What was it like Dad? Tales from the last bust @Mineweb

What was it like Dad?

Mining finance and investment 

The weekend read: Brent Cook provides some perspective on resource markets. 

Brent Cook | 19 June 2015 15:21 

What was it like, Dad?

It was tough kid. We were just coming out of the most perfect spring. The fruit trees were all in blossom, streams filled with fish, deer abounded, and we were all feeling pretty right with the world—we owned it and were the chosen ones.

Then we headed out across the flats, believing the prophets that the next paradise, just over the horizon, was even better. But the horizon never came, the land turned to salt flats and dust; the temperature reached 110°, day after day after day. We burned and suffered. The roving bandits knew we were doomed and had no interest in what little we had left. Each promising oasis was a mirage and one by one we lost our way, numbed and staggering in all directions. We lost nearly everyone on that journey which began so optimistically—and naively.

It was brutal and devastating kid; I hope to never go through that again. But some of us did survive to carry on, and I’m here to tell you about it.

Yeah, right, I’ve heard that, but like, what about the 1997 to 2002 mining bust?

Well, that wasn’t really much different kid. We had come off of a truly remarkable mineral discovery boom from 1992 to 1997. The diamond discoveries in the Northwest Territory were fabulous: Diamet went from $0.21 to $55. Aber Diamonds (now Dominion) had a 40% interest in the Diavik discovery and went from $0.50 to $50. In Labrador, another company looking for diamonds, Diamond Fields, stumbled across a nickel showing (Voisey’s Bay) that was eventually acquired by Inco for $164/per share. It had been a $5 stock.

You see the world had suddenly been opened to modern exploration and all we had to do was Go There: we could do no wrong. Huge area plays developed around these discoveries, and the juniors with land on trend or close by doubled and tripled in a matter of months– regardless of the geology or prospectivity.

Corriente Gold traded up to $18 on a project in Peru that it never had to drill. Arequipa Resources, a copper explorer, put a bunch of holes and a tunnel into the Pierina gold prospect in Peru and went from $0.60 to a buyout price of $30 in nine months. Francisco Gold’s El Sauzal discovery in Mexico took the share price to $40. Queenstake went from $0.07 to $4.50, based on its Kilometer 88 projects in Venezuela.

What, you never heard of these companies? It figures.

I fondly recall my first trip to the Prospectors and Developers (PDAC) conference in March 1997: landing there after a field stint in Brazil (for which I was stiffed) with little more than a windbreaker and a couple of phone numbers. It was an amazing site to behold. Money was flowing everywhere and to everyone—even the strippers were getting rich on insider stock tips. I was literally stunned to see some geologist in khakis working a booth raise $2 million in a matter of minutes, based on a satellite color anomaly somewhere in Mongolia– on a piece of ground I don’t think he even controlled.

It was oysters and champagne at the Canoe Club, lavish parties thrown by all the brokerage firms; even the geologists were invited—engineers, not so much. Greed and speculation were rampant, risk unheard of, and failure? Virtually impossible.

It all seemed so irrational, yet real.

That was the year John Felderhof received the Prospector of the Year award for the 70 million going-to-200 million ounces Bre-X had found in Borneo. Bre-X went from $2.60 to $275 within a three-year period. It was obvious that nearly every one of us was a genius and sitting on millions in profits. We knew it as just going to get better.

Then things began to sour.

Metal prices started to drop; then some guy “falls” out of a helicopter in Indonesia. Bre-X is proven a massive scam and goes to zero. A company that used to be into the garbage container removal business, Cart-away, that had gone from $0.125 to $26 (based on reports of visible nickel and copper in drill core from a property near Voisey’s Bay) went to zero, when assays revealed it was all fool’s gold. Corriente, Francisco, Queenstake, and all the tag-along companies collapsed, folded, or changed their business plans.

I joined Rick Rule at Global Resource Investments just after the Bre-X bust. At that time brokers and clients were thrilled at how much cheaper these highflying stocks had become by mid to late 1997. Companies they had avoided because of the high prices were now affordable, and it was a good time to start picking them up before the boom re-asserted itself. The letter writers were all proclaiming we were getting a second chance—“Don’t waste it”.

We didn’t.

The first stock I bought was Almaden Minerals (AMM) at about $1.25 in late 1997. It had been $3.60 a little over a year earlier. It had great properties, plenty of cash, and was run by a successful and honest geologist, Duane Poliquin. “Better than half off” was the sales pitch.

