(Disclosure: The following represents my opinions only. I am not receiving any compensation for writing this article, nor does Hydra Capital have any business relationship with companies mentioned in this post. I am long AU.V)
Tonight after the close, Aurion Resources (AU.V, last at $1.63) reported results from its maiden drill program at the Aamurusko gold project in the Central Lapland Greenstone Belt, Finland. For those hoping that Aurion would hit the motherlode on its first swing at the plate, the results reported will likely leave you wanting. With 21 holes drilled in the initial 3,500 metre program, Aurion found quartz veining with gold on the 13th hole and then drilled 8 more holes (all finding quartz veining) before shutting down for Christmas to wait for assays and interpretation of the drill hole data. The best result reported was 10.1 g/t Au over 1 metre in hole AM170015. While these are not the kind of results that will get casual observers excited, make no mistake about the fact that they nonetheless represent good “smoke” in the hunt for the source of the high-grade boulders seen at surface in the Aamurusko project area. Zones of quartz veining up to 20 metres wide were intersected in core with individual quartz veins up to 6.3 metres wide (all downhole widths).
Calling it “smoke” might seem like an exploration cliché to some people (I know, I know, “I didn’t come for smoke… show me the fire!”), but it really is important to keep perspective on what realistic expectations should be at this stage. While there is nothing more exciting that the first long, rich, “discovery hole” in any exploration project, when you’re early on a story that hole can seem to take a while to hit… and that’s because there’s a lot of work that goes into hitting that first zinger. When you actually objectively look at what’s been reported, Aurion has revealed a very key piece of the puzzle with just 3,500 metres of drilling. With only 21 holes likely costing a little over a million dollars (that assumes $300/metre all-in costs, which should leave plenty of room for error on my part), Aurion was able to find multiple gold-bearing quartz veins in bedrock with geochemistry and textures that closely resemble the boulders seen at surface. If you put your explorationist hat on, that’s a pretty good start, because finding gold in quartz veins in bedrock that closely resemble the very same quartz boulders seen at surface is a very key deliverable from this initial drill program. The case for worrying that the boulders all came from somewhere off the property can be pretty much thrown out the window now. That’s a big deal. There are literally hundreds of gold-bearing boulders at surface at Aamurusko and the thesis that they very likely came from the property is now supported by actual drill holes (with quartz veining, comparable geochemistry, textures, and gold in them) as opposed to only relying on their blocky (i.e., not rounded due to transport) shapes. To put it another way, the odds of the boulders at surface not being related to the gold-bearing quartz veins now found in the underlying bedrock are essentially zero in my view… and being able to make that leap is what made a very pretty penny in a story called Alpha Minerals few years back.
Forgive the digression, but I think it may be useful for the uninitiated. For those who are unfamiliar with the story of Alpha Minerals, it was not so unlike the story of Aurion. The Alpha story goes something like this… Alpha had identified a high-grade uranium boulder field in Saskatchewan on the margin of the Athabasca Basin. The next closest mine was some 60 kilometres away and the source of the boulders was unknown. No uranium deposits had been found in the immediate area, mostly due to lack of methodical exploration, not lack of geologic prospectivity. In the last 4 holes of a 28-hole drill program (the company's second or third pass in the area), Alpha identified pitchblende (uranium mineralization) in core and assays were pending. The stock went from 10 cents to around $2.20 before assay results came back and I was long a fair bit of stock as I’d been buying it all the way up. When the assays came back, the company reported an intercept of 12.5 metres of 2.5% U3O8. The results were not “hot enough” for some investors and I watched the stock fall from $2.00 to $1.40 the next day. I racked my brain. The company had just drilled a very intriguing intercept that was not the “motherlode” that the market was hoping for, but the result had clearly derisked one of the main aspects of the story, which was, “Where did those boulders come from?” And yet, there the stock was, down 30% as the result wasn’t “good enough” for short-term traders to make their fortunes overnight. The data had never been more supportive, but results had failed to live up to market expectations. What was I to do? Unwilling to be shaken from my “no-way-those-boulders-aren’t-related-to-this-find” conviction, I actually bought more stock that day and in the days and weeks following. Not long afterwards (only about 2 months later) Alpha was already out drilling on its follow-up program and started hitting thick high-grade holes… and the rest is history. Once they were “in it”, Alpha just kept hitting, and hitting, and hitting, and the chart was “up-and-to-the-right” for the next 10 months after that, after which Alpha was taken over by its partner, Fission Uranium, at a little over $6 per share. That was some sweet vindication and some even sweeter profit.
