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Junior Resource Stocks Most Valuable Asset
Quick. What's the most important asset a junior resource company has?
If you said anything other than its management team you especially need to read this.
If there is one thing I have learnt from investing in and researching several hundred junior resource stocks and getting to know the movers and shakers in this industry, it's that no matter how good a project may be, it doesn't mean squat if a weak and inexperienced management team is calling the shots.
I strongly believe that the junior resource sector has some of the best company leaders and versatile management teams of any industry in the world. On the flip side, it also has some of the worst management teams in the world: opportunists just looking for a pay-cheque. Thankfully, if you do the research, it's not hard to separate the bad from the good.
The reason the junior resource market attracts some of the best leadership in the world is simple. It's a challenging industry that is constantly changing. Management must have the ability to adapt to changing commodity cycles, responsibly allocate working capital, maintain a high level of enthusiasm from the public market and be patient while aggressively looking for deals - no matter what the economy is doing.
It's very hard to get bored working in this sector. Right when you think you've mastered it, another giant hurdle is thrown in your way. This is challenging, but the elite movers and shakers are drawn to this sector for these very reasons. It's an extremely versatile sector that provides them with the stimulation they need. It gives them a reason to wake up excited every morning.
It's All About the Ego
The common denominator all the successful players in the junior resource sector have, is that they are politely ego driven. This is not a bad thing, quite the opposite in fact. It's great for shareholders and these are the people I want to put my money with. You see, these ego driven individuals aren't managing these junior resource companies for a pay-cheque. That's the last thing on their mind, because in most cases, they are already set up financially for life.
These leaders are in the junior resource sector to build on their legacy; to conquer another challenge. You should see the pride these leaders have when speaking about past buyouts they were instrumental in putting together; or how they turned a pile of rock on a hillside into $75 million a year in profits (true story).
When discussing past successes, great leaders rarely talk about how much they (personally) netted on their last deal, but rather the hurdles they had to overcome before making the big deal; or how they played hardball with a big miner before eventually being bought out at a significant premium to the market price. These are the people you want to invest in when buying your next junior resource stock. Investing in junior resource stocks is about investing in people.
As an investor, I want to know that management will stay the course during tough times because they've been here before. I want to know they aren't basing all their decisions on where the stock price is; that is very short sighted and will eventually become tiresome and can often lead to desperate decisions. I want to know they will cut costs (without stalling work programs completely) before thinking about raising money at depressed share price levels. I want to know they are doing everything they can because they hate to lose and are addicted to success, don't want their image tarnished and are capable of making the tough decisions. I want to know they take their reputation extremely seriously and want to be the toast of their social club because they've got all their friends and family invested in their company. If they tasted success in the past (in the form of a buyout, major discovery or production), chances are they dealt with just as great of challenges and know how euphoric of a feeling it is to conquer another project. This is where the polite ego comes into play. If you get to know some of the great management teams in this industry, you will see they all have this common denominator. In the end, share price matters to them, but it doesn't dictate their day to day decisions.
Where's the grey hair?
As facetious as I may sound here, I'm serious. Exploration projects require a tremendous amount of experience. It isn't a terrible thing to have a young CEO run a junior resource company, but if he isn't supported by a seasoned technical team (more often than not a team with a lot of grey hair - or no hair), the company is going to make crucial, short-sighted mistakes.
Junior resource companies need youthful energy, but also a team of seasoned veterans who have been there before. If a young CEO isn't savvy enough to realise he needs a mature, experienced support team, he isn't worth investing in. Also, when a company heads to Bay Street to raise significant and strategic institutional money for its project, the 'money men' want to see an experienced team running the show before they even think about investing in the company. I've seen it before; a company with a phenomenal asset, but a youthful management team (lacking experience) makes a trip to a big institution's headquarters in need of capital. More often than not, the management team walks away empty handed or ends up making a deal that was in the best interest of only the institution. This leaves current shareholders with a significantly diluted position at often higher prices.
* Good management teams finance projects with the mentality of bringing in strategic partners, not just to raise money because they need cash.
Remember, when investing in junior resource stocks, your investing in the people running them.
Great management will find great projects and acquire them at an advantageous cost for shareholders. Don't ever worry about that. However, occasionally great projects don't find great management...at first. When poor management luckily falls upon a great project, in many cases, great management eventually takes over the project for a steal - usually in a down market when the bad management team moves on to the next fad commodity.
A Tell-Tale Sign of Bad Management
One of the most obvious signs of poor management is a lack of focus.
So often I will see companies who one-day are focused on a gold project, a couple months later they are a zinc explorer and the following year start exploring for uranium. These types of management teams are chasing fads. Whatever's hot they go for. In the mining industry, that strategy never works and patience and durability pay in the end. More often than not these 'fad chasers' end up with 100 million shares outstanding, no defined resource for any commodity and have blown $20 million in the process. In the end the people who get burnt are the shareholders, as the company often rolls-back its stock and does it all over again.
The people running these types of companies are often looking for a pay-cheque and hopefully, a bull market so they can sell their positions. It's not hard to spot these types of management teams either. That's the good thing. Yet, somehow, they manage to find investors who buy into their fad chasing philosophy. Unless you are a momentum trader, stay far away from these types of plays.
In late 2008, during the heart of the market crash, I was attending an investment conference in Germany. A speaker was interviewing a CEO of an exploration company and asking him about his falling stock price. The company's stock had recently gone from $0.90 to $0.10 thanks to the market crash. The speaker was asking some fantastic, probing questions. He came to the question about salaries. The speaker asked the CEO, who now had a company with a market cap of about $5 million, what his annual salary was. The CEO stated "$300,000 a year". The speaker paused for a moment and asked him if he was going to cut salaries given the current market environment. The CEO said he had no plans to do so. The speaker then asked how much money the company had in its treasury. The CEO responded rather proudly, "about $1.5 million". The speaker then asked "so 20% of your current treasury will be going to pay your salary?" You can imagine the look on spectators' faces.
This is a classic case of bad management just looking for a pay-cheque and not willing to cut expenses (his own salary) to avoid future dilution.
It came as no surprise, when a few weeks later, the company announced that it would be raising $1 million dollars at $0.10 - adding 10 million shares of dilution (15 million if you included the warrants).
I felt it prudent to write about management at a time when the majority of junior resource stocks are down (over the last 4 months) anywhere from 25% to 60%. Now is the time to be looking for great opportunities at discounted rates. Companies with phenomenal management teams have seen their stock price collapse over the past few months. However, unlike the companies with weak management, companies with seasoned and successful leadership will rebound in due-time.
Companies with management who have made a big discovery in the past, been bought-out or gone into production, have seen downturns like this many times. They know how to weather the storm and will do it again. That polite ego will keep them in the winner's column. When you invest in junior resource stocks, you're investing in the people running the company. Invest with people who have won in the past.
Enjoy the weekend,
This article represents solely the opinions of Aaron Hoddinott and not of PinnacleDigest.com nor Maximus Strategic Consulting Inc. Aaron Hoddinott is not an investment advisor and any reference to specific securities in the list referred to in the article does not constitute a recommendation thereof. Readers are encouraged to consult their investment advisors prior to making any investment decisions. The information is of an impersonal nature and should not be construed as individualized advice or investment recommendations.