Month: September 2016

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Strategies for Successful Buying or Selling

Junior Stock Review

As I’m sure you have heard or experienced, the junior resource market is highly volatile. To protect yourself, there are a number of different ways to buy and sell positions for maximum gains. I have put together a few of the strategies that I have used to squeeze out as much profit as I can with the juniors.

Tranche Buying

Tranche – def: a portion of something.

Tranche buying is the dollar cost averaging of the stock of your choice. Typically, dollar cost averaging is used over a specific time period. The investor decides they are going to invest X amount of money in a company and buy its stock over a certain period of time. The buying price of the stock isn’t taken into account, and will vary across that given time period.

Tranche buying is similar, but all price dependent. The investor picks a total position size and buys a large percentage of that total position as a first tranche. Typically, a first tranche can range from 40% to 60% of the total position. The remaining tranches will make up the remaining position, the portion of each is up to the individual investor. For myself, if I’m using this tactic, I will buy in two or three tranches, with the first tranche making up 50% and the other two split 25%/25%.

Typical rules of thumb for deploying the second and third tranches: A second tranche is bought if the stock drops by 10 to 20% below the initial investment. A third tranche is bought if the stock drops below 30% of the initial investment. Also, it should be noted, you should always investigate why the stock is dropping; is it just the regular volatility of the market or is it bad news that can’t be beaten? Answering these questions will tell you if you should buy a tranche or possibly even sell your position.

In my experience, I didn’t do enough investigation into why the stock was falling, because I was so used to a bull market that averaging down my initial position was somewhat automatic. A great example of this is Exeter Resources (XRC); I bought the stock in early 2012, somewhere around $3.00. The stock rose to around $4.00 and then proceeded to fall back down below a dollar by early 2013. I bought twice along the way – it was like trying to catch a falling sword.

In retrospect, with Exeter, I was chasing a deposit that looked amazing above $1400 USD/oz Au, but fell apart once the despair and doubt of the bear market took over. For a number of reasons, I should have caught this earlier, but I didn’t. Lesson hopefully learned. As Howard Marks says in his book, The Most Important Thing Illuminated, we need to be second-level thinkers; what are the unanswered questions? Have they been answered? What do the answers mean?

A Simple Example of Tranche Buying:
Total position – $10,000 in Explore Corp
1st tranche – $5000 @$1.00/share
2nd tranche – $2500 @$0.90 to $0.80
3rd tranche – $2500 @$0.70 and below

NOTE: There are many speculators who will average up their position in a stock after answering questions that open up new avenues for the success of the company. Answering major questions that might persuade you to buy more at a higher price include:

    – Good drill results that suggest there are more good things to come
    – Better than expected feasibility study results…higher IRR%
    – Political change, the de-regulation (these days, this rarely happens) of the mining industry

Free Ride

My first exposure to this rather simple concept was through Casey Research. They coined it taking a “Casey Free Ride,” because the initial investment amount is sold once the stock doubles, thus allowing you to take a free ride on the remaining portion of the stock that you own. For the junior companies, this is a great way to de-risk yourself as there are so many ways for a project to fail. By having your initial investment removed, you’re only playing with potential profit.
The downside to this strategy is that it significantly reduces the amount of upside potential the stock presents to you and it also increases the broker fees.

Full Position Buying

Depending on your risk appetite, this may be the most straightforward way to invest in the junior market. Personally, it’s the system I use the most these days. I find the best value for my risk appetite and deploy my full amount into that stock. The twist, however, is that if the stock price does fall and I’m ready to buy my next position, I will compare the value presented by each of the stocks in my portfolio to any new positions that I may be interested in buying – whatever presents the best value or buying opportunity is what I buy.
My most recent example of this is buying Lydian International (LYD). I bought my initial position in Lydian in the fall of 2014, just above $1.00. The stock dropped like a brick over the next year and found a resting place fluctuating between $0.20 and $0.30. Evaluating my portfolio this past spring and comparing it to the value in the market, I believed – and still believe – that Lydian poses remarkable value in a quickly rising market.

