I'm reading Thomas Peters and Robert Waterman's classic "In Search of Excellence: Lessons from America's Best-Run Companies". The following passage struck me, from the chapter on experimentation as a businesses strategy: Alacrity and sheer numbers of experiments are critical ingredients to success through experimentation. Several years ago, we studied the successful versus the less successful wildcatters in the oil business. We concluded that if you had the best geologists, the latest in geophysical technique, and the most sophisticated equipment, and so on, the success rate in wildcat drilling in established fields would amount to about 15 percent. Without all of these pluses, the success rate dips to around 13 percent. The finding suggests that the denominator--the number of tries--counts for a great deal. Indeed, an analysis of Amoco, recently revitalized to become the top U.S. domestic oil finder [this is an old treatise], suggests just one success factor: Amoco simply drills more wells. The company's head of production, George Galloway says, "Most favorable results were unforeseen by us or anybody else... That happens if you drill a lot of wells." We found the same phenomenon in minerals exploration. The critical difference between the unsuccessful exploration companies is a dramatic difference in the amount of diamond (bit) drilling that they do. Although diamond drilling looks expensive, it is the only way to find out what's really down there. The rest is all speculation, however well informed, by the geologists and geophysicists. If you talk to enough professionals in the resource sector, you hear such sentiment a lot. Oil people have told me their biggest-producing wells came on prospects they didn't like much at the pre-drill stage. And that many of the plays they really liked based on the preliminary data turned out to be dusters. Bottom line: trying to analyze exploration prospects is a tough game. Exploration prospects are the unthinkables. You can throw as much thought and analysis as you want at blobs of geochemical data, squiggly seismic lines and alteration mapping. All the sweating in the world over this information isn't going to tell you much about which prospect has the better chance of success. The stats from the book are worth repeating here (and I have heard similar from other sources). State of the art technology and cutting-edge staff gives a company a 15% chance of success. Not having such drops the rate to 13%. Having a "dream team" of explorationists only ups your odds of a discovery by 2%. Given the expense involved with assembling and keeping top people and equipment, this is a small return on investment. Analysts too, often get caught up in the unthinkables. They believe if they can just parse the data properly, they can pick out the prospects with the best chance of becoming a mine or a major oil field. As the numbers above show, they might as well throw darts. Here's a better use of analytical time and energy. Ask: how is this company going to maximize its drilling opportunities? How will management ensure they get drills in the ground on the largest number of projects possible, harnessing the "strength in numbers" advantage that made Amoco so successful? The most obvious strategy is the farm-out model. Generate quality exploration targets and then bring in partners to pay the drilling costs in exchange for an interest in the project. I'm following currently an Alberta oil company that's done this. Management identified a large oil-in-place resource and brought in a partner to do the detailed development drilling. The farm-in group is paying 100% of drilling costs to earn a 50% interest, leaving the project development group with a no-cost 50%. By not spending money on drilling, a group gains staying power. Management will remain well-financed for longer, allowing them to generate more projects, usher in more partners, and ultimately drill more prospects. Maximizing chances for a discovery. Obviously a group must have some skill in prospect evaluation in order to gather the information on a play that will entice a partner to spend money. But good management teams realize there's only so much data they can collect. They don't waste cash trying to over-analyze. The truth is ultimately in the drillbit. This is a critical lesson for investors, analysts and corporate management. Ask not, "How good is this project?" But rather, "How many good projects can this company come up with and test?" Finally, a quick word about some free stuff. If you look at the Pierce Points website, you'll notice something new at the top right. The Statsweeper Finance Slipstream. One of the most exciting things to happen to the internet recently is user-generated content. Sites like Facebook and Twitter allow users to customize their own pages, putting up their favorite writings, pictures and videos for the wired world. The Slipstream allows investors to share their thoughts with the financial world. What's your most important indicator right now? The expanding U.S. monetary base? Outstanding gold futures? Foreign buying of America's sovereign debt? With Slipstream you can take your pick of any of this data from the Statsweeper site (and more... we added over 500 new data sets last week alone) and stream it in real time on your website. Your investment views, your custom content. All in one simple, bolt-on web tool. I've arranged with Statsweeper management to offer Slipstream free to Pierce Points subscribers. The site is doing a premier "print run" of 50 copies. The first 50 people to e-mail me (dforest@piercepoints.com) and put up their hand will help us make finance history. Here's to strength in numbers, Dave Forest dforest@piercepoints.com Copyright 2009 Resource Publishers Inc. Note: The information provided in this newsletter is based on the independent research of Dave Forest and Notela Resource Advisors Ltd. and is intended solely for informative purposes and is not to be construed, under any circumstances, by implication or otherwise, as an offer to sell or a solicitation to buy or trade any securities or commodities named herein. Information contained in this newsletter is obtained from sources believed to be reliable, but is in no way assured. All materials and related graphics provided in this newsletter and any other materials which are referenced herein are provided "as is" without warranty of any kind, either express or implied. No assurance of any kind is implied or possible where projections of future conditions are attempted. Readers using the information contained herein are solely responsible for verifying the accuracy thereof and for their own actions and investment decisions. Neither Dave Forest nor Notela Resource Advisors Ltd., make any representations about the suitability of the information delivered in this newsletter or any other materials that are referenced herein for any purpose whatsoever. The information contained in this newsletter does not constitute investment advice and neither Dave Forest nor Notela Resource Advisors Ltd. are registered with any securities regulatory authority to provide investment advice. Readers are cautioned to consult with a qualified registered securities adviser prior to making any investment decisions. The information contained in this newsletter has not been reviewed or authorized by any of the companies mentioned herein.