“Give a man a fish, and you feed him for a day. Teach him to fish, and you feed him for a lifetime.”
An obsession with the “how” or “why” instead of the “what” is integral, in my opinion, to being successful in the world of investment. While the “how” can often be enough to make your eyes glaze over, it’s what ultimately separates the wheat from the chaff.
I believe the success I’ve had in my investing career, thus far, is due in large part to listening to and informally learning from successful investors within the sector.
Today, I’m sharing an interview I did with someone to which you should pay attention. It’s key to learning the “how” and the “why” of investment within the resource sector.
Justin Tolman is an economic geologist by trade and is a part of a world-class technical evaluation team at Sprott Global Resource Investments. In our conversation, we cover a number of topics including his background, jurisdictional risk, lessons learned in the sector and much more.
Enjoy!
Brian: You joined Sprott Global Resource Investments last year as an economic geologist within their technical team. The Sprott technical team is known throughout the sector as one of the best in the business and, thus, the mere fact that you joined them, in my view, speaks volumes about your technical acumen.
Can you give us an overview of your work history and how it brought you to where you are today with Sprott Global Resource Investments?
Justin: I have
degrees in both economic geology and business, but I think more pertinently, I
spent the last 20 years on the operating side of the resource world doing what
I could do ensuring that mines were profitable, exploration was successful, deals
were accretive, and that was tremendously rewarding. I got to go out sleeping
under the stars looking for gold deposits for weeks at a time. And I’d work in
big underground mines a mile under the earth. At the right time of the year,
you don’t see the sun until the weekend. But I used to joke that all that time
I was trying to work at what I wanted to be when I grew up. And the net result
was that I got to have some great world-class mentors. I got to be molded in
the crucible of some exciting discoveries. But I spent those two decades always
looking to learn the next thing, find ways to add value.
Inadvertently, I ended up as this broad, renaissance geologist, which sort of
primed me for the current role with Sprott, where a key part of the job is
trying to identify top tier management teams or be earliest into new
discoveries.
Brian: For me, jurisdictional risk is an interesting subject because everyone has their own criteria for what constitutes risk.
A good example is Russia. Many jump to the conclusion that it’s a VERY risky country and, therefore, not a place to invest. I don’t necessarily disagree; most of the propaganda about Russia, today, is ‘negative.’
Let’s, however, consider one of the criteria listed by the Fraser Institute in its examination of jurisdictional risk; political stability. Relative to its peers, Russia scored low, which a lot of people translate to ‘stay away.’ While political stability is a complex factor, I was taken aback when a friend, whose company does business in Russia, said he finds this scoring comical; “does anyone really think there’s going to be some serious political upheaval while Putin is in charge?” Given the complexity of evaluating political stability, his answer isn’t complete, but it still reveals the contrast in views – those who have experience in these ‘risky’ jurisdictions, and those who rely solely on narrative to form their opinions.
How do you view jurisdictional risk and how does it tie into the investment analysis of a junior resource company?
Justin: Risk is a
fascinating subject especially with resource investing. Jurisdictional risk
obviously is nuanced, subjective and multi-faceted, not only for people on the
outside trying to evaluate it, Also for those teams who find themselves
operating across different cultures and borders. Obviously, jurisdictional risk
is one element that goes into a risk matrix. It’s a foundational element, and
it’s one that even the best teams can only ever have limited influence over.
But, like other types of risk, it can be mitigated, and the reality is some
groups will be better at forecasting probable outcomes. Some teams will be
better at operating in certain environments.
Personally, I can be quite risk tolerant with respect to jurisdiction. I can
justify investments in comparatively risky locations. The caveat is that the
returns have to be sufficient to warrant it. If you look at somewhere like the
DRC, global risk consultants consistently and quite rightly rank it as having
very high political and operational risks. But committed, in country
exploration continues to highlight an emerging camp of world-class copper mines. That sets up an interesting dynamic.
As a final comment, you need to be quite judicious in applying broad risk
categories to entire jurisdictions, whether it’s countries or provinces, the
reality is that often it depends. Some superficially low risk places for mining
investment, like Peru, in actuality can be a very complex patchwork of
attractiveness depending on local community attitudes, legacy issues, and a
host of other things. That’s one of the things that we like to think
differentiates us at Sprott we get out on the ground in these areas early and
develop a deeper understanding for this aspect. A big part of my job is spending
time on the ground at lots of these projects first-hand.
