Category: Profile

Everyone has different reasons for investing or speculating in the resource sector. I believe, for the majority of the participants, it’s the allure of 10 baggers that attract them to the juniors.

While the appeal to windfall profits is attractive to almost anyone, I believe it’s exactly this mindset that keeps many investors from actually realizing the gains they are given in the market.

Too many times, I have spoken to fellow investors who haven’t taken money off the table when it’s there, and are left holding the bag until the market turns or the company successfully answers the next unanswered question.

First, if you are an investor who can stomach the ebb and flow of the market then taking a long-term position in juniors can work. Secondly, and key to the first point, it can only work if you are right about the junior company in which you are invested. Will they continue to get ‘yes’ answers as they pursue the development of their mineral deposit?

The juniors draw much of the attention in the resource market, however, I think that there are larger companies that have big upside potential, pay a dividend, and are actual investment-grade companies.

Let’s take a look at one of them!

 

 

 

Altius Minerals Corporation

I’m very bullish on both precious and base metals moving forward. However, the pragmatist in me is especially drawn to the base metals, as their value proposition in today’s society is so easily understood.

Today, I have for you an interview with Chad Wells, VP of Corporate Development of Altius Minerals Corporation (ALS:TSX). Altius is the sector’s only diversified base metal royalty and project generation company.

Currently, Altius has 15 producing royalties in copper, zinc, nickel, potash, iron, thermal and metallurgical coal. In addition, the project generation side of their business has drastically grown in overall equity value since 2016, moving from roughly $22 million to $68 million at September 30.

There  are 54 new projects since Q1 2016 within Altius’ project generator portfolio and these will not only be the source of cash through equity sales in the future, but more importantly, will be the source of new cash flow by way of the royalties that are associated with most of the projects in their portfolio.

In my opinion, Altius is the best example of intellectual capital and how people are, by far, the most important commodity in any business.

As Wells mentions in our conversation,

“We’re a group that sticks to our guns, and believes in our own reasoning and rationale. At the end of the day, it’s about relying upon your own technical expertise and surrounding yourself with the right people that are willing to give you the right opinion that is unbiased, genuine and legit.”

I have long been an Altius shareholder and, in my opinion, would say that if I could only own one company in the sector, it would be Altius Minerals, hands down.

 

 

 

Altius Minerals (ALS:TSX)

 

MCAP – $556 M (at the time of writing)

Shares – 43.0 million

Annual Dividend – $0.16 / share

Outstanding Debt – $120 million

Cash and Public Equity Holdings – $180 million ($33.8 million cash)

2018 Royalty Revenue Guidance – $64M to $69M

 

 

 

Brian: In my conversation with Brian (referring to CEO Brian Dalton) last November, he was super bullish on iron ore and, over the course of the year, Altius has taken big steps to capitalize on the iron ore market.  First in March, by increasing your position in Alderon Iron Ore and, most recently in Q3, increasing your position in Labrador Iron Ore Royalty Corporation.

Can you please explain the opportunity you see in the iron ore market?

Chad: We’ve been a mainstay player in the Labrador Trough since 2004 and 2005. Originally, it was from an exploration perspective where we generated projects and sold them on to third parties. Alderon Iron Ore was created during that time, as a part of that strategy, and lead to us becoming very intimate with the iron markets. The Labrador Trough iron ore fits a niche portion of the global marketplace.

Brian (referring to Altius CEO Brian Dalton) has an innate ability to see around corners so he’s been predicting a bifurcation happening in the broader iron ore market this past few years for high grade iron ore with low impurities, compared to the lower grade, higher impurity stock coming out of the Pilbara. A lot of it’s being driven by Chinese pollution standards and emissions targets  through their steel mills. You’ve seen the Chinese cut significant volumes of steel production last year because mills were burning lower purity met coal and iron ore.

That’s led to a premium for the high grade, low impurity products. While the quoted price for iron ore, let’s say is at $70 per ton, the high grade Trough products are getting better than $100 per ton, while low grade is trading at a discount.

Brian recognized the separation that was coming in the market between high and low grade long before the broader market did. For us, it spawned an investment thesis to buy a substantial share position in Labrador Iron Ore Royalty Company (LIORC) mainly accumulated with the Fairfax preferred money starting in early 2017. LIORC has a 7% gross revenue royalty on Iron Ore Company of Canada’s  (IOC) Carol Lake operations, as well as a 15% equity stake. LIORC is a passive type issuer, taking the money that they get from the royalty and then dividending most of it straight to shareholders.

For us it was the opportunity to have exposure to a royalty on a premier iron asset in Labrador, at a time when we thought the market was going to start to take recognition of that.

Over the last year, we increased our Labrador Iron Ore Royalty Corporation holdings substantially. If you look at our average price, which was around  $17 a share before we bought the most recent addition of another .4%, LIORC stock traded last week as high as $31. At the same time, the yield of the dividends that we’ve realized off the asset are quite pronounced. And of course, we treat it as royalty income, effectively, in our per annum royalty revenue. So it fills out some of that diversified commodity exposure. So it’s been really good.

Alderon was much more strategic. We were a founder, having discovered the underlying Kami deposit way back in 2005-06.  Our recent doubling up, if you will, on Alderon, goes back to this bifurcation in the iron ore market thesis, which we believe is a real thing and that’s going to last.  It’s also worth mentioning that we bought the additional $5 million stake from Liberty when we agreed to a friendly transaction buying out the balance of the potash royalties that we’d held together in a JV.

