Quinton Hennigh: A Geologist's Playbook for The Next Big Discovery | Gold & Critical Minerals

Key Concepts

• Underexploration: The phenomenon of a declining discovery rate for significant mineral deposits globally.
• Tier One Deposits: Large-scale, high-grade mineral deposits that are economically viable for large-scale mining operations.
• Junior Companies: Smaller exploration and development companies in the mining sector.
• Royalties and Streams: Financial arrangements where a company grants a third party a right to a portion of future production or revenue in exchange for upfront capital.
• Greenfield Exploration: Exploration in areas with no prior mining history.
• Brownfield Exploration: Exploration in areas with existing mining infrastructure or past production.
• Porphyry Deposits: Large, low-grade copper and gold deposits often associated with volcanic activity.
• Epithermal Deposits: Deposits formed by hot, mineral-rich fluids circulating through volcanic or subvolcanic rocks, often associated with precious metals.
• Carlin-type Deposits: A specific style of gold mineralization found in Nevada, characterized by disseminated gold in sedimentary rocks.
• NI 43-101: A Canadian National Instrument that sets standards for technical reports on mineral projects.
• Permitting: The process of obtaining regulatory approval to develop and operate a mine.
• Value Investing in Geology: A strategy of identifying and investing in geological assets with unrecognized potential for significant value creation through exploration.
• Contrarian Investing: An investment strategy that involves going against prevailing market trends.

Summary

The Decline in Discovery Rates and the Shift in Exploration

Dr. Quinton Henny, a renowned economic geologist, highlights a critical issue in the mining industry: a precipitous drop in discovery rates for major metals like copper, silver, and zinc over the past decade or two. He attributes this decline to a fundamental shift in exploration strategy. Historically, major mining companies self-funded exploration with sophisticated teams and technology. However, approximately 20-25 years ago, they largely abdicated this responsibility to the junior mining sector. Dr. Henny argues that the junior space has not effectively delivered on this mandate, with capital often being inefficiently allocated, leading to the current deficit in discoveries.

The Value of Underexplored Assets and Strategic Acquisitions

Despite the overall decline in discoveries, Dr. Henny emphasizes that any good discovery, even in a challenging market, will command significant value. He points to recent aggressive acquisitions of silver companies like SilverCrest, Gatling Exploration, and MAG Silver, which traded at substantial premiums (1.7x to 1.9x Net Asset Value) even before the silver price surge. This demonstrates the market's appetite for quality discoveries.

Dr. Henny's current focus is on the acquisition space, specifically targeting assets with significant exploration upside where he and his team can add substantial value. He cites the example of St. Christo, acquired by a private group from Sumitomo Corporation, where subsequent exploration efforts added many years of sulfide mine life and led to a "remarkable silver discovery." His strategy involves identifying assets with unrecognized exploration potential, where a few drill holes can unlock significant value, aiming for multiples of 10x or more on invested capital.

Geological Preferences and the Focus on Large-Scale Deposits

While Dr. Henny has a historical passion for gold and Carlin-type systems, he is now more agnostic, looking for "big systems" regardless of specific mineralization style. He expresses a particular interest in the porphyry and epithermal realms, believing these offer the potential for the large-scale deposits needed for the future of mining. His hyperfocus on big deposits is driven by the simple fact that these are the types of assets large mining companies are looking to acquire, thus generating better returns. He posits that it requires as much effort to pursue a small project as a large one, making the pursuit of large-scale opportunities more logical.

Greenfield vs. Brownfield Exploration and Strategic Land Positions

Dr. Henny acknowledges the traditional mining adage that "the best place to look for a new mine is in the shadow of an old mine" (brownfield exploration). However, his primary passion remains greenfield exploration, particularly in jurisdictions with significant untapped potential. He favors a hybrid approach, utilizing brownfield exploration around existing operations while simultaneously pursuing greenfield discoveries on adjacent ground. He likens this to Pierre Lassonde's philosophy, where a large land package acts as a "free option on future discovery optionality."

He observes that many major mining companies, despite holding vast land packages, have lost their internal exploration capabilities and are not actively exploring their assets. This presents an opportunity for him to acquire "second-tier" assets that these majors deem less attractive, unlocking their hidden potential. He highlights Sumitomo's lack of exploration appetite at St. Christo as a prime example of this missed opportunity.

