Category: Profile

Whether it’s a black swan or a white rhino, the Covid-19 Pandemic will go down as one of the major events in world history.

In my mind, the question that remains is whether Covid-19 is remembered more for the deaths it has caused or the financial and social chaos which could follow?

Personally, if I had to choose, my guess would be that history will look back at the Covid-19 crisis as the precipice of something much bigger.

Clearly, the world financial system has been pushed to its limits, as the U.S. Federal Reserve’s pledge of QE Unlimited really makes you wonder where this is all headed.

On the social side of things, there have been many troubling developments, from the Canadian government’s attack on free speech to India’s Aarogya Setu tracking app, which allows the Indian government to track its users.

It’s a brave new world.

With that said, the case for higher gold prices has literally never been better than it is today.

Although higher gold prices spur thoughts of grandeur among many gold bugs, higher gold prices do come with the caveat of chaos.

The late Richard Russell said, and I’m paraphrasing,

“In the next crisis, it isn’t who makes the most, but who loses the least.”

Given the circumstances, he may very well be right – a sobering thought.

Today, I have for you an interview with one of the resource sector’s best, Mark O’Dea, who is the Founder and CEO of Oxygen Capital.

In the interview, we cover a number of topics, including the investment thesis for PureGold, which is in the midst of constructing its PureGold Red Lake mine in Northern Ontario.

Enjoy!

Brian: The Covid-19 crisis has swept over the world the last few months, shutting down economies and forcing us into uncharted territory both economically and socially. Governments have pledged unprecedented amounts of money to repair the damage, but uncertainty about the future still remains.

In a 1959 speech, John F. Kennedy said,

“The Chinese use two brush strokes to write the word ‘crisis.’ One brush stroke stands for danger; the other for opportunity. In crisis, be aware of danger – but recognize the opportunity.”

In your opinion, today, what danger should people be aware of and, secondly, where is the opportunity?

Mark: Well, thanks Brian. I think the danger is already baked into the reality that we’re all living right now. Stocks have been crushed, economies are struggling, danger levels remain high and people are on high alert. Whether stocks fall lower, testing the lows of a few weeks ago or not, remains to be seen. It kind of feels like that’s not the case, but who knows? I think throughout this, what’s emerged as an opportunity, a sort of counterpoint to all that risk and crises, is that gold is looking really constructive and is in a very good place right now. So, it’s done what it’s meant to have done in the sense that it’s behaved really well. If you look at its chart, it’s up 33% over the past year and it’s up 13% year to date in the face of this massive financial crisis, and it’s trading at or above US$1700 an ounce.

As governments continue to print trillions of dollars to stabilize the economy with interest rates near zero and debt levels through the roof, gold has reacted to that and has adjusted upwards very nicely. Printing all this new money inevitably leads to serious reduction in the future purchasing power of a dollar.   Owning gold, which is rare and intrinsically valuable, as opposed to a paper dollar, is a way to preserve the purchasing power of your money.  So, in my experience, having gold as an allocation in your portfolio is a sensible thing to do. 

There are great opportunities that exist in the gold equities right now, and what’s compelling from an investment thesis is that we’re seeing operating margins increase dramatically with this rise in gold price. So, if a company, for example, was making $300 an ounce in margin a year ago, they’re now making $600 or $700 an ounce and that bump in profitability goes straight to their bottom line. That massive margin expansion isn’t yet priced into the equity valuation in my opinion. So, I think there’s a pretty interesting opportunity to capture there. It gets even more pronounced for Canadian gold mining companies like Pure Gold Mining (PGM:TSXV), for example.  Because the Canadian dollar has weakened relative to the US dollar, gold is now trading at all time highs in Canadian dollar terms. Gold is hovering around $2,400 Canadian dollars per ounce.  It really is incredible. 

So, for a near term Canadian producer like Pure Gold, where your costs are in Canadian dollars but you’re selling a product in US dollars, it translates into huge margin expansions at the operation, so profitability goes way up.

Brian: Recently, Barrick Gold announced that the Government of Papua New Guinea would not be extending Barrick’s Special Mining Lease on their Porgera gold mine.

The nationalisation of assets is a risk which miners in the developing world always have to consider.

My question for you is do you believe there is more political risk in the developing world today, given the economic calamity we are facing globally? Please explain.

Mark: I think it’s inevitable that risks in developing countries have gone up. The economies of developing countries are at risk of being completely wiped out or at least pushed back 20 or 30 years because of this crisis.  I firmly believe that this inevitably leads to increased chances of expropriation of mining projects.   It becomes a matter of survival. 

In contrast, in countries like Canada and the United States for example, things are quite a bit different.   Big mining and development projects become a key part of the engine for re-stimulating the economy through all the direct and indirect benefits and the increased tax base created.  Getting people back to work in high paying jobs goes a long way to helping a nation recover.  So my prediction and hope is that we’re going to see big resource development projects multiply and come online quicker as a stimulant for recovery in developed countries. 

Brian: A quick binary question for you, will gold be trading above US$2,000 per ounce by the end of 2020, yes or no?

Mark: I rarely make predictions around commodity price because I’m always wrong.  But given the macro environment that we are in for gold, it feels like a perfect storm.  So, I wouldn’t be at all surprised to see gold reach US$2,000 an ounce this year.

Brian: Without a doubt, the case for gold has never be stronger than it is today. Given this, I personally see tremendous upside potential in owning gold equities, especially the best of the best juniors. Oxygen Capital has a great stable of companies, all of which have varying degrees of exposure to precious metals.

To me, PureGold (PGM:TSXV) stands out from the rest given its stage of development, as it has commenced detailed engineering, procurement and construction of its PureGold Red Lake mine.

First, could you give us an overview of the Red Lake Gold Camp and why is having property within the Red Lake Gold Camp so valuable?

