Silver and Gold Mining stocks typically droop in the summer heat...
A PROFESSIONAL INVESTOR with Boy Scout genes in his DNA, "mercenary geologist" Mickey Fulp picks winners in the junior resource sector based on three criteria, says the Gold Report:
Share structure, people and projects.
Here Mickey Fulp shares his Mercenary Geologist insights for mining-stock pickers, and also suggests that the summer slump – with low volumes and low prices – is a good time for some homework on gold equities that could double within 12 months.
The Gold Report: So far in 2010, there's been both positive and negative economic news. We now have health reform, about to have financial reform and stimulus money is still working its way through the system. The markets are bumpy. What's your view for the second half of 2010?
Mickey Fulp: We always see volumes take a nosedive in the summertime, as everybody in the business goes on vacation. We're in the summer doldrums right now, and so I think we would hope for a better market after Labor Day. Amongst the juniors, liquidity has been the real problem. Volumes have been way down on the Toronto Venture Exchange; that's one of the criteria I always look at for the health of the market. We're down to around 150 million per day; you want to see something on the order of 250 million in a robust market. There's not been wholesale divestiture, though, so after Labor Day I think we'd expect higher volumes for the juniors and, hopefully, a better market. I even saw some Canadian analysts the other day talking about how the World Cup has affected volumes in that country.
TGR: You've talked about junior resources as a very high-risk, high-reward sector where people must be prepared to lose, as well as win. If they consider this gambling money, your "Power of Two" concept helps them improve their odds. Could you explain this concept?
Mickey Fulp: It's actually simple: The Power of Two is the idea that you take your money off the table when a stock doubles, so you're playing with somebody else's money. Let's take an example: Say you invest $10,000 in a junior stock that costs $0.20 per share. When it reaches $0.20, sell half; take all your initial investment off the table. Then take your $10,000 and find another stock that will double within 12 months and do exactly the same thing. It's an iterative process. You're accumulating positions in a basket of juniors and preserving your initial capital. If you do it five times, you still have your $10,000 ready to go into stock number six; and 25,000 shares each of the five investments with a zero cost basis. It's an infallible way to make money in a bull market.
TGR: What if the stock halves instead of doubles?
Mickey Fulp: There's only one reason to buy a stock – because you think it's going to go up, or if it's a blue chip, to generate cash flow through a dividend. There are myriads of reasons to sell a stock. If the reason you bought has changed, sell it; if not, hold it or average down on weakness, because you still think it will double within the original 12-month period. Part of the Power of Two concept is to buy stocks you think will double within 12 months, and nearly all active exploration juniors will have a low-to-high in any 52-week period of at least a double. In other words, during any given year, the stock's high will be at least double its low. The key is to buy at low volumes at low prices and sell at high volumes and high prices.
TGR: And when do you sell?
Mickey Fulp: If the reason you bought the stock has changed, when do you sell? It depends on many things. Perhaps it becomes deadwood and doesn't perform. You hang on to break even. Perhaps there are better opportunities, so you sell at a loss and move money elsewhere. Perhaps you sell it at the end of the year for a tax loss, because if you're doing your homework – and doing it right – you will have profits so you can take tax losses and write off against your capital gains. If it was a bad investment decision, just take your lumps and move on.
TGR: If the key is to buy at low volumes at low prices and sell at high volumes and high prices, does it make sense to buy now, during the summer doldrums?
Mickey Fulp: Yes, the summer doldrums always present buying opportunities in Gold Mining stocks. But make sure you don't buy too early. If you buy stocks with underlying good fundamentals and value, you will be rewarded at some point.
TGR: Aside from juniors, what would you advise investors?
Mickey Fulp: It's important to have a nest egg, and I have that outside of the money I have in the junior equity market. It's important to spread your assets and, therefore, your risk. I'm a bit of a Boy Scout, so I'm prepared. It's necessary to own your own shelter, and hopefully you don't have a mortgage on that. I have some farmland, keep some cash on hand and own large market cap equities, mainly in a managed IRA. I own gold, guns, gas and goods. I'm a bit of a survivalist. It's important to be prepared.
TGR: You say you look for three critical components in any public company: Share structure, people and projects. Tell us what you want to see in share structure and why that is important to you?
Mickey Fulp: You want a low number of shares outstanding, but it's a floating target that depends on the stage of the flagship project. I have some rules of thumb that I use for what constitutes a low number of shares. If it's a startup company, you want a low number of shares – 10 million to 20 million – that are tightly held. If it has an advanced project, the acceptable number of shares would be higher, perhaps in the range of 40 million to 60 million. For a company going into the development stage, I like to see no more than 100 million shares outstanding. You want insider holdings to be significant, and you want insiders to participate in their company's private placements. They need to have skin in the game.