Well, it went down by more than half again over the following year (1998) and the refrain became “if you liked it at $1.25 you’ve gotta love it at $0.60”. The share price continued to decline into 1999, 2000, and early 2001. At one point you could buy the stock for a little more than cash in the bank: $0.25/share. I picked up a bit more at about $0.50 but couldn’t bear to keep adding to the position, or even look at it in my portfolio. I loathed it.

The Almaden story was mirrored by nearly every junior resource company, or at least those that stayed in business. The only successes during this period were the companies that switched to high tech, the Internet, or biotech. That is where the money went to, and was made, during the 1997 to 2002 resource bust. There was virtually no money coming into the resource sector. Bill Gates could have bought the entire gold industry with half of his Microsoft shares.

Gold had been exposed as a “barbaric relic of the past”—so said all the Wall Street pundits, of little value except for dental fillings and jewelry. Its price fell to $250 an ounce. Copper was at $0.60/lb and uranium $10/lb—all virtually worthless in this new virtual economy.

Value was now perceived as “eyeballs and clicks” on a company’s web site. Profits and profitability became old-fashioned measures of a company’s worth that ignored the limitless future of selling stuff to people all over the world. Junior company promoters, although pretty good at bullshit, could not compete with the New Age Internet Masters at this level. Mining was dead and anyone associated with it abandoned and forgotten on the salt flats.

Our Global brokers would sit for days without a call or sell. Regardless of how good a project was, or how cheap a company had become, there were virtually no buyers. Clients didn’t want to be reminded of their portfolio, let alone add another losing idea to it. Liquidity dried up. Good or bad news were both reasons to sell, and then the news stopped coming at all. Offloading a small $10,000 or even $5,000 position could crush a company’s price. There was no incentive or reason to step into a position that had been declining for years and showed every sign of continuing to do so forever.

The ’97 to ’02 bust dragged on and on and on. It was a lonely desolate space kid.

The first year of the bust was a correction—a buying opportunity. The second we were on bottom. The third, nearing an end: it couldn’t get much worse. By the fourth year I think nearly everyone had resigned him or herself to the fact that gold and metals were indeed going the way of the buggy whip. Gold, copper, uranium, virtually all metals were selling for less than their cost of production. Mining professionals and successful entrepreneurs –the people who knew the industry best–hated it the most. They quit.

I recall a Hard Assets Investment Conference held in some shabby hotel on the outskirts of Miami in 1999. The headline speaker was some nut job newsletter writer who had somehow gotten on NBC, ranting about the end of Western civilization the very microsecond the computer clocks clicked over to January 1, 2000. That, he claimed, was when all the gold and guns stored in your backyard bunkers would become valuable. The conference was absolutely devoid of investors. In desperation, the conference organizers bussed in a load of folks from some nearby old folks homes. They arrived with bags strapped to their walkers and proceeded to steal anything not tied down to a booth. I think that was the low point.

Honestly, it was a depressing period during which a lot of good people abandoned the industry and no new blood entered.

However, in retrospect, it proved to be an exceptional time to buy real companies, assets, and people at a steep discount to their potential or the value represented by those assets.

Almaden Minerals (AMM), which merged with sister company Fairfield, continued its business through the bust, acquiring quality properties that no one cared about, and advancing them to the drill stage. The share price climbed from its low of about $0.25 in 2000 to $3.60 in 2006: a 1,340% gain in six years, if one had bought the low (Fig. 1). As the chart shows, AMM offered a second opportunity for a substantial gain (from the 2008 low) based on the Ixtaca discovery in Mexico. Good people keep coming back.

Figure 1: Almaden Minerals share price



Source: Bloomberg (in USD)

Virginia Mines (VIA) was another company I purchased on the way down. A $3.75 stock in 1996 was a “steal” at $1.50 in 1998. Virginia was Andre Gaumond: one of if not the best guys in the business, working in the best province in the world (Quebec), getting money back from the government, and fully funded for years. This was as good as an exploration investment gets.

Yet VIA continued to decline. I reluctantly added a bit later that year at $0.75– I mean the guy had $0.45 a share in cash! At one point in 1999 the stock was selling for $0.35: a 22% discount to cash. The stock languished at under $1.00 until about 2002, eventually hitting $1.50 in late 2003.

Figure 2: Virginia Mines share price



Source: Bloomberg (in USD)

After looking at the chart above you are probably expecting, since it’s my tale, that I stayed the trade to the end. I didn’t. Seventy-five cents to $1.50 at that time was a big (and rather rare) win after years of pain. I took the profits and bought you some shoes, kid.