Mark: There are 30 million reasons to like Red Lake, and by that I mean there have been 30 million ounces of high grade gold produced in the camp over the past +80 years. It’s become world famous for some of the highest grade gold ever produced – anywhere.  It’s a place where Tier one companies are born and bred. For example, it turned Goldcorp into what it became after the discovery of the famous High Grade Zone in the late 1990s. It was Placer Dome’s bread and butter and jewelry box for decades.  Red Lake exists as a place because of mining, so as a location, you couldn’t ask for any better. Many of us at Pure Gold cut our teeth in Red Lake. And frankly I think that is a key attribute of our Company.  If you are building Canada’s next gold mine in Red Lake, you want a team with significant Red Lake experience.  For example, Darin Labrenz, our President and CEO worked in Red Lake for 10 years and was Chief Geologist at Placer Dome’s Campbell Mine.  Phil Smerchanski, VP Exploration and Chris Lee, Chief Geoscientist, both worked extensively in the Red Lake camp for Goldcorp and other companies.  I consulted for Goldcorp in Red Lake, early in my career and started my first Company called Fronteer Gold with an initial focus on Red Lake, backed by Placer Dome and Rob McEwen.  Rob Pease, one of our directors, was General Manager Exploration for Placer Dome where he was responsible for Canadian exploration, including Red Lake.  Finally, Maryse Belanger, also a Director, was a Senior VP Technical Services for Goldcorp, whose responsibilities included the Red Lake Mine Complex. 

So, we have all spent years working at, and figuring out other people’s mines in Red Lake, and have more on the ground experience in the camp than any other group in the world.  It feels so exciting to now be on the cusp of running our own mine and being the next chapter in the evolution of this incredible place.  It feels like coming home. 

What I have also learned is that not all geology is created equally in Red Lake.  And we control (100%) of a continuous ten kilometre long stretch of some of the most fertile gold rich geology in the camp.  We feel strongly that despite having already defined well over 2 million ounces of gold, and being the 5^th highest grade gold mine in Canada, we have just barely scratched the surface. 

Brian: Secondly, could you give us an overview of the current investment thesis for PureGold?

Mark: The first investment thesis really revolves around near-term production and cash flow into a rising gold market.  The second, and equally important theme is grade, resource growth and the scalability of the mine itself.  So let’s start with the first one, the near-term cash flow.  We are coming out of what’s traditionally viewed as a fairly dull period in any company’s evolution. That is the construction phase of a mine.  We are nearing completion of construction now and there is clear visibility to first gold production.  We can see the finish line and we anticipate pouring gold before the end of this year.  What typically happens during this period is a Company’s valuation begins to re-rate upwards from a developer to a producer.  For example, when you look at what junior producers are trading at today, they are valued at roughly one times their Net Asset Value (1 x NAV).  Currently, Pure Gold is trading at much lower than that.  So, as we get our Phase 1 mine plan into production and in turn demonstrate that we can quickly scale up to even higher production rates, I really believe there is a valuation gap that is going to get filled.  Layer onto that the strong operating margins that come from gold being at roughly $2,400 CAD per ounce, and you have a project that generates an additional $C680M of cash flow compared to our feasibility study just 12 months ago.  This type of margin expansion isn’t factored into our equity valuation at all. 

Brian: Finally, where is the upside potential – Is the deposit open at depth? Is there potential for discovery on other targets within the project’s land package?

Mark: What’s really unique about these types of deposits is that they pack a huge punch in a relatively small footprint and they’ve got very, very deep roots; they continue for kilometers at depth.  The perfect example of this is the Red Lake Mine Complex up the road.  It has produced 20 million ounces and has been mined down to 2.5 km depth.  We have exactly the same geology and potential at Pure Gold, with the same opportunity for growth.  Our orebody is about 7 km long currently and has only been drilled off in places to about 1km depth.  It is literally open in all direction.  And I feel we’ve barely scratched the surface.  The real prize is still yet to be found.  We have already defined two and a half million ounces of gold at ~9 g/t from 1.3 million meters of drilling.  So it is exceptionally well understood geologically.  We know mineralization continues at depth because we have intersected it in drill holes down to 2.1 km depth.  We know It keeps going.  So in my opinion, by extending the deposit down to the depths that they’re mining at the Red Lake complex up the road, you can see the potential for at least another five million ounces here.  It is important to me that when investors look at Pure Gold they don’t just see the current reserves and resources.  But rather, they see this as a multi-generational asset that is going to keep growing in size with ongoing drilling.  Pure Gold is a big part of the future of Red Lake and we are on the cusp of starting a whole new chapter in this world class mining region.

Brian: Formal and informal mentors have made a tremendous impact on my life. I can honestly say that without their influence I wouldn’t be where I am today.

What is the best piece of advice a formal or informal mentor has given you?

Mark:   One piece of advice would be to stick to your knitting and trust that value will come. It’s easy to get distracted in this business. But I do believe that sticking to your knitting and playing the long game is the way to go.  Especially if you are lucky enough to be sitting on a project as special as the one we have at Pure Gold.  And that’s advice that was given to me by some wise mentors, and it’s certainly served me well.  There are no overnight successes in this business.  It might look that way from the outside looking in, because values crystallize in an instant in a takeover or in an exciting discovery.  But preceding that moment, there are usually 5 or 10 years of incredibly hard work.  A second piece of advice would be that you can’t do it all yourself and you need a team you can trust.  Surround yourself with people who are smarter than you.  Let your talent run and trust them.  

Brian: If you could offer a piece of advice to your 20-year-old self, what would it be?

Mark: I was 34 years old when I became CEO of my first company, Fronteer Gold.  So I will give my 34 year old self some advice.  And that is “comparison is the thief of joy”. I think it’s a useful piece of advice because there’s always a stock or a company that’s higher or lower than yours  for reasons that don’t make any sense at all.  And they may never make any sense.  Don’t obsess about it.  You can let it motivate you and learn from it, but you must keep your eyes focused on what you can actually control and focus on doing everything to the best of your ability to create fundamental value. 

Next would be, raise more money than you think you’ll need because the companies that do the best in this business do not do it by raising half a million dollars at a time. That gets you nowhere.  You want to raise enough money to get meaningful work done and take a project from one milestone to the next so you can unlock value.  The companies that have the best valuations are the ones with a healthy treasury giving them enough working capital to make real progress.

Brian: Finally, at the end of our last interview, you left us with a very timely quote from Miles Davis.

“Time is not the main thing. It’s the only thing.”

Do you have any words of inspiration for today’s investors?

Mark: I would say do your homework. It’s easy to jump on the momentum train. Do your homework, look for transparency in companies.  Look for companies that are going to take you along with them through the steps in their evolution, from resource to economic studies to permitting and so on, rather than companies who lack that transparency.

