Understanding the Rational Speculation Model

Valuing Diamond Plays with the Rational Speculation Model

Ever wonder if an exploration play represents good, fair or poor speculative value? During the past decade juniors have discovered three diamond deposits with a real value in excess of $6 billion. By 2004 Canada will supply 15% of the annual US $8 billion rough diamond market. Within a few years Canada will have squeezed South Africa out of third place. Canada is a vast diamond exploration frontier that several dozen juniors are scouring for the Holy Grail of the diamond industry, a pipe on a scale with Russia's Udachnaya and Botswana's Jwaneng. Each mine annually produces the diamond equivalent of 4 million ounces gold. Dia Met, whose Ekati diamond mine produces half this amount, went from $0.60 to $60 before its partner BHP bought out the junior for a price that valued Ekati at $2 billion. With this sort of dream target, how do you decide when a diamond play is a bargain or too expensive? The answer lies in understanding the diamond exploration cycle and using the Rational Speculation Model to decide when a junior's stock price offers good, fair or poor speculative.

Take a close look at the IPV Chart below. In a single graphic it marries the theoretical framework of the rational speculation model with the exploration stage of diamond plays and how the market is presently valuing each play. The IPV Chart is the fruit of 20 years I have spent struggling to understand how the market prices mineral exploration plays. By the time you finish this article you should not only understand how it works, but you may also appreciate why I believe that within five years the IPV Chart or some variation of it will be as indispensable a tool for resource junior investors as has become a basic stock chart for investors in general.



Don't care for diamond plays? Here is an IPV Chart for other metal plays. The only thing that has changed is the name of the exploration stage. Throughout Kaiser Bottom-Fish Online you will find diamond or non-diamond IPV Charts. If you not learn how to read them, you will not know what I mean when I describe a play as offering good, fair or poor speculative value.




How can something "speculative" have "value"?
What is this notion of "speculative value"? Isn't that an oxymoron? Many people assume successful investing in exploration juniors involves luck, guesswork, momentum trading or inside information. Most are unaware that an elegant valuation logic underlies mineral play exploration and is accessible to the average investor. While esoteric talk about risk-reward does cause eyes to glaze over, most investors intuitively understand the gambling concept that a bet is fair if the payout delivered by success matches the probability that success will be achieved. Putting it in simple terms, a horse with 5:1 odds of winning should pay 5:1 if it wins. On the other hand, a "good" bet would be a ringer with 5:1 odds but which will pay 10:1, and a "poor" bet would be a dog with 10:1 odds that will pay only 5:1. Every gambler's secret goal is to find an opportunity where the fundamental odds and promised payout are mismatched. The same can be said for speculators in the junior resource sector.

Like gambling, speculation involves making a financial bet on an uncertain outcome. But unlike gambling, which merely reshuffles the ownership of existing wealth, mineral play speculation creates new wealth through major discoveries like Hemlo, Eskay Creek, Ekati, Voisey's Bay, Pierina, Snap Lake, Veladero and Bulyanhulu. The investment community hates to hear gambling compared to mineral play speculation, but investors are far better off when they appreciate the similarities and differences.

Racetrack betting an instructive analogy for exploration play speculation
A racetrack metaphor Getting people to see mineral play speculation as a superior form of gambling is not easy, so consider this trip to the horse racing track. Tip sheets prepared by professional handicappers lay out the success odds for various horses based on their history, the lineup, the jockey, and expected track conditions. Doesn't this sound a lot like research reports about a mineral project's geology, its exploration history, the management team, and the market outlook? Our gambler reviews the report, listens to the chatter from the shills, and homes in on a horse the handicappers say is a longshot at 10:1 but which the shills suggest is a ringer with 2:1 odds. The gambler figures the shills are exaggerating, but after some "due diligence" concludes that the real odds are something like 5:1, which is still better than what the handicappers suggest.