Brian: In my view, current market sentiment is about as bad as I have seen it within the resource sector. Many of the emails I have received in the last month, or so, ask my opinion on where the market is headed or if they should follow the adage, “sell in May and go away.”
In your opinion, are investors wasting their time worrying about the direction of the market?
Justin: My opinion is that investors should absolutely be aware of where they are in a cyclical market. You should be allocating some of your brain capacity curating an opinion or seeking trusted advice on the direction of the market. Unquestionably, there’s value to be unlocked for those who can position themselves accordingly. But honestly, it’s not something I worry about on a day-to-day basis. Instead, one of the things that we do as part of the technical diligence team is to identify companies and assets that will be able to operate profitably or attract capital at any point in a price cycle, good or bad. And this way clients can anchor their portfolios around quality and the market will do what it wants.
Brian: Are market sentiment and fundamentals like the chicken and the egg? Meaning, does it make a difference which one comes first to alter the tide from a bear to bull market?
Justin: That’s a great question. I suspect those two elements certainly exert some influence over each other. The trick would be to extricate the relative proportions of each at any given point in time. But to borrow from one of the mental models of Warren Buffet and Charlie Munger, I feel we may have drifted outside my circle of competence at that this point. I just let the market do as its want. Instead, I try to start with an estimate of an asset’s fundamental value, and then if you are able to identify where market sentiment has drifted a long way from that starting point, it helps to guide future decisions from there. I’d much rather look at a tree than the forest sometimes.
Brian: In my opinion, exploration companies are a great way to speculate within the junior resource sector, especially during a bear market, as discovery pays no matter where you are in the market cycle.
While I see the chance for high returns, it definitely comes with high risk, as the odds of finding an economic deposit are stacked against you.
Firstly, do you agree with my statement regarding speculation in exploration companies in bear markets? Secondly, in your view, what are the most important steps or criteria in evaluating an exploration company and its probability of success?
Justin: Great question, and it might not be a short answer. Instead, I might tweak that statement to read, “Speculating in the best exploration companies at the right time in a project’s life cycle can provide outsized returns no matter where you are in the market.” It might be self-evident, I guess, but not all exploration companies are created equal. Most hemorrhage money on ineffective or inefficient exploration. So as you allude to in the second part of your question, the trick is identifying those companies with the greatest probability of success. And you have to layer over that looking at those groups who also show good financial acumen. Corporately, can they attract funding for their ideas? Are they going to be good stewards of capital? So it always starts with management. Are they ethical? Are they motivated? Can they build social license? And then need to look at their experience in the deposit style, project stage and region that they’re operating in? Do they know what a mine looks like? Another way of saying this is “do they know when to cut bait and move to the next target or do they fall in love with their projects?”
Pre-discovery, it’s important to have an appreciation for the region and the type of deposit for which the company is exploring: its geology, its prospectivity, the maturity of the region. And when you zoom in to the project scale, the list of diligence criteria multiplies again. As they progress into drilling, can it have sufficient size to be material to someone? How will it be mined? What process will be required to recover the minerals of value?
At the end of the day, if you can’t recover something economically, your discovery becomes moot, and it gets relegated to a technical success, the trick is recognizing this as early as you can. For those people who can see that ahead of others, there’s a huge advantage there.
Brian: Recently, Irving Resources released their first drill results from their Omu Gold Project in Japan. Irving is targeting a low sulphidation epithermal system, which they have systematically identified over the course of the last couple of years.
The initial results are very interesting as it appears to me that they have discovered, on their 2nd hole, the upper portion of the boiling zone. The market responded very well to these results, but it is clear that more drilling is needed to better understand and identify the main source of the hydrothermal system.
Why is it important to identify the boiling zone within a low sulphidation epithermal deposit?
Justin: Boiling in low sulphidation epithermals is a powerful and complex mechanism. It’s associated with a drop in the temperature and the pressure of the system. And this in turn causes a bunch of gasses to escape. It changes the pH a little. But most importantly from our point of view, it causes precious metals like gold and silver to drop out of solution and be deposited locally. So that’s a lot of words to say that for this type of deposit, if there was gold available in the system, this is where it would be concentrated.