To take a quote from Abe Lincoln,

“If I had 6 hours to chop down a tree, I would spend 4 hours sharpening my axe.”

Spend 4 hours sharpening your axe and do your homework on the companies that you are going to invest in. Make sure they are backed by good people, with a solid track record, who have skin in the game and who have good projects in good places.

Until next time,

Brian Leni  P.Eng

Founder – Junior Stock Review Premium

Disclaimer: The following is not an investment recommendation, it is an investment idea. I am not a certified investment professional, nor do I know you and your individual investment needs. Please perform your own due diligence to decide whether this is a company and sector that is best suited for your personal investment criteria.

NOTE: This Interview was completed at the end of January 2020 and was published for Subscribers on Feb.18/2020. Become a Premium subscriber today and save 40% until March.31st using the Promo Code – PREMIUM

Your decision making ability will ultimately determine the course of your life.

Personally, I believe everyone needs to be anchored in a core set of principles or rules that shape their decision making process.

Without the anchoring, emotion or outside influences can take over and could ultimately steer you in the wrong direction.

So what’s my point?

It goes without saying that those who choose to invest in the stock market, especially those who invest in the junior resource sector, are continually tested by the decisions they make.

Very quickly, bad decisions will lose you money.

Understand yourself and form a set of rules or principles to invest by. Additionally, when given the opportunity, learn everything you can because applied knowledge is power and profitable.

Today is one of those great learning opportunities, as I bring you an interview with Justin Tolman. Tolman is an economic geologist and is a part of a world-class technical evaluation team at Sprott Global Resource Investments.

In our conversation, we cover a number of topics including his view on the current gold equities market, where the next big mining innovation will come from, how to avoid value traps and much more.

Enjoy!

Brian: 2019 was a great year for the gold price with it hitting a high above US$1500 per ounce for the first time since 2013. Many headlines throughout the media equate the strong gold price with the beginning of a new bull cycle in the junior equities.

However, for those who watch the junior gold equity market closely, you will see that the equities have lagged the metal prices.

What is your view on the current junior gold equity market?

Justin: Before I opine on this, I should say from the outset that we have a wealth of professionals within the Sprott group who spend much more time than I do thinking about our industry from a macro view and broad market trends. I get a lot of value from what they say and people could sign up for that information for free – Sprott’s Thoughts.

That being said, I will opine; I do think that junior equities are lagging the gold price and there’s good reasons for that, following the excesses of the last bull market.  The onus is on us in the industry to close that gap and show that we’re responsible stewards of invested capital. Now, sustained higher gold prices are always better than the alternative, and should be a good leading indicator for a recovery in gold equities.

I don’t think all junior gold equities will necessarily appreciate in value at the same rate, if at all.  There’s a spectrum of both quality and risk across that universe of issuers, and personally I am most interested in those projects that have potential to go on and become profitable mines.

 In that context, there are some compelling opportunities we’re actively allocating towards now.

Brian: Protecting my downside risk is a major part of my investment strategy. For companies with existing discoveries or outlined deposits, it’s fairly straightforward in how to construct a valuation model and compare against the company’s current MCAP.

However, as of late, I have had a hard time deciding how to construct a fair valuation for exploration projects and, on a grander scale, the value of an exploration company.

Generally speaking, how do you calculate the fair value of an exploration project or company that, for all intents and purposes, has nothing of quantitative value – excluding cash? Please explain.

Justin: That’s the trick, isn’t it? We’re always dealing with incomplete information and we’re always trying to quantify intangibles.  Especially with early-stage exploration companies where often the short answer is, it depends.

One of the metrics I see used a lot by junior explorers is to compare themselves to their peers in a nice bar graph and it inevitably leads to the conclusion that the company in question is woefully undervalued. Now, this obviously has potential to be a very flawed way of doing this, especially if you’re gonna let the company hand pick its own peers.

If you have some knowledge of the inputs and the nuances and pick the peer comparison yourself it can work better. 

A couple of petroleum industry guys, Paul Newendorp and John Schuyler, pioneered some really good work on decision making for exploration, I’ve got their text books on my shelf in front of me here. I’ve used some of their principles before to help deal with risk applied to hard rock exploration – using decision trees and some other tools.  But to make it work you need to understand the exploration process and be prepared to make some assumptions about the probability of different outcomes.

 At the end of the day, though, as I’m thinking about this, part of any exploreco’s valuation comes from the team; some groups are just going to be better at coming up with well-thought ideas, testing them efficiently, and when it doesn’t work, moving on.

When you can identify those people or teams that demonstrate competence in execution, both in the field and the boardroom; who experience in a given geography and deposit style; who show integrity in looking after shareholders, those guys out-perform over time and command a premium.

Brian: Most of the major innovations within the mining industry occurred many years ago. First, in the late 1800s, with major advancements in mineral processing, and then the birth of geophysics in the mid 1900s.

It would seem to me that the mining industry is due for another major step forward.

In your opinion, where will the next major innovation in mining be?

Justin: Due for a step forward, I’d love that. It’s been a while since we had a step change in the tool box available to us. In fact, it’s been a while since we had a step change in our understanding of ore deposit controls, but just because it’s due, doesn’t mean it has to happen.

It’s a bit fashionable now to talk about the machine assisted learning, artificial intelligence in exploration, I see that popping up in the vernacular of junior press releases. I don’t tend to put too much emphasis in them except for very special cases.  Those sorts of systems tend to work best in data-rich environments and they certainly don’t tell you when to stop spending money.

On the exploration side, I think in the future we’re going to see more discoveries made at depth, beyond the range of what we can directly detect from the surface using traditional tools, so that implies an increasing reliance on the drill bit and vectoring from there.

There’s a bunch of neat down-hole applications which are evolving from this. Short wave infrared scanning of core and increased sensitivity of down hole geophysics are getting gradually more sensitive and affordable every year.

On the mining front, I see an increasing role for equipment automation using combinations of existing technology. Not just to incrementally improve productivity or lower costs, but to drastically improve site safety and working conditions.

I’m seeing more and more adoption of this picking up globally, it enables mine equipment to operates in extreme temperatures, confined spaces and other hazardous work environments autonomously or remotely.  Meanwhile people can oversee the operations from somewhere comfortable and safe. 