As the betting window opens the board shows 10:1 for our gambler's pick and our gambler places his bet. But as word circulates that this horse is a ringer, other gamblers jump in with similar bets. Before long, and much to our gambler's dismay, the board shows the odds improving to 5:1. Oh well, the horse is no longer a "good" bet, but it is still a "fair" bet. But soon, thanks to the touts, the horse's ringer status becomes the worst kept secret. The failure odds plummet to 2:1, and our gambler is tearing his hair out because now he is stuck with a potential payout of only 2:1 even though he remains convinced the horse's real odds are 5:1 or worse.

Perception does not dictate reality
The payout has dropped because the racetrack pari-mutuel betting formula adjusts the payouts according to how and what gamblers have bet. It is a zero sum game less the leakage to the track operators. When the betting window closes, the posted payouts reflect the expectations of the gambling audience, not the underlying odds, which remain unchanged. Once the race starts excitement surges as gamblers cheer the horses on which they have placed their bets. Our diligent gambler who did his homework stops fretting as his horse pulls ahead of the pack, but his mood sours as the horse starts to lag and eventually comes in dead last. The professional handicappers were right he grumbles as he throws away his worthless ticket.

Change the words around a bit and you have your typical gold or diamond play stock promotion. But there is an important difference. Had our gambler been speculating on a publicly traded exploration junior rather than betting on a horse race, he need not have been stuck with the outcome. An exploration play is like a horse race in that it starts out with a certain optimism which changes in response to exploration progress reports. The play either ends in a bust sometimes euphemistically dubbed a "technical success" or as a winner which becomes a buyout target for major mining companies. But in between the play can look awfully close to delivering the homerun, and it is this "speculation cycle" which is the lifeblood of the junior exploration industry.

Cashing in on changing real and perceived odds
Unlike the horse race where gamblers are stuck with the bets they placed regardless how actual and perceived odds change, exploration play speculators can "withdraw" their bets almost anytime before and during the "race" by simply selling their stock. Herein lies the key to the rational speculation model: when a junior stock price goes up, the market is saying that the odds of turning that drill target into a major discovery are improving. A racetrack gambler can only watch as the "odds" change while he awaits the race's outcome, but the mineral play speculator can collect profits or cut losses before the project exploration cycle's final outcome is known.

(If your understanding of betting is a little fuzzy, the Online Betting Guide for Beginners provided by www.oddschecker.com provides a very good introduction. To understand the rational speculation model you need a good grasp of how sports betting works.)

Value is defined by cash flow generating ability, not exchange price
A market is generally viewed as a price discovery mechanism for the value at which asset ownership changes hands. This metaphor is inappropriate for speculative markets such as the TSX Venture Exchange where the shares traded represent title to a potential asset rather than a real asset. In abstract terms an asset is the ability to generate cash flow, and economic value is the measure of that cash flow ability. This notion of an asset's value is different from the one that defines value as the price a buyer is willing to pay. In the long run, as the dot com bubble demonstrated, the cash flow definition of value prevails.

The sky is never the limit for exploration plays
A drill target is not yet an orebody, and consequently has no cash flow generating potential. A drill target does have physical limits and usually a deposit model associated with the geological setting, so it is possible to visualize the target outcome. An orebody's economic value boils down to tonnage, grade, and commodity price on the revenue side of the equation, and capital and operating costs on the cost side. Should exploration work establish a deposit that can be profitably mined, that orebody's asset value would be the present value of its future cash flow less the up front capital costs. DCF, or discounted cash flow, is the valuation basis on which a major mining company would price an offer to buy out a junior's discovery such as Pierina or Ekati. Cash flow is constrained by deposit size, grade, commodity prices, mining scenario, capital costs and operating costs. All legitimate mineral exploration plays have this "hard asset" outcome as their ultimate goal. The sky is never the limit for an exploration play because every deposit has concrete limits that a pencil putting facts to paper can clearly outline. This does not mean a market bubble will never price an exploration play substantially beyond its rational valuation limits. Such bubbles are particularly possible during periods of structural demand change when commodity prices are rising without corresponding cost inflation. But it does mean that nobody has reason to complaint about exploration play losses sustained when a market bubble pops.

