What to Ask Before Investing
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 to shareholders?”
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 many more.
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 or to attend any of our investment conferences, visit www.sprottglobal.com.
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