Brian: In our conversation earlier this year, I asked you about jurisdictional risk and how it fits into your investment analysis. One comment, in particular, that caught my attention was,

“You need to be quite judicious in applying broad risk categories to entire jurisdictions, whether it’s countries or provinces, the reality is that often it depends. Some superficially low risk places for mining investment, like Peru, in actuality can be a very complex patchwork of attractiveness depending on local community attitudes, legacy issues, and a host of other things. That’s one of the things that we like to think differentiates us at Sprott we get out on the ground in these areas early and develop a deeper understanding for this aspect. A big part of my job is spending time on the ground at lots of these projects first-hand.†~ A Conversation with Justin Tolman, Economic Geologist at Sprott Global Investments

I completely agree and think that it’s vital that investors heed your advice in looking as deep as possible into the jurisdiction they are planning to invest in.

With that in mind, I think it’s a great opportunity to discuss a country that you most recently visited, Brazil.  Brazil, on a whole, I think, has been painted with a high-risk brush.

In terms of mining investment attractiveness, how do you view Brazil?

Justin: Well, if you remember the last interview, you’ve kind of done exactly what I advocated against.  You just asked for a comment on risk regarding the 5th largest country in the world.  On balance, I am pro Brazil as an investment jurisdiction, but it’s always going to carry the caveat of “under the right circumstancesâ€. Given the mineral endowment,  there’s plenty of opportunity across the country for groups who can execute on the ground.  My recent trip that we were talking about, I visited a number of projects in Para, Bahia and Maranhão  states. All of them had some mining history and some exposure to large-scale mining operations. At the time, I was looking at gold, copper, and nickel projects.  Some we own in house, others we were considering investing in.  None were large-scale iron ore operations which obviously have come under increased scrutiny in the wake of the tragic tailings dam collapse last January at Brumadinho.

Brian: Executive compensation within the junior mining industry is an interesting topic, as I have heard a variety of opinions on what is appropriate and what isn’t.

As an investor, of course, I would rather see low executive wages and their compensation focused on share price appreciation – options, etc. However, I do see the other side of the coin, when it comes to attracting and keeping top talent.

So, it begs the question, where is the appropriate balance between the interest of the shareholders and the adequate amount and type of compensation for the team which is running the company?

Justin: Those two things don’t have to be diametrically opposed. Why can’t it be both? The goal perhaps should be to structure incentives to align between investors and executives. Maybe that’s a bit utopian but it’s a worthwhile discussion. I can tell you that how a management team is incentivised is absolutely something that we are conscious of, look at and factor that into our investment decisions and recommendations internally.

Fundamentally, what gets measured and rewarded drives decision making and outcomes.  So consider if somebody is financially motivated to sell their company via a generous change of control clause, does a higher share price help or hinder that outcome for them?

Striking the right balance of short and long-term performance incentives is important, what’s the criteria for determining their short-term bonus pay outs?  How much stock does an executive own and what price did they acquire it for?

These are questions that we ask routinely, and investors should ask more.  One way to encourage an aligned compensation package is having independent directors on the compensation committee that are actually independent.  

Certainly, we love it when company executives eat their own cooking, buying shares alongside us in the market.

Brian: During university and the days of +US$100 per barrel oil,  I can remember one of my professors stating that he thought peak oil was one of the biggest concerns for humanity moving forward, and that the price was only headed up because of it.

Today, with the use of horizontal drilling and other factors, the oil price has plummeted and the talk of peak oil seems to be a thing of the past.

 Moving to the hard rock sector of the mining industry, much of the ‘peak’ talk I have heard has focused on gold, with a few pundits suggesting that we are in peak gold – we will never again reach the production or new discovery numbers seen in the past.

In your opinion, is peak gold legit?

Justin: I don’t know? There’s lots of variables that go into peak gold and some of them are beyond my ken and I don’t really pretend to have an opinion.  Wasn’t US peak oil originally supposed to be in the seventies and then hydraulic fracturing came along and that all changed? I subscribed more to the necessity-is-the-mother-of-invention type philosophy for these things.

With that said, we do work in a cyclical business, and if we’re willing to shorten the time horizon for peak gold to something shorter than forever I happy to comment.  Certainly in the last few years it’s apparent that mining companies have underinvested in Greenfield exploration, and have been ruthlessly squeezing the existing operations for additional, increasingly marginal production.

This has led to declining discovery rates. The very attractive tier 1 deposits, that are so sought after are increasingly scarce, and when you couple this with the increased timelines to permit new operations, future global production is under a lot of pressure.

So, barring a paradigm shift in technology, like you asked about before, this obvious implication is that the demand for quality deposits and genuine new discoveries is only going to increase.  Which makes me kind of happy. It’s the reason I get up in the morning and come into the office.

Brian: In my view, to be a consistently successful investor in the junior resource sector you need to buy companies with good management teams, and that are selling at a price which is less than their intrinsic value.

In saying this, investors do have to be wary of value traps, which I define as companies that have the potential to never escape the market discount.

First, do you agree that value traps exist or it is just a matter of the investor getting the thesis wrong?

Secondly, if you do agree that value traps are out there, do you have any advice for steering clear of them?

Justin:

Great Question.  It dovetails nicely with your earlier one on trying to calculate fair value for exploration companies.  There no question value traps exist, in face our industry is littered with them. 

Just because something is cheap on whatever metric you happen to be using, doesn’t mean it has to go up.  One clue that a stock might be a value trap is that it will appear to have been cheap for an extended period of time.   What changed to make it appear cheap?

When you suspect you are dealing with a value trap the think about stress testing your assumptions and valuation metrics.  Is the asset in an inherently risker part of the world demanding a higher cost of capital?  Is there an issue with the orebody not immediately apparent that might prevent the asset from being mined profitably?  Like a remote location or a lack of water or community support for example.

Next you need to see a way forward for the project, some measurable catalyst that will work to unlock value.  Permitting a road, changing the mining/processing method, or in some cases rebooting the corporate structure.   

Then think about to what extent the outcome of that catalyst in in the control of the company.  If not at all then I fear your plan is based on hope.  Which tends to be unpredictable.

Brian: Sprott USA offers a wide range of the best services and products in the natural resources market. From full-service brokerage accounts to private placement opportunities and exchange traded products and bullion trusts.