The Rational Speculation Model in a nutshell
Mineral play speculation involves imagining a target outcome based on available geological evidence, estimating what the target outcome would be worth if it became reality, and assigning a probability that the dream will come true. The audience will have a wide range of expectations. Everybody will have their interpretation of a play's tonnage and grade potential, their own expectations about metal price trends, and differing opinions about how strongly the geology supports the target outcome. The jargon for these concepts are "target outcome", "ultimate project value", and "success probability". The Rational Speculation Model requires a speculator to visualize what "success" would look like, crunch the numbers to see what "success" would be worth, and assign failure odds to this scenario.

The exploration cycle and the probability ladder
Doesn't this sound too complicated to be what actually happens in speculative markets? Not really. Visualizing the dream target is underway when a geologist trots out his diagrams and cartoons amid heavy arm waving. Target outcome valuation is underway when numbers scribbled onto the back of a napkin get plugged into calculators. What speculators do not commonly do is to apply the probability ladder associated with the exploration cycle. A probability ladder is the series of improving failure odds as a project moves through the exploration cycle from grassroots concept to producing mine. The odds associated with each exploration stage represent the probability that the project will progress from that stage to the final stage of a producing mine. The probability ladder is used explicitly by the exploration industry to prioritize projects and allocate budgets. The market implicitly does the same thing when it prices a junior exploration play.

The table below presents the stages in the exploration cycle for diamond plays and the success probability at each stage.

Exploration Cycle Stages

Probability Ladder

Valuation Channels ($ Millions)

	Diamond Plays	Chance	Odds	$100 UPV	$500 UPV	$2,000 UPV
M0	Grassroots	0.5-1%	99-199:1	<$1	$2.5-5	$10-20
M1	Target Drilling	1-2.5%	39-99:1	$1-2.5	$5-12.5	$20-50
M2	Micro-Diamond Testing	2.5-5%	19-39:1	$2.5-5	$12.5-25	$50-100
M3	Mini Bulk Sampling for Grade	5-10%	9-19:1	$5-10	$25-50	$100-200
M4	Bulk Sampling for Value	10-25%	3-9:1	$10-25	$50-125	$200-500
M5	Prefeasibility	25-50%	1-3:1	$25-50	$125-250	$500-1,000
M6	Permitting & Feasibility	50-75%	0.3-1:1	$50-75	$250-375	$1,000-1,500
M7	Construction	75-100%	0-0.3:1	$75-100	$375-500	$1,500-2,000
M8	Production	100%		$100	$500	$2,000

(UPV = ultimate project value ie what it is worth in net present value terms once in production)

Below is the same table adapted for mineral exploration plays in general:

Exploration Cycle Stages

Probability Ladder

Valuation Channels ($ Millions)

	Mineral Plays	Chance	Odds	$100 UPV	$500 UPV	$2,000 UPV
M0	Grassroots	0.5-1%	99-199:1	<$1	$2.5-5	$10-20
M1	Target Drilling	1-2.5%	39-99:1	$1-2.5	$5-12.5	$20-50
M2	Discovery Delineation	2.5-5%	19-39:1	$2.5-5	$12.5-25	$50-100
M3	Infill Drilling	5-10%	9-19:1	$5-10	$25-50	$100-200
M4	Bulk Sample & Metallurgy	10-25%	3-9:1	$10-25	$50-125	$200-500
M5	Prefeasibility	25-50%	1-3:1	$25-50	$125-250	$500-1,000
M6	Permitting & Feasibility	50-75%	0.3-1:1	$50-75	$250-375	$1,000-1,500
M7	Construction	75-100%	0-0.3:1	$75-100	$375-500	$1,500-2,000
M8	Production	100%		$100	$500	$2,000

Applying racetrack betting logic to the exploration cycle
Suppose we apply the gambling logic described earlier in our racetrack example to an exploration play. A fair bet was one where the payout ratio matched the fundamental success odds. Suppose our dream target is a world class diamond pipe worth $2 billion. A junior company has staked a large land package in a remote part of Canada. The project is at the grassroots stage, meaning that no targets have yet been generated. Our probability ladder shows that the success probability is 0.5-1.0%. Stated in another way, the failure odds are 99:1 to 199:1. Is a $2 billion dream target realistic? The geological setting is an Archean craton that already hosts a major diamond mine, so we know the craton is fertile for diamonds. The claims cover what is believed to be a thicker part of the craton where the diamond stability field that fosters diamond growth is most likely to be. The property is crisscrossed by what appear to be deep seated structures that might have served as conduits for kimberlitic magmas ascending from the mantle several hundred kilometers deep. The $2 billion dream gets a thumbs up. Based on the 0.5-10% chance of success, our probability table says fair speculative value ranges $10-20 million.