Institutions can be good or bad. Companies with advanced projects often have a large institutional fund holding. I am very particular about seeing a spread of institutions, and not one institution controlling a significant number of shares, because management then becomes beholden to that institution.
The Achilles heel for most of the juniors is the lack of liquidity, or trading at low volumes. Volume is generated in the market by a healthy retail public float, so although you want companies that are relatively tightly held by insiders, families and friends, you also want a significant retail public float because that's what generates liquidity.
TGR: What do you consider significant?
Mickey Fulp: 50% or more. Retail investors are the ones that provide trading volume.
TGR: What percentage of insider holdings do you like to see as opposed to, say, institutional holdings?
Mickey Fulp: I certainly prefer at least 10% to 20% insider holdings, sometimes more. I don't have strong feelings about institutional holdings. Oftentimes, it depends on the institutions and how committed they are to the junior resource market. Institutional funds need to make money, so they often do not have the company's best interest in mind. If any institution holds 10%, 15% or 20%, you want to make sure they are pros and committed to the company business.
TGR: Any other share structure factors that you consider important?
Mickey Fulp: You want to be wary of overhanging warrants, especially if they're marginally in or out of the money, because that can cap the share price. A company can go on a run but, in times of low news flow, drift back toward the price of overhanging warrants.
I always run working capital in with share structure. You want to make sure the company has sufficient working capital for a year or the ability to raise money – at non-dilutive share prices – when necessary.
The other thing I very much watch is insider selling. As a general rule, I want insiders not to sell. They should make their money on options and not huge salaries. If they sell into positive news or front-run, that raises a big red flag as does selling before or during bad news I've dropped coverage of three companies in my two-year newsletter history; two because of insider selling. It's very easy to find out about insider selling, assuming those people file transactions on time. There's a website called CanadianInsider.com that shows the last 10 insider transactions for every listed company, and sedi.com lists all the insider transactions in the history of a company. It's all available but no different: I look a lot of people pay attention to it. They absolutely should.
TGR: How are you feeling about the future for silver?
Mickey Fulp: I call silver the bipolar metal. In good economic times, it functions as an industrial metal, which makes sense because the majority of the world's silver is produced as a byproduct of lead, zinc and copper mining. So when base metal is in high demand, silver producers do very well. In times of economic crisis and duress, it acts as a precious metal. For me, silver is a hedge against calamity, the same as gold is but to a lesser extent. I own Silver Bars and so-called junk silver, which is silver-bearing US coins minted prior to 1965.
When I buy precious metals, I look at the Gold-Silver Ratio. It's currently in the upper 60s, which is not attractive to me. When the ratio was in the low 80s, in October and November of 2008, I bought silver. So I Buy Silver when that ratio is high, meaning the price of silver is relatively depressed. Otherwise, I default to gold.
TGR: Mickey, you are a big proponent of investors doing their own due diligence. What conferences, books, seminars or newsletters would you recommend to those who might be new to the gold sector?
Mickey Fulp: There are numerous investment conferences every year, and I personally speak at about 10 or 12 of them. They're held in various large cities – Vancouver, Toronto, Calgary, Chicago, Phoenix, New York City, New Orleans, San Francisco. I encourage investors to go to these. Most of them are free to the investing public. At the upcoming San Francisco show (Hard Assets Conference, November 21-22), there are educational workshops, some of which are free and some requiring small fees.
TGR: You'll be there?
Mickey Fulp: Yes. I will be presenting my educational workshop called Geology for Lay Investors. Probably the most difficult thing for lay investors to get a handle on is the geology of these junior resource companies' projects. We geologists tend to speak our own language. We understand the jargon but it's probably puzzling to the investing public who has no background in the science. So in an hour-long seminar, and however long I stay for questions – which tends to be quite a while – I try to boil it down into the basics of geology. Geology is a science, but the best geologists are artists. So through these educational seminars, my mentoring of investors and a book I'm writing on resource investing for the lay investor.
TGR: When is that coming out?
Mickey Fulp: I keep saying a year, but it keeps getting put off as I keep adding more chapters, kind of like most juniors' Gantt Charts. I'm chipping away at it but then I get busy with other things. I'm writing it chapter by chapter, so it's a work-in-progress. Stay tuned.
TGR: Any final thoughts you'd like to share today, Mickey?
Mickey Fulp: Yeah, I've got one. "There ain't no cure for the summertime blues." Except that "Time is on my side, yes it is."
TGR: You ought to set that to music.
Mickey Fulp: I think that's already been done.
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