As a general rule, the most successful man in life is the man who has the best information
When looking for an investment the approach I take involves looking at the global - big picture - conditions. I study trends, read the news, basically watch and listen to what’s going on in the world. Then I study the different sectors in order to select the one that I think is going to match up well with, what I think is, the soon to be overriding theme. This is top down investing.
The second part of my search for the dominant investment is a bottom up approach. This is where I find individual companies in the specific sector I have chosen to invest in. I pick the company I want to invest my money in based on the quality of its management team.
If you’ve done your homework all the necessary ingredients for a potentially successful investment - the right place/time and a high quality management team with projects that need to be worked - should be in place.
Always remember everything about a company flows from management - the ability to find a project or have projects or joint ventures (JV) offered to the company, development of the project in a timely efficient manner, financings done at a higher and higher share price, control over the share structure along with management interests aligned with shareholder interest.
Three Sides to Every Management Team
It’s a fact in the mining world that most discoveries are made by a) junior mining companies and b) old time individual prospectors. Why are the juniors so successful at finding mines? Well the good ones are lean mean boots on the ground exploration and development companies run by people who have been out there and know what it takes. They know how to raise money from the suits and they know how to get the story out to the retail investor.
They are not tied up in bureaucratic red tape and can make the important decisions without commissioning a six month study or running it up through 12 layers of pencil pushers and then sitting on their butts waiting for an answer while somebody else scoops the prize. They can and do make up their minds very quickly and can execute immediately on plans.
The most successful management teams have three complementary but very different sides. The first side of the team is the people who can find the quality projects and who have the technical expertise to explore, develop and advance them. But a good all round junior isn’t comprised of only these people - there has to be more.
The second side of a successful team are the members who have the ability to make deals for projects, go into the board room and sell the story to the institutional investor, the suits, and raise the money needed for acquisitions, exploration and development.
The third side of the team are the people with the ability to tell the story to retail investors.
Officers of the company make up side one and side two, they should be experienced business persons, geologists, mining engineers, lawyers and accountants. The president and or the chief executive officer should be the public face and voice of the company. They do not have to be geologists or engineers, they do have to be smart businessmen and strong salesmen or women who can make the best deal possible on acquisitions and go out and sell their company to the different brokerage houses who can than raise the needed money from their own clients to acquire, explore and hopefully advance the company’s projects.
Do not make the mistake of thinking side one and side two management can do side three. Giving dog & pony shows to a group of brokers and mining analysts, an institution or group of high net worth individuals, being on TV and doing interviews is a much different skill set than running a promo campaign to retail investors and actually picking up a phone and talking to them all day.
Make sure the company you are interested in has all three skill sets. There’s nothing worse than sitting in a junior with an excellent project but no money to advance it and a market cap that should be many times higher than it is due to a lack of or just plain terrible promotion efforts.
Company stage – risk v. reward
Only you can decide the level of risk you can tolerate and how much patience you have to sit while developments, the story, plays out.
The most upside (and by far the greatest risk) comes from buying a junior when they are exploring and make an initial discovery. Great drill assay results can send a juniors share price skyrocketing. The reverse can also be true. Junior explorers, the green field plays, are the riskiest plays by far. Strike out on assay results and it could be goodbye to a share price rise for a very long time - till the company finds another project they can work on. If you’re buying into this kind of play make sure the company has another fallback project in its portfolio.
My favorite stage junior is a junior in the post discovery resource definition stage (also known as brown field stage companies). These companies have all ready found something, the share price has settled back after the initial discovery (never chase a company whose share price has already exploded, the share price has had its run, for now the moneys been made. I try and enter after the excitement has died down and the share price has settled back) and the company is going in to see what they have and hopefully produce a 43-101 compliant resource estimate and build upon it. The risk has been greatly reduced, the waiting time for a discovery non-existent and the reward very nice considering the much lower amount of risk.
For nearer term producers - for those further down the development path towards a mine - you have:
- Preliminary Economic Assessment (PEA) or scoping studies are done to examine potential mining scenarios and economic parameters - A PEA or scoping study is an important milestone for a mineral project, it’s the first step in a company’s economic and technical examination of a proposed mine
- Preliminary feasibility studies or pre-feasibility studies are more detailed than PEA’s and are used to determine whether or not to proceed with a detailed feasibility study. They are also used as a reality check to determine areas within the project that require more attention
- Feasibility studies will determine definitively whether or not to proceed with the project. A feasibility study or bankable feasibility provides budget figures for the project and will be the basis for raising capital to build the mine
Remember all these different stage studies are only yes/no decisions on whether to move to the next stage. NONE of them mean you are going mining, there’s no mine till every stage is completed, permits approved and the necessary financing has been arranged.
Because these companies are well advanced along the development path a lot of the guesswork about grade, size, costs and metallurgy have been taken out of the equation for us. They have done sufficient work to give investors a certain level of confidence that their project will successfully move towards being a mine. The later stage companies (those doing feasibility, permitting and money raising) can have an excellent entry point for investors - they often enter a quiet period when they are doing the advanced studies and raising money to go into production. They often base (a flat share price) for quite a while through this period - possibly a good time for accumulation of their shares if you believe in the story. After the money is raised for production investors can see they are going mining - cash flow is just over the horizon - and the share price will often break out of its trading range.
With producers you have to look at the balance sheet, consider their plans for the future and judge for yourself the ability to meet those plans. Remember cash flow is king, but can they grow that cash flow? These large well established producers have the least risk and the least upside. But gains could be steady and maybe they pay a dividend.
Conclusion
I spend the majority of my due diligence time and effort on:
- A top down theme - discover the dominant overall global theme(s)
- Bottom up searches - find the companies involved at the stage your comfortable investing in
- Management due diligence
Is a global theme - top down, bottom up investing and the best management teams you can find, in the soon to be hottest sectors, - on your radar screen?
If not, maybe it should be.