Translating probability ladder jargon into stock market profits
How do we translate that into a stock price? Suppose our diamond junior has 20 million shares issued on a fully diluted basis and 100% title to the diamond play. Let's assume the junior's other projects are trivial compared to the one with the hot target and that all its cash is going to get used up on exploration work. The market capitalization of the junior represents the speculative value of that diamond play. If fair speculative value is $10 million, simple arithmetic says the stock price should be $0.50. That happens to be what the stock is trading at. What would happen to the stock price if the junior's diamond play made it all the way through the exploration cycle to become an Ekati Mine worth $2 billion? Assuming no significant equity dilution, the stock would rise to $100, rewarding the shareholder with a 199:1 payout or a profit of nearly 20,000%! What if nothing is ever found? The stock ends up at a dime or less and the speculator pretty much loses his investment.

How do speculators usually think about an exploration play?
Speculators do not start out with ultimate project values and theoretical project values corresponding to a probability ladder. They start out with the stock price, figure out the fully diluted capitalization, find out what project the promoter is touting, and what net interest the company will end up with in the project. This information can be tied together by multiplying fully diluted capitalization by the stock price and dividing by project percentage expressed in decimal form. The result is the "implied project value" (IPV), or what the market is saying the project is worth in its entirety based on the junior's stock price. Then the speculator asks where the project is in the exploration cycle, how big the discovery will be and why, and what the company is doing to make it happen. None of this answers the speculator's most pressing question: is the stock a decent buy? The answer becomes a lot easier to see when the question is plugged into the framework of the rational speculation model. In what follows we will walk through the stages of the diamond exploration cycle, which is closely resembles the exploration cycle for any metal or mineral.

Diamond Exploration Cycle Stage 1: Grassroots Exploration
Suppose an exploration junior decides that it wants to discover a world class diamond mine. Management firsts conducts research about where economic diamond pipes have already been found, what sort of geological setting is associated with these pipes, and what land is available which shares these geological characteristics. Once the junior has obtained title to its land position it will initiate grassroots exploration to generate drill targets. Because diamond pipes are small volcanoes that punch through whatever rocks happen to be at the surface, and typically get covered by lakes, swamp or overburden, geological mapping and prospecting is not of much use. Diamond exploration involves filtering for vertical "needles" called kimberlite pipes on ever tighter grids. The primary target generation tools are geophysical surveys and indicator mineral sampling. There can be many explanations for a geophysical anomaly, but there is only one explanation for minerals at surface which form only deep in the mantle: an erupted kimberlitic magma. As a kimberlite magma ascends it swallows material in its path, which may include diamonds. Diamonds form only within a special pressure-temperature regime that happens to be shared by other more abundant minerals like pyrope and eclogitic garnets. Diamond inclusion studies have shown that certain chemical compositions such as those which define G10 garnets occur only in the diamond stability field. Finding such diamond indicator minerals is the goal of till sampling programs. Till sampling works because glaciers will have gouged out a kimberlite and dragged the pieces along their path over long distances. Grassroots exploration involves flying airborne magnetic surveys and sampling for indicator minerals. When the results are plotted up, the junior hopes to see a fan shaped train of increasing grain counts that converges on a bulls-eye magnetic anomaly. This represents a kimberlite target, and if the indicator minerals plot in the diamond inclusion field, the kimberlite will likely be diamondiferous.