Margin Buying

Certainly the riskiest of the buying styles, the investor uses margin (or credit) to purchase more stock than they have actual money in their trading account. This allows for massive gains when you get it right, and massive holes when you don’t; major market fluctuations in such a small market, margin calls or outright company failures leave you very open to risk. This is not a buying strategy that should be taken lightly. I highly suggest that you speculate with money that you can afford to lose, but it’s your choice and fortune does favour the bold!

Private Placement Shares Becoming Free Trading

The primary source of cash for junior companies comes from private placements (PP). These PPs become free trading four months after issue. Investors in need of cash flow, especially after a run up in the stock, will therefore use this first opportunity to cash in their investment. You can play this a number of ways; firstly, you can short the stock in anticipation of the free trading shares, or you can think of it as a possible entry point and buy on the weakness, or both (Use SEDAR or SEDI to find this information).

Expiration of Warrants

Typically, warrants are issued during private placements. Warrants will always have an expiry date, and investors who have not exercised their warrants may rush to cash them out. Giving you the potential to enter the stock at a reduced price or the ability to short the stock in anticipation.

Forced Conversion of Warrants

Forced conversion of warrants isn’t a part of all private placement deals, but it can be. Reading the details of the deal can reveal this information and give you a leg up on the rest of the market. Forced conversion may be worded something like this, “if the stock price trades above a certain price for 20 trading days, the company has the right to force convert the warrants laid out in the PP.” Like the other PP related buying strategies, you can use this knowledge in a number of different ways (Use SEDAR or SEDI to find out this information).

Options or Insider Buying/Selling of Management or Consultants

Knowing when insider options are exercised or open market buying or selling is occurring is integral for understanding how much skin the company insiders have in the game. There’s an article I wrote which outlines this in more detail and explains how to keep track of insider buying and selling for your favourite stocks. Check it out. Invest Like an Insider

Until next time,

Brian

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2016 Natural Resource Symposium: A-List Speakers, Sexy Commodities & Words of Wisdom You Can’t Afford to Ignore

Natural Resource Symposium 2016

“Money is made on the delta between value and price.” ~ Rick Rule – Natural Resource Symposium, July 2016

For those who have never been to an investment conference, it’s time you attended one. If you have the budget, time and desire, the annual Natural Resource Symposium is the best there is when it comes to resource investment conferences.

The Symposium was held at the Fairmount Hotel in the heart of Vancouver, British Columbia, from July 26th to 29th of this year. The full cost of the conference was $899 USD (not including accommodations), but if you’re interested in future conferences, there are plenty of opportunities to lock in at a cheaper price, if you book early in the year.

For those who weren’t able to attend, they also offer mp3 recordings of the entire conference minus Robert Freidland’s speech. The mp3 recordings cost $299 USD and are a great alternative if you couldn’t be there in person.

To get an idea of what you can expect from this annual event, check out their website.

The Theme

With gold breaking out over the last 8 months, it isn’t surprising that there was an overarching precious metals theme at the Symposium. Honestly, though, even in the bear market of the last 4 years, interest has been focused on gold. It’s the sexiest commodity out there.

Besides gold, uranium was represented by Goviex, UEC’s Amir Adnani, and Fission’s Dev Randhawa. Personally, this is what interested me the most because I believe uranium is the next market to change cycles; coming out of the bear market that has slaughtered the uranium spot price to a 10-year low of around $25 USD per pound.

Stayed tuned! Subscribe to my FREE newsletter to receive the upcoming 4-part series on the uranium market. I’ll be discussing the Nuclear Fuel Cycle, world supply and demand, and a few of the companies you may want to watch.

