district discoveries the same as greenfield discoveries, but obviously they can be very important.

In 1998 or 1999, with gold’s price so battered, would Aurelian have been able to raise money to explore in Ecuador? Possibly not. I think it was clearly the result of this exploration cycle, and the availability of funding for juniors over the last few years that allowed them to get the funds they have and pursue that project. And that led to a discovery and I think the same thing will happen again, perhaps this year, and certainly in the years ahead. Given that exploration spending is running at record highs, it’s assured in my mind. There will be new discoveries made.

CG: Where in the world do you think the potential is highest for the next big discovery?

RP: I wish I knew. That’s a topic we’ll be covering extensively in Chicago when a panel including myself and other members of the Explorers’ League compare notes from recent exploration programs in an effort to pinpoint the two or three most likely candidates for a major discovery. While I will be giving a lot more thought to the topic between now and the Summit at the end of May, I would mention Africa as a continent that seems largely underexplored. For instance, in the Democratic Republic of Congo, a really terrible place in terms of political risk, there’s a company called Moto Goldmines which is sitting on what looks to be a really large deposit. But there are other parts of Africa with apparently good endowment that are unlikely to see the same level of activity as other parts of the world because of the politics, and the risks are so great for companies to get involved in those locations. That could be said perhaps for parts of Russia, perhaps for Central Asia. But there are also other areas—parts of North and South America for instance—that are richly endowed and far more workable. It should be a very interesting discussion in Chicago.

CG: In speaking with your partner, Richard Bedell, he said something that stuck in my mind, “Anyone can drill, but there is an art to drilling.” Could you elaborate?

RP: Well, I’ll try. When you’re exploring, and when you’re assessing properties as exploration plays, you’re dealing with very scant data. You’ll have rock samples from the surface. You might have some geophysics. You might have a magnetic survey. Probably some processed TM imagery from Richard. But the reality is that you can’t see underground and so the data set you’re dealing with is really, really limited. Nothing in the data will say “There’s a gold mine here.” Our approach might be to say “If there is something in the way of a gold deposit here, what could it be that is consistent with the data we have and the kind of deposit we’re looking for?” In other words, you’re looking to find an ore deposit underground in the third dimension. I have some data. If there was a deposit here, what would it have to look like? And you base your exploration ideas on that sort of thinking. Then drill with a firm geological/ore deposit hypothesis in mind. Each drill hole tests your ideas and proves or disproves them.

The fact is, mineral exploration is a difficult business to be successful at. You fail most of the time. I think your ability to look at data and come to new ideas for exploration targets is very important. And you can do that only if you can fall back on fundamental experience, experience gained from having seen a lot of ore systems and having a clear appreciation for how they form. That can lead you to develop ideas that you then test with drilling. That was really what I think Richard was referring to as the “Art of Drilling.” It really comes down to experience. Frankly, there are a lot of very good, very smart people in the industry. But I think that for a company of our size, we can be as skillful at this as any of our peers.

CG: If our readers could spend time with you in person, they’d see the passion you have for exploration, a trait we’ve found in all of the Explorers’ League Honorees. Clearly you still get excited when you see things start to come together, as they have on your recent Long Canyon discovery.

RP: You have to love this kind of work and you have to get a great sense of satisfaction out of it. Because again, on most projects, you explore and you fail to find an economic ore deposit. It’s very, very rare that you find something you can develop to the point of becoming a mine. The real test in any of these is to drill and see whether or not you get gold in a drill hole. And the real high in this business is when you drill a hole and you get an ore-grade intercept back. That’s what you live to see. Most of the time when you drill holes in a new area, you get surprises about the geology and you don’t find gold mineralization in economic amounts. But sometimes you get the geology right and if you’re really lucky, you find potentially economic gold values. That’s a discovery and that’s something that gets you really excited. It’s the few fleeting times that you do that which gets you hooked on the business. Nothing is more exciting in this business than drilling holes that come back with ore-grade intercepts. That’s the ultimate high.

CG: Thanks for your time. Considering where we are in the exploration cycle, it seems like there will be much to discuss in Chicago. We’ll see you there.

RP: Yes, the timing is excellent. See you there.

(Casey’s Gold & Silver Stock Summit— sponsored by Casey Research and Financial Sense Online—will be held at Chicago’s elegant Drake Hotel on May 30 & 31, 2007 and will feature over 20 of the world’s leading explorers and precious metals stock analysts providing their very best picks for mega-profits in the unfolding bull market. There is literally no better place in the world to get the timely answers to your personal portfolio questions and do a thorough “spring housekeeping” of your precious metals stock holdings. To assure maximum interaction between the audience and faculty, attendance is strictly limited to the first 300 registrants. The last Summit was a quick sell-out. To learn more and register.)

© 2006 Doug Casey
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