Then in 2004, Andre and his team exposed some gold mineralization in trenches at the Eleónore prospect in Quebec. Over the next two years successive drill campaigns showed Eleónore to be a very large, high-grade gold deposit. Goldcorp acquired the deposit for shares, in a deal that equated to ~$13 per VIA share. Goldcorp proceeded to double after the acquisition. VIA shareholders also received half a share for every VIA share in the Newco, Virginia Gold. Virginia Gold was recently acquired by Osisko Royalties (OR) for ~$14.50.

Bear in mind, all this could be had for a price that valued the original Virginia Mines at less than the cash in its treasury.

Sidenote: (I re-acquired VIA in early 2004 after visiting the trenches at Eleónore when I was contributing to Paul van Eeden’s letter. We held through the ensuing take-outs by Goldcorp and then Osisko: some face saved, and lots of money made.)

Not to belabor a point on this walk down memory lane, but there were other examples of truly stupendous profits that were made on purchases during the ‘97-’02 bust, at a time when having teeth pulled seemed a more enjoyable choice than coughing up the dough for a junior exploration company story.

In late 1997 some young kid named Brian Dalton and his mates who had funded their way through university staking claims and renting trailers during the Voisey’s Bay land rush IPO’d their company at ~$0.25. From there Altius Minerals (ALS) traded as low as $0.18 and slowly climbed to $0.70 over the next four years. ALS was a bet on some frugal Newfies using other people’s money to explore for world-class deposits. The wait was worth it. They attracted Barrick into a search for Carlin gold deposits in Newfoundland, made a uranium discovery in Labrador (Aurora), nearly closed a deal on an oil refinery, and bought a few royalties along the way. The stock got as high as $30 in 2006 and now sits at about $14 (Fig. 3). Buying smart, honest people running companies with a tight share structure in a busted market is usually a good idea—if one has the patience (Fig. 3).

Figure 3: Altius Minerals share price



Source: Bloomberg (in Canadian Dollar)

First Quantum had built a small copper recovery operation in Zambia near a project I was involved with (ZCCM). Nice little operation, very smart people that we (mostly Rick Rule) financed at ~$0.75 in 1999 in a placement that included a full warrant. The company managed to lever its success into bigger and better African copper projects, hitting $4.50 in 2004 and $27 in 2011 (Fig. 4).

Figure 4: First Quantum share price



Source: Bloomberg (in Canadian Dollar)

I met Ewan Downie, President Wolfden Resources, at the 2002 PDAC. He was an unknown then, with few friends and fewer backers, yet it was clear he had some very good ideas on projects that he had picked up for nothing in the Canadian north. Rick and I financed him at $0.35 and were virtually alone in the deal. He subsequently made the High Lake copper discovery, taking the share price to $8 in 2005. It was eventually sold for $3.60 in 2006 and Premier Gold (PG) was spun out of it.

Nevsun Resources (NSU) was another highflyer from the ‘92 to ’97 boom; it fell from $16 to $0.10 (Fig. 5). Then in January 2003 it discovered the Bisha deposit in Eritrea, which took the share price from about $1 to over $8 (admittedly on some serious broker BS). Nonetheless, the company found a legitimate deposit that is now in production and making good money.

Figure 5: Nevsun Resources share price



Source: Bloomberg (in Canadian Dollars)

On the whole, no. There were certainly some people who understood the cyclical nature of the metals market, and that we couldn’t continue producing copper, gold, etc., at below the cost of production (Ross Beaty, Frank Holmes, and Rick Rule come to mind). But honestly, in 2000 few if any saw the China miracle, emerging markets’ boom, 9/11, Bush, Greenspan, the Iraq debacle, the Taliban, etc., coming. No, the sector was dead and there were few of us left with any optimism or belief.

I don’t see the need to rehash the 2002 to 2010 commodities bull market in any detail—you lived it. Suffice to say the Internet and real estate bubbles burst; gold rose from about $300 to a peak of around $1,900; copper $0.60 to a high of $4.50; uranium ran to ~$130; nickel to ~$23; iron to ~$180: it was all about a billion Chinese buying refrigerators and cars, while the US printed trillions of dollars. Big numbers that attracted big dollars into a sector that had been demolished and was perfectly positioned for a serious melt-up, if there were only a new narrative to bolt onto.