Symposium Speakers

The list of speakers at this year’s Symposium may have been the best yet, with an all-star line up of newsletter writers; Louis James (Casey Research), John Kaiser (Kaiser Research), Marin Katusa (Katusa Research), Matt Badiali (S&A Resource Report); company executives that included Ivan Bebek (Auryn Resources), Robert Quartermain (Pretium), Patrick Anderson (Dalradian), Randy Smallwood (Silver Wheaton); and finally, brokers and resource personalities like Jim Rickards (The New Case for Gold), Trey Reik (Sprott), Peter Grosskopf (Sprott), Doug Casey (Casey Research), and John Embry (Sprott). And the list goes on…

Just like investments, you want to ensure that you’re receiving the best bang for your hard earned buck when you purchase a financial product. I could review each speaker and give a blurb about what they said and why it’s important, but I’m not going to do that. Simply put, Rick Rules’ talks alone were worth the money you’d pay to go to the conference (or to buy the mp3s) – the dozens of other presentations were icing on the cake. Even though much of what he says is the same every time I hear him speak, I always learn something, or better yet, have a ‘EUREKA’ type moment. I can truly attribute a lot of my success in the junior sector to what Rule has said in his speeches.

Rick Rule – Wednesday July 27, 2016 @7am

In total, Rule gave 5 presentations during the conference, one of which was an introduction to the companies that were in attendance. The focus of this review will be the talk he gave on the morning before the main event.

Here’s a summary of what were, in my opinion, the top 3 points from Rule’s speech:

1. Rule believes that the most common mistake speculators make is (transcribed from his speech):

“Every day you don’t sell a stock…for cash, you’ve bought it…If you are not willing to buy a stock that is in your portfolio…with fresh money…sell it.”

Rule made this statement as context for a free portfolio review he did with a prospective client. He reviewed their portfolio and asked why they owned certain stocks, but they couldn’t give a good answer. Rule proceeded to suggest that they sell the stock. The prospective client basically refused and said ‘no, I’m way down!’

To dig into Rule’s comment, every day that you hold a stock it’s like buying it again. If you wouldn’t re-buy the company in its present form and share price, you should sell it. A drop in the share price is like a sale at the mall; if you liked what you bought last week at full price and it’s on sale this week, wouldn’t you want to buy more?
When to sell a company is just as important as when to buy, but even still, I’d be willing to bet that most people are fixated on the buy side instead of the sell.

2. Rule believes the key to junior investing is (transcribed from his speech):

“You add value by answering unanswered questions…the key to making money in this business.”

This point is very important when it comes to determining the potential valuation of a company, as there should be a definite plan for answering these unanswered questions. If you ask the company executive how they plan to accomplish their goal, and they can’t give you a straight answer, walk away, or as Rule puts it, hang up the phone.

Conveniently, I recently wrote a post that examines this topic in greater detail, along with reviewing some of the ideas found in Howard Marks’ book, The Most Important Thing Illuminated.

3. Something that I wish I’d learned from Rule earlier in my investing career (transcribed from his speech):

“When a company’s story changes or your reason to own the stock vanishes…you have to sell.”

My worst loss to date was Banks Island Gold. My mistake? I didn’t sell when the story changed. Banks held two main properties, Yellow Giant and Red Mountain (now owned by IDM Mining). To make a long story short, they had issues at Yellow Giant and missed a payment to Seabridge for the Red Mountain – and they lost it. Red Mountain was the key to the speculation, but I didn’t sell. I still felt they could turn it around. Instead of losing 30%, I hunkered down and lost 95%. Hopefully, I’ve learned my lesson.

Thinking for the Long-Term

Everyone is interested in hearing about junior stock picks, but take it from me, you will make more money in your speculations if you take what Rule says and put it to work. Like the saying goes, give a man fish and he eats for a day, teach him to fish and he will eat for a lifetime. Early next year, most likely after PDAC in March, you will see the first rumblings of ticket booking for the 2017 edition of the Natural Resource Symposium. I highly suggest you go, or at least purchase the mp3s.

