The BarkerLetter

Greetings investors.

Here’s the odd thing — I think that Aurelian Resources (ARU.TSX) was actually going to try and mine their Fruta Del Norte gold discovery down on the Ecuador/Peru border.

Imagine that!

Oh sure, every junior intends to mine their own discoveries. But most don’t. That’s just window dressing, playing hard to get for the majors.

I’m not suggesting that exploration firms can’t be good miners. However, the exploitation of what I call ‘mineral discoveries of size’ in third world countries generally falls to major mining companies, and with good reason. The Newmonts, the Barricks, the Rio Tintos of the world have experience in working in ecologically sensitive countries populated by indigenous peoples and governed by populist leaders.

Does little Aurelian have the resources and experience - and perhaps most importantly, the time - for endless negotiations with multi levels of government, lobby groups, artesanial miners, indigenous peoples, environmentalists from near and far, guerillas, and anyone else who comes along and claims to be a stakeholder in the region? Perhaps they do. But I kind of doubt it. These projects take years to come to fruition. Does Aurelian have the wherewithal to go the distance? If I were a shareholder I’d be asking those hard questions.

The recent events in Ecuador were entirely predictable. The Ecuadorans weren’t going to let a junior miner walk away with billions of dollars in gold. It was inconceivable from the start.

There’s a very good reason why Newmont Gold’s 32.6 million ounce Yanacocha gold project is steaming ahead in nearby Peru. Actually several reasons: They have billions of dollars, they’ve been in the country for generations, and they could afford to wait 20 years to do it. Even so, they’ve had to undertake the very complex balancing act of guarding their operations from guerillas without alienating the local population. It’s no cakewalk.

Whoever gets to exploit Fruta Del Norte will find themselves in a similar role. They’ll be expected to provide many of the services traditionally administered by government, and probably for years to come. They’ll have to deliver power to villages, construct roads and schools and hospitals, maybe even arbitrate land disputes and/or provide law enforcement. Is Aurelian up for that?

Last year I wrote in this space that the company would never mine that project, that it would fall into stronger hands. That was speculation on my part, but I’m sticking by it.

Unfortunately, Aurelian is in the hard place now of having a rapidly escalating project to administer and pay for, while the political risk throughout Latin America grows daily.

I think they should have put themselves on the block last fall. Perhaps they did and nobody stepped up to the plate. Perhaps they were merely waiting to develop the project a little more to drive the price up. Perhaps they were waiting for a top in the gold price. Perhaps they were naive, or maybe they’d gotten a little high on themselves (hubris happens!)
But it’s a little late now, in any case.
I don’t mean to heap scorn on the company or its board of directors. It must be very difficult to let go of a project that was built from scratch into an exciting discovery with world class potential. They may have an entire gold district there that will eventually rival Yanacocha. Most exploration companies go through their entire life cycle without knowing what that feels like.
But I think they should have - for the sake of the shareholders.
Careful out there.

Kb