Can you give us an overview of what is new at Sprott and what opportunities are available for interested investors?

Justin:  You’re right, there is lots going on at the moment. We just completed our acquisition of Tocqueville earlier this month, which was really exciting for us adding an additional $2 billion or so in assets under management.

The bit that I get excited about however is that it consolidates and build on our in house technical and sector expertise in the gold business. 

Here at Sprott Global , we’ve got some really exciting actively managed products available; the Rule Managed Account has been running for a year now as resource portfolio and gives participants a chance to participate in investment themes that Rick [Rule] is tactically trading in.

One of our most experienced advisors Jason Stevens has been running the Sprott Real Asset Value+ Strategy which has put together some really impressive returns which is great for long-term alternative investment exposure.  Jason pays a lot of attention to balance sheets and the business’ value drivers to identify core positions.

Personally, I’m as busy as I’ve ever been working with our teams and PM’s to identify undervalued high quality projects and new discoveries that we can get out in the market and support.  

Don’t want to miss a new investment idea, interview or market commentary during this once in a lifetime buying opportunity in the Junior Resource Sector? Become a Junior St Subscriber today.

Until next time,

Brian Leni  P.Eng

Founder – Junior Stock Review

Becoming a competent investor requires the constant willingness to learn and the pushing aside of what you think you know. Over the course of my personal investing career, there have been a handful of people who have greatly influenced the way I invest my money in the market. Rick Rule, without a doubt, has had the largest impact to date.

In a few weeks, July 30^th to August 3^rd, the annual Sprott Natural Resource Symposium will take place in Vancouver, British Columbia, Canada. Rule will be giving a speech at 8 am on August 1^st entitled, Lessons, Re-Learned, In a Bear Market.

In my opinion, this single speech is worth the price of admission, never mind the whole host of other headline speakers, such as Doug Casey, James Rickards and Grant Williams to name just a few.

Today, I have for you a conversation with Rick Rule. In our conversation, we covered a number of topics, but most importantly, Rule explains why it’s vital for an investor to be self-aware and, secondly, frames the mindset which is needed to invest in “risky” jurisdictions.

Additionally, at the end of the interview, Rule gives you, the reader, a great offer that I hope you will take him up on!

See you at the Symposium.

Enjoy

Brian: Access to cash is to the junior resource companies like air is to human beings; an absolute necessity.

For many, Toronto, Canada represents the Mecca of junior mining finance. However, it appears this may be rapidly changing, as the bear market in resources is not only affecting investor profits, but also the banks and institutions which have, for many years, been the suppliers of cash to junior resource sector.

I have a two-part question; First, in your opinion, do you agree that Toronto’s role as the center of the junior mining finance world is diminishing? Secondly, if so, do you foresee any repercussions for this seemingly major change?

 Rick: I think to an extent, Toronto’s role may be declining, it’s really a consequence of the increase in participation in other parts of the world. I’m thinking particularly of the Pacific Basin, Hong Kong, Shanghai, and of course, Sydney. Toronto still punches, Toronto and by extension Vancouver, still punch well above their weight on a global scene, meaning that they still originate more capital for mining that is consumed inside Canada. It’s worthy to note the centers of excellence occur in both cities that make important contributions to the service sectors in those cities. My suspicion is that as the mining market turns from cyclical lows that the importance of Toronto and Vancouver, that is the importance of Canada, as a mining finance center, will continue.

Brian: Over the last month or so, the gold price has been strong, surpassing the US$1400 /oz mark, a price we haven’t seen since 2013.  While a rising gold price will undoubtedly draw more eyes to the sector, which is positive, I can’t help but think that there are some drawbacks to a world with a rising gold price.

How do you view a world with rising gold prices?

Rick: Gold traditionally has functioned as insurance, which means it does well when confidence decreases. The circumstance that would see a very high gold price would almost certainly be a poor outcome for most aspects of your life and your portfolio. The truth is that gold does well in response to things like war or economic unrest.

So the circumstance that would see gold at levels that some forecasters have talked about, $5,000 US and now $6,000 US, and now $7,000 US an ounce, would not be pleasant for the rest of your portfolio. That said, I think a prudent investor always allocates for circumstances that would be problematic. And gold, for thousands of years, has operated in that part of people’s portfolio.

Brian: Are market sentiment and fundamentals like the chicken and the egg? Meaning, does it make a difference which one comes first to alter the tide from a bear to bull market?

Rick: I believe it does. I believe in mining, well, I believe in all economic activities that bull markets are the authors of bear markets and vice versa. People’s expectation of the future is set by their experience in the immediate past, and it’s my belief that markets overshoot in both directions. I believe the next bull market in mining will be a consequence of people’s anticipation of success being so low that the challenge for the industry would be to get under the bar rather than over the bar.

In other words, the industry needs to beat people’s expectations for a while. People’s expectations are now so low that beating those expectations will, in fact, be easy. The fundamentals must change relative to value before expectations change. And, mercifully, the mining industry is in the midst, the beginning, of a renaissance I believe that will cause it to do exactly that.

Brian: Over the last year or so, I have found great value in studying my losses and trying to find similarities in my mode of failure.  Not surprisingly, there is a commonality in my failure mode and it is directly linked to my own bias tendencies.

Self awareness is important in all aspects of life, but hard for some to attain. I heard a wise man once say,

“you may not know who you are, but I bet you can tell me who you aren’t.”

This really resonated with me because the more I think about it, the more this backwards type of thinking makes sense.

As an investor, how important is it to be self-aware?

Rick: I think that’s probably the most important question I’ve been asked all month. And I would suggest to you that there are many paths to investment success, but they all begin with who you are. I have learned myself that most of my worst investment wounds were in fact self-inflicted. And while I look at the range of risks in the market, interest rates, governments, dishonest promoters, the biggest risk that I face is conveniently located to the right of my left ear and to the left of my right ear. That is my own biases.

We talked a bit in the prior question about the earliest bias. We all believe ourselves to be rational fact seekers, taking information from all sources, and organizing that information logically and making rational conclusions. That’s not what happens. We, in fact, select information that makes us comfortable with our existing prejudices and biases. And the truth is that we have short memories. Our experience in the recent and the immediate past shapes our expectation for the future much more than our experience going back two decades or three decades, which is, in fact, more valuable.