Subscriber Investment Summit

I started the review with sage words from Rule; “Money is made on the delta between value and price.” Well, on October 11 of this year, a conference of tremendous value and the best price in the business – FREE – will take place in Vancouver, British Columbia. It’s the Subscriber Investment Summit (SIS), hosted by Tommy Humphreys of CEO.ca, Eric Coffin of Hard Rock Analyst, and Keith Schaefer of Oil & Gas Bulletin.

Book your FREE ticket to check out companies that include: IDM Mining, CanAlaska Uranium and Colorado Resources; just to name a few.

Really, there’s no better way to do your due diligence than by speaking to a company’s CEO and/or other executives. Whether it’s the Sprott Symposium, the SIS that I attended back in the Spring, or any other investment conference, there’s a lot of value to be gleaned from the presentations and one-on-one conversations with the industry’s top minds. Plus, it’s always fun to fraternize with like minded individuals!

Until next time,

Brian

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The Most Important Thing Illuminated

The Most Important Thing Illuminated

What Type of Thinker are You?

The depth to which you research and think about an investment will most often dictate how successful you are. Howard Marks uses a great comparison of first versus second-level thinkers. He says,

“First-level thinking is simplistic and superficial, and just about everyone can do it (a bad sign for anything involving an attempt at superiority).”
~Marks, The Most Important Thing Illuminated. pg.4

“Second-level thinking is deep, complex and convoluted. The second-level thinker takes a great many things into account…Second-level thinkers know that success in investing is the antithesis of simple.” ~ Marks, The Most Important Thing Illuminated, pg.4

Here is a real world investing situation with a first and second-level solution: A gold mining company publishes a news release about lower production numbers for the next quarter, unfortunately, matching the previous quarter’s low results.

• A first-level thinker reads the news release and says let’s dump the stock

• A second-level thinker reads the news release and asks, “can they fix this production issue? What is the value of the stock if they can only produce at this current rate of production?” Most people will sell the stock because of this news; I think you should buy if there’s value there!
It’s easy to see the difference between the two lines of thinking and why the second-level thinker will always beat the first-level thinker. BE A SECOND-LEVEL THINKER! In the end, the choice may be the same, the best choice may be to sell, but by getting more complex with the questions you ask, a more reliable conclusion can be made.

“Upshot is simple: to achieve superior investment results, you have to hold non-consensus views regarding value, and they have to be accurate. That’s not easy.”
~Marks, The Most Important Thing Illuminated, pg.7

A Lesson from One of the Best

On numerous occasions, Rick Rule of Sprott Global, has spoken about the concept of answering ‘unanswered’ questions when you’re evaluating a company’s upside potential. After researching the basics of the company and what their end goal is, you should be able to assemble a list of questions that must be answered to reach that goal. It’s a good idea to try to roughly estimate a company’s value if that goal is achieved, which will give you a sense of their upside potential.

Recently, I wrote an article about an investment idea that I’ve been contemplating, Sandspring Resources. For those of you who aren’t familiar with Sandspring, it’s a 4.1 Moz gold project in Guyana. The following is an example of a few questions the company must answer to reach their goal of constructing a producing gold mine:

• How high will the gold price go and for how long? Sandspring’s economics are highly leveraged to the gold price. A strong gold price above $1300 USD for a prolonged period of time makes it a very good value proposition. In my mind, this is the most important question of all, as I believe that, barring a major political shift in Guyana, even if management decides not to drag their feet while attempting to build the mine, tremendous share price appreciation is in the future if the gold price continues to rise.

• Will they finance the project and, if so, how? There are a few different ways that they can finance the project, each with positives and negatives for the shareholders. They will only try to finance this project with a strong gold price and, therefore, this shouldn’t be an issue.

• How large of an impact will the drill results at Sona Hill have on the company’s economics? They are drilling 8000 metres over the course of the next year, good results could mean that the gold price may not need to be above $1300 USD for it to be of good value.

