Trust, But Verify: Jayant Bhandari, a fund adviser, recently published a guide called "High Risk, High Reward: Disciplined Junior Mining Investing" that suggests comparing company presentations to the annual reports usually available on the company website or at sedar.com. "It is not illegal for companies to fail to provide you full information in these presentations," he cautions. For example, a company might show in the presentation that it has $5 million ($5M) in cash, but might not mention that it also has $50M in long-term debt. Or a presentation might feature a project without telling you that the company doesn't currently own it. "As you dig deeper, the incongruities that you discover between what they show in the presentation and what they actually have tell you a lot about their integrity, who they think they work for, and what respect they hold for you, the owners of the company," Bhandari says. He suggests looking out for the following red flags. "If they try to get you to value them based on how much each ounce of gold they have in the ground must be worth—a ridiculous way to value a project—they might be telling you that their project lacks economics, and hence must be promoted using flawed metrics. If they give you a net present value that is not explicitly shown as pre-tax, it might be worth asking if tax is really voluntary in their area."
In Rick Rule's A Guide to Natural Resource Investing, he outlines the 10 fundamentals of junior resource stock analysis. The corporate presentation is a great starting point for a lot of those exercises.
Value Investing: One important measure of a company's true worth is the comparison of liquidation value to market capitalization, Rule says. "A company is only worth what it owns." The first step might be to turn to the financial statements in the corporate presentation or the annual report. He suggests adding up all the current assets (such as cash), subtracting liabilities, and adding the liquidation value of the company's projects. Compare that to the market value (outstanding shares multiplied by the current market price). If the market cap is more than the value the company would bring if it were auctioned off, that raises more questions. This is how you differentiate between price and value.
People Power: Relevant experience of the management and board can be the difference between success and bankruptcy regardless of the resource. Rule says, "While deposits are discovered, a mine must be built and it takes technical prowess to turn a mineral deposit into a producing mine." It also takes financing, permitting and managing costs. A company needs the skills to raise money, deal with local governments and work with diverse constituencies, including neighbors, politicians and investors. That is why one of the first things Rule looks for is an experienced team for the project type and location.
The quality of the shareholders matters, too, Rule says. Have the major shareholders ridden previous projects to successful conclusions for all involved? Are senior managers major shareholders and at what price did they buy shares (not options)?
Insider Trend Spotting: Ted Dixon, cofounder and CEO of INK Research, which tracks legally reported stock buying and selling by public company executives and institutional investors, cautions stock watchers to look for the reasons behind insider trading. "If a stock is going up and there's a lot of insider buying, that could mean insiders are buying into the news. On the other hand, if the stock has fallen and there's a lot of insider buying, that could signal a value opportunity, that the market has overreacted."
Other questions can often be answered in the distribution of share ownership column of the company presentation. What is the ratio of institutions to retail shareholders? Do any of the majors have a substantial stake in the company? That can say a lot about possible future partnerships and acquisitions. These questions get to the issue of the confidence level of management in the future success of the company and ensuring that their interests are aligned with investors.
The Bottom Line: The capital structure portion of the presentation can give a glimpse into how many shares are outstanding, the volatility in the 52-week high and low and the average daily volume. This can clue investors in on how liquid the stock may be when it comes time to sell. It can also speak to how well the company is telling its story and letting potential investors know about the growing value of the stock.
Matt Badiali, editor of S&A Resource Report, pays close attention to the cash position and the company burn rate. "I need to know how much money a company is going to spend this year," he says. That answer is immediately followed by "How much money do you have in the bank?"
"Companies are notorious for having $2M in the bank and a $6M burn rate. Often the plan is to make up the difference by selling a bunch more shares. That is when I turn on my heel and walk away. I would rather buy after the company has diluted the current investors," he says.
Technical Issues: Geologist and Exploration Insights Editor Brent Cook has some tips for where to look for inconsistencies when doing due diligence. "One of the most common problems I see in these reports relates to the resource estimates. A large number of those turned out to be inaccurate, making the financial models based on them wrong," he warns. He suggests paying close attention to the cutoff grade used in estimating the tonnes and grade of a deposit. "In theory, that cutoff grade should be what a company or resource estimator projects is the breakeven point between making money and losing money. If the cutoff grade is, say, 0.5 grams per tonne (0.5 g/t), then I like to see an average grade that is at least twice that, say, over 1 g/t, because above that is where you really make the money."
Cook points to metallurgy as the most important aspect of any deposit, but that's difficult to discern from a corporate presentation or even a feasibility study, which can be very technical. "All that the retail investor can do is guestimate if the grade and tonnes are sufficient to cover the probable capital and mining costs," he warns.
One good metric is the internal rate of return (IRR), especially if it is after taxes. Cook looks for about 20% IRR after tax, although it depends on where the project is located and on the exploration upside.
Cook also advises checking out the rest of a company's website. "Be wary of a company that puts out a news release with no maps, no sections and no data. Watch for news releases that report high grades smeared over long intervals, and always search for historical data from the property being promoted. Most properties have a history that gives you some insight into possible tonnes and grade."
Reach Out: The last slide in a presentation is often the contact information for management at the company. Take this as an invitation to make a phone call or at least send an email asking follow up questions—lots of follow up questions. Management is almost always happy to talk about the project. In fact, for The Agletter Editor Tom Wallace, the enthusiasm of the CEO or investor relations person is one of the tests. "People love talking about success, so if the company has nothing to say for itself, it's probably best to move on to the next one," he says.
When Rick Rule talks to a company, he has one query he likes to ask management to get to the heart of the project. "Please distill for me the most important unanswered question right now. What's the thing that you can do that will deliver me the quantum increase in value that is required to induce me to take the risk to invest in your shares?" That leads to the question, "How long will it take to get an answer to that question and how much money will be required to answer the question?" Then as an investor, you can decide if the reward associated with a yes answer is worth the risk that you are being asked to bear.
Rule also wants to know the timing for profit for the company and the investor. That can help to reassure a potential investor that the company does have a plan, the schedule of possible catalysts and a benchmark to determine whether the company is delivering according to plan.
Taking the time to really examine a company presentation and do some homework before making a phone call can lead to a much more meaningful conversation—and possibly a more profitable portfolio—than one arrived at by throwing darts in the dark.
Following are some of the presentations being shown at the Sprott-Stansberry Vancouver Natural Resource Symposium. Now it is your turn to be the analyst.
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