The Gold Report: Not so long ago, mining promoters—larger-than-life personalities who revved up retail investors about stocks—were an essential part of the junior mining business. But the NI 43-101 limits how much company presidents and CEOs can tout their stocks. Do promoters still have a role or have they disappeared from the scene?
James West: Promoters have not disappeared from the scene. Yes, the NI 43-101 puts a filter on how public companies communicate with the market, but promoters are essential to the life cycle of public companies.
There was a time when promoters were infiltrated by a larcenous element that would create and promote deals that could at best be described as very optimistic. Back then, these misleading statements could be distributed almost clandestinely. Thanks to the Internet and the NI 43-101, that larcenous element has largely been unable to operate as freely. People hear "promoter" and they immediately think "con artist," which is wrong-headed and a throwback to the pre-Internet era. Promoters now are legally responsible for the statements they make on behalf of a company. As a result, promotion is a lot more respectable.
Today, because the level of sophistication has gone up with the proliferation of chat rooms and discussion groups, information considered "overly promotional" is discounted by the audience. People are a lot more savvy about promoters and promotional language than they used to be.
"A great stock promoter can credibly and convincingly convey the technical aspects of a project and the merits of the management team, and can honestly indicate who the other investors are and what the exit strategy is to as broad an audience as possible. He also needs a great Rolodex."
Promoters are still there, they are just more transparent. Today, promoters are part of the management team. They go to the meetings, presentations and trade shows. Excellent promoters attract capital and investors. A company without a good promoter on the management team is a company with few investors, that nobody has heard about and that can't raise money.
TGR: Given the transparency and availability of information, would investors be better off if the NI 43-101 rules regarding resource disclosure were relaxed to allow greater promotion?
JW: No. It is thanks to the NI 43-101 that the Toronto Stock Exchange (TSX) and the Toronto Venture Exchange (TSX.V) are the No. 1 destination exchanges for resource stocks. Those rules create a level of investor trust such that investors expect that any legitimate resource-oriented public company raising money must have an exit strategy that involves the TSX or TSX.V.
However, I believe NI 43-101 enforcement should be undertaken more carefully. For example, look at what happened to Orbite Aluminae Inc. (ORT:TSX) last year. Orbite extrapolated a rare earth estimate between holes two kilometers apart. The geologist at the Ontario Securities Commission took exception to that and halted the stock. Later, the Autorité des Marchés Financiers in Québec did the same thing on the same grounds. Additional NI 43-101 reports were ordered by both agencies. Eventually, 11 independent geologists concluded that Orbite's approach to the assumption was sound and that the estimate was accurate. While it was halted, the stock built up a short position of 11 million (M) shares. When it was finally unhalted, it got hammered, and is now trading at nowhere near where it should be trading.
TGR: Do the recent poor performances of resource equities and the difficulties companies have raising money make a good promoter more valuable?
JW: Absolutely. Some promoters are raising millions of dollars. That is the result of a combination of good projects and good management, which includes a good promoter.
TGR: What makes a good stock promoter?
JW: A great stock promoter can credibly and convincingly convey the technical aspects of a project and the merits of the management team, and can honestly indicate who the other investors are and what the exit strategy is to as broad an audience as possible. He also needs a great Rolodex.
TGR: How do today's promoters differ from your dad's junior mining promoters?
JW: They do not drink or smoke nearly as much, and they probably do not make as much money. Back in the day, you could promote 10 or 15 deals. If just one took off, you would be off to the races financially.
Today, if you are on more than one management team, your attention is assumed to be divided and your effectiveness is perceived to be limited as a result. Promoters cannot have as many balls in the air as they used to. Promoters are a visible part of management and are accountable.
TGR: Who would you consider to be a good, or even great, promoter active today?
JW: A great promoter, without saying too much, gets you so excited about the deal that you buy stock in the market or you participate in a private placement. Without being promotional, he paints the picture and leaves you to read between the lines if it's a truly remarkable project.