• Will the mine be permitted for construction? This is always a huge question when it comes to mines. It is one thing to drill and find mineralization, it’s another thing all together to permit a mine. Fortunately for Sandspring, a neighbouring mine, Guyana Goldfield’s Aurora Project, has been permitted and is producing.

• Are the people involved able to take this project successfully to production? They have done it in the energy sector in North America, can they parlay that to Guyana?

By answering these questions, you create more questions. The process is never over, you need to determine where your exit is and follow through when you do or don’t reach that goal.

As Rick Rule puts it, “it is easy to confuse a bull market with brains.” I can totally attest to this, because coming out of the crash in 2008, everything I bought went up. As the bear market bore its ugly head in 2012, I wasn’t ready for it and neither was my portfolio.

I can’t stress how important it is to buy at the bottom of the market’s cycle. True value lays where the majority of the investing population believe it’s not. A great example is the first six months of this year, when the precious metals market came back with a boom. For the last four years, the junior miners have been beaten down, dropping over 90% in nominal terms, and yet, the talking heads of the mainstream media and a good portion of your average investors believed there was no return from this hole.

With the money flowing into the resource sector the last few months, you almost can’t make a mistake – all boats are rising. This is very characteristic of a bull market in the junior resource sector. However, the more confident the general population becomes, the less comfortable you should be.

Until next time,

Brian

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Risky Business

money

Risk, we manage it in every part of our lives, but it’s most prevalent in our investments. The best in the business make it their goal to minimize it, while still maximizing profits.
In the junior resource sector, risk is managed by understanding a number of different aspects about a company, including: Who are the people, Where is the property, What does the balance sheet look like, and How much of the stock is owned by the company insiders?
Answering these questions will allow you to mitigate risk and maximize profits. The better the questions you ask, the better the results, I have no doubt!

“The art of investment has one characteristic that is not generally appreciated. A creditable, if unspectacular, result can be achieved by the lay investor with a minimum of effort and capability; but to improve this easily attainable standard requires much application and more than a trace of wisdom.”
~Ben Graham – The Intelligent Investor

Mr. Graham sums it up in this timeless quotation that applies to pretty much everything in life; mediocre results can be achieved by anyone, it’s only those who strive to outperform and act differently than the crowd that can achieve spectacular results. Managing risk is a big part of success in the financial world and, therefore, it’s very important to not only understand your risk tolerance, but also how to judge the amount of risk that exists in the investment you intend to buy.

Disclaimer: The following is not an investment recommendation, it is an investment idea. I do own shares in some of the companies mentioned in this article. Please perform your own due diligence to decide whether any of the companies mentioned fit your personal investment criteria.

Portfolio Distribution

During that first period in my investing career, I didn’t pay much attention to the risk associated with the portfolio I had assembled. I knew speculating in junior resource companies was risky, but I didn’t consider the level of risk that was involved with the types of companies I owned.

What do I mean? Well, in my view, there are a few different types of companies within the sector. Here are a few examples, plus some of the risks associated with each type of company:

Explorers (highest risk)

These companies are drilling for discoveries on properties that hopefully have the goods. In most cases, some mineralization has been found, but it currently doesn’t amount to much more than a hope or a dream.

Risks Associated with Explorers: They are cash burners with nothing but the cash in the coffers and the potential of their property to prop their stock price up.

Examples:
Colorado Resources
West Red Lake Gold Mines

Early Discovery (medium to high risk)

These companies have hit mineralization, but are looking to expand their discovery. These companies have not performed a Pre-Feasibility Study, Feasibility Study or Preliminary Economic Assessment.

Risks Associated with Early Discoveries: Consider if there’s further mineralization, whether that mineralization is economical, politics (unfortunately, always a risk), and how much money they need to further outline the resource.

