Investors who have gotten involved in junior resource stocks in the past decade have seen the rise and fall of stocks in the midst of rising metal prices. For many investors, this is all they know. But investors who have been around a lot longer than this know that times have changed – new industry regulations and requirements, new excitement because of never-before-seen metal prices, and (of course) widespread access to good and bad information via the internet.
John Kaiser, of Kaiser Bottom Fish, remembers how things used to be for junior resource investors. There used to be much more speculation than there is today, and it had a different focus than the kind of thing today's investors are looking for. Mr. Kaiser believes that we need more of that old school speculation in today's market.
We spoke with Mr. Kaiser at the Hard Assets Investment Conference in New York in May.
He started the interview by giving us an overview to today's market conditions: "The problem in the market right now is there is an embedded pessimism about the future direction of metal prices," said Mr. Kaiser. "Although the metal prices are still hanging in there at close to all-time highs, the equities are on a free fall and that seems to be the market telling us we're heading into a global recession… perhaps a depression down the road because China is not going to be able to pull out of the slowdown or that Europe is not going to be able to solve its problems."
Although a lot of economists and junior resource experts are saying those things, Mr. Kaiser doesn't agree entirely. "I'm inclined to think it's overdone," he said. "I think there are signs that the United States is emerging in the middle of its problems." However, he says that the good news is largely clouded by bad news: "The US is in the middle of election campaigns and it's in the interest of one side to make everything look as bad as possible to enhance their own election chances."
What does Mr. Kaiser advise investors to do? After performing appropriate fundamental due diligence, he asserts that one cannot time the bottom of the market so the best thing to do is average out a number of stock purchases through the bottom instead of buying it all at once: "Say you want to buy $10,000 of a stock. Buy some now and then buy more when it drops and then buy more when it bounces up a little. Don't try to be a hero and time the market."
Mr. Kaiser also suggested that investors rethink what kind of companies they invest in. He's sees opportunities in reverting back to an older style of speculation: "What has dominated the market in the past decade has been cash-flow-analysis-based juniors. [These are] advanced deposits that already exist and it's just a matter of figuring out what the cost is to put them into production. The metal price helps determine that." For example, a company might find a deposit and then calculate whether it is economical to mine that deposit. If it is, they'll move forward. So the price of the metal factors significantly into the business model.
But Mr. Kaiser suggested something else – something that could lead to bigger wins: "In this type of market where people are worried that metal prices might stay where they are or (more likely) head lower, there might be a shift in the speculative focus away from the advanced projects to the more early-stage discovery-oriented plays that have not been in vogue since the Bre-X betrayal in 1997." Later, he added: "I think people should put their focus on – old fashioned discovery and exploration."
Rather than focusing so much on the price of the metal as a determining factor in moving forward on a deposit, Mr. Kaiser said investors should adopt a more speculative approach by looking at earlier stage discoveries: "Discovery plays only qualify as such if the implications are that the discovery is large and rich, where it doesn't matter what the price of the metal is. In 1995/1996, nobody cared what nickel and copper were trading at when the Voisey's Bay discovery was happening."
Mr. Kaiser said that audiences are demanding it, and he believes that it will improve what industry conferences and newsletters have to offer: "The audience out there wants to stop listening to nonsense about ideology and macroeconomic projections. They want to get back to the basics of speculating on how big is a discovery and how high will a stock go before it stops going on. It would make these conferences far more interesting than they have become. Back to the old days when there was tremendous buzz where newsletter writers were actually relevant because they would talk to these companies and would pick up information that wasn't in the company's news releases. [Newsletter writers] would connect the dots and the subscribers would actually get value out of reading this pundit stuff."
Next, we asked Mr. Kaiser about how investors could achieve his idea of a more speculative approach. He said: "I'm telling people to start rummaging in the garbage can of the juniors. There are many companies that have a lot of stock outstanding. There is going to be a major consolidation where companies roll back their stock and start afresh. But before they blow up all the shareholders that they attracted in the past decade, they need to go take their best projects and dress them up as a target and throw a Hail Mary pass. I am now looking for companies like that, that have targets to which the market is assigning very low valuations because [people think] 'the glass is half empty and everything is going to fail'. It pays to look for companies that still do exploration work."
To finish up our conversation, Mr. Kaiser gave to stock recommendations (both of which he owns). His first recommendation is: "Nevada Exploration Inc. (TSX-V: NGE) has a new exploration tool for looking for gold deposits under the gravel in Nevada, which are very difficult to target. They use a gold in groundwater sampling technique to identify geochemical plumes in areas where nobody where anyone would start looking."
And his second recommendation is: "Uravan Minerals (TSX-V: UVN) are up in the Athabasca basin. This company has used science where they take 3 core samples and measure the lead isotope ratios and there's a certain type of isotope that decays from uranium. So they're prioritizing all these geophysical conductors through this method of sampling." Then he told the story of a property that uranium company Cameco swapped with Uravan because Cameco hadn't found any uranium on it. Uravan did their tests and found uranium and now Cameco is buying back in.
"Those are two high-risk exploration-type plays that I'm following," Mr. Kaiser said.
Today's investors have access to a lot of information, but that doesn't necessarily mean they are more informed. In fact, the sheer volume of information might actually be detrimental if investors don't have a way to filter the information. Mr. Kaiser's solution is to get back to the basics of speculation and find a company whose deposits are exciting without requiring the additional consideration of commodity prices.
Hard Assets Investment Conference: http://www.hardassetsny.com/
Kaiser Bottom Fish: http://www.kaiserbottomfish.com
Uravan Minerals: http://www.uravanminerals.com/