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Mickey Fulp Shares His Investing Criteria – and Adds a New One

on 3/26/2013

Junior resource investors have watched almost helplessly as their mining portfolios dropped lower and lower. Investors are wondering if they will continue to drop, for how long, and how low their portfolios can go. Today's marketplace is no longer a place where investors can jump in on a hot tip and ride an express elevator to higher values, based only on lucky guesses.
Mickey Fulp is an economic geologist and newsletter writer, well-known as "the Mercenary Geologist". We met up with him at the recent PDAC Convention (in Toronto Canada on March 3rd to 6th) where he shared his analysis and outlook of the market. He also talked about his investing criteria – something we've quoted him here on MetalsNews in the past – and he's recently added a new criterion for investing in today's market.

Mr. Fulp started our interview by sharing his view of the market. Not surprisingly, it was a mix of bad news and good news. First the bad news: "The junior resource sector is in abysmal shape. The carnage is starting to begin. I expect it to continue for another year or two and wash a bunch of these low-level juniors out of the market."

But there is light at the end of the tunnel, asserted Mr. Fulp, and that's where the opportunity arises: "We'll come out of this, hopefully in a couple of years, with a much stronger junior resource sector. This is a contrarian's dream… Most of the good stocks are undervalued." Later he added some clues in the market that investors should watch for: "I think it's a year or two out at least before this bear market ends. That presumes that commodity prices stay strong. If commodity prices start going south then it could get really bad in this business. As long as we have these relatively high commodity prices and that goes from oil and gas to gold to the other precious metals and into the base metals – particularly copper – the best companies will do fine."

Next, Mr. Fulp shared the metals he is particularly bullish about (although he follows several other metals on his website). "I'm a long-term secular bull in the copper-uranium markets – that is what I talked about yesterday at the newsletter writers' forum [a special forum held at PDAC]. The supply/demand fundamentals of both those metals are compelling." Because of a variety of factors, supply of copper and uranium is declining but demand is growing. "In both of these instances – either copper or uranium – it takes 10 to 15 years to develop a major mine. In the mid- to long-term, I think the evidence that the world needs both of these metals is strong… and we're not finding enough. The easy deposits have been found already. Worldwide, we have increased nationalism and geopolitical considerations and aboriginal issues. So it becomes increasingly difficult to explore for, discover, develop, permit, and produce metal."

About copper, Mr. Fulp said: "We have 3% to 4% of year over year growth of copper demand since 1900. Twenty-five percent of the world's population (that's 1.75 billion people) still live in the dark at night. They can't turn on a light switch. That's changing. You can't transmit electricity without copper."

And about uranium, Mr. Fulp said: "Mine supply is 70% or 80% of total demand, year over year. Where is the uranium going to come from? We have the end of the Megatons-to-Megawatts program in 9 months. That's 24 million pounds of nuclear fuel taken off the market. If you look at the cost of production at new mines, it requires $65 to $80 per pound of uranium to be economic. There has been supply disruption lately because of low uranium prices, major projects have been shelved." And he also spoke about the uranium market as it relates to Japan's nuclear program: "Forty-eight of fifty reactors in Japan are still operable but non-operating. I think that has to change because it's costing the Japanese people $100 million a day for an alternative energy source, which is mainly liquefied natural gas.  It's wrecking their economy and their economy wasn't that healthy to begin with! So they've come on with another round of quantitative easing – massive quantitative easing! – in Japan. As some point they're going to say, 'we've got to get nuclear energy going again.' A lot of what's happening in the short-term spot market is that Japanese utilities have been selling stockpiles into the spot market because it's costing them more to supply power with natural gas; they've got to recoup something. It's a vicious circle. The national government recently elected is pro-uranium. The problem is it comes down to a local level decision for the most part to get these things back online. But I think it has to happen."

Then Mr. Fulp shared his investing criteria with us. These are the due diligence factors he investigates before buying a resource stock. He's shared most of these criteria with us in the past but he's recently added a new criterion because of today's uncertain market.

The first criterion is share structure. He said that investors should look for "tight share structure with insiders holding significant shares; meaning they have skin in the game."

The second criterion is the expertise of management. Investors should look for "management with previous experience in the junior resource sector, with technical backgrounds, and success with that previous experience. If you've bankrupted three companies previously, I don’t consider you a venture capitalist or an entrepreneur."

His third criterion is the quality of the project. Investors should look for "a good flagship project. For me, that's usually an advanced exploration project because that's where I see the upside, or a prospect generator model."

We've heard him share these criteria before but in this interview he introduced another criterion that addresses today's uncertain market: "The other criterion would be cash on hand. That's a new [criterion for me]. You want to make sure they have cash in the bank for a year or two of activities. If they don't, then you want to make sure that they have a group of committed investors that are willing to put money in at some point in the next couple of years. Red flags are raised when companies raise less than a million dollars in a public financing at a price of $0.05 or $0.10. Generally that means they are raising money in a last gasp effort to keep the lights on, pay their salaries, and pay their listing fees on the stock exchange. So watch out for that red flag."

While many investors look at all of the listed resource stocks and ask "which one should I invest in?” Mr. Fulp takes the opposite approach. "There are so many companies; we try to find the fatal flaws from [the available options of listed resource stocks] and eliminate most of them from further consideration. It's pretty easy to find those fatal flaws."

Once investors have their short-list of stocks that fits the criteria he mentioned above, they then have to "decide how low those stocks will go and try to pick a point to start buying," said Mr. Fulp. And later he added: "You want to make sure they are undervalued with respect to their peers. My investment philosophy is to double in twelve months or less. I challenge you to find a company in the junior resource sector that does not have a double between its running 52 week high and low. So it's incumbent on us, as contrarians, to buy stocks at low valuations when no one else wants them."

In today's market, investors watch as their portfolios drop in value day after day. But to Mr. Fulp's contrarian view, this is a good thing. While it's never nice to see portfolios decline in value, it does present a contrarian opportunity that allows the bad stocks to wash out of the market and the good stocks to decrease in value to attractive buying points.



Mickey Fulp:



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