It's all about the People
by Dr. Richard S. Appel
June 23/05
My entrance into the gold stock arena was via the purchase of East Rand
Proprietary Mines in 1972. This was a marginal South African gold producer
who began production during the 1890's. They were slated to go out of
business within a few years if the gold price did not rise from its then
$50 an ounce price. At that time, and for the ensuing three decades, I
invested in an untold number of gold and other primarily exploration companies.
I was solely focusing upon the major projects that each company was pursuing.
I first entered the Canadian junior market in 1993. This was when gold’s
final, major, upward correction began, within it’s 20+ Bear Market.
I had not yet altered my approach towards divining the next great profitable
stock investment, and continued to search for the best “story”
that I could find. However, to my detriment, many of the “stories”
that were presented to me and that I believed, were essentially those
conjured up by the minds of one various promoter or another.
When the Bre-X scandal exploded onto the exploration sector landscape
in 1996, it hammered the final nail into the coffin of the junior companies
for the next several years. From that point forward, until 2001, the junior
companies basically withered away in price. I remained a distant observer
until that year licking my earlier wounds, and wondering why my supposed
great companies had gone bad. I thought that despite the market reversal,
some of what I thought were exceptional companies surely should have succeeded.
After much soul-searching and questioning it began to become evident to
me that I had approached this volatile yet incredibly opportunity wrought
market, seeking the wrong company attributes. Rather than focusing upon
what appeared to be reasonably priced companies with good projects, it
dawned on me that a great project that is run by less than among the best
management teams, is likely destined for failure. How could that be? That
is the question that even I would never have asked several years earlier!
The reason is simple and obvious. Yet, it requires experience to fully
understand and appreciate it. Until you invest in this industry for several
years, and have suffered the consequences of believing that the project
is all that is important, few would have a clue. It is that the people
that direct the companies typically make the difference between possible
success or failure.
The single most important factor that can make or break even the best
company is its ability to raise working capital. Money is the lifeblood
of any enterprise! And, because the mining industry is so capital intensive,
if a company runs out of money it has virtually no ability to advance
its projects, let alone its share price. The next item that is essential
to a junior company’s future is its ability to acquire a substantial
project. It is a given that their management is significantly talented
to know how to make the most of each project. Finally, if the marketplace
is not made aware of the value that a company’s management has added
to it, through a market awareness or promotional campaign, even an organization
progressing a great project may see its stock languish for years. It is
mandatory for all of these components to be in place for a company’s
shares to perform at their maximum level. This, in order to bestow upon
their investors and management, the profits that they have worked for
and deserve.
The element that is missing from all but the few, very best junior resource
companies, is a group of directors that possesses all of these attributes.
Some companies have exceptional promotional teams, but have little if
any real projects of substance. Their shares will perform well for a while,
until their insiders have taken their profits at the expense of their
shareholders. A few experienced stockholders will ride the crest of these
company’s public relations campaigns. If they are nimble will sell
their stock at a profit. Unfortunately, most investors that are attracted
to the “story” as it is told, and buy at or near the top of
the stock’s run, will likely retain their stockholding until most
of their original investment has dwindled away.
Other companies have the ability to attract money because their investors
have profited from following their directors in other associated fields.
Unfortunately, if a management team was successful in discovering a natural
gas, oil or nickel deposit, it doesn’t mean that they have the ability
to find a gold or silver mine. A different type of expertise is needed
for each of these endeavors. However, with the money that they are capable
of raising, those boasting earlier successes will at least have an opportunity
to attract one or more important projects as well as exceptional staff
members. Remember, major companies or individuals who control the best
projects will seldom vend them to a company unless they feel that their
future partner can finance and properly manage the needed exploration.
The vendor will only seriously profit through a discovery or hopefully
when a mine is brought into production.
Still other companies are able to attract world class projects due to
their prior success in bringing one or more mines into existence. Further,
these management teams normally have little difficulty attracting capital
because they have a history of making money for their stockholders. However,
for one reason or another they often lack either the desire or the ability
to bring sufficient market attention to their companies. This prevents
them from moving their share prices to the sufficiently high levels that
they deserve. They do have the best likelihood for ultimate success. Yet,
they are forced to issue too many shares at low prices, in their effort
to acquire sufficient working capital to advance their projects. This
causes them to shortchange themselves and their stockholders, even in
the event that they make yet another economic mine.
To my mind, the ideal company of which there are a paltry few, is directed
by a management team that has one or more important discoveries under
their belt. For self-serving reasons, major mining companies and individuals
within the industry recognize their ability, and desire to have them manage
the exploration of some of their main projects. In this fashion the vendors
have the best opportunity to maximize the value of the projects they possess,
without incurring substantial financial expenditures unless success is
at hand. For this reason these successful junior managers are regularly
offered the best available projects from which they can pick and choose.
