Meaningful Chats

You don’t know what anything is worth until you know what can go wrong.

Recently a friend and I were discussing investment opportunities over drinks before our wives joined us for dinner. He is a successful businessman but a new investor in resource stocks.  He has been reading that gold is becoming an increasingly attractive investment. He was asking me to share where I was investing. He knows I like gold stocks and have invested in gold for years but was surprised to discover my penchant for junior exploration companies. I was reluctant to give him names because I didn’t understand his investment objectives. I understand he wants to make a profit but that is about it.

Without understanding what he was trying to achieve was a sure-fire way of causing problems. Juniors have to be constantly watched and studied. If you are not prepared to do this, juniors are probably not for you.

He said he understood the risk but given that he doesn’t know gold mining, I wondered if he really did. I didn’t want to be a smart ass, but asked him how much reading and investigation he had done on mining and gold, in particular. He thought I was being obtuse but I wasn’t, I wanted to help but I am not sure that what I am investing in is right for him.  He had read a few articles but that was all. I thought back to my early days of investing and how much money I had lost through not doing my homework.

Man has always wanted to become rich without work. That’s why gambling is so popular, but investing is not gambling. Successful investing requires work. You need to really understand the business and the sector. Then you need to understand the individual business within the sector. It’s no accident that Warren Buffett says he doesn’t invest in businesses he doesn’t understand. We should all follow that rule but of course the way you learn is by doing. That’s certainly how I learned.

Every investment has uncertainty because unless you are an insider, you operate from incomplete information. Over and above uncertainty, junior explorers are inherently risky because there are enormous unknown and unknowable risks that take time and money to resolve. Fortunately the rewards are high enough to make this an attractive sector for many investors like myself.

However, when you understand the business, you understand the ingredients that contribute to success and can evaluate each. Many times there isn’t enough information, so you have to make educated guesses. This is also a time when you need the help of experts like geologists and mining engineers. Once you know the unique risks and management’s derisking plans, you can make a decision but not before. Many people just want a tip and are willing to invest hard earned dollars without the necessary due diligence. This works out from time to time but is not a sure fire way to successful investing.

It’s important to realize that just because there is gold or other minerals there, doesn’t mean it is ever coming out of the ground. A mineable discovery is what makes money. I have heard that only 1 or 2 out of 1,000 projects ever become mines.  Before you get to that there is considerable derisking that has to take place. There is financial risk, geological risk, mining risk, jurisdictional risk, commodity risk and there is metallurgical risk to name a few. The difference between risk and uncertainty is clear but seldom thought about. If the project isn’t derisked, it will likely be cheaper but you need to understand what it will take to derisk the project and bet accordingly.

It’s only through measuring and considering all of these factors can you truly assess the value of a junior mining company. Some juniors are unquestionably over priced while others are unquestionably underpriced.

Our recent purchase of Laiva Gold Mine in Finland was based on a thorough understanding of what had gone wrong for the previous owners and what could go wrong for us. Our team believes the project is largely derisked and while nothing is certain, we should be in production by the end of the summer.

Knowing what can go wrong helps you understand if an investment is underpriced or overpriced. Until you know this, you cant know if it is worth investing. I don’t invest in overpriced stocks and I no longer invest in what I don’t understand.

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