LJ: We’ve always had an eye out for the takeovers and kept them on the radar, but we started to focus on them more when the liquidity issue became very serious, because, frankly, as the number of subscribers grew we became market movers. We moved toward more liquid shares in the newsletter, and takeovers are among the best liquidity events.
As Rick says, M&As aren’t an “if” but a “when” question for the larger mining companies, because if they don’t buy the successful exploration efforts, they will no longer be larger companies. There’s no way a mine can be anything but a depleting asset, so if these companies don’t spend money replacing reserves through their own grassroots efforts, they have only one choice.
TGR: Rick, you say only a handful of management teams have created most of the value in the mining sector. Who are they?
RR: Two generations of relationships with the Lundin family reminds me of owning a row of slot machines. They’ve done something good for me every year for 35 years. I’ve also known Bob Quartermain for 35 years. I’ve done two companies with him, and he’s been spectacularly successful. And the worst of the four companies that he wasn’t involved in but recommended to me over a period of 20 years was a tenbagger. Same with Ross Beaty, who I’ve known since I was in university. A serially successful man.
In Calgary, there’s Murray Edwards. Serially successful. If all you did for 20 years was hang out with Murray Edwards, you would have made truly spectacular amounts of money. Most junior resource investors won’t spend time and don’t have the education to make technical decisions with regard to the length and breadth of the market, but if they discipline themselves to stick with people who do that for them for the long term—management teams that may make mistakes and stumble but will deliver—they’ll do well.
TGR: So even those with the Midas touch sometimes stumble?
RR: Oh, yes. I talk about how much money Ross Beaty has made my customers over the years. There hasn’t been a Ross Beaty stock we’ve ever been in that hasn’t fallen by 50% or more at one point in time when we owned it. In the first incarnation of Lumina Copper Corp. (LCC:TSX.V), I think the financing was $2/share. The stock ran to $6/share. Everybody loved it. It fell back to $2.80/share. If you lost your nerve and sold out then, you missed a 4½-year move to $44/share.
Marin runs a fund that I invest in, the KCR Fund. I told him, “Visit everybody you can in Canada between the ages of 30 and 40 and find me the next Ross Beaty. It ain’t going to be easy but it’s more important than anything else you can do for us.”
TGR: Whom did you find, Marin?
MK: We created the NexTen, which is the next generation. Those in Rick’s generation are Casey League Explorer honorees, a kind of hall of fame in junior exploration. Amir Adnani, one of the first NexTen, actually built a uranium mine, and he’s 33 years old. He sat behind me in organic chemistry class in university, so I’ve known him since then. And there’s Nolan Watson, who was the youngest CFO of a NYSE-listed company with a market cap over $1 billion and probably knows more about royalty structures than anyone else in our business.
Morgan Poliquin, president and CEO at Almaden Minerals Ltd. (AMM:TSX; AAU:NYSE.A) is also among the NexTen. His father is Duane Poliquin, Almaden’s founder and chairman; he’s a Casey League Explorer honoree. When it comes to the geologists, you stick with the young ones who have it in their blood. They are true company builders. They aren’t serving on the boards of 10 different companies, spending half their money on Canucks box tickets and the other half on their Ferraris.
LJ: We did a panel in Vancouver in January with maybe six Explorers. If you’d invested in their plays in this cycle in the last couple of years, you would have doubled or tripled your money. That’s striking because it’s not just the 80/20 rule. It’s 80/20 and then 20% of that 20%, who make most of the discoveries. It’s very much the cream of the crop, with those serially successful track records.
Rick mentioned how Ross Beaty’s companies have had 50% haircuts on their way to multiple gains. We have to cull the herd in our newsletters, so we exited the second-generation Lumina when everything went into reverse in 2008. But we didn’t say “sell” in our newsletters. We said we were closing our position for portfolio reasons, that we may not sell our own personal shares and we didn’t think there was any hurry for readers to sell theirs—but we weren’t going to be following the company anymore.
Interestingly enough, a good number of our subscribers didn’t sell either. Now that political risk has increased in Argentina, where Lumina operates, we’re getting more “should we sell?” questions—which tells me how many people held on to that stock. When we closed our position at about a 50% loss, it was at about $0.50/share. Last I noticed, it was in the $6–7/share range; if you’d held on, you’d have had a high multiple on your investment. Or if you bought at $0.50/share as a contrarian, you’d have done extremely well—more than a tenbagger.
Every time Ross pitched something to me and I didn’t buy it, the stock went up a lot. The least was a little bit better than a double on Ventana Gold Corp. (VEN:TSX). I thought it was already expensive, but darned if it didn’t more than double after I didn’t buy it. It pays to bet on winners like this.
TGR: You’re talking about company-builders providing a lot of value in the share price, and how stockholders will get the value out of the some of these equities through M&A. Are the majors looking at management?
LJ: I doubt Newmont Mining Corp. (NEM:NYSE) cares whether quality operators like the Poliquins have advanced a project. They look at the numbers and decide, “Yes, this fits our needs, it dovetails with our existing production or whatever. It works for us and at X price, its value-accretive to us.”
I don’t think the majors look that much at management. Good management does the things the majors want to see. They derisk a project and advance it properly. When the majors review the data, they see this is a real resource.
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Anybody who thinks an NI 43-101 will protect them from a fraud
is smoking something or should be– Louis James
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RR: Professional speculators, too, can focus on second-tier management teams and segregate properties. Most investors don’t have the ability to separate the wheat from the chaff. If they’re attracted to the performance this sector can produce, the most reliable way is to stick with the very best operators. With something like 250,000 geoscientists in the world and 3,000–4,000 operating mines, most geoscientists will never be part of a discovery. But others, like those in the Explorers’ League, are responsible for 4–5 discoveries each.
MK: These aren’t one-man shops, either. They build exceptional teams. Ross Beaty has David Strang as Lumina president and CEO, and Leo Hathaway as vice president of exploration. A close friend of mine, Jim O’Rourke, chairman of Copper Mountain Mining Corp. (CUM:TSX), has built five mines and teams around him. He’s 72 years old and still drives up to the Copper Mountain mine near Princeton, British Columbia, on Friday nights because that’s what he loves.
TGR: Bud Conrad, Casey Research’s chief economist, pointed out during the summit that gold stocks have never been lower compared to the gold price. When will this change?