Also, due to the fact that they have a long list of investors that have
profited from their earlier relationships with them, they have little
difficulty in attracting virtually any quantity of money that may be required.
Finally, they recognize the importance of making the market aware of their
acquisitions, progress and developments, in order to boost its share price
to a level commensurate with their company’s worth. Lesser management
teams on the other hand, seldom have the opportunity to acquire anything
other than reworked or secondary projects that have far less opportunity
for exploration success.
To the real world. Most of best managed junior companies possess most
but not all of these qualities. The one that is most often lacked is the
desire or effort to bring the attention of the marketplace to their stock.
Many of these extremely successful and talented individuals believe that
their ultimate success will cause investors to clamor for their shares.
While they are correct, this has both positive and negative implications
for the investor. First, their share price will typically lag behind its
deserved market value until they have sufficiently progressed their project,
and it stands out from others in the industry. On a positive note, this
gives the patient investor the ability to carefully follow their progress
and increase their stockholdings at the most opportune times. In this
fashion they can ride the crest of their management’s success and
still cheaply acquire their last shares.
I believe that it is incumbent upon anyone who invests in the resource
sector to regularly keep in touch with their companies. It is best to
develop a relationship with someone in their management rather than in
their public relations staff. With practice you will learn to ask the
right questions in order to ascertain whether your company has the right
qualities that are necessary to give them at least an above average opportunity
for success. You truly owe it to yourself to make your best effort to
pick the most likely teams for success. Learning how to operate in this
industry, as in all other aspects of life, is an ongoing process. You
will certainly make mistakes. We all do!
I continue to err in judgment myself. However, they are becoming fewer
and further in between. Don’t berate yourself, but try to learn
from your mistakes. I do my best to feature companies in Financial Insights
that are relatively new in their development and that I believe offer
exceptional relative value. In this fashion anyone investing in them should
reduce their downside risk. For success in this market it is best to avoid
stocks that appear overvalued when compared with their peers. If they
seem overpriced they likely are. Remember, the higher a stock’s
price the further that it can fall.
I publish Financial Insights. It is a monthly newsletter in which I discuss gold, the financial markets, as well as various junior resource stocks that I believe offer great price appreciation potential.
Please visit my website www.financialinsights.org where you will be able to view previous issues of Financial Insights, as well as the companies that I am presently following. You will also be able to learn about me and about a special subscription offer.
CAVEAT
I expect to have positions in many of the stocks that I discuss in these
letters, and I will always disclose them to you. In essence, I will be
putting my money where my mouth is! However, if this troubles you please
avoid those that I own! I will attempt wherever possible, to offer stocks
that I believe will allow my subscribers to participate without unduly
affecting the stock price. It is my desire for my subscribers to purchase
their stock as cheaply as possible. I would also suggest to beginning
purchasers of these stocks, the following: always place limit orders when
making purchases. If you don't, you run the risk of paying too much because
you may inadvertently and unnecessarily raise the price. It may take a
little patience, but in the long run you will save yourself a significant
sum of money. In order to have a chance for success in this market, you
must spread your risk among several companies. To that end, you should
divide your available risk money into equal increments. These are all
speculations! Never invest any money in these stocks that you could not
afford to lose all of.
Please call the companies regularly. They are controlling your investments.
FINANCIAL INSIGHTS is written and published by Dr. Richard Appel and
is made available for informational purposes only. Dr. Appel pledges to
disclose if he directly or indirectly has a position in any of the securities
mentioned. He will make every effort to obtain information from sources
believed to be reliable, but its accuracy and completeness cannot be guaranteed.
Dr. Appel encourages your letters and emails, but cannot respond personally.
Be assured that all letters will be read and considered for response in
future letters. It is in your best interest to contact any company in
which you consider investing, regarding their financial statements and
corporate information. Further, you should thoroughly research and consult
with a professional investment advisor before making any equity investments.
Use of any information contained herein is at the risk of the reader without
responsibility on our part. Past performance does not guarantee future
results. Dr. Appel does not purport to offer personalized investment advice
and is not a registered investment advisor. The information herein may
contain forward-looking information within the meaning of Section 27A
of the Securities Act of 1933 and Section 21E of the Securities Exchange
Act of 1934. In accordance with the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995, the statements contained herein
that look forward in time, which include everything other than historical
information, involve risks and uncertainties that may affect the company’s
actual results of operations. © 2004 by Dr. Richard S. Appel. All
rights are reserved. Parts of the above may be reproduced in context,
for inclusion in other publications if the publisher's name and address
are also included for credit.