Diamond Exploration Cycle Stage 2: Target Testing
Suppose after a season of grassroots exploration our diamond junior ends up with a large bulls-eye geophysical anomaly and an associated indicator mineral train with very good diamond inclusion chemistry. The project has progressed from the initial grassroots stage to the next stage of drill ready targets. Our probability ladder shows that the chance of ending up with a diamond mine has improved to 1.0-2.5%, or, phrased another way, the failure odds now range from 39:1 to 99:1. Our $2 billion dream target remains intact and the probability table indicates that fair speculative value ranges $20-50 million. The market reacts by bidding the stock up into the $1 to $2.50 range, delivering profits of 100-400% to our speculator who bought at $0.50 when the play was still a longshot.

There is no guarantee that drilling this target will deliver a $2 billion diamond mine, but if it did, the stock price would increase another 40-100 times. The improved odds have resulted in a profit for our speculator which he is free to take by selling his stock. Who will buy his stock? The buyers will be other speculators who would rather bet on a potential 40 bagger than a 200 bagger. As a mineral play works its way through the exploration cycle the target outcome gradually gets fleshed out. Sometimes its scale gets reduced from $2 billion to a smaller number like $500 million or vice versa if the dream target started out as a more modest number. Often, and this is a reason diamond play exploration is called high risk, the dream target evaporates and the junior must start from scratch. As a play climbs the probability ladder and the target outcome becomes tangible it attracts a bigger and different audience of speculators. If the play makes it to the permitting stage and beyond its "value" shifts from "speculative" to "economic" value and the stock qualifies as an investment rather than a speculation.

Diamond Exploration Cycle Stage 3: testing for micro-diamonds
Our diamond junior is trading at $1 as drilling gets underway. If drilling hits rock that looks like kimberlite, it is sent off for petrographic analysis. Once confirmed as kimberlite the core is submitted for micro diamond analysis. Because the market already has a rough idea of the tonnage implications based on the width of the geophysical anomaly, and high expectations about diamond grade based on the indicator mineral chemistry, confirmation that the target is indeed a large kimberlite improves the odds that the $2 billion dream will come true. Moving up the probability ladder to the micro diamond testing stage, fair speculative value now ranges $50-100 million. In stock price terms our junior is now trading in the $2.50-$5.00 range.

All the tonnage and diamond indicator chemistry in the world do not count for anything if diamonds are not present. In micro diamond testing the heavy minerals which include diamonds are extracted from the core after it is crushed and dissolved in an acid bath. Diamonds are recovered down to a 0.1 mm sieve size. If the kimberlite is diamondiferous there will be many micro diamonds, but because the sample is typically less than 1,000 kg, there will rarely be present any commercial sized diamonds caught by a 1.5 mm sieve. Even if such a large diamond is recovered, it has no statistical significance on its own. Unlike gold or any other metal where every particle counts toward the grade and value of a deposit, only commercial-sized diamonds contribute to grade and carry value. So what can the micro diamond results tell us about macro grade potential?

Understanding micro-diamond results
Diamonds are crystals that form and grow randomly under the right conditions within the earth's mantle where the diamond stability field is present. Within any physical space there will be a range of crystal sizes with a lognormal size distribution, meaning that the smallest stones are most abundant. A kimberlite magma swallows the diamond bearing host rock, gradually breaks the rock down into individual mineral crystals, and thoroughly mixes them within the magma. Where the big stones end up as the kimberlite chills at the surface will be random. This is the complete opposite of a gold deposit, which is formed by concentrating gold into a host rock. Diamonds start out concentrated and end up dispersed within a kimberlite magma. Very importantly for diamond exploration, the relative abundance of stone sizes is preserved in the kimberlite despite the dilution. Recovered micro diamonds are sorted into a series of sieve sizes and plotted as normalized frequency counts per sieve size. The result will be a micro diamond size distribution curve. The shallower the slope of the curve, the higher it floats in the chart, and the farther it extends into the larger sieve sizes, the higher the macro diamond grade potential of the kimberlite.

Diamond Exploration Cycle Stage 4: Mini Bulk Sampling for Grade
Early stage micro diamond results are only a guide for grade potential, and can be distorted by several factors whose applicability may not be apparent at this exploration stage. To keep the $2 billion dream target alive micro diamond testing must deliver a size distribution curve suggestive of a high macro grade. If the diamond junior reports good micro diamond results, and indicates it will proceed to the next stage of mini bulk sampling for macro grade and delineating the kimberlite's geometry, the play climbs to the next rung of the probability ladder where the success chance ranges 5-10%. This translates into fair speculative value of $100-200 million reflected as a stock price of $5-10 for our diamond junior. By now our grassroots speculator is up 2,000% and hopefully taking at least some profits.