We supplied the ratchet and did it again: nothing could go wrong, and massive quantities of indiscriminate money flowed into mining. The billion in China were soon to be followed by the billions in India and the rest of the developing world. QE and currency debasement was an endless treadmill that guaranteed gold would be the last man standing as fiat currencies imploded around the world.

But then metal prices began to decline, economies slowed, profits disappeared and another crash began again.

What went wrong this time Dad? Is it all over? I mean, like, this time seems really bad.

Disclaimer: Brent Cook owns shares in Lara, B2 Gold, Nevsun, Premier, and Osisko Royalties.

To read more of his weekly newsletters, go to Exploration Insights

 

What was it like Dad? - Mineweb

#Nevsun makes #VMS discovery near #Bisha http://www.mineweb.com/regions/africa/nevsun-makes-vms-discovery-near-bisha/ @Mineweb

Just yesterday we were talking about Nevsun. There should be plenty more. 

Nevsun makes VMS discovery near Bisha

Exploration

Validating the case for more VMS deposits near Bisha.

Kip Keen | 19 June 2015 11:24

HALIFAX – Nevsun Resources reported a notable volcanogenic massive sulphide discovery Thursday not far from its operating Bisha copper-zinc-gold mine in Eritrea. Calling it Asheli, Nevsun drilled as much as 23 metres @ 2.39% copper and 4.5% zinc, 0.45 g/t gold and 37 g/t silver with a higher grade zone therein. So far Nevsun drilling reveals massive sulphides in a few intercepts over 100 metre strike and 100 metres vertically in a steeply dipping VMS deposit.

How significant the discovery is will remain unclear until Nevsun finishes and reports results from the rest of the dozen-plus drillholes it has drilled over roughly 1 kilometre of strike at the target. The miner – which began mining Bisha in 2011 – has taken a fairly aggressive approach to exploring Asheli. As it notes in a statement Thursday, it made 100-metre step-outs, which should begin to give a rough picture of the immediate size of the Asheli sulphide zone quite quickly.

Even if Asheli proves small, it will nonetheless wet Nevsun's appetite to focus on exploration in the region, 20 kilometres southwest of Bisha. VMS deposits frequently form in clusters and pods. So where there's one, it's usually a good idea to look for others. Indeed, Nevsun has long contended that Bisha and environs, poorly explored, has a good chance of showing more VMS deposits. In that sense, Asheli lends credence to Nevsun's approach and supports the possibility it may find more ore near its operating Bisha mine.

Stefan Ioannou, a Haywood Securities analyst, framed it that way. These are "definitely some very good results…especially given the new discovery's proximity to Bisha," he noted in an email.

The Asheli discovery is also another case of a just-missed deposit by a previous operator on the project. Near surface portions of Asheli had been drilled before Nevsun's tenure, testing for a gold in an oxidized surface anomaly. No deposit was outlined, but that program showed minor chalcopyrite (a copper sulphide) and sphalerite (a zinc sulphide) in stringers. This attracted Nevsun to map the area in greater detail, which showed indications of a VMS deposit. As Nevsun put it in a statement Thursday, "This work defined a 700-metre long zone of highly sericite and chlorite altered felsic volcanic stratigraphy associated with gossan zones enhancing the probability that a VMS deposit was likely to be found in the area".

That led Nevsun to drill a little deeper beneath the near-surface holes, which were duds from the point of view of economic mineralization but not geological information. Just 100 metres below these old holes, Nevsun hit Asheli's massive sulphides.

 

An excellent interview with Rick Rule of #Sprott on the key questions every investor in #MiningStocks should ask the management.

Must read. 

