There are about 1750 Toronto-listed junior resource companies, and more starting up each month. It's hard enough for a professional investor to keep up and find the few good stocks among the many not-so-good ones, so how can the average investor hope to do this?
At the recent PDAC Conference (Toronto, March 4th through March 7th), investors heard from a number of experts about how to uncover good stocks. Among those experts was Mickey Fulp, The Mercenary Geologist. We've provided highlights of his talk below. Where possible, quotations are used directly from his presentation but may have been slightly edited.
His speech was divided into two parts. In the first part, he briefly ran down a list of project criteria he uses when doing due diligence on a stock. The second part focused on "good, bad, and 'butt-ugly' aspects of commodities that investors should be aware of.
Mr. Fulp started by reviewing some key ideas on his due diligence project checklist. While this list isn't comprehensive, it does provide investors with a good starting point.
He said, "There are four key criteria that you need to decide if a particular flagship project meets your speculative goal."
The first criterion is timeline to development and/or production. Mr. Fulp said: "An average junior will have a lifespan of 5-8 years. Therefore, you need to find a project that can go from exploration to development and permitting in a time span of 5 to 8 years."
The second criterion is the cost of production. "Economic geologists, CEOs, and financiers all know that you need to be in the lowest quartile of production costs among peer companies for whatever metal you're producing," he said.
The third criterion is access to capital. "A junior has limited access to capital and can raise $50 to $100 million by itself but likely no more," he said.
The fourth criterion is multiple exit strategies. "A lot of juniors will say 'our exit strategy is to sell to a major'. Well only one junior in a one or two hundred will ever find any resource big enough to sell to a major. To me, that's not a viable exit strategy."
Later in his speech he revisited this topic and offered several "bullet point" phrases that he also includes on his due diligence checklist:
He said:
· "Every good geologist knows that grade is king."
· "Most junior resource companies are simply mining the stock market."
· "Mark Twain said 'A mine is a hole in the ground with a liar standing beside it.'"
· “A day without learning is a day wasted."
· "Beware of frogs masquerading as princes."
The next part of his speech was entitled "the good, the bad, and the butt-ugly", in which he covered deposits and metals and companies that he felt should be looked at more closely or avoided entirely.
Beginning in 'the good' category, he said: "I like open pit heap leach oxide gold deposits, open pit heap leach copper deposits or (ISR) in situ copper recovery, and in situ recovery or open pit heap leach uranium deposits."
Then he listed a few companies that fit into this category, and mentioned that he is a shareholder and/or has a business interest in each one:
The first was Goldgroup Mining (TSX: GGA). "They have a small heap leach gold mine in northwest Sonora. This is a cash flow positive gold mine that was put into production for less than $2 million capex in 2003. The real attractiveness of the company is a large advanced gold project in Veracruz currently being test mined and on a fast-track to production. "
The second was Curis Resources (TSX: CUV). "This is an ISR copper oxide project in southeast Arizona. It was first developed by BHP Billiton in 1990 but they gave up because copper prices were very low in the early 1990's. It’s not a mine; it's a well-field. In-situ recovery is a very low-cost, environmentally-benign and effective way to leach and recover copper."
A third good company is Uranium Energy Corp (NYSE: UEC). He showed a picture of its ISR uranium project in South Texas where it is a low footprint operation and the recovery facility looks like a small gas plant . "The business model is a number of satellite deposits feeding a central recovery facility," he said.
The fourth company he mentioned in the good category is Strathmore Minerals (TSX: STM) with its Gas Hills, Wyoming open-pittable uranium deposits. He summed them up as "a very good uranium development company."
He continued this section of his speech by talking about 'the bad'.
He defined as 'bad', the following deposits and minerals: "I don't like polymetallic deposits like lead-zinc-silver deposits orany project that has the combination of nickel-copper-PGMs-cobalt. Porphyry copper deposits are way too big and take way too long for juniors to explore, develop, and permit. You'll need a minimum of 5 billion pounds of copper and that will exceed the lifetime of most juniors to explore, find, permit, and develop. Iron ore deposits are also outside of the realm of what juniors can successfully develop and finance themselves. Juniors may find these deposits but they won't be able to develop them without major partners. "Because of the very long time frame of exploration, permitting, and development, and because of the high cost of big mills and the third-party risk of smelters, these are the types of deposits that require an integrated mining company. A junior with such a project has only one exit strategy and that is to sell out, either to a major or the Chinese."