Four key exploration stages and still no sense of economic value
The mini bulk sampling stage involves extracting a large enough sample to measure grade, but not enough to measure value. While an ounce of gold is worth the quoted price per ounce no matter what the gold looks like, the value of a diamond is controlled by its weight, colour, clarity, cut (crystal shape), and, increasingly, certifiable conflict-free origin. The quality of a diamond can range from a near worthless industrial boart to a very expensive D flawless gem. To complicate matters more, a single D IF 10 carat diamond will be worth six times the combined value of ten identical quality 1 carat diamonds. Large bulk samples that have yielded several thousand carats are needed to assess average carat value for a kimberlite. At the mini bulk sample stage the junior is only concerned with establishing a macro grade, defining the internal geometry of a pipe, and obtaining a rough tonnage estimate. The internal geometry is important because it will reveal grade variation due to different emplacement facies and magmatic eruptive phases.

If the mini bulk sample grade confirms expectations created by the micro diamond results, the internal geometry shows that this grade will likely be representative of the tonnage indicated by the kimberlite's size, and the junior plans to proceed with a bulk sample to test for carat value, fair speculative value jumps to the next rung of the probability ladder. The diamond play now commands a speculative value of $200-$500 million, which translates into a stock price ranging $10-$25.

Diamond Exploration Cycle Stage Five: Bulk Sampling for Carat Value
The bulk sampling for value stage is critical because until now there will only have been anecdotal indications of value potential. Mini bulk sampling and micro diamond analysis can create a high degree of confidence in grade, but it sheds little light on carat value. How does quality behave as the stone size increases? How big can the stones get? The presence of larger stones does not make a significant contribution to the grade indicated by the recovery of smaller diamonds through mini bulk sampling, but the larger stones can make a big contribution to average carat value. Modeling experts can sometimes predict that large diamonds will be present, but they cannot predict their quality. As a rule, the larger a diamond, the lower its chances of being high quality. The bigger a diamond grows the more opportunity there will be for other mineral inclusions and crystal complexity that limits cutting freedom. While nature will be consistent about size distribution, it can be quite quirky with regard to quality distribution. Furthermore, human fashion tastes can create demand that makes diamonds of a certain quality more valuable than diamonds with a rarer quality. To assess the value of a diamond population the company must recover a large parcel of diamonds, "measure" their value, plot these values into the various size categories, and make statistical adjustments for high value outliers. A big question is how to treat isolated high value stones. Was their presence a stroke of luck not to be repeated until another thousand tonnes have been processed, or is the high value stone part of a measurable pattern?

Diamond Exploration Cycle Stage Six: Prefeasibility - figuring out capital and operating costs
Once a bulk sample has delivered a carat value it becomes possible to apply the discounted cash flow model using tonnage, grade, carat value and cost projections. This is the stage where the dream target becomes concrete. It may have to be adjusted downwards or, less often, upwards. This is also the stage where the dream target may collapse entirely if the average carat falls short of expectations. If the $2 billion dream target emerges intact, the success chance jumps to 25-50% as the project moves into the prefeasibility stage. The play now has a fair speculative value in the $500 million to $1 billion range, which translates into a stock price of $25-$50 for our diamond junior. By this point the only reason grassroots speculators still own the stock is for tax planning reasons. The prefeasibility stage may include more bulk sampling to tighten resource calculations, but much of the work is now aimed at figuring out the cost side of the economics equation. In addition to the mechanics of mining the kimberlite, the capital and operating costs will have to include whatever is needed to obtain a mine permit. Socio-economic benefits, government royalties, and environmental impact must all become part of the cost. At this stage the project comes under attack from various interest groups which either hope to extract a piece of the action or which operate as non-profit organizations that nourish themselves through donations stimulated by their morally outraged opposition to mine development.