I don’t recount the Alpha story here to say or suggest that history will repeat here. I’ve seen plenty of programs come up empty handed over the years, but short-term sentiment is a funny thing. When expectations are high and not met, people will sell stocks like they’re going out of style even though the data is more supportive of the initial thesis than ever before. It’s an evil bit of market psychology and it is extremely difficult to see through/think rationally in the face of an irrational/impatient market, but that is literally what makes a market. Now look, it would be amazing if I had a crystal ball, but barring that I can only look at Aurion’s results in the same light as I did Alpha’s. There are 632 boulder samples with grades and textures that suggest there’s at least one gold deposit at Aamurusko somewhere, and the project is in a very compelling overall geological setting that should be expected to yield some large gold deposits (remembering its geologic similarities to the ~75 million ounce Timmins camp, for example). So, when you get right down to it, I think that the critical question that everyone has to answer for themselves is this:
“What are the odds that the gold-bearing quartz veins found in Aurion’s maiden drill program are completely unrelated to the hundreds of gold-bearing quartz boulders at surface?”
That’s it… and I really do think that’s the main thing that Aurion holders need to ask themselves on the back of these results, because drilling has already started up again (first targeting a prospective structural bend indicated by the just released drill hole data) and with somewhere around $20 million in cash (thanks largely to 9.9% holder Kinross, who “gets” the prospectivity of Aamurusko and the exploration process) Aurion has plenty of swings at the plate (i.e., time). Gold-bearing quartz veins are far from common occurrences and to find them in bedrock under an area littered with similar looking boulders is a pretty big step in the right direction. If Aurion had its back against the wall with out any backers or money, sure, run for the hills, but with no need for financing in the foreseeable future, Aurion has nothing but time to find the source of those boulders. With its cash on hand, I estimate that Aurion could probably drill 50,000-60,000+ metres without raising another dollar from the market. Given that the most recent program was just 3,500 metres, with only the last 8 or 9 holes in structure, I think it’s safe to say it’s early days. Remember that Aamurusko is a blind target (the bedrock is covered by rocks, trees, and dirt) and drilling more holes is the only way to find the source of the high-grade boulders.
As I said above, I think that the odds of the quartz veins now found in core not being related to the quartz boulders at surface are about zero. I also know that it will be a long time before Aurion needs to think about needing any more money. It’s only a question of time and perseverance and I have a great deal of confidence in the perseverance of the Aurion team. All Aurion holders need to make their own decisions on news days like this, because no one has a crystal ball. In Alpha’s case, things worked out very well for me and a big part of that was being able to look at the initial drill results and put them in context relative to what the available data was at the time. That means that I was either smart, or lucky… or maybe a little of both.
When I look at the following excerpt from Aurion’s August, 2017 press release (linked here), I find that it puts things in context a little. This is a large area and Aurion has barely even scratched the surface with its drilling so far. Of particular note, only around 20% of the boulder samples outlined below graded greater than 1 g/t gold. In that light, Aurion has actually done pretty well on its first time out. Gold systems are organic things (i.e., expect variability during “the hunt for the source”) and the drill results reported today should leave little doubt that Aurion is in the right neighbourhood, but has yet to find the high-grade. Here’s a rehash of the boulder results from August of last year that generated so much excitement in the first place:
“To date Aurion has received assays from 632 rock samples including the 2016 samples and samples from the June 2017 sampling campaign. The average of these samples is 26.7 g/t Au with 68 assaying greater than 31 g/t Au, 97 assaying greater than 5 g/t Au and 131 assaying greater than 1 g/t Au. Assays from several hundred more rock samples collected throughout the Aamurusko corridor and elsewhere on the Risti property are pending.
