What to Ask Before
in Natural Resource Stocks
Rick Rule, Chairman of Sprott Global Resource Investments
Ltd., says that the ‘management interview’ is critical before investing in any
junior resource company.
In an interview with Henry Bonner, Rule outlines what
questions to ask before investing.
“You want to figure out how the company will generate a
return for your money,” says Rick.
Exploration is similar to research and development in
technology, he explains. Companies are trying to answer a question, or a series
of questions. They need to discover something new of value. In the case of
‘juniors,’ the task is usually to discover a deposit or add on to an existing
discovery by exploring over a wider area.
Start with a few simple questions, he says:
“What is the most important objective of the company?
What key question is the company focused on answering?
“Should we care about its project? Is the effort worth
the potential prize? You must determine how much value – if any – the company
will create if it is successful.
“How likely is the company to succeed? And how long will
it take the company to solve their ‘unanswered question?’ How long must we hold
the stock before receiving a possible reward?
“How much money will it cost to carry out the project?
Does the company have enough cash on hand to perform its research? If not,
where will it get this cash?
“How will the company know to cut its losses on a
project? And what will happen to any cash left over? Will management return it
Many companies have more complex plans besides finding a
new deposit. Perhaps they are negotiating the purchase or sale of an existing
discovery. Or making a small mine more profitable. In these cases, achieving
this goal is their ‘unknown.’ And often, resolving one question may lead to
Of course, we have left out one key problem: Why should
you trust what the person says? And why should you trust the company’s
management? Are they qualified to take on the project in the first place?
“You want to know whether management is right for the
job,” says Rick.
We want management teams that have already been
successful – who have already proven themselves.
And don’t be fooled by past success that is unrelated to
the current project. For instance, a team may have an impressive track record
of making discoveries, but no experience at all in building successful mines;
these endeavors require completely different skillsets.
Not all companies who successfully answer these questions
will be winners. But most companies will not be able to do so. And you can
quickly cross them off your list. This narrows the number of companies that we
might consider buying, and improves our odds of success, Rick believes.
Even non-specialists can perform this task, he says, as
long as you use common sense. “If a purported ‘fact’ told to you by the company
does not make sense to you, it is likely because it is untrue.”
Today is the time to be out performing this type of due
diligence, says Rick, when most investors are depressed and scared.
Rick also joked about your first time talking to a
company. You will sit through ‘the pitch.’ That’s where the person at the booth
or on the phone tries to sell you on the stock. You might as well enjoy it,
since it is inevitable. It will give you a chance to assess the speaker before
asking your own questions. Was the speaker competent and honest? Did he or she
present an actual plan to create shareholder value? Once you have suffered the
pitch, it will be your turn to take charge.
Editor’s Note: If you are interested in
investing in natural resources, we invite you to attend our inaugural Sprott
Vancouver Natural Resource Symposium in Vancouver, from July 22-25, 2014.
Admission to this well-timed conference is $699.
At the event, you will hear from industry leaders
including Rick Rule, Doug Casey, Frank Holmes, Adrian Day, and mining mogul
Robert Friedland. For the speaker lineup or to register go to www.opportunity-travel.com/vancouver or call