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?
Keith Schaefer: I am very focused on paybacks. When a company drills a well, I want to know how long it takes for that well to pay for itself. In the larger oil sector, anything that has less than a two-year payback is good, but in the junior sector, where I play, payback needs to be no more than 15 months.
You could ask for the net back, or profit per barrel, or the net present value (NPV) or the production rate. But that doesn’t matter as much as the payback—how fast you get that money back so you can drill another well. That is, by far, No. 1. The information that goes into that answer encompasses the answers to many other questions.
The other big questions are how much money the company has and how big a deadline it has. How much liquidity does the company have before management has to raise money again? Those would be questions I would ask management out of the gate.
TMR: Do the secondary questions inform the first question? If a company is well funded is the payback time as important?
KS: Regardless, I want to see a 12–15 month payback. If management tells me it has a two-year payback, and it’s a really small company, that just doesn’t work. If the payback is right, I’ll ask how much the wells cost, and how much money is in the bank, because I can do some pretty simple math to figure out the next time the company will need to raise money. But if a company doesn’t have a 15-month payback and is really small, I don’t care to hear anything else about them.
TMR: Eric, what do you want to know?
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.
“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.”—Eric Coffin
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?