Brian: Generally speaking in regards to a system such as this, moving forward, what does failure look like?
Justin: We’ve obviously
been in a bear market the last few years when the question is phrased as what
does failure look like rather than the other way around. The sinter which marks
the target area in this case is comparatively large, and the drilling’s at a
very early stage still. So the company is looking for a blind feeder at depth
underneath this sinter. ‘Blind,’ here, is in the sense that they don’t know
exactly where this is located under the alteration. They’re kind of poking
holes in there trying to vector. Now they have some indications that the
boiling zone is deep. They have indications that it could be auriferous because
they have a thin hit from just their second hole on the property, which is a
solid start.
In this case, exploration is an iterative process. You need to be looking at
each drill result and the geology successively to help you vector in three
dimensions. These systems, generally, here have a well-established zonation and
you can play a game of ‘Warmer-Colder’. Failure could happen by degrees as the
available space for an economic deposit progressively gets whittled away hole
by hole. Success could happen all at once. This is a good example of one of the
things that we actively monitor as a program progresses to help us develop our
own opinions on prospectivity.
For those interested in getting a better feel for Omu or projects like this, my
colleague, Andrew Jackson, was on site late last year. Some photos from that site
visit and many of our others are just available now at SprottUSA.com. We’re trying something new and making images
from our field work available on this platform with some commentary. For those
interested, that’s an easy way to track the things we’re looking at in-house
from a technical perspective.
Brian: Continuing with the exploration theme, last year, Evrim Resources’ Cuale project was in the headlines for the discovery of what many thought had the potential to be an economic deposit. This was not the case, however, as the ultimate ground truthing mechanism – the drill, delivered dusters at depth.
In your view, can investors learn anything from this failure?
Justin: There’s
always lessons from failure, often more contextual and more painful ones than
from success, right?
Brian: Very true.
Justin: At the outset, there was no
way to know categorically what the drilling would show. Now, Cuale was an
atypical gold system in many respects. There are absolutely learnings available
there, technically and geologically, for example, the difference between a hand
dug trench versus a mechanical trench and how that affects where you can sample
within the regolith profile, but it’s not always straightforward. Remember,
Evrim had a whole bunch of major mining companies on site who looked at those
rocks and were also excited by the potential.
So I think for investors, which is what you asked, a key lesson here is to take
profits. Selling when a stock is going up can be hard psychologically
sometimes. It’s easy for emotion and the innate tendency to project recent
trends forward, and that can overcome prudence. But taking some money off the
table at key junctures is often wise.
Cuale didn’t live up to expectations. However, I think the company itself is well
financed and doing quality work with credible partners.
Brian: Conferences are a great way to expand your knowledge of the sector and to speak to the people who are running the companies in which you’re investing. Personally, I think it is of the utmost importance to try and learn who these people are – you’re trusting them with your money.
For those looking for a conference to attend, I highly suggest that you attend the Sprott Natural Resource Symposium from July 30th to August 2nd, in Vancouver.
In your opinion, what’s the value proposition of the Sprott Natural Resource Symposium?
Justin: I attend lots of different mining and investment conferences, Brian. And each of them fills a niche within the broad arc of the industry. The Sprott Symposium distinguishes itself I think by providing quality content for investors in the natural resource space. Service providers need not apply. It’s relevant to Corporate Development teams or pure explorers, but they’re not the target audience, investors are.
The presenting companies have to be both invited and owned in-house. The guest speakers and the panel members are top notch in their fields. There’s a good balance of macro and project dynamics.
The conference itself is structured so that those presenting and those being presented to have more chances to interact, which I think lets delegates explore areas of interest to them beyond the typical investor relations pitch. The culmination of this means that the caliber of the conference participant that it attracts is actually extremely high. I get as much from talking to the other delegates as I sometimes do talking to the presenters. I always leave that symposium wiser than when I arrived.
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Until next time,
Brian Leni P.Eng
Founder – Junior Stock Review
Disclaimer: The following is not an investment recommendation, it is an investment idea. I am not a certified investment professional, nor do I know you and your individual investment needs. Please perform your own due diligence to decide whether this is a company and sector that is best suited for your personal investment criteria. I do OWN shares in Irving Resources and Evrim Resources. I have NO business relationship with any of the companies discussed in this interview.
