Hookers and Blow: The Only Real Metric in the Junior Mining Industry
We have suffered through at least four years of soul-sucking mining markets. The pain has shot through the juniors, the intermediates, even the mighty senior producers.
Many in the industry this year have been quick /eager/ desperate to call a recovery. “It’s over!” we shout, with fingers crossed, hoping that saying it makes it true.
PDAC 2012: ah, the good ole days. Every booth in the trade show and the investor side was spending marketing money. The parties were huge. Treasuries were full. Scotch tastings, a banquet of food and 35,000 people wedged into downtown Toronto for The Mining Show. Companies were on undisciplined buying sprees, spraying capital like water from a hose. That’s what the smell of gold near $1,800 an ounce will do.
Fast forward to PDAC2014. Think Cormac McCarthy’s The Road, the great Irish potato famine, Mad Max, Fort McMurray after the fire, the dark side of the moon. That year, attendance fell to about 25,000, with empty booths artfully draped to cover up the holes. The number through the turnstiles was likely much less than that. Parties were much smaller, guest lists more tightly controlled, marketing more focused. Value had been obliterated in those two years and mining companies were adjusting to a more limited treasury.
PDAC2016 was a time of desperate optimism. Official attendance was down to 22,000, but those 22,000 real mining people made a better group than did the 25,000 in 2014. Good projects were barely getting funded, bad projects were properly dying the death they deserved. Intermediate projects had to battle to see another day. Some companies survived on having raised a well-planned amount of money at the right time, others on pure luck. If you attended PDAC2016 in Toronto, you would have seen few of the trappings of a happy trade show. Very few big parties (except for Integra Gold, who truly deserved to throw a big celebration for the amazing year it had for itself and its investors), almost no chachkis in the trade show or the investor side, demoralized white guys (like me) working the booths trying to communicate a company’s real value proposition to a crowd that was afraid to listen.
Warren Buffet: “Be fearful when others are greedy, and be greedy when others are fearful.”
Get our daily investorintel update
If PDAC2016 was desperate optimism, PDAC2017 could best be described as “cautious optimism”. If 2014 was “Oh God, this’ll never be over”, 2017 was “Oh God, this might be over, right?” The Canadian Securities Exchange and the TSX Ventures Exchange both point out the uptick in the junior markets over the past two years, as though that trailing indicator will influence future behaviour. Perhaps it might, because that is the point of marketing.
The TSXV Market Intelligence Group issues a monthly report with data on new listings and capital raised. The one for March/17 is here. It shows 71 new listings, of which only 18 were in mining. Of the $13B raised on the TMX and TSXV combined, only $2.3B went to mining. The good times aren’t rolling yet.
But if enough people say the bad times are over, then they’re over, right? Aren’t the markets just a reflection of what people think things are worth, and if they think it’s worth more, then it’s worth more. Right?
Maybe. Equity certainly has a component of undefinable goodwill to it. But in mining, and especially in the juniors, there is a different metric to consider which we’ll lay out below. First, consider the metrics that aren’t of much help in assessing a ‘good junior’.
Audited financial statements: For a non-revenue junior mining company, there are few things more irrelevant than its annual audit. It’s a waste of fees (minimum $15,000) to tell the shareholders exactly what they knew four months ago. Audited statements have a place in the public domain but the junior mining market is not one of them. The audit system is broken and needs a regulatory fix.
Earnings: almost meaningless. On occasion you will see a junior with earnings, as a result of a capital gain from the sale of a mining asset. That can be an indicator of a management team that knows how to buy and more importantly when to sell. See above for the Warren Buffet quotation. Otherwise, meaningless.
Net equity: due to accounting interpretations, most juniors choose to expense all of what would in other industries be considered capital expenditures. As a result, there is no value built up in the asset portion of the balance sheet. There is little book value in a junior, good or bad. Net equity and a deficit are irrelevant.
The mining assets: a great place to start. If the assets are weak, there’s no point continuing. To understand the assets you will need a geological professional. Right now there are too many companies with marginal lithium assets, still trying to ride the lithium wave. As investors we have to realize that lithium is actually not hard to find. You can drill on Main Street and likely assay some lithium. The magic in Li, like rare earths, is in the processing. Don’t consider giving your hard-earned capital to a lithium company unless it already has something of an idea on its metallurgy.
A NI43-101 report: 50/50 on this one. It’s not a useless document, but it’s of limited assistance. It’s one good piece of due diligence for an investor, but many are out of date, data-selective, reliant on third party or management data, and overly structured. Some are outright horsecrap – for an example, compare Barkerville’s atrocious 10 million ounce resource estimate from June, 2012 (for which the BCSC penalized Barkerville) to its far more informative July, 2013 report.
Cash in the treasury: a lot more meaningful. Not the whole story, but important to consider.
Cash flow: Hmmmm, by definition, it’s a junior miner, and if it has positive cash flow, it’s not a junior. But where that cash is being spent is extremely important. How much goes into the ground to increase real long-term shareholder value?
Management: there’s one of the best metrics in a junior. Who are they, have they done it before, do they treat shareholders with respect, how transparent is their reporting, have they been able to raise capital on other occasions, how do they react in difficult times, how do they manage risk, is it a balanced team?
The last two items actually fit together into my favourite metric for the juniors, and it’s pretty basic: how does management spend the shareholders’ money? Is it like 2012, blowing it out the doors because it seems like fun, or is every day (even in the good times) like 2016 with a vice and velcro holding the purse strings tight? Does the money go into the ground, with a reasonable amount for overhead and management and marketing, or is there a disproportionate amount being paid out to promoters, investor relations teams, management and directors?
There’s someone in the public markets in Canada infamous for his phrase “hookers and blow”. He helps companies raise a fair bit of capital, but chooses to spend an unreasonable amount of it on illegal marketing involving women of negotiable virtue and illicit drugs. The phrase “hookers and blow” has become shorthand for “management is wasting the shareholders’ money on management”. That is in our opinion the best metric by which to measure the juniors.
How much is management getting paid? Are they continually issuing options to themselves at a discount to the market, and then bid-banging to get the cash to exercise the options? Does management rent its own space to the issuer (which is OK if disclosed) at a premium to the local real estate market (not OK)? Does management have irrational termination fees? Whose family is on payroll? Does the CEO answer shareholder phone calls / emails or do they get pawned off on a paid minion? How much is going to third party promoters for a short term ramp-up in the share price vs long-term investments in the data?
Right now, the cyclic mining market is emerging from hibernation, with the good times on the horizon. If the market were a calendar year, we’d be in March. It’s time to pay attention to Warren Buffet’s quotation and to be highly intelligent with your investing dollars. Invest in the mining assets and the management team – don’t get fooled by the hookers and blow.
Mr. Clausi is an experienced investment banker, executive and director. A graduate of Osgoode Hall Law School called to Ontario's bar in 1990, Mr. Clausi ... <Read more about Peter Clausi>