The most important question top stock pickers Keith Schaefer, Eric Coffin and Lawrence Roulston ask company presidents

The Mining Report | February 18, 2014

Payback time? Fallback plan? Money in the bank? What would you ask the CEO of a company you were considering investing in? In advance of the Prospectors and Developers Association of Canada convention in March, newsletter writers Keith Schaefer, Eric Coffin and Lawrence Roulston are bringing 15 energy and mining companies together for a "meet the management" Subscriber Investment Summit in Toronto. In this interview with The Mining Report, the experts share their sometimes surprising responses to the state of the industry.

The Mining Report: Keith, in a recent e-mail to your subscribers, you mentioned that one of the secrets to successful investing is meeting the management. Would each of you share some of the questions you ask company heads to determine if they can be successful?

Eric Coffin: Life is not so simple at Hard Rock Co., unfortunately. Obviously, how much money a company has is very important. It tells us how fast that company will need to go back to market.

But I need to know the background of management, and what kind of projects the management team has been involved with. I like to see that team members have had hands-on exploring experience. Some guys are very good at running exploration projects successfully, and others not so much.

I also want to hear about the target, the geological model, the upside if this works out and the fallback position if it doesn't. Most of the time, the fallback position is either secondary projects and/or cash in the bank, so the company can go look for something else. You need to get an idea of the scale potential. If a company has a $20 million ($20M) capex and is drilling for 200–300,000 ounces (200–300 Koz) gold equivalent, there's just not a lot of upside there. I want to see that, if management is successful, there's a significant amount of upside. Explaining the target gives me some comfort that management knows what it is doing.

TMR: When it comes to a fallback position, do you like to see companies with multiple projects in the pipeline, or would you rather see them focused on just one project?

EC: I like to see other projects in the pipeline. There is some truth to the idea that you can try to do too many things at once. If I see a company that constantly switches over to whatever is hot that week, I basically just ignore it. I like to see that company management has a concept and a philosophy, like "We look for copper-gold porphyries," or "We're focused on epithermal gold projects." I like to see other properties advancing to drill target stage while the main property actually is being drilled. That gives shareholders a stronger fallback position, because exploration isn't going to work out on most projects. That's just the math.

On the other hand, I like to see that a company has two or three projects it can fall back on, not 15 or 20, with management running around in circles. But if a company is focused on just one property, and if I really like the targets, I'm not going to be afraid of the company. I just know it comes with a bigger downside if the drilling doesn't work out. You have to understand that going in. If that's the case, the target has to be that much bigger.

TMR: Lawrence, what do you ask to determine whether a company will be successful?

Lawrence Roulston: Beyond all the basic questions about the financial situation, the project and management's background, which are all important, I need to know whether management has the drive and determination to overcome the endless obstacles on the road to success. You can only get that sense if you talk to the people behind the company; spend a bit of time and get to know them.

Unfortunately, this industry has evolved away from old-style compensation, where members of management had low salaries and big stock positions, thereby aligning their interests with shareholders. We've moved way too far toward big salaries. There are a lot of people out there who are more interested in protecting their salaries than in adding shareholder value. Those intangible, subjective measures are critical to determining if a company will be successful.

TMR: What do you want to see in a CEO's background? Would you rather see someone from finance/business, or a geologist?

LR: Mining requires some very specialized skills. A person also needs to be an entrepreneur. If someone has had a big success in the past, that can be a plus, but it's also really exciting to find the young guys who are going to be the stars of next year. Both business and geology are important. A good company needs a well-rounded team that can cover all the bases

TMR: The Summit—where all of these companies are going to be in one place for investors to talk to—is being held in conjunction with PDAC. What are you hoping to hear at the conference? What trends will you be sharing with attendees?

LR: The mood is definitely picking up in the resource industry. We had a terrible couple of years, but interest is coming back. Most retail investors are shell-shocked. But the "smart" money—the veteran investors—are coming into the market now. The better-quality companies are already starting to move up on a fairly consistent basis.

Beyond that, there is a huge amount of money waiting in the wings. Part of that is U.S. private equity. These investors recognize the tremendous value to be found in the industry. We haven't seen a lot of deals announced yet, but they're looking at things. I think we're going to see a lot of money from that sector coming into the resource space over the next few months, which will contribute to what's already beginning to be an upturn for the industry. PDAC is a tremendous event. There are people from all over the world coming together in one place. Conferences are a very important venue, where investors can get face-to-face with the management teams.

TMR: Eric, are you looking forward to the same upbeat spirit?

EC: Yes. I am calling for 30%+ gains on the Venture this year. That sounds like a lot, but it is a speculative index. I pointed out to readers that for those gains to happen, all we really need is 10% of the companies on the Venture to do very well and carry the can for everybody. Another 20% will do reasonably well, and get financed along with the top 10%. Half of the companies will probably do nothing and, hopefully, a bunch of them will disappear. I'm quite happy to see some of the also-rans not around anymore.

Gold has reacted quite well to good news and bad news. The Chinese are strong in the market still. It looks like gold has put in a fairly important double bottom, and I think the Venture index has as well. I expect things to be a lot more optimistic. PDAC will be a chance to find out if management groups are building their own momentum. It's tough to stay on track when you've gone through three terrible years. But the management groups that have been able to hold things together and raise money are the ones that will come out of the starting gate fast.

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