I think if anybody takes away anything from this interview it is being self honest, attempting to be self honest, pardon me, checking your biases, and continuing to invest in your own education is the best guarantee that you can have of investment success.

Brian: In my opinion, political risk within a jurisdiction is rooted within the culture of the society in which it inhabits. Therefore, understanding the culture of the society is integral for gauging the risk of a prospective investment.

Being bullish on one of the world’s riskiest jurisdictions is usually correlated with some major change within the given country’s politics. However, I’m not sure if the change that is expected is ever really real, as most countries seemingly never escape the handle of ‘risky.’

Is it possible to have or expect real change in risky jurisdictions?

Rick: I think you need to define a risky jurisdiction. The truth is that mining is a location specific and capital intensive business, so it is particularly prone to political risk. It’s also a small business, which means that it never enjoys the political power necessary to defend itself. Mostly, the controllable aspect of political risk is price and probability. People who look like you and I, and I’m venturing into dangerous territory here, politically risky it can go, tend to believe that money that is stolen from us by white people in English, according to the rule of law, is less gone than money that’s stolen from us in ways that we understand less well.

So, I believe a lot of political risk is expectation and the price that one assumes for the risk. My biggest economic experience with political risk occurred 30 years ago in a wayward jurisdiction known as the People’s Republic of California where net present value in excess of about $700 million was taken by shareholders by the capricious California legislature. And people tell me that Congo is risky.

I would argue with you right now that the People’s Republic of British Columbia, which is regarded as a superb place for politics, is extraordinarily risky. The BC provincial legislature is a joint venture between the Socialists and the Greens. Not exactly mining’s best friend. The wealth grabs that the BC legislature in Vancouver City Council have made frankly protectionist racist taxes on foreign investors are, I think, a harbinger in the future. So, when people talk about cultures and political risk, people need to discriminate I think based on their understanding of the culture that they operate in and the culture that they are familiar with. Yes, Brazil has a long standing history of formal corruption. I would ask you what the difference between a campaign contribution and a bribe is.

Brian: Having attended many resource sector focused investment conferences over the years, it’s clear, to me at least, that the majority of investors in the sector are in their, so-to-speak, ‘golden years.’ The younger generations, mainly the millennials, on mass, are virtually absent with their attention seemingly more focused on cannabis and crypto. The question that comes to my mind is, why? Is it a matter of relatability?

In your opinion, why has the resource sector failed to attract the millennial generation’s investment dollars, thus far?

Rick: I think that the younger generation is extremely narrative oriented, and the resource narrative hasn’t played out for a long time. My own generation, we’re definitely past our sell by date. Certainly in the ’60s, we were attracted to much more mainstream investment activities until our paradigms were changed by the decade of the ’70s, which saw natural resources explode in price, and that price justified the narrative to us.

My suspicion is that sometime in the next 10 years we are going to have another upward move in resource prices, in particular precious metals prices, and I think the precious metals narrative. Appealing to people’s greed and fear will have an extremely profound impact on millennials. Interestingly, I have found in the last 18 months that the inbound interest that Sprott has received around the world is now about evenly divided between younger people and older people, and is interestingly now 40% female. A circumstance which I have never seen before.

So, while the situation that you describe still prevails today, I would suggest to you that it’s changing very, very rapidly. The industry is attracting interest from around the world rather than just from developed countries. It is attracting increasing interest from younger people, and for the first time in my career, attracting substantial interest from younger females.

Brian: Conferences are a great way to expand your knowledge of the sector and to speak to the people who are running the companies in which you’re speculating. Learn who these people are – you’re trusting them with your money.  

For those looking for a conference to attend, I highly suggest that you attend the Sprott Natural Resource Symposium from July 30^th to August 2nd in Vancouver.  In my opinion, it’s by far the best conference in the business and worth every penny.

In your opinion, what’s the value proposition of the Sprott Natural Resource Symposium?

Rick: I think we have several value propositions. The first is that the sort of keynote headline speakers, the generalists, who go to the narrative that we were just discussing, our top, top, top line. Danielle Dimartino Booth, sort of a new voice on the scene, but a profoundly bright individual. She will be joined on the main podium by Nomi Prins, another person who just came to prominence in the last decade. Of course, Jim Rickards will be back, and Doug Casey will be back.

But keeping the macro theme company. Importantly at this conference there will be five or six presenters who have built multi-billion-dollar natural resource companies from standing starts. People who can talk about how you generate billions of dollars of wealth in the resource business, and how their experience building companies has shaped how they invest and how it can help the way you invest.

Importantly, at this conference, our attendees have told us that the exhibitors, the public companies who come to tout their wares, are more than advertisers. The attendees say that the exhibitors are content, too. So in our conference, which is different than other conferences, in order to be allowed to exhibit a public company it must be owned in a Sprott managed equity account. That doesn’t sadly guarantee that everything we invest in goes up in price. But the truth is that you will have a curated list of exhibitors, which are all owned in Sprott managed accounts, and by Sprott principles.

So, I think the combination of an absolutely great top line group of commentators and newsletter editors, with combined circulations over a million people, a high quality group of industry people who have made billions of dollars for their investors, and a curated group of exhibitors combine to make this, I think, the finest high net worth retail natural resource conference on the planet.

Brian: That’s great. I’m really looking forward to it. Thank you very much for your time today.

Rick: Always a pleasure, Brian. If I may, I would like to offer your readers an inducement to get to know Sprott. For any of your listeners who care, I am willing to personally rank their speculative resource portfolio.

If they would email me the names and symbols in text, not as an attachment, in an email to RRule@sprottglobal.com, I will rank their holdings and send them back by return email.

Absolutely no obligation on their part. This is something that we do to get to know people. So if that is of interest, I invite your listeners to email me personally.


Brian: That’s a great offer. Thank you very much, Rick.

Rick: Always a pleasure. Thank you. I look forward to seeing you in Vancouver.

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Until next time,

Brian Leni  P.Eng

Founder – Junior Stock Review

Disclaimer: The following is not an investment recommendation, it is an investment idea. I am not a certified investment professional, nor do I know you and your individual investment needs. Please perform your own due diligence to decide whether this is a company and sector that is best suited for your personal investment criteria.

“Give a man a fish, and you feed him for a day. Teach him to fish, and you feed him for a lifetime.”

