Should You Listen to Mining Stock Promoters?
How mining stock promoters have changed in recent years...
ALTHOUGH there have been some rotten apples in the past, good, ethical promoters are "essential to the life cycle of public companies," according to James West, author and publisher of the Midas Letter. The best of them tell a credible story about the company's structure, finances and deposit.
When promoters do their jobs and investors do their homework, everyone stands to benefit from the legendary "tenbaggers," as West discusses in this interview with The Gold Report.
The Gold Report: Not so long ago, mining promoters—larger-than-life personalities who revved up retail investors about stocks—were an essential part of the junior mining business. But the NI 43-101 limits how much company presidents and CEOs can tout their stocks. Do promoters still have a role or have they disappeared from the scene?
James West: Promoters have not disappeared from the scene. Yes, the NI 43-101 puts a filter on how public companies communicate with the market, but promoters are essential to the life cycle of public companies.
There was a time when promoters were infiltrated by a larcenous element that would create and promote deals that could at best be described as very optimistic. Back then, these misleading statements could be distributed almost clandestinely. Thanks to the Internet and the NI 43-101, that larcenous element has largely been unable to operate as freely. People hear "promoter" and they immediately think "con artist," which is wrong-headed and a throwback to the pre-Internet era. Promoters now are legally responsible for the statements they make on behalf of a company. As a result, promotion is a lot more respectable.
Today, because the level of sophistication has gone up with the proliferation of chat rooms and discussion groups, information considered "overly promotional" is discounted by the audience. People are a lot more savvy about promoters and promotional language than they used to be.
Promoters are still there, they are just more transparent. Today, promoters are part of the management team. They go to the meetings, presentations and trade shows. Excellent promoters attract capital and investors. A company without a good promoter on the management team is a company with few investors, that nobody has heard about and that can't raise money.
TGR: Given the transparency and availability of information, would investors be better off if the NI 43-101 rules regarding resource disclosure were relaxed to allow greater promotion?
James West: No. It is thanks to the NI 43-101 that the Toronto Stock Exchange (TSX) and the Toronto Venture Exchange (TSX.V) are the No. 1 destination exchanges for resource stocks. Those rules create a level of investor trust such that investors expect that any legitimate resource-oriented public company raising money must have an exit strategy that involves the TSX or TSX.V.
However, I believe NI 43-101 enforcement should be undertaken more carefully.
TGR: Do the recent poor performances of resource equities and the difficulties companies have raising money make a good promoter more valuable?
James West: Absolutely. Some promoters are raising millions of Dollars. That is the result of a combination of good projects and good management, which includes a good promoter.
TGR: What makes a good stock promoter?
James West: A great stock promoter can credibly and convincingly convey the technical aspects of a project and the merits of the management team, and can honestly indicate who the other investors are and what the exit strategy is to as broad an audience as possible. He also needs a great Rolodex.
TGR: How do today's promoters differ from your dad's junior mining promoters?
James West: They do not drink or smoke nearly as much, and they probably do not make as much money. Back in the day, you could promote 10 or 15 deals. If just one took off, you would be off to the races financially.
Today, if you are on more than one management team, your attention is assumed to be divided and your effectiveness is perceived to be limited as a result. Promoters cannot have as many balls in the air as they used to. Promoters are a visible part of management and are accountable.
TGR: Who would you consider to be a good, or even great, promoter active today?
James West: A great promoter, without saying too much, gets you so excited about the deal that you buy stock in the market or you participate in a private placement. Without being promotional, he paints the picture and leaves you to read between the lines if it's a truly remarkable project.
I would put Richard Whittall in that category. He does not shout from the rooftops. He diligently goes about the business of credibly articulating the structure and financial condition of the company and the deposit.
TGR: Some might consider you a stock promoter. How do you straddle the line between being a promoter and remaining credible?
James West: Arguably, anybody who speaks positively about a public company is promoting it. In our newsletter, we are happy to promote the stocks we invest in because we own them in our fund, and we think they have value. When we write about these companies, we try to articulate a company's merits in terms of structure, financing, projects and management without being too promotional. The idea is to say, "This company is good enough for me to invest in it, and here's why I like it." It is third-party endorsement in its most sincere form.
TGR: But you also try to create a story and use language that people can easily understand and relate to.
James West: The role of a newsletter writer in mining is to convey complex technical concepts in simple terms that a layperson can understand and use to decide whether an investment is appropriate for them. We aid in the function of promoting the stock, but we are not promoters.
Increasingly, I have been invited into deals as a founding shareholder. In that instance, I do become more a part of the promoting function, and in most of those cases, I'm proud to be a promoter because I believe in the deal, the project and the team. But you rarely see a newsletter writer on a management team or a board of directors.
There are exceptions, like John Lee, who was a fund manager and newsletter writer.
TGR: Institutional investors and investment banks are quite active in the junior mining space today. Do you think the space will be reclaimed by retail investors?
James West: First, the sheer size of the investment banks gives them an advantage over individual investors. Second, because the investment bank's business model relies on transaction volume, they are only in it for the structure, not the story.
So, yes, retail investors are reluctant to participate, especially in this kind of market and because of the mercenary nature of the investment-banking model. That being said, the earliest stage of the public company lifecycle is exclusively the domain of retail investors.
TGR: The best times to get into an equity position are at the seed capital stage and at an IPO. But many of our readers do not have those opportunities. What is the next best time in a company's life cycle to invest?
James West: I will start by saying that for the average investor whose portfolio is less than $100,000, the high-risk portion is the only portion that should be allocated to investing in junior mining.
The best time to participate in a high-risk venture is before a junior makes a discovery. For individual investors that typically means after an investment bank has done a financing and the stock price drops below where the financing was done, and when all signs point to a discovery. At that point, you are in cheaper than the institutions and the share price is unlikely to be driven down lower. After the discovery moment, the stock price goes parabolic for a brief phase.
TGR: Investors can reduce their odds through due diligence and listening to people like you.
James West: Yes. A good management team and a great geologist can look at a piece of ground and render an opinion about what might lie beneath it. Reinforce that with geophysical and geochemical data, and they might be able to improve on where they would drill a hole. But it is still largely a puzzle.
The best thing you can do in this market is look for companies that have made discoveries but whose share prices do not reflect the value of the deposit.
TGR: There have been recent concerns about the viability of mining projects in Peru. What is your view?
James West: Peru's president, Ollanta Humala, was elected on a platform of making sure more money from Peru's resources goes to the poor people who need it most. Now that he is president, he has to deliver on that. Peru's revised tax system for mining does give the government more money.
Some local people are convinced that a mine will destroy the water they rely on for agriculture. That kind of problem can happen anywhere; it is not specific to Peru. Now there are questions, because President Humala has been forced to side with the people, that some mines may not move forward. That has created a general sense of enhanced risk that needs to be priced into anything happening in Peru.
TGR: James, you are by-and-large a positive person. Why should retail investors be optimistic today?
James West: Arguably, we are in a continuation of the 2008 crisis, which was offset temporarily by a massive injection of quantitative easing and easy fiscal policies.
A crisis is an opportunity. This is a great time to accumulate as long as you do not put a timeframe on your exit. In many cases, the high-quality juniors have been pulled down along with the lesser quality companies. That is the opportunity and the reason for optimism.
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