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	June 15, 2015
	Share this: Rick Rule: When Interviewing Companies Investors Should Start By Asking—"What's Your Liquidation Value?" Chance encounters can provide some of the most rewarding opportunities for investors. Rick Rule, Chairman of Sprott US Holdings, recounts how a small mining event led to a career-changing investment. Rick still attends conferences on a regular basis. As he says, you never know who you may meet. With the 2015 Sprott-Stansberry Vancouver Natural Resource Symposium coming up on July 28th-31st, Rick also describes how you can get the most from attending this conference – or other investor events. By: Tekoa Da Silva Read online > >>Interview with Rick Rule (MP3) TD: Hi. I'm Tekoa Da Silva with Sprott Global Resource Investments. I'm sitting down here again today with Rick Rule, Chairman of Sprott US Holdings. Rick, as always, good to see you. RR: My pleasure Tekoa. Thank you for doing this. TD: What I would like to talk with you about today is the subject of conference attendance as an investor. You've been attending conferences for years both as an exhibitor and as an investor. I'm wondering if we can talk about your experiences and the type of things you've gotten out of that activity. To start with, how many years have you been attending conferences as a 'plain clothes' civilian investor? RR: Well, certainly since the early 1970s which would suggest that I have a 40-year duration in conference attendance and presentation. I should stress at the outset that when I'm at a conference today as a presenter, I am certainly also an attendee. I attempt to get as much out of a conference as I possibly can, which is one of the reasons why this interview is so important. I have benefited greatly from every role at conferences, from presenter to attendee to exhibiter. I think it's important for people who plan to devote the time and attention necessary to attend a conference to understand how to get the most out of it. TD: In speaking with you about conference attendance in the past, I found there are three phases of conference preparation – pre-conference activities, in-conference activities and post-conference activities. Could you talk to those three phases and their importance? RR: Yes. I think that's critical, and attendees should know that most of their competitors which are other attendees (people competing with them for investment ideas) only think of the conference in terms of their time spent there. Then they probably only spend half of the allotted time productively. So to get your money's worth out of a conference, you need to be aware of pre-conference, in-conference and post-conference activities. I think that's absolutely the case. Pre-conference means that you prepare yourself such that you utilize time efficiently at the conference. Study the scheduled speakers. Study what you expect to get out of each speaker and budget your time. If there is a speaker who you don't think will be beneficial to you, you might consider skipping his or her talk. Consider in the context of the speakers what questions might be appropriate for you to ask during the question and answer period. In other words, if a speaker is there speaking about gold royalties and you care about gold royalties, what part of it do you care about? Be prepared to extract the maximum benefit that you can. Study the companies that are exhibiting at the conference and try to determine before you go the priority with which you will attend the exhibitors. Going up to a booth and asking questions about the exhibitor is a wonderful way to get more out of the conference, and don't just ask the exhibitors about their own company. Go to an exhibitor and say, "Other than yourself, tell me who the top three companies on this exhibition floor are and why." There is all kinds of wisdom to be had at a conference if you understand how to extract it. But a lot of that really has to do with your preparation. Another thing I frequently do that many investors don't know they can do, is before the conference, I email as many of the speakers and the exhibitors as I can so that I can arrange time to spend with them or so I can ask them questions about their presentation, company or area of expertise. This helps me become more prepared when I go to a conference, and to get as much out of it as I can. The conference itself might be a one-day, or multiple-day event. If you want to maximize your time there, you have to understand that you are going to run an absolute gauntlet. There is so much information available to you that you're going to have to be extremely organized. You're also going to have to have an awful lot of endurance to be able to participate and compete. The next activity I would recommend is taking notes. I remember something much clearer if I have it written down on paper. Most people don't take notes. Also consider using a recording device on your iPhone for speeches that you find particularly appropriate. Hopefully have an appointment book set up before you attend the conference so that time with a presenter or an exhibitor is available to you, to prevent you from being disappointed. By the time you get to the conference, that speaker or that exhibitor's time may already be booked up by other people. The way you win that fight is to show up and compete ahead of time. Understand also that the workshops and breakout sessions are often more informative than the general session presentations. As a conference presenter, I often use the general session presentation as a way to drive traffic to the workshops. In other words, I get the real work and communication done in the breakout and workshop sessions, which contain a smaller more focused groups of attendees. So be sure to allocate your time among the speakers or presenters that you're particularly interested in, in a way that focuses on the smaller and breakout sessions. Another critical thing to understand is that in a conference like our Vancouver conference, where we have 30 presenters and 800 very wealthy people in the audience, the idea that all the knowledge present at the conference flows from the dais to the crowd is farcical. Understand