Examples:
Auryn Resources
Gold Standard Ventures
Balmoral Resources

Outlined Resource (medium risk)

These companies have found a resource. The value of the resource is directly linked to the Feasibility Study (or Pre-Feasibility) or Preliminary Economic Assessment.

Risks associated with outlined resources typically relate to the commodity price, politics (permitting and taxes), and financing.

Examples:
Dalradian Resources
Orezone Gold Corp.
Lydian International
Goldquest

Prospect Generators (medium risk)

These companies are explorers (high risk), however, they use other people’s money to drill their properties, making it less risky than a typical explorer, but there’s still the risk of not finding any mineralization.

Risks associated with prospect generators are typically similar to explorers, however, they are less of a risk because they have access to other people’s money. ‘Other people’s money’ typically refers to senior producers, who will pay certain companies to perform exploration work for them.

Examples:
Lara Exploration
Mirasol Resources

Producing (medium to low risk)

These companies have a resource that they are harvesting. They can be further broken down into segments based on the amount of ounces they produce, with the low multi 100Ks ounces being mid-tier producers and those in the millions of ounces being considered senior producers.

Risks associated with producers are political and production related failures.

Examples:
Endeavour Mining (mid-tier)
Guyana Goldfields (mid-tier)
Gold Corp (Senior)
Barrick Gold (Senior)

Streamers (low risk)

These companies generally fund juniors with an outlined resource. The deal works for both parties, as the funding company is able to buy a certain portion of the produced commodity at a fraction of the spot price, typically for the life of the mine and any future discoveries on the property. The junior benefits by acquiring funding without diluting shareholders and depending on perspective, receives a better deal on the financing cost of the project.

Risks associated with streamers are political and production related failures, however, streamers typically have multiple streams and therefore dilute the risk associated with any one given jurisdiction or mine facility.

Examples:
Silver Wheaton
Franco Nevada
Royal Gold
Sandstorm Gold

When designing your portfolio, it’s wise to choose the types of companies that fit your risk profile, whatever that may be. Keeping in mind that the value of the companies in any of the given categories may make investing in them less risky than if all of the companies are trading at what you could call “fair market value.” Also, company type is only one part of the risk analysis.

“The bigger the discount, the bigger the margin of safety. Too small of a discount and the limited margin of safety provides no real protection at all.”
~Marks, The Most Important Thing Illuminated, pg.25

Assembling a Portfolio

Breaking the types of companies down into groups, you’re now better equipped to decide what’s going to make up your portfolio. I would highly suggest picking at least ten companies and splitting your money between them. Which percentages in each? Now, that’s another detail you will have to decide. During this last bear cycle, I believed the best value for my risk profile laid with the Early Discoveries and Outlined Resources. Therefore, these two groups made up 85% of my portfolio positions. In today’s market, August 2016, I would say that most of the value is in the explorers, which are, in most cases, sub-40 million dollar MCAP companies. But, the risk associated with that value may be too high for most people’s blood, because it truly is boom or bust with this group of juniors.

Putting it Together

My examples have been entirely precious metals based, because it’s been my focus for the last four years. To be a true value investor in the resource sector, however, you must branch out into whatever resource presents itself as the best value, which is typically whatever everyone else thinks you shouldn’t be in. Right now, in August 2016, that could be oil or uranium..?
I have only made one gold stock purchase in the last nine months and, right now, I sit contemplating where to put the profits from the stock that I sold. Does it go back into the precious metal sector for the next leg up in the bull market? Does it go into uranium (I’m very intrigued)? Or, does it go into oil (I actually bought my first oil stock in over four years, two weeks ago)? Not sure yet, but I want to manage my risk effectively and that, to me, means buying value, not what’s hot.

If you want to hit your first 10 bagger, it won’t be from buying the hottest stock going, it will be by doing the opposite of what most think to be true. For example, accumulating gold junior stocks in 2014 and 2015!

Unitl next time,

Brian