The quartz vein blocks range from 0.1 m to >3 m wide, trend NE-SW and are hosted by quartzites and polymictic conglomerates of the Kumpu Group and mafic volcanics of the Sodankyla Group. The conglomerates are interpreted to be unconformably in contact with the mafic volcanics.
The sampling has now extended the main Aamurusko trend to 1.4 km NE-SW. The southern-most sample assayed 2520 g/t Au. Further extension of this trend is hampered by deep overburden cover. The prospecting and mapping thus far has now identified several discreet quartz vein block trends within a greater than 2.5 km wide east to west corridor. Again, the limits of this corridor are constrained by overburden cover.”
My math pegs the Aamurusko target area at around 3.5 square kilometres. I’d hardly say that 21 holes are going to evaluate more than a collective postage stamp within that prospect area. Once again, context is important in the early days when data is scarce.
None of my ramblings here are intended as advice, because I’m a firm believer that everyone needs to make his or her own decisions. All I’m doing here is stepping back and taking an objective look at the data, the company, the cash, and the thesis all in light of my own personal experience in similar situations in the past. Patience can be a very tough power to wield in a market where there’s a new opportunity every five minutes and the market measures you on a daily basis. Over time, I’ve consistently found that if I can truly assure myself that my risk level in a story is decreasing, not increasing, the market usually follows suit. That’s not to say that there won’t be fits and starts, but at the end of the day if the data stays supportive and there’s enough cash to keep going, then it’s onwards and (hopefully) upwards. At any given time, if you can look through what’s screaming in your face in the moment (the share quote) and see the bigger picture, that’s a decent step towards not being an emotional trader. Some people may sell with the hopes of “buying back lower” at a later time, others may throw their hands up, sell, and move on, and others still will use this as an entry point on a story that they always liked, but previously didn’t like the valuation.
Aurion has already started a follow-up drill program that will continue to chase the source of the high-grade boulders in the underlying bedrock and with approximately $20 million in the bank; the company is very well-financed for the task at hand. Some people may prefer not to stick around and wait it out, but Aurion’s share price has already pulled back some 50% from its September highs, so a lot of steam has already come out of the stock and it’s hard to know how long the market will focus on these results (i.e., the rear-view mirror) before starting to look at the road ahead again. Those people with years of experience in the sector and a long-term view are likely to be relatively unfazed by the results of a 9-hole sample of a system whose scale is measured in kilometres, while those with shorter time horizons in mind may take the opportunity to chase marijuana or blockchain stocks, or whatever the flavour of the day may be. I have seen and been in both sets of shoes over the years. All I can say is that discovery is a process that takes time, with the key to success being found in the technical capabilities of the team, the financial capacity to execute a significant amount of drilling, and of course a little bit of luck. Aurion has the first two of those in spades, so holders can take some comfort in that... and a lot of people say that you make your own luck with positioning and hard work. With significant quartz veining already identified, Aurion is hitting the ground running with the follow-up drill program that’s currently underway.
Having been to site, and having seen the sheer number of high-grade boulders literally sitting at surface at Aamurusko, I’m now even more convinced that those boulders didn’t fall out of the sky or come from very far away. With that in mind, and with Aurion already getting sniffs of gold-bearing quartz veins with some of the final holes of the 2017 program, I still think this represents an excellent exploration target worthy of the attention from the majors that it’s getting (e.g., Kinross). With gold prices up 9% over the last year, Aurion’s timing could end up being quite good as the market is still hungry for gold exploration stories with needle-moving potential. When pre-drill expectations are as high as they were for Aurion, the company was almost in an impossible position, but cooler heads will prevail (as they always do) in the coming days and weeks as the company continues drilling at Aamurusko. There’s a lot of story yet to be written and I think there’s still a good chance that this story has a happy ending… maybe not today or tomorrow, but when it comes to exploration drilling, timing is the hardest part.