that some of your fellow delegates will have a lot to offer. Listen carefully to the questions that are asked by other attendees to the speakers and if you notice somebody asking particularly astute, informed questions, go up and introduce yourself to him or her. The idea that among 800 rich attendees looking to increase their wealth, that there isn't an awful lot of expertise that you can borrow is silly. Compete in that regard too. Use every available resource. At the beginning of the day, before you hit the conference floor, map out your day. Think about who you're going to listen to and think about the information that you would like to extract from that person. At the end of the day, before you go to bed, write down the things that occurred during the conference that you think are most valuable to you. Remember particularly the mental notes you made about following-up with people so that you in fact remember to follow up with them when you go home. After the conference may be the most important time of all. When you go to a conference Tekoa, you are going to be inundated by absolutely spectacular salespeople, both the presenters and the exhibitors. The most important thing to do at the conference in terms of investing is nothing. Absorb all the information but do not act. There is an unlimited amount of opportunity but there is always a limited amount of capital and you want to make capital allocation decisions empirically, not emotionally. You will hear an awful lot of emotional pitches at a conference, so you'll need to be aware. After assimilating an abundance of information at the conference, ask permission to follow up with various speakers and exhibitors that are of interest to you. Absolutely do it. Interview them. It's very difficult for an exhibitor or presenter to turn down an interested appeal for a one-on-one discussion with somebody who has done that person the favor of having listened to what they had to say and assimilated it. The probability that you can obtain a second one-on-one discussion which could be much more beneficial to you than simply listening among 800 other people to a presenter, the possibility of getting that second meeting is high. So ask for it. Another thing you can do after the conference is pay particular attention to the arguments presented by presenters that make sense to you and follow up with original research to determine whether or not you believe those claims are true. Often if something sounds too good to be true – it is, because remember, these are spectacular salespeople.    So like Ronald Reagan used to say, trust of course. But verify post-conference. TD: Rick, when it comes to newsletter writers, if the person reading is considering a newsletter service who's editor is going to be speaking at the conference, have you gone as far as asking the newsletter writer for a trial subscription ahead of the conference or possibly afterwards to get to know their work more, since they will be speaking there? RR: I have certainly appealed to newsletter writers for a "try before I buy," which is sometimes successful, sometime not successful. But what's the harm in trying? TD: When you think back on the 40 years attending conferences as an investor, are there any anecdotes, any interesting experiences dealing with fellow investor attendees or exhibitors that come to mind? RR: Well, certainly the most dramatic example I can give you of personal benefit occurred in maybe 1998 or 1999 at an obscure conference in Western Australian called 'Diggers and Dealers.' Diggers and Dealers is a very colorful conference. It's held in a mining town in Western Australia, called Kalgoorlie and the theme of the title as the name suggests is that the financial interest in Australia meet with the mining people, hence diggers and dealers. Kalgoorlie, to put this in context, is sort of 1000 kilometers from anywhere. It's a town that in those days produced a million ounces of gold a year from within the city limits. In fact, the Super Pit, the Kalgoorlie Super Pit approached the town from the northwest. When I say Super Pit, the pit was a mile across, a truly spectacular pit. At any rate, this was a very pleasant, very focused and in those days very small conference. I think I was the only non-Australian present, which meant among other things that all of the exhibitors viewed me particularly as fresh meat. I was extremely popular being non-Australian, being American. As a consequence really of my notoriety, I was able to visit with virtually all of the presenters and certainly all of the exhibitors, an exhausting set of circumstances. I remember at the time being attracted to the uranium business for reasons that we've discussed before, reasons like nobody else cared about it and the cost to produce uranium exceeded what it was selling for. So the price had to go up. Then I remember coming across a little company in the uranium business called Paladin Resources. As a consequence of being the only one in the audience that cared, I was able to spend a substantial amount of time with John Borshoff, the CEO of Paladin Uranium. I was convinced to do a financing in Paladin Uranium at 10 cents. I was convinced subsequently to do another financing at 12.5 cents. I was rewarded for my genius with the share falling in price from 12.5 cents to a penny. We financed it again, if my memory serves me correctly, at 1.5 cents. I know so far Tekoa this doesn't seem like a benefit. But what's of note is three years after that 1.5-cent financing the stock was trading at $10.00. There is no way in the world I would have found Paladin had I not gone to that conference. There is no way in the world had I not accidentally found Paladin, that I would have had the opportunity to spend five or six hours with John Borshoff. There is no way without having established a personal relationship with John Borshoff that I would have had the courage to write the 1.5-cent check after the 12.5-cent failure. TD: For the person reading, if they're new to the natural resource space, they might be thinking, "Well, if I had the opportunity to speak with a company, I wouldn't know what questions to ask." For that person we've produced a