Diamond Exploration Cycle Stage Seven: permitting and feasibility
Once a prefeasibility study has quantified what is needed to develop a diamond mine, a decision will be made to proceed with a feasibility study and initiate permitting. The two go hand in hand because obtaining permits will reveal additional costs. If the $2 billion dream target remains alive, and by now it should be rigorously supported by discounted cash flow based valuations, fair speculative value jumps into the $1-1.5 billion range where our junior would trade at $50-$75. The feasibility and permitting phase can last several years during which stock prices weaken below the fair value range where bottom-fishers in search of good speculative value accumulate the stock.

Diamond Exploration Cycle Stages Eight and Nine: Construction and Production
Once a mine permit has been obtained construction can begin. With the uncertainty about the timing of cash flow gone, the market will push the project's value toward the $2 billion target. Once production begins and actual cash flow meets or exceeds projections, the market will use traditional valuation methods such as price-earnings ratios to value the project. By then the grassroots speculators are long gone. In all likelihood so will be the junior, which a major mining company may have bought out any time after a bulk sample produced a reliable carat value.

The IPV Chart: a graphical presentation of the Rational Speculation model
The exploration cycle and probability ladder can be tied together into a graphical framework called the IPV Chart. The fair speculative value range associated with each exploration stage for a target outcome such as $2 billion or $500 million can be plotted as valuation channels. The implied project value for actual diamond plays can also be plotted onto this chart in the appropriate exploration stage. The IPV Chart included with this article shows how the market was pricing key junior diamond plays as of May 23, 2003. Some of the plays such as Metalex's Attawaspiskat play in the James Bay Lowlands plot well above the $2 billion valuation channel. Ashton's Foxtrot project in Quebec plots within the $2 billion valuation channel. Mountain Province's Kennady Lake in the Slave project plots below the $500 million channel. Tahera's Jericho project plots well below the $500 million channel. So does Pele Mountain's Festival project in the Wawa area. Kensington's Fort a la Corne play has a much higher valuation than Shore Gold's nearby Star play, even though both are at the bulk sample stage.



Which of these various plays represents good, fair and poor speculative value? It all depends on the exploration stage and what sort of target outcome it is reasonable to entertain based on the work so far done by the juniors. The rational speculation model and IPV Chart do not provide specific answers to these questions, but they do reveal what the answers mean in terms of speculative value. Ultimately the speculative value of an exploration lies in the eye of the beholder, who brings to bear his or her assumptions about future commodity prices, analysis of a project's geological potential, and knowledge about mine development and operating costs. The Rational Speculation Model is not a decision-making blackbox that spits out unique buy, sell, or hold signals.

Within the company profile sections of Kaiser Bottom-Fish Online you will project lists like the one below for Shore Gold. The arrows are color coded for the target outcome (red for $100 million, yellow for $500 million and blue for $2 billion). The arrows indicate whether the market's current valuation of the play represents good (up arrow), fair (sideways arrow), or poor (down arrow) speculative value in terms of the respective target outcome. A skinny arrow indicates that the valuation is within 25% of the fair value channel for that target outcome (UPV). A good, fair or poor speculative value ranking corresponds to a buy, hold or sell recommendation, but as you can see, all three in this case apply to Shore Gold's Star project. Which is the right one? That depends on which target outcome you believe is realistic given the available information about the Star kimberlite pipe. That question can only be answered through old-fashioned analysis of the geological fundamentals, and the final word is ultimately delivered by exploration results. These results are uncertain, which is, after all, why we call this a speculative play.

Active Company Projects

Country	Region	Project	Net Interest	Stage	IPV $ MM	$100	UPV $500	$2000	Mineral Group	Metals	Deposit Style
Canada	Fort a la Corne	Star	100% WI	M4-Bulk Sample	$80				Diamonds	D	Kimberlite

The rational speculation model does not tell you which valuation channel is appropriate for a particular play. But it does tell you how much you can expect to make or lose if this or that target outcome becomes reality. And that is something most speculators have historically never understood when it comes to exploration juniors even though they understand it perfectly well when betting on the horses at the racetrack.