Identifying Tier One Potential and Jurisdictional Considerations

To identify potential tier one deposits, Dr. Henny looks for assets with a land position commensurate with the target size, a strong scientific thesis or hypothesis, and compelling evidence of both scale and grade. He stresses the importance of operating in jurisdictions where mines can be built and products can be exported without undue political interference.

His "no-go" list includes many African jurisdictions due to risks of nationalization and certain Central Asian countries due to political uncertainties and logistical challenges (e.g., landlocked deposits). Conversely, his "must-go" list includes countries with a deficit of exploration work despite great potential, where modern exploration advancements can be applied. Examples include:

• Japan: Has not seen significant modern exploration for over 30 years, offering a fresh perspective with new geological understanding. He is actively involved with Irving Resources in Japan.
• Bolivia: Despite a checkered past with nationalization, it possesses untapped exploration potential and is becoming more favorable.
• Argentina: Offers fantastic geology and underexplored regions, where he is actively investing through Crescat Capital.

He is less interested in areas like the Arabian Nubian Shield or Guyana Shield, which he considers "picked over" and increasingly crowded, despite their historical exploration.

The Junior Mining Landscape: Too Many Companies, Inefficient Capital

Dr. Henny expresses concern about the proliferation of junior mining companies, estimating that 90% are "lifestyle companies" or lack direction. He believes the influx of capital into the junior space, particularly during boom periods, has led to misallocation of funds to companies without the vision or technical expertise to make discoveries. He advocates for a significant reduction in the number of junior companies, suggesting that a 50-70% decrease would not negatively impact the industry.

He views the mining industry as fundamentally undercapitalized, yet paradoxically, capital is often misallocated due to inefficiencies. This leads to a worrying situation where money chases "stupid things."

The Critical Shortage of Technical Talent and Leadership

A major concern for Dr. Henny is the dwindling number of technical professionals in the mining industry, with experienced individuals retiring and insufficient young talent entering the field. He notes a significant "chasm" in this regard. He observes a concerning trend of CEOs stepping down from major mining companies without clear successors, creating a vacuum. He emphasizes the need for engineers, geologists, and metallurgists to lead these companies, rather than accountants, lawyers, or those solely focused on ESG without a pragmatic approach to mining.

Permitting Challenges and the Burden of NI 43-101

Dr. Henny identifies permitting as a significant hurdle, with the mining industry having done a "terrible job" of reducing the burden. He highlights the impracticality of long permitting timelines (10-15 years) when calculating project Net Present Value (NPV), rendering many projects economically unviable.

He also criticizes the evolution of NI 43-101 reporting. While originating from the need to prevent scams like the Bre-X incident, he argues that it has shifted the focus from making money through mining to making money by "making the discovery and then flogging it to somebody." This encourages perpetual drilling by junior companies with a slow path to cash flow, to the detriment of the industry. He believes the goal should be to maximize discovery size and quality, not just the number of ounces reported.

The Parasitic Nature of Royalties and Streams

Dr. Henny views the royalty and streaming industry, while historically successful (citing Pierre Lassonde and Goldcorp), as currently "cannibalizing the rest of the mining industry." He argues that when junior companies issue royalties out of desperation to stay afloat, these projects become burdened with obligations that are difficult to sustain. He is particularly critical of streaming agreements, stating that selling 20-30% of gold production at a discount (e.g., 20% of spot price) is a recipe for failure, and companies engaging in such practices "might as well just hang up their spurs and go home." He describes this as an "unnecessary parasitic plague on the industry."

The Path Forward: Education, Efficiency, and Pragmatism

To address these challenges, Dr. Henny advocates for:

• Education and Talent Development: Actively attracting and educating younger generations, including sponsoring students from countries like Bolivia who are eager to enter the mining profession.
• Efficient Capital Allocation: Ensuring that capital is spent wisely and effectively, with a focus on making discoveries and building mines.
• Pragmatic Permitting: Streamlining the permitting process to reduce timelines and make projects economically viable.
• Focus on Core Competencies: Prioritizing technical expertise in leadership roles within mining companies.
• Value-Driven Exploration: Pursuing assets with genuine geological potential and a clear path to value creation.

He concludes by expressing a desire for the industry to adopt a "repentant" attitude, learn from past mistakes, and focus on doing a "good job" in efficiently developing the world's much-needed mineral resources.