IT'S ALL ABOUT THE PEOPLE
June 19, 2005 - My entrance into the gold stock arena was via the purchase of East Rand Proprietary Mines in 1972. This was a marginal South African gold producer who began production during the 1890's. They were slated to go out of business within a few years if the gold price did not rise from its then $50 an ounce price. At that time, and for the ensuing three decades, I invested in an untold number of gold and other primarily exploration companies. I was solely focusing upon the major projects that each company was pursuing.
I first entered the Canadian junior market in 1993. This was when gold's final, major, upward correction began, within it's 20+ Bear Market. I had not yet altered my approach towards divining the next great profitable stock investment, and continued to search for the best "story" that I could find. However, to my detriment, many of the "stories" that were presented to me and that I believed, were essentially those conjured up by the minds of one various promoter or another.
When the Bre-X scandal exploded onto the exploration sector landscape in 1996, it hammered the final nail into the coffin of the junior companies for the next several years. From that point forward, until 2001, the junior companies basically withered away in price. I remained a distant observer until that year licking my earlier wounds, and wondering why my supposed great companies had gone bad. I thought that despite the market reversal, some of what I thought were exceptional companies surely should have succeeded.
After much soul-searching and questioning it began to become evident to me that I had approached this volatile yet incredibly opportunity wrought market, seeking the wrong company attributes. Rather than focusing upon what appeared to be reasonably priced companies with good projects, it dawned on me that a great project that is run by less than among the best management teams, is likely destined for failure. How could that be? That is the question that even I would never have asked several years earlier!
The reason is simple and obvious. Yet, it requires experience to fully understand and appreciate it. Until you invest in this industry for several years, and have suffered the consequences of believing that the project is all that is important, few would have a clue. It is that the people that direct the companies typically make the difference between possible success or failure.
The single most important factor that can make or break even the best company is its ability to raise working capital. Money is the lifeblood of any enterprise! And, because the mining industry is so capital intensive, if a company runs out of money it has virtually no ability to advance its projects, let alone its share price. The next item that is essential to a junior company's future is its ability to acquire a substantial project. It is a given that their management is significantly talented to know how to make the most of each project. Finally, if the marketplace is not made aware of the value that a company's management has added to it, through a market awareness or promotional campaign, even an organization progressing a great project may see its stock languish for years. It is mandatory for all of these components to be in place for a company's shares to perform at their maximum level. This, in order to bestow upon their investors and management, the profits that they have worked for and deserve.
The element that is missing from all but the few, very best junior resource companies, is a group of directors that possesses all of these attributes. Some companies have exceptional promotional teams, but have little if any real projects of substance. Their shares will perform well for a while, until their insiders have taken their profits at the expense of their shareholders. A few experienced stockholders will ride the crest of these company's public relations campaigns. If they are nimble will sell their stock at a profit. Unfortunately, most investors that are attracted to the "story" as it is told, and buy at or near the top of the stock's run, will likely retain their stockholding until most of their original investment has dwindled away.
Other companies have the ability to attract money because their investors have profited from following their directors in other associated fields. Unfortunately, if a management team was successful in discovering a natural gas, oil or nickel deposit, it doesn't mean that they have the ability to find a gold or silver mine. A different type of expertise is needed for each of these endeavors. However, with the money that they are capable of raising, those boasting earlier successes will at least have an opportunity to attract one or more important projects as well as exceptional staff members. Remember, major companies or individuals who control the best projects will seldom vend them to a company unless they feel that their future partner can finance and properly manage the needed exploration. The vendor will only seriously profit through a discovery or hopefully when a mine is brought into production.
Still other companies are able to attract world class projects due to their prior success in bringing one or more mines into existence. Further, these management teams normally have little difficulty attracting capital because they have a history of making money for their stockholders. However, for one reason or another they often lack either the desire or the ability to bring sufficient market attention to their companies. This prevents them from moving their share prices to the sufficiently high levels that they deserve. They do have the best likelihood for ultimate success. Yet, they are forced to issue too many shares at low prices, in their effort to acquire sufficient working capital to advance their projects. This causes them to shortchange themselves and their stockholders, even in the event that they make yet another economic mine.
To my mind, the ideal company of which there are a paltry few, is directed by a management team that has one or more important discoveries under their belt. For self-serving reasons, major mining companies and individuals within the industry recognize their ability, and desire to have them manage the exploration of some of their main projects. In this fashion the vendors have the best opportunity to maximize the value of the projects they possess, without incurring substantial financial expenditures unless success is at hand. For this reason these successful junior managers are regularly offered the best available projects from which they can pick and choose. Also, due to the fact that they have a long list of investors that have profited from their earlier relationships with them, they have little difficulty in attracting virtually any quantity of money that may be required. Finally, they recognize the importance of making the market aware of their acquisitions, progress and developments, in order to boost its share price to a level commensurate with their company's worth. Lesser management teams on the other hand, seldom have the opportunity to acquire anything other than reworked or secondary projects that have far less opportunity for exploration success..
To the real world. Most of best managed junior companies possess most but not all of these qualities. The one that is most often lacked is the desire or effort to bring the attention of the marketplace to their stock. Many of these extremely successful and talented individuals believe that their ultimate success will cause investors to clamor for their shares. While they are correct, this has both positive and negative implications for the investor. First, their share price will typically lag behind its deserved market value until they have sufficiently progressed their project, and it stands out from others in the industry. On a positive note, this gives the patient investor the ability to carefully follow their progress and increase their stockholdings at the most opportune times. In this fashion they can ride the crest of their management's success and still cheaply acquire their last shares.
I believe that it is incumbent upon anyone who invests in the resource sector to regularly keep in touch with their companies. It is best to develop a relationship with someone in their management rather than in their public relations staff. With practice you will learn to ask the right questions in order to ascertain whether your company has the right qualities that are necessary to give them at least an above average opportunity for success. You truly owe it to yourself to make your best effort to pick the most likely teams for success. Learning how to operate in this industry, as in all other aspects of life, is an ongoing process. You will certainly make mistakes. We all do!
I continue to err in judgment myself. However, they are becoming fewer and further in between. Don't berate yourself, but try to learn from your mistakes. I do my best to feature companies in Financial Insights that are relatively new in their development and that I believe offer exceptional relative value. In this fashion anyone investing in them should reduce their downside risk. For success in this market it is best to avoid stocks that appear overvalued when compared with their peers. If they seem overpriced they likely are. Remember, the higher a stock's price the further that it can fall.
The above was excerpted from the July 2005 issue of Financial Insights © June 19, 2005.
I publish Financial Insights. It is a monthly newsletter in which I discuss gold, the financial markets, as well as various junior resource stocks that I believe offer great price appreciation potential.
Please visit my website www.financialinsights.org where you will be able to view previous issues of Financial Insights, as well as the companies that I am presently following. You will also be able to learn about me and about a special subscription offer.
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