So where would you place your bet?

Recently I was chatting to a Canadian colleague about the junior exploration sector.?He mentioned an Exploration Radio podcast where Rick Rule talked about “lifestyle” junior companies.?A rough measure of these companies was expenditure - they spent ~65% on G&A (general expenses and administration).

My Canadian friend posed the question as to whether we see the same sort of numbers in Australia.?So, we pulled out some ASX (Australian Securities Exchange) quarterlies (March 2022 and June 2021) to have a look.?Now many will argue, quite rightly, that the figures in the quarterlies are not 100% accurate and can be “fudged”.?But in lieu of any other easily obtainable data, this seems to be a good to place to start a discussion.

Well things aren’t quite so bad for the junior exploration companies we looked at in Australia – or so we thought.?Average administration costs for the sector were between 30 and 35% which looks pretty reasonable compared with the Canadian “lifestyle” companies.?However, my Canadian friend was unimpressed.?

“How can they justify spending between one quarter and one third of their money on non discovery activities??We’re looking to invest in companies that are “lean”. ?Find me companies that are under 20% admin, preferably under 10%. ?We’ll invest in these if we like their projects”.

Do these junior explorers exist? Well, we have to dive deeper into the numbers to find out.?Let’s be clear - we acknowledge cost is not the only measure of makes a successful explorer.?However, given the low success rate of the industry (say 1 in 100, maybe 1 in 1000) shouldn’t costs be commiserate and reflect the high-risk nature of our enterprise?

Maybe it’s a mistake to regard the junior exploration sector as a single entity. The huge variation in variable administration (G&A) costs.

Thus, we defined four nominal categories of explorers: Conventional, Sharers, Disruptors & Sub Developers - and the expenditure seperated.?Again, maybe imperfect but just somewhere to start. Notably, the variability of admin expenditure within these categories is small (+/- 5%) which likely indicates that the categories are "robust".

Given that the average annual expenditure of Groups 1-3 is ~$3M, each 5% increment is $150K – or maybe one or two targets that don’t get drilled. So a Disruptor can put $600-750K more in the ground per year than a Conventional

How low can they go? One of the Disruptor junior explorers, no CEO/MD, was 4% admin!

It’s only the Sub Developers with advanced exploration programs that have any chance of getting close to the Disruptors with admin at ~10% - lots of drilling costs does wonders for lowering your admin percentage!

Sharers can get lower than 20% - increasing the office from two to three to four companies will continue to chip away at that admin cost but the percentage decrease is not linear.

About ten years ago I worked for a group who “stabled” about ten junior explorers and developers - a Sharer.?Administration costs were charged at a fixed rate per month – more for the developers than the explorers - and most of us worked for two or three of the ASX listed companies. ?Only the Disruptor companies reviewed here had a lower admin cost than these explorers.

This has made us reflect on how a junior exploration company should be run.?Recently there has been chatter by a number of people commenting that the junior exploration model is “broken” and we need to look at new ways of funding – probably not bitcoin but some have suggested crowd funding or some other form of private equity.

Perhaps instead of just changing the funding of the junior sector, we need to revise the way junior explorers are structured.?

What does it say about the culture of your company when one dollar in three doesn’t go into the ground?

Assuming you’re a junior company, specifically an explorer without a defined resource or an advanced project, then we think the following questions should be asked:

·???????Is a junior exploration company running a “widget” business or selling a dream??If it’s the latter, then why structure it like the former?

·???????Do we reward people appropriately to the risks inherent in the work??

·???????Did the 19th century prospectors in Kalgoorlie/Ballarat/California pay themselves a healthy salary when they didn’t find gold?

·???????Does your MD/CEO need to be full time??

·???????Are their more appropriate success driven ways to reward staff – options, performance shares, bonuses, etc.

·???????Can you half the salary & “double” the success component?

·???????Where should your staff be based?

·???????Is a regional base/shed with a small team close to projects away from promoters how you want to explore?

·???????Do you need your own office? Can you share office space or maybe not have an office at all?

·???????Do you know what the real costs of exploration are? For example, what is the “all up” total cost of a soil sample or drill metre when planning time, collection time, processing time, storage, analysis, etc. is factored in?

·???????If your exploration programs are campaigns or seasonal do you need full time staff?

·???????Do you need to promote strongly through multiple groups before you’ve found something?

·???????Do you want your company to be different or the same as the pack??

·???????How many people do you need on you board?

·???????If your ground is “more prospective” do you think that justifies higher admin costs?

·???????If you were an investor, where would you place your money?

So maybe its time to have a discussion about getting “lean”