“Art is a kind of mining,” he said. “The artist a variety of prospector searching for the sparkling silver of meaning in the earth.”
~ Jane Urquhart
A bull market in metals makes every mining CEO look like a genius. A rising tide lifts all boats, including the ones that are going to sink. Which is why, when capital floods back into the junior miners, the People question matters more than ever.
There are discovery machines and there are dilution machines. It’s hard to distinguish them in the financials, initially. And they can overlap for a long while. The difference shows up first in the People.
Unlike most sectors, junior mining companies go public in some fashion before they have accomplished much of anything. An exploration-stage mining company has no revenue, no product, and no customers. They’ve got nothing that supports even a guess at future profitability. They don’t have a P/E ratio. They are the antithesis of a value investment.
A junior mining company has a patch of ground, a treasury, and a few human beings deciding how to spend the treasury. As a speculator in such a company, you are taking your currency and (directly in private placements, and indirectly in the open market) letting other people have full power over it. You are not buying a business. You are not investing in a company to expand its profitable revenue. You are backing a jockey.
Doug’s screening question is: who are the key players, and have they made money for shareholders before? The Boy Scout virtues—honesty, thrift, courage, diligence—count. So do competence, knowledge, and experience. Look for the track record of success. That’s the composite score.
Nothing succeeds like success.
Many—perhaps most—exploration geologists retire without a single discovery that turns into a profitable mine. Discovery is hard and luck is scarce. Casey Research once ran the Explorers’ League, whose membership requirement was a minimum of three economic deposits found. It was a short list. When a Robert Friedland (behind Voisey’s Bay nickel, Oyu Tolgoi copper-gold) or a Ross Beaty (founder of Pan American Silver and builder of the Lumina copper companies) attaches his name and his money to a project, we notice.
The Austrian school explains why this works. The market runs a continuous examination: profit and loss. An entrepreneur who converts scarce capital into something more valuable has done something special—exactly what he is supposed to do. He earns trust and gets handed more capital to convert. The destroyer of capital eventually loses access to the till. But watch out: he can go find another till.
A track record represents decades of assessment. It becomes the market’s accumulated verdict on a person’s judgment in the field in which he professes to be an expert.
Now invert the question, because failure teaches. Mining is a high-risk business, and very good people can drill very dry holes. When a past venture went to zero, ask what management did on the way down. Did they cut their own salaries to the quick, return the remaining treasury and/or find a better way to deploy capital that worked? Or did they suck the treasury dry to pay themselves and leave shareholders a big bag of nothin’. I’ve watched some companies jump from sector to sector, such as taking the treasury initially formed for a specific project in gold exploration and turning themselves into a cannabis stock, and then when that failed, back to a resource explorer, picking up new funding at each transition.
Character is revealed at the bottom of the cycle, when there is desperation.
Beware of the lifestyle company.
In these frustrating entities, management buys a large initial position with token money, rounds up capital, pays itself well, drills just enough each season to provide juicy anecdotes for their next dog-and-pony show, and dilutes shareholders year after year, ending up with a token position of their own. They are speculating on their ability to get more money from you, not on getting gold from the ground.
The defenses against this? Insiders with real skin in the game. They behave differently from salary collectors. Who wrote checks in the last financing? Did the insiders step up? Then work the phones. Mining, for all its billions, is a small village. A few calls to brokers, competitors, and colleagues will ferret out the known snake-oil salesmen. And watch the hired talent: the best geologists and engineers can work anywhere, so they migrate toward the projects with the best personal upside. When good people start jumping ship from a company, there’s probably a helluva big leak. Don’t be waiting for the rats to jump off to close your position.
At Crisis Investing, we would rather own an ordinary property in the hands of proven winners than a spectacular property in the hands of salary collectors. The winners will advance the ordinary property, or sell it and find a better one. The salary collectors will turn the spectacular property into twenty years of overhead.
So before the drill results, before the resource estimate, before the macro thesis: who are these people, what have they built, and who made money standing next to them? Answer that, and the most essential component of your due diligence is done.
~ John Hunt, MD
Doug Casey’s Crisis Investing & Grey Swan
P.S. Last week, Grey Swan Live! returned with John Robb.
We continued the conversation that John started in recent issues of the Grey Swan Bulletin.
Specifically, we reviewed John’s thesis that the age of “mass” – dominated by large nation-states and large corporations – is giving way to a new geopolitical order.
- Mass media has already fractured into millions of competing voices.
- Politics no longer produces anything resembling national consensus.
- AI is beginning to dismantle the mass market.
- And cheap drones and robotics are changing warfare so dramatically that relatively small countries can increasingly frustrate much larger military powers.
John argues these aren’t separate stories.
They’re manifestations of the same technological shift.
The replay is up on the site for members here. Make sure you take advantage of this feature of membership – we love being able to share our conversations with some of the smartest minds today in Grey Swan Live!
We’re traveling this week, but will return with our regularly scheduled Grey Swan Live!
And this week in Grey Swan Trading Fraternity, we’re digging into the latest bank earnings, how lenders are fueling the AI boom and whether financial stocks are ready for their traditional year-end rally — or if the midterm elections will put that momentum on hold.