I would put Richard Whittall from Newstrike Capital Inc. (NES:TSX.V) in that category. He does not shout from the rooftops. He diligently goes about the business of credibly articulating the structure and financial condition of the company and the deposit. The fact that Newstrike's share price is holding where it is in this market is testimony both to the quality of the deposit and to Whittall's effectiveness as a president and promoter.
TGR: Some might consider you a stock promoter. How do you straddle the line between being a promoter and remaining credible?
JW: Arguably, anybody who speaks positively about a public company is promoting it. In our newsletter, we are happy to promote the stocks we invest in because we own them in our fund, and we think they have value. When we write about these companies, we try to articulate a company's merits in terms of structure, financing, projects and management without being too promotional. The idea is to say, "This company is good enough for me to invest in it, and here's why I like it." It is third-party endorsement in its most sincere form.
TGR: But you also try to create a story and use language that people can easily understand and relate to.
JW: The role of a newsletter writer in mining is to convey complex technical concepts in simple terms that a layperson can understand and use to decide whether an investment is appropriate for them. We aid in the function of promoting the stock, but we are not promoters.
"The best time to participate in a high-risk venture is before a junior makes a discovery."
Increasingly, I have been invited into deals as a founding shareholder. In that instance, I do become more a part of the promoting function, and in most of those cases, I'm proud to be a promoter because I believe in the deal, the project and the team. But you rarely see a newsletter writer on a management team or a board of directors.
There are exceptions, like John Lee, who was a fund manager and newsletter writer with Prophecy Coal Corp. (PCY:TSX; PRPCF:OTCQX; 1P2:FSE) and Prophecy Platinum Corp. (NKL:TSX.V; PNIKD:OTCPK; P94P:FSE); Victor Goncalves, who stopped writing to become president of Threegold Resources Inc. (THG:TSX.V); and Jim Sinclair, who has a huge audience and is the president of Tanzanian Royalty Exploration Corp. (TRX:NYSE.A).
TGR: Institutional investors and investment banks are quite active in the junior mining space today. Do you think the space will be reclaimed by retail investors?
JW: First, the sheer size of the investment banks gives them an advantage over individual investors. Second, because the investment bank's business model relies on transaction volume, they are only in it for the structure, not the story.
So, yes, retail investors are reluctant to participate, especially in this kind of market and because of the mercenary nature of the investment-banking model. That being said, the earliest stage of the public company lifecycle is exclusively the domain of retail investors.
TGR: The best times to get into an equity position are at the seed capital stage and at an IPO. But many of our readers do not have those opportunities. What is the next best time in a company's life cycle to invest?
JW: I will start by saying that for the average investor whose portfolio is less than $100,000, the high-risk portion is the only portion that should be allocated to investing in junior mining.
"The best thing you can do in this market is look for companies that have made discoveries but whose share prices do not reflect the value of the deposit."
The best time to participate in a high-risk venture is before a junior makes a discovery. For individual investors that typically means after an investment bank has done a financing and the stock price drops below where the financing was done, and when all signs point to a discovery. At that point, you are in cheaper than the institutions and the share price is unlikely to be driven down lower. After the discovery moment, the stock price goes parabolic for a brief phase.
TGR: The discovery phase is when investors are most likely to tap into the legendary "tenbagger." Can you tell us about some names that may or may not be tenbaggers?
JW: GoldQuest Mining Corp. (GQC:TSX.V) comes immediately to mind. On May 23, 321,000 shares of its stock traded at $0.075. The company announced the Romero discovery at the Las Tres Palmas project in the Dominican Republic; drill results were 230 meters (m) grading 2.4 grams per ton (g/t) gold, which included 160m grading 2.9 g/t gold and 0.62% copper. In textbook fashion, the stock tripled, closing at $0.31 on 16M shares of volume. It touched a high on June 1 of $0.74. From $0.075 to $0.74, that is a tenbagger, a 10-times return investment if you sold it on June 1.