"Finally, we get to what I call the 'butt-ugly'," Mr. Fulp said of the next part.
Supply and demand problems make up a big part of what he defines as 'butt-ugly': As an example, Mr. Fulp talked about molybdenum. "Moly's the most fickle metal on the planet and a junior cannot compete in molybdenum space." He talked about molybdenum's price drop from $33/pound to $8/pound in November 2008 and how Freeport-McMoran put development on this giant and fully permitted mine on hold and is waiting until prices go back up. Mr. Fulp asked, "How can a junior possibly compete with the second best molybdenum deposit in the world that will not go into production for the foreseeable future because of lack of sufficient demand?"
Another butt-ugly sector of the resource industry that investors should avoid is sub-economic deposit types. As an example, Mr. Fulp talked about volcanic-hosted uranium. "I only know of one significant volcanic-hosted uranium district in the world. It’s in southeastern Russia and would not be economic in any capitalist country in the western world. This type of uranium deposit doesn't make economic mines."
He also doesn't like what USGS researchers have called "unconventional deposits". "They're called 'unconventional' but they should be called 'uneconomic'.
"The ugliest of the butt-ugly would be the specialty and ferrous metals." Then he briefly listed several:
"Lithium: The lithium bubble was never real and now is over. The worldwide lithium space is dominated by three large chemical companies and a junior cannot compete in that space."
"Scandium: Scandium gets lumped into the rare earths. The total world demand for and production of scandium in 2010 was 21 tonnes, mainly as a minor additive metal in sporting goods. That’s minuscule."
"Transition metals, or the ferrous metals: I don't like titanium, vanadium, chromium, manganese, cobalt, and nickel, all used as alloys for steel. This is 'big boy football' and juniors cannot compete in this arena.”
"Gallium and germanium are specialty metals that have never produced a stand-alone mine. They are a by-product of zinc and copper smelters. Significant tonnage demand for these metals has never existed and will not exist in my opinion."
"Zirconium production is mainly from heavy minerals sands deposits and is dominated by major mining companies."
"Tin production is a controlled cartel mainly based in Asia.” He also listed a number of other by-product metals and extremely rare metals (not rare earth elements) that are not viable commodities for junior projects.
Another sector that investors should avoid i those resources that are controlled by one country, one company, or a consortium of companies, or a cartel: He then talked about a metal monopoly in niobium via a mine in Central Brazil. "They have 120 years of world reserves, the highest grade, and the easiest mined deposit. There are only two other niobium mines in the world with one in production in Canada because the monopoly company wants a high cost producer to justify a higher niobium price."
Lastly, Mr. Fulp admitted that these are just rules of thumb. "There are always exceptions," he said. "I told you that I don't like lead-zinc-silver deposits but if they are near existing smelters, they will work. One example is Fortuna Silver (TSX: FVI) in Peru."
Then, he wrapped up with one additional idea: "Graphite is the next big thing. One new company I really like is Flinders Resources (TSX: FDR)," he said.
Mr. Fulp's engaging and informative presentation can help investors quickly eliminate the innumerable junior resource stocks out there with little chance of success so they can focus on a few quality opportunities.
Disclaimer: Mickey Fulp is not a certified financial analyst, broker, or professional qualified to offer investment advice. Nothing in a report, commentary, website, interview, and other content constitutes or can be construed as investment advice or an offer or solicitation to buy or sell stock. Mr. Fulp is a shareholder of Goldgroup Mining, Curis Resources, Uranium Energy Corp, Strathmore Minerals, and Flinders Resources. Curis Resources and Flinders Resources pay fees to Mercenary Geologist.com, LLC as sponsors of the MercenaryGeologist.com website.
REFERENCES
www.MercenaryGeologist.com; www.MercenaryGeologist.asia
Goldgroup Mining: http://www.goldgroupmining.com/s/Home.asp
Curis Resources: http://www.curisresources.com/s/Home.asp
Uranium Energy Corp: http://uraniumenergy.com/
Strathmore Minerals: http://www.strathmoreminerals.com/s/Home.asp
Fortuna Silver: http://www.fortunasilver.com/s/home.asp
Flinders Resources: http://www.flindersresources.com/s/Home.asp