Some points to consider when investing in gold stocks...
IT MAY seem as though almost any Gold Mining stock you see these days is a bargain just waiting to be plucked. While most stocks have seen major drops from their highs and some are showing significant price turns, others have more downside left and a few just won't make it to the next market peak.
Ivan Lo, publisher of The Equedia Weekly Letter, takes both a macro view of market and economic conditions and then carefully studies the specifics of each stock he decides to follow or acquire. In this interview with The Gold Report, Ivan Lo talks about the critical factors that can separate a mega-winner from a rollback candidate.
The Gold Report: Your newsletter, The Equedia Weekly Letter, talks mainly about Canadian companies you actively own. Why did you begin writing this newsletter and how do you choose the companies you invest in?
Ivan Lo: I've always been interested in the capital markets because they are the source of the world's growth. Without them there wouldn't be Google, Microsoft or Apple. My father was editor-in-chief of a prominent global newspaper, so I guess that's where I combined the two ideas. There are some extremely able men in our industry and I get to have some great discussions about investment philosophies, strategies and market outlook. We often trade ideas and go through what works and what doesn't.
These brilliant men don't think like the average person; their thought processes are often beyond that of the average investor. That's how The Equedia Weekly Letter got started. I wanted to bridge that gap and turn complicated investment philosophies into something simple that everyone could understand, from macroeconomics to mining 101. My job is to make it simple and start with macroeconomics, the big picture. For example, I believe the precious metal sector is undervalued right now.
First, I'll look at the project. Does it have value or is it just a crapshoot? When it comes to mining, drill results alone aren't enough. A company can drill spectacular numbers but if it is drilling in the middle of nowhere, those drill results are just shareholder Dollars turned into geological numbers for reference. The likelihood of that project doing anything anytime soon is very slim. But if it is drilling great numbers near an already producing mine, its chance of success becomes a lot higher.
Then come the people behind it. If a project isn't managed by great people, I won't invest in it. I've been burned before by finding great projects only to have the management team destroy it because they didn't understand the capital markets. They raise a few million here and a few million there. They get excited. They spend it all and yet produce no shareholder value. Good drill results alone don't mean it's a success unless it brings shareholder value with the money that is spent.
After that comes the capital structure. Who owns the paper and at what price? The last thing a lot of people don't consider is management's marketing ability. If a company is public, management needs to market it. The shares are only as good as what The Street says they are worth. At the end of the day, someone has to buy your shares from you at a higher price for you to profit. That's how the stock market works. If no one knows about the company, no one will buy it and your shares are worthless.
TGR: Unfortunately, just because you get competent geologists running a company doesn't necessarily mean they know what they're doing when it comes to running a public company.
Ivan Lo: Yes. I've seen it time and again, especially in the past couple of years where we had a bull market for about a year and all these geologists went out and spent all their money yet created no shareholder value.
TGR: There are so many bargains out there now that it seems almost anything you buy could produce a nice profit, assuming the company can obtain financing without diluting itself into oblivion. What do you look for now in a potential mega-winner?
Ivan Lo: That's true, but just because something is beat up doesn't mean it is a bargain. A lot of the stocks out there are still junk. As for a potential mega-winner, I go back to my investment philosophy. I look for a battered stock with a strong project and a management team capable of marketing its story to the world. I'm also looking for a company that is a potential takeover target.
It would have to be near a producing mine or be on the verge of some very significant milestones. Grades are important. People think that because you drill 100 meters and get 1 gram/ton that it's an amazing grade. It's not. High grade is the most important thing for projects nowadays, because the cost of exploration and production are rising like crazy.
TGR: Lots of stocks are trading between a dime and a quarter. Some are going to survive and could become a ten or twentybagger. Other ones are probably going to be one-for-ten rollback candidates. How can investors figure out which are really alive and which ones are going to be dead?
Ivan Lo: It's funny you ask that question because I actually see a lot of these juniors being forced to roll back and many juniors going bankrupt or getting delisted. Investors need to know a company's actual cash position and burn rate. How much of its cash is allocated and already committed for spending?
Companies shouldn't just stop their drill programs because the market stinks. But, they need to be more conservative with their spending and know when and how to cut back. That's why they should focus on what will bring them results instead of drilling blind to see how far the mineralization extends. Management's primary goal is to maximize shareholder value and know when to cut back. If a company has a staff of geologists on the payroll that aren't doing much, I can bet you it will be a candidate for a rollback in this market.
TGR: Unlike many years ago, when most work was done on a contract and project basis, a lot of these companies have built-in overhead that doesn't go away very easily.
Ivan Lo: That's why you need to know exactly how much of a company's cash is being allocated or if it has already been committed to these drill programs. Does the company have to go out and finance in this market?
TGR: So, it's important to not just get all excited about new drill results but to know how a company will finance the rest of its operations.
Ivan Lo: Especially in this market.
TGR: So, can you give us a little wrap-up and summarize what our readers should be doing or not doing at this point to try to make money and avoid losing money in this market?
Ivan Lo: The big one for most people is trying not to lose money. If you want to play it safe you buy the big names and, of course, straight silver and Gold Bullion. But, if you're looking for the best bang for your buck, I would continue to look at the beat-up junior market and follow my investment philosophy. Focus on management, takeover candidates, capital structure and marketing ability. A lot of these juniors still have some downtrend. But, many will be trading a lot higher two years from now, or even sooner.
An easy way to start filtering them is to look for the ones that have already bounced from their 52-week lows on good volume. Those are a good start because it shows they're in an uptrend. If you're going to invest in juniors, you have to have the stomach for it. No risk, no reward. None of us invest in juniors to make a few bucks here and there. We invest to change our lives. If you have the patience and the guts, the junior market is going to give you the best bang for your buck.
TGR: You've given us some valuable information. Now it's up to individual investors to decide what they want to do. Thanks a lot for speaking with us.
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