Apart from promising preliminary geology and geophysics, there was no way for an investor to know that GoldQuest was going to pop out a hole like that. That really speaks to one of the keys behind successful resource investing—plain luck.
TGR: Yes, but investors can reduce their odds through due diligence and listening to people like you.
JW: Yes. A good management team and a great geologist can look at a piece of ground and render an opinion about what might lie beneath it. Reinforce that with geophysical and geochemical data, and they might be able to improve on where they would drill a hole. But it is still largely a puzzle.
TGR: Shortly thereafter GoldQuest closed a $6.6M private placement. Could it have done that if it had not made that discovery hole?
JW: It might have been able to do that, but certainly not at $0.45 a share, and I doubt it would have been able to raise $5M prior to that discovery.
TGR: What is GoldQuest's next step?
JW: To keep drilling now that it has the money, and hope that hole is representative of the ground it owns at Las Tres Palmas.
TGR: What other names do you like, James?
JW: The best thing you can do in this market is look for companies that have made discoveries but whose share prices do not reflect the value of the deposit.
My first example would be Hunter Bay Minerals Plc (HBY:TSX.V; HTBNF:OTCQX). Hunter Bay completed its first drill program on the Sela Creek project in Suriname and announced 42m of 1.2 g/t gold as initial results. Artisanal miners have worked the surface of this area for 50 years. This is a discovery in the sense that modern exploration techniques have discovered the source of all that surface gold.
The nearby Rosebel mine belonging to IAMGOLD Corp. (IMG:TSX; IAG:NYSE) is at 14 million ounces (Moz). Newmont Mining Corp.'s (NEM:NYSE) Nassau deposit is 4+ Moz. Both of these discoveries were found under similar circumstances.
Yet, Hunter Bay trades at just $0.20/share. Nobody understands the implications of the initial drill results, and it is not generating the broad market appeal that GoldQuest did. But that is what makes it an opportunity for investors. Hunter Bay will continue drilling. Chances are it will continue to prove up this kind of drill intercepts, indicating the existence of a mineable deposit.
TGR: In our last interview, you talked about Tinka Resources Ltd. (TK:TSX.V; TLD:FSE; TKRFF:OTCPK) and Seafield Resources Ltd. (SFF:TSX.V). What is happening with them?
JW: Tinka already has 20 Moz silver in combined resources at its Colquipucro deposit in Peru. On May 1, it announced 20m of 86 g/t silver. That is almost 3 ounces per ton silver. There have been other positive announcements as well. This is an existing resource where drilling continues to prove out intercepts that demonstrate the potential for an economic deposit. The company has been beaten down by general market aversion. However, as an investor, if you buy into the idea that the silver price is rising incrementally, it is excellent exposure to silver at an excellent price.
TGR: There have been recent concerns about the viability of mining projects in Peru. What is your view?
JW: Peru's president, Ollanta Humala, was elected on a platform of making sure more money from Peru's resources goes to the poor people who need it most. Now that he is president, he has to deliver on that. Peru's revised tax system for mining does give the government more money.
But the problem with the specific deposit that is causing trouble for Newmont is that it is in an area where the people do not want mining at all. The local people are convinced that a mine will destroy the water they rely on for agriculture. That kind of problem can happen anywhere; it is not specific to Peru.
Now there are questions, because President Humala has been forced to side with the people, that the mine may not move forward. That has created a general sense of enhanced risk that needs to be priced into anything happening in Peru.
TGR: How is that likely to affect a company like Tinka?
JW: It should not affect Tinka. You have to ask yourself: Is this an economic deposit that a major will want to acquire and add to its production portfolio? If the answer yes, Newmont's problems are not relevant to Colquipucro unless it, too, is an agricultural community. The indications are that the people of Colquipucro are open to a mine for economic reasons.
TGR: What about Seafield?