An obsession with the “how” or “why” instead of the “what” is integral, in my opinion, to being successful in the world of investment. While the “how” can often be enough to make your eyes glaze over, it’s what ultimately separates the wheat from the chaff.

I believe the success I’ve had in my investing career, thus far, is due in large part to listening to and informally learning from successful investors within the sector.

Today, I’m sharing an interview I did with someone to which you should pay attention. It’s key to learning the “how” and the “why” of investment within the resource sector.

Justin Tolman is an economic geologist by trade and is a part of a world-class technical evaluation team at Sprott Global Resource Investments. In our conversation, we cover a number of topics including his background, jurisdictional risk, lessons learned in the sector and much more.

Enjoy!

Brian: You joined Sprott Global Resource Investments last year as an economic geologist within their technical team. The Sprott technical team is known throughout the sector as one of the best in the business and, thus, the mere fact that you joined them, in my view, speaks volumes about your technical acumen.

Can you give us an overview of your work history and how it brought you to where you are today with Sprott Global Resource Investments?

Justin: I have degrees in both economic geology and business, but I think more pertinently, I spent the last 20 years on the operating side of the resource world doing what I could do ensuring that mines were profitable, exploration was successful, deals were accretive, and that was tremendously rewarding. I got to go out sleeping under the stars looking for gold deposits for weeks at a time. And I’d work in big underground mines a mile under the earth. At the right time of the year, you don’t see the sun until the weekend. But I used to joke that all that time I was trying to work at what I wanted to be when I grew up. And the net result was that I got to have some great world-class mentors. I got to be molded in the crucible of some exciting discoveries. But I spent those two decades always looking to learn the next thing, find ways to add value.

Inadvertently, I ended up as this broad, renaissance geologist, which sort of primed me for the current role with Sprott, where a key part of the job is trying to identify top tier management teams or be earliest into new discoveries.

Brian: For me, jurisdictional risk is an interesting subject because everyone has their own criteria for what constitutes risk.  

A good example is Russia. Many jump to the conclusion that it’s a VERY risky country and, therefore, not a place to invest. I don’t necessarily disagree; most of the propaganda about Russia, today, is ‘negative.’

Let’s, however, consider one of the criteria listed by the Fraser Institute in its examination of jurisdictional risk; political stability. Relative to its peers, Russia scored low, which a lot of people translate to ‘stay away.’ While political stability is a complex factor, I was taken aback when a friend, whose company does business in Russia, said he finds this scoring comical; “does anyone really think there’s going to be some serious political upheaval while Putin is in charge?” Given the complexity of evaluating political stability, his answer isn’t complete, but it still reveals the contrast in views – those who have experience in these ‘risky’ jurisdictions, and those who rely solely on narrative to form their opinions.

How do you view jurisdictional risk and how does it tie into the investment analysis of a junior resource company?

Justin: Risk is a fascinating subject especially with resource investing. Jurisdictional risk obviously is nuanced, subjective and multi-faceted, not only for people on the outside trying to evaluate it, Also for those teams who find themselves operating across different cultures and borders. Obviously, jurisdictional risk is one element that goes into a risk matrix. It’s a foundational element, and it’s one that even the best teams can only ever have limited influence over. But, like other types of risk, it can be mitigated, and the reality is some groups will be better at forecasting probable outcomes. Some teams will be better at operating in certain environments.

Personally, I can be quite risk tolerant with respect to jurisdiction. I can justify investments in comparatively risky locations. The caveat is that the returns have to be sufficient to warrant it. If you look at somewhere like the DRC, global risk consultants consistently and quite rightly rank it as having very high political and operational risks. But committed, in country exploration continues to highlight an emerging camp of world-class copper mines.  That sets up an interesting dynamic.

As a final comment, you need to be quite judicious in applying broad risk categories to entire jurisdictions, whether it’s countries or provinces, the reality is that often it depends. Some superficially low risk places for mining investment, like Peru, in actuality can be a very complex patchwork of attractiveness depending on local community attitudes, legacy issues, and a host of other things. That’s one of the things that we like to think differentiates us at Sprott we get out on the ground in these areas early and develop a deeper understanding for this aspect. A big part of my job is spending time on the ground at lots of these projects first-hand.

Brian: In my view, current market sentiment is about as bad as I have seen it within the resource sector. Many of the emails I have received in the last month, or so, ask my opinion on where the market is headed or if they should follow the adage, “sell in May and go away.”

In your opinion, are investors wasting their time worrying about the direction of the market?

Justin: My opinion is that investors should absolutely be aware of where they are in a cyclical market. You should be allocating some of your brain capacity curating an opinion or seeking trusted advice on the direction of the market. Unquestionably, there’s value to be unlocked for those who can position themselves accordingly. But honestly, it’s not something I worry about on a day-to-day basis. Instead, one of the things that we do as part of the technical diligence team is to identify companies and assets that will be able to operate profitably or attract capital at any point in a price cycle, good or bad. And this way clients can anchor their portfolios around quality and the market will do what it wants.

Brian: Are market sentiment and fundamentals like the chicken and the egg? Meaning, does it make a difference which one comes first to alter the tide from a bear to bull market?

Justin: That’s a great question. I suspect those two elements certainly exert some influence over each other. The trick would be to extricate the relative proportions of each at any given point in time. But to borrow from one of the mental models of Warren Buffet and Charlie Munger, I feel we may have drifted outside my circle of competence at that this point. I just let the market do as its want. Instead, I try to start with an estimate of an asset’s fundamental value, and then if you are able to identify where market sentiment has drifted a long way from that starting point, it helps to guide future decisions from there. I’d much rather look at a tree than the forest sometimes.

Brian: In my opinion, exploration companies are a great way to speculate within the junior resource sector, especially during a bear market, as discovery pays no matter where you are in the market cycle.

While I see the chance for high returns, it definitely comes with high risk, as the odds of finding an economic deposit are stacked against you.

Firstly, do you agree with my statement regarding speculation in exploration companies in bear markets? Secondly, in your view, what are the most important steps or criteria in evaluating an exploration company and its probability of success?