document at Sprott Global called A Guide to Natural Resource Investing, which contains the written system of questioning that you've followed in interviewing companies in the past. I'm wondering if you can talk about that. RR: Sure. It's a pretty easy process and if as you suggest the reader of this interview downloads the document and takes it with him or her onto the conference floor, it's useful. But the interrogation process goes something like this: First, let them tell their story. You can't help it. They're preprogrammed to do it and you have to let them get it out of themselves. So spend five or six minutes and let them do the 30,000-foot version of their story. If you are interested in the story then say, "That's very interesting. I would like to ask you some questions so that I can assimilate your story into a framework that I can deal with." The first question would go something like this: Tell me what your company's liquidation value is. I know how many shares outstanding you have and what they sell for. That's the price. What I'm worried about is the value. I don't want you to talk about your assets in terms of the market cap that they might attract, if owned by a competitor. What I'm interested in is what's the liquidation value of your company, the blow-down value. If you took the projects out and sold them for cash to a competitor, what is it worth? I'm not suggesting by the way Tekoa that if you can't buy companies for dimes on a dollar in terms of liquidation value, that you don't do it. I'm just suggesting that if you know the liquidation value, you know the downside, which is important – as important as knowing the upside. The second thing you want to ask them is, "Please distill for me the most important unanswered question right now. What's the thing that you can do right now that will deliver me the quantum increase in value that is required to induce me to take the risk to invest in your shares? I understand that you're trying to prove a five-million-ounce gold deposit. But what's the first step? What's the most important unanswered question right now?" It might be that the company has done surface sampling and established a grid and what they need to do now is trench to see how deep that gold mineralization goes. It might be that they have in fact trenched it and they've developed a drill target. So the next thing that they need to do is shoot geophysics or drill a hole. But find out from the presenter what the most important unanswered question is, how long it will take to get an answer to that question and how much money will be required to answer the question. Then try and figure out in your own mind if the reward associated with a 'yes' answer is worth the risk that you're being asked to bear. Now, the managers love to answer that question if they're any good. But surprisingly, probably 70% percent of the people you address that question to, will never have thought about it. This is analogous Tekoa to you and I deciding to walk to Los Angeles, getting the right shoes, a couple of bottles of water, and heading East. If you don't have a plan, how are you going to get somewhere? So the good news about this question is you get to throw away 70% of the companies and never spend any more time on them. But assuming they survive that, you move on to another question, which goes something like this (you don't need to be impertinent about it), but say, "No offense sir. But tell me why I should care about your opinion. Tell me specifically about your past successes and your experience in this area. If you're exploring for precious metals in tertiary volcanics in the high Andes of Peru, have you been successful doing that before? Do you have any relevant experience? Tell me about the rest of the team. Tell me about how their specific experience fits into the specific task at hand." What you will find is that perhaps 70% of the 70% who survived the last cut might survive this cut. You will find people who say, "Well, I've been a success at mining. I operated a gold mine in Quebec." But the truth is that the expertise required to operate a gold mine in French-speaking Quebec in ancient rock can be very different than the expertise required to find a gold mine in young volcanic rock in Spanish-speaking Peru. So it's very important with this question that you establish the point of specific expertise. Then you can say, "That's very interesting. It's reassuring to me that you and your team have this expertise. Talk to me about how much confidence you have. This company has 20 million shares outstanding. How many of them do you own? In other words, do you have courage in the project and courage in your own expertise or are you merely a hired manager?" If somebody says to you, "Well, I don't own any stock, but I have 10 million options," you say, "Oh, well, are you trying to sell me options or stock? I don't understand. Are our interests aligned or are they not aligned?" It's better to deal with partners than to deal with managers. Moving on from that, if we assume we like the people and we assume that our interests are in some way, shape or form aligned and we like the property, we need to go to means. I will tell you another interesting story. Many years ago, probably 30 years ago, I was exhibiting at something called the Boston Gold Show, which no longer exists. After I got off the podium, I was going to get on a plane. So I had changed from my corporate regalia to blue jeans and a polo shirt. I was wandering around the floor. There was a particularly aggressive promoter, wonderful salesman. At any rate, I attempted to get past his booth unmolested, but was unsuccessful and dragged into the booth. He was vociferous in his company's exploration potential and an extraordinarily aggressive program to drill it off. I at one point in time remarked, "Well, this is an extremely aggressive program. I understand what you're saying about news flow. But what about money – how will you accomplish this?" I will never forget Tekoa. He looked at me and said, "Well, money is unimportant." I couldn't help but take the bait. I said, "Really? My money is important. Explain to me why money isn't important." He said, "There's a real