90% of the management teams you interview will be unable to present a reasoned argument for pursuing their project and to justify the approach they are using so let’s examine Rick Rule’s 11 “must ask” questions, one by one.
So writes Henry Bonner (sprottglobal.com) in edited excerpts from a conversation he had recently with Sprott Asset Management USA Chairman Rick Rule as posted in an article under the title Does Your Junior Have Competent Management? – Rick Rule.
[The following article is presented by Lorimer Wilson, editor of www.munKNEE.com and the FREE Market Intelligence Report newsletter (sample here) and may have been edited ([ ]), abridged (…) and/or reformatted (some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. This paragraph must be included in any article re-posting to avoid copyright infringement.]
Bonner goes on to outline Rule’s most essential insights into investing in natural resources in further edited (and paraphrased in some instances) excerpts:
“Exploration is a knowledge business and only a small number of sector participants generate the overwhelming majority of the industry’s economic success – two realizations that are key to improving your chances of success.
In order to pick the winners, you must have the ability to view the entire field as a spectrum. Each management team will fall somewhere on the spectrum – most around the average – but those on the higher end of the bell curve become exponentially more valuable. As such, investors should seek to determine the quality of the management team independently of the value of the current project they are undertaking.
The key for investors is to evaluate management teams based on their past performances in similar situations, to beware of teams whose past successes were in areas different from where their current project is located. Past success in the relevant field is an invaluable tool to filter out the truly productive industry participants especially since…more than half of the management teams you interview will not be able to point to a history of success relative to the task at hand.
Making money and adding value in mineral exploration is a function of answering a series of unanswered questions. Management must have first established sufficient credibility that we care about their answers. They must identify and defend their thesis based on the evidence at hand.
90% of the management teams you interview will be unable to present a reasoned argument for pursuing their project and to justify the approach they are using so let’s examine the questions one by one.
- Is the process by which an exploration team proposes to pursue their target valid or optimal?
- Does it, in fact, address the most essential questions that will determine whether the project is a success?
- Does the management team possess the requisite skill sets to conduct the process and efficiently answer these questions?
- Does the management have a reasonable estimate as to how much time will be required to answer these questions?
- How was the estimate established?
- Does the management know how much money will be required to answer these questions?
- How much will it cost to run the company during that time?
- If there are capital shortfalls, how, when, and from whom will the shortfall be addressed?
- How would the management quickly ascertain that the project was unsuccessful – meaning that the target is not of sufficient value to justify further exploration? (This is a very inconvenient situation for management, which may result in a reduction in their equity and options values. They may construe disappointing exploration results as threatening to their salaries. In most exploration projects, we expect that exploration will be unsuccessful at establishing a resource, but the ramifications of this outcome are rarely discussed be management.)
- What valuation range will we have if exploration does result in the discovery of a resource? (Too often, exploration teams pursue targets where even ‘success’ will produce a paltry reward relative to the risks. Small mines have as many problems as big mines, but they cannot make you big money.)
- Finally, is management’s estimate of the potential economic value of a project well-reasoned?”
Rule believes the above questions are essential to ascertaining with confidence that a mining company’s management team is competent, knowledgeable, and will efficiently deploy their shareholder capital.
[Editor’s Note: The author’s views and conclusions in the above article are unaltered and no personal comments have been included to maintain the integrity of the original post. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor.]
*http://sprottgroup.com/thoughts/articles/does-your-junior-have-competent-management-rick-rule/ (© Sprott Inc.; Subscribe to our complimentary publications Sprott’s Thoughts and Markets at a Glance)
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