JW: This is a story with great geology. It has continuous excellent intercepts since its announcement of 449m of 1.25 g/t in December 2010. The stock took off. But Seafield had been financed at very low levels after the 2008 crisis, so there was a lot of stock out there. Insiders ended up killing the momentum in the share price because they had been starving for so long.
TGR: But then management changed, did it not?
JW: Yes. The new management team is led by Cesar Lopez, who was somewhat successful with Apoquindo Minerals Inc. (AQM:TSX.V), now AQM Copper Inc. Seafield has an NI 43-101 coming and the drill results are great. But the sentiment is so negative that is very hard for the stock to move forward.
TGR: This is Seafield's Miraflores property in Colombia. The company just put out a preliminary economic assessment that demonstrated a 50% internal rate of return and a net present value of $249M. What did you think of those numbers?
JW: The proof is in the pudding. If a reputable engineering firm could draw that conclusion, it demonstrates viability.
TGR: You are moving more into the energy space. What oil and gas plays do you have positions in?
JW: My top oil and gas position is in Terra Nova Minerals Inc. (TGC:TSX.V) in Australia's Cooper Basin. It will start drilling in October. The Cooper Basin is a rich hydrocarbon field, so the chances are that at least one of the four holes Terra Nova plans to drill will lead to an oil well.
Africa Oil Corp. (AOI:TSX.V) is the poster child for the tenbagger in the oil and gas space. The company had a low share price; investors did not care about it or were selling it.
Then it discovered a major oil find at its Ngamia-1 well in Kenya. The stock went from below $2/share up over $10/share and today is still trading around $8/share.
Then there is EFL Overseas Inc. (EFLO:OTCBB), a big gas play in the north of Canada.
TGR: Is it publicly traded?
JW: It is on the OTC right now, at $2.50/share. It has a land position in the Liard Basin in the Yukon. This is a huge field that could be larger than Papua New Guinea. The company will be listed on the TSX within three months if it succeeds in this undertaking.
TGR: James, you are by-and-large a positive person. Why should retail investors be optimistic today?
JW: Arguably, we are in a continuation of the 2008 crisis, which was offset temporarily by a massive injection of quantitative easing and easy fiscal policies.
A crisis is an opportunity. This is a great time to accumulate as long as you do not put a timeframe on your exit. In many cases, the high-quality juniors have been pulled down along with the lesser quality companies. That is the opportunity and the reason for optimism.
Midas Letter is the journal of investment strategy of the Midas Letter Opportunity Fund, a Luxembourg-based special investment fund that specializes in Canada-listed emerging companies in the resource sector with a focus on precious metals explorers and miners, and the Midas Letter Securitisation Fund, also Luxembourg-based, which provides secured capital to advanced development projects across all commodities and energy. James West is the portfolio and investment advisor to the fund. Every month, West's Midas Letter Premium Edition deconstructs the economic and political events of the past and upcoming week, and identifies risks and opportunities to investors seeking to profit while the majority of investors are losing money.
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1) Brian Sylvester of The Gold Report conducted this interview. He personally and/or his family own shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Gold Report: Orbite Aluminae Inc., Newstrike Capital Inc., Prophecy Coal Corp., Prophecy Platinum Corp., Hunter Bay Minerals Plc, Tinka Resources Ltd. and Seafield Resources Ltd. Streetwise Reports does not accept stock in exchange for services. This interview was edited for clarity.
3) James West: I personally and/or my family own shares of the following companies mentioned in this interview: Orbite Aluminae Inc., Newstrike Capital Inc., Prophecy Coal Corp., Prophecy Platinum Corp., Hunter Bay Minerals Plc, Tinka Resources Ltd., Seafield Resources Ltd., EFL Overseas Inc., Terra Nova Minerals Inc., IAMGOLD Corp., Newmont Mining Corp., and GoldQuest Mining Corp. I personally and/or my family am paid by the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this interview.