hot-shot West Coast broker named Rick Rule and he really likes my project, and he's going to give me all the money I need." He obviously didn't recognize me. "But see, here's the opportunity," he continued, "the stock is selling at .50 cents now and he won't finance under $2.00. So when I get the stock to $2.00 from .50 cents, Rick will finance and you will be able to leverage off Rick's money at $2.00." At that point in time I pulled out my wallet, and showed him my driver's license. I said, "I know this Rick Rule guy pretty well, and I think the probability of you solving your financing problems with him is extraordinarily low." So when I say listen to these stories, but verify, that's what one has to do. The main theme of this story is that resource businesses are capital intensive businesses, and if the company has no capital, they have no business. So if the person telling the story has reasonably convinced you that he has an important unanswered question, you need to say, "How much money does it take to answer the unanswered question?" because an unanswered question has no value. Suppose the person talking to you says, "Well, to answer the question, technically it's going to cost $2 million." OK, that's a good answer. "How long will this take you?" "Perhaps two field seasons, so 18 months." "And what will be your general administrative expense over 18 months?" "A million dollars." OK. "So it's going to take you $3 million to get me 'yes' or 'no' answer. Is that correct?" "Yes," they respond, "that's correct." "How much money do you have?" "A million dollars." "Well, subtracting a million dollars from $3 million leaves a $2 million gap. How are you going to bridge this gap?" It isn't important necessarily that they have the money in the treasury. But they better have a good story about where they're going to get it and what it's going to cost them. If they say, "I'm going to get the money from Sprott Global," call and ask us, 800-477-7853. Say to the company, "Who at Sprott Global is going to give you this money? It's very important to me to verify that you have the means to achieve this end. If I can't verify it, obviously I can't speculate on this occurring. I wouldn't have enough information." Another thing that's very important is to say to the person, "You know, if I invest in your company, I'm going to read the quarterlies, press releases, filing statements, and I am going to be looking for how to understand your incremental progress up to getting a 'yes' or 'no' answer on that unanswered question. Who specifically at the company can I talk to, to give me human color on these filing statements? Where will I get my information? I'm not asking for material or non-public information, I'm asking for your help in deciphering the 'corporate speak' that I will see in filing statements and in financial statements. So who might I rely on to facilitate my ongoing understanding of your company?" Many attendees think that the CEO of a company is too busy to talk to them. If it's a good CEO, that is not the case. If it's a good CEO, that CEO is so wrapped up in what they're doing, that they're thrilled to talk about it. They don't want to talk about baseball. They don't want to talk about politics. They don't want to talk about opera or popular culture because that's not what interests them. They want to talk about their company and if the person doesn't want to talk about their company, you will know that they are not suitably interested and you shouldn't be interested either. TD: If I can ask you a question or two more here Rick before winding down, while these questions do apply to any conference, our team has a conference coming up this year in July, 2015 which is the Sprott-Stansberry Vancouver Natural Resource Symposium. What would you say makes this conference different, and what should attendees expect? RR: In the first instance, this is a paid conference. It's not a free conference, which means that the conference sponsor has a loyalty to the attendee. While there's a lot of good information available at free conferences, the free conference promoter's loyalty is to the exhibitor, the people who pay the freight. In this case, our loyalty is to the attendee. The second thing is that attendees have told us in years past that exhibitors should to be content too. From a free conference promoter's standpoint, the exhibitors are simply revenue. They're simply advertising. But the attendees have told us year after year that they consider exhibitors to be content too. What this means is that we at Sprott only allow companies to exhibit that we are large shareholders of. It doesn't mean that if we made an investment that we'll always be successful. What it means is that we have put our money where our mouth is, and we understand what attendees are saying with regards to exhibitors. At many conferences, the qualification to be an exhibitor is a driver's license and a check that cashes, in reverse order of course. At a Sprott conference, you have to be invited to be an exhibitor. The third differentiator of this conference is that it is unapologetically a natural resource and precious metals conference. Many conferences have morphed from precious metals to technology and now marijuana or whatever they thought could attract exhibitors. Ours is unabashedly a resource conference, seeking to be the best of its kind. This conference will feature five or six of the top mining CEOs in the world, talking not just about how they built their companies but about the lessons they learned building their company, and how those lessons are valid to you as an investor. You don't get that at many other conferences. TD: Rick Rule, Chairman of Sprott US Holdings, thanks so much for sharing your comments with us. RR: Pleasure Tekoa. Thank you for giving me the opportunity. To learn more about the 2015 Sprott-Stansberry Vancouver Natural Resource Symposium, visit: NaturalResourceSymposium.com For questions or comments regarding this article, or on investing in the precious metals & resource space, you can reach the author, Tekoa Da Silva, by phone 760-444-5262 or email tdasilva@sprottglobal.com.
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