Justin: Great question, and it might not be a short answer. Instead, I might tweak that statement to read, “Speculating in the best exploration companies at the right time in a project’s life cycle can provide outsized returns no matter where you are in the market.” It might be self-evident, I guess, but not all exploration companies are created equal. Most hemorrhage money on ineffective or inefficient exploration. So as you allude to in the second part of your question, the trick is identifying those companies with the greatest probability of success. And you have to layer over that looking at those groups who also show good financial acumen. Corporately, can they attract funding for their ideas? Are they going to be good stewards of capital? So it always starts with management. Are they ethical? Are they motivated? Can they build social license? And then need to look at their experience in the deposit style, project stage and  region that they’re operating in? Do they know what a mine looks like? Another way of saying this is “do they know when to cut bait and move to the next target or do they fall in love with their projects?”

Pre-discovery, it’s important to have an appreciation for the region and the type of deposit for which the company is exploring: its geology, its prospectivity, the maturity of the region. And when you zoom in to the project scale, the list of diligence criteria multiplies again. As they progress into drilling, can it have sufficient size to be material to someone? How will it be mined? What process will be required to recover the minerals of value?

At the end of the day, if you can’t recover something economically, your discovery becomes moot, and it gets relegated to a technical success, the trick is recognizing this as early as you can. For those people who can see that ahead of others, there’s a huge advantage there.

Brian: Recently, Irving Resources released their first drill results from their Omu Gold Project in Japan. Irving is targeting a low sulphidation epithermal system, which they have systematically identified over the course of the last couple of years.

The initial results are very interesting as it appears to me that they have discovered, on their 2^nd hole, the upper portion of the boiling zone. The market responded very well to these results, but it is clear that more drilling is needed to better understand and identify the main source of the hydrothermal system.

Why is it important to identify the boiling zone within a low sulphidation epithermal deposit?

Justin: Boiling in low sulphidation epithermals is a powerful and complex mechanism. It’s associated with a drop in the temperature and the pressure of the system. And this in turn causes a bunch of gasses to escape. It changes the pH a little. But most importantly from our point of view, it causes precious metals like gold and silver to drop out of solution and be deposited locally. So that’s a lot of words to say that for this type of deposit, if there was gold available in the system, this is where it would be concentrated.

Brian:  Generally speaking in regards to a system such as this, moving forward, what does failure look like?

Justin: We’ve obviously been in a bear market the last few years when the question is phrased as what does failure look like rather than the other way around. The sinter which marks the target area in this case is comparatively large, and the drilling’s at a very early stage still. So the company is looking for a blind feeder at depth underneath this sinter. ‘Blind,’ here, is in the sense that they don’t know exactly where this is located under the alteration. They’re kind of poking holes in there trying to vector. Now they have some indications that the boiling zone is deep. They have indications that it could be auriferous because they have a thin hit from just their second hole on the property, which is a solid start.

In this case, exploration is an iterative process. You need to be looking at each drill result and the geology successively to help you vector in three dimensions. These systems, generally, here have a well-established zonation and you can play a game of ‘Warmer-Colder’. Failure could happen by degrees as the available space for an economic deposit progressively gets whittled away hole by hole. Success could happen all at once. This is a good example of one of the things that we actively monitor as a program progresses to help us develop our own opinions on prospectivity.

For those interested in getting a better feel for Omu or projects like this, my colleague, Andrew Jackson, was on site late last year. Some photos from that site visit and many of our others are just available now at SprottUSA.com.  We’re trying something new and making images from our field work available on this platform with some commentary. For those interested, that’s an easy way to track the things we’re looking at in-house from a technical perspective.

Brian: Continuing with the exploration theme, last year, Evrim Resources’ Cuale project was in the headlines for the discovery of what many thought had the potential to be an economic deposit. This was not the case, however, as the ultimate ground truthing mechanism – the drill, delivered dusters at depth.

In your view, can investors learn anything from this failure?

Justin: There’s always lessons from failure, often more contextual and more painful ones than from success, right?

Brian: Very true.

Justin: At the outset, there was no way to know categorically what the drilling would show. Now, Cuale was an atypical gold system in many respects. There are absolutely learnings available there, technically and geologically, for example, the difference between a hand dug trench versus a mechanical trench and how that affects where you can sample within the regolith profile, but it’s not always straightforward. Remember, Evrim had a whole bunch of major mining companies on site who looked at those rocks and were also excited by the potential.

So I think for investors, which is what you asked, a key lesson here is to take profits. Selling when a stock is going up can be hard psychologically sometimes. It’s easy for emotion and the innate tendency to project recent trends forward, and that can overcome prudence. But taking some money off the table at key junctures is often wise.

Cuale didn’t live up to expectations.  However, I think the company itself is well financed and doing quality work with credible partners.

Brian: Conferences are a great way to expand your knowledge of the sector and to speak to the people who are running the companies in which you’re investing. Personally, I think it is of the utmost importance to try and learn who these people are – you’re trusting them with your money.  

For those looking for a conference to attend, I highly suggest that you attend the Sprott Natural Resource Symposium from July 30th to August 2nd, in Vancouver. 

In your opinion, what’s the value proposition of the Sprott Natural Resource Symposium?

Justin: I attend lots of different mining and investment conferences, Brian. And each of them fills a niche within the broad arc of the industry. The Sprott Symposium distinguishes itself I think by providing quality content for investors in the natural resource space. Service providers need not apply. It’s relevant to Corporate Development teams or pure explorers, but they’re not the target audience, investors are.

The presenting companies have to be both invited and owned in-house. The guest speakers and the panel members are top notch in their fields. There’s a good balance of macro and project dynamics.

The conference itself is structured so that those presenting and those being presented to have more chances to interact, which I think lets delegates explore areas of interest to them beyond the typical investor relations pitch. The culmination of this means that the caliber of the conference participant that it attracts is actually extremely high. I get as much from talking to the other delegates as I sometimes do talking to the presenters. I always leave that symposium wiser than when I arrived.

Don’t want to miss a new investment idea, interview or financial product review? Become a Junior Stock Review VIP now – it’s FREE!

Until next time,

Brian Leni  P.Eng

Founder – Junior Stock Review

Disclaimer: The following is not an investment recommendation, it is an investment idea. I am not a certified investment professional, nor do I know you and your individual investment needs. Please perform your own due diligence to decide whether this is a company and sector that is best suited for your personal investment criteria. I do OWN shares in Irving Resources and Evrim Resources. I have NO business relationship with any of the companies discussed in this interview.