With that comes the reality that you’re playing Carol Lake, through LIORC. Also, we have a convertible debenture with Champion Iron. Champion is the company that bought the Bloom Lake assets for $10 million in cash plus assumed liabilities of around $43 million from Cliffs, who had sunk nearly US$3 billion of capital into the project during the last iron bull.

The way we see things playing out in the Trough, we believe IOC brings a lot of transparency and reality to the broader marketplace, of the niche, that Labrador iron fits. We think that spills over into Champion, which is a very high margin operation right now, but is flying under the radar. We think the market will take credence and recognition there.

And as this market continues to want more high grade, low impurity iron ore, the next shovel ready project in that district is Kami. For us to buy that stake, on favourable terms, in Alderon from Liberty, brings us back to being that major shareholder with a big stick , it makes a lot of sense for us strategically.

If you reflect back to the last cycle, it was the asset that would have tore the lid off the can for Altius as a royalty generative business. The thing that most of the marketplace doesn’t realize today is that Altius is a different type of royalty company. It’s not a Franco or a Wheaton, who grows through acquisition. We actually grow our royalty portfolio organically and Alderon is one example of that.

In the past bull market in iron, around 2011, when we thought that Kami was going to get built, Alderon raised a bunch of money with the Chinese partner, Hebei Group. It almost got through the window in the sense of raising the capital to build a new mine. If that had to have happened, not only would we made a couple hundred million on the equity, but we would have had an underlying royalty on that asset at 3% gross royalty that based on the feasibility numbers of the assessment at the time, it would have generated about $25 million per year of royalty revenue for Altius for 20+ years.  The reason it didn’t happen is because the iron ore bull market ended so quickly when prices dropped from around $130 per tonne to levels less than half that.  If you add the premiums to the current spot, we’re edging closer to $100+ again.

Alderon is an extraordinary opportunity of optionality and because of what’s happened in the bigger iron ore market and because of the strategic significance of Labrador iron product in general, I think it happens this cycle.

Kami still needs a billion dollars in capital to get it done, but consider what’s going on with Rio Tinto and IOC and the rumors of them IPO-ing their IOC stake, and, again, the success of Champion in restarting Bloom, and it seems a reasonable bet that Alderon will raise the capital this time around. It might get built.  If it does, it will differentiate Altius from all of the others because the net asset value just from the royalty aspect that gets created from nothing, is profound.

 

 

Brian: That leads into my next question, generally speaking, in your opinion, how difficult is it to raise $1 billion to develop a mine, today?

Chad: Very difficult and, in saying that, today’s market is probably not the one to do it in. Will that market come? Of course it will. One thing that’s going to be very apparent in what I’ll call the pending bull cycle in commodities, is that the story is going to be about supply this time around, not demand.

What we’ve seen happen is the world has not developed enough copper, nickel and high grade iron ore mines to sustain just the static needs of society. So ultimately, it’s going to be a supply crunch and there’s just not going to be enough supply out there.

So that will incentivize commodity pricing, and incentivize capital, and more mines will get built. So will it happen? It will. The Iron ore business is a bit different, because there is a lot of iron ore that came on through the last cycle through investment. But most of it is in this low grade or medium grade stuff. So it doesn’t have the strategic niche of this high grade, low impurity ore, which quite frankly, the Chinese need.

So is the capital there today? Probably not. Will it come? It will. Also, I’d say you don’t necessarily have to think that these things are going to be built by the market. There’s a lot of diversified miners out there that have good balance sheets, have made a lot of money here in the last few years, again, and are going to be looking for shovel-ready assets to acquire to develop themselves.  Maybe some of these things get built in different ways, not necessarily going to be through the capital market conventions of a bull market, if you will.

 

 

Brian: Earlier this year, Altius entered the lithium market with the investment in a closed end limited partnership with Lithium Royalties Corporation. The deal gives Altius the rights to buy up to 10% of selected royalty direct investments.

Generally speaking, what criteria is Altius looking for in terms of the ideal investment in the lithium space? For example, does the lithium deposit type or jurisdiction matter?

Chad: We’ve always been a group that has focused on exploration and investment in bread and butter commodities, which lithium would not fit. We’ve seen a lot of these specialty themes over the years and we haven’t invested in them because their supply and demand fundamentals have been so wonky that we just weren’t comfortable with the volatility.

In the case of lithium and the battery metal craze in general, I’d say we missed it with lithium. We didn’t necessarily believe that it was going to be one of these bread and butter commodities. I think we’ve come to realize that it is something that we should have spent more time investing in earlier through our exploration business, but we didn’t. Because regardless of how much we try to minimize the forecasts of different battery chemistries in the EV build-out scenario, you just can’t ignore lithium. And the big correction in the pricing this year gives us a more comfortable entry point to be buying when prices are not so near the top. o it is a bit of a catch up game.

What we did do this year is we partnered with expertise. The guys at Lithium Royalty Corp., especially Ernie Ortiz, the CEO of that ship, he’s a specialist in the lithium world. He’s been an authority in lithium for many years starting as one of the first sell side analysts to take apart the EV forecasts as the story was unfolding for the future demand of lithium.

So, again, what Altius decided, in this case, is to partner with some really smart people who had the groundwork laid and had the best-in-class assets sized up and deals templated. We are investing basically side by side with them through an equity position into that company and our royalty co-vestment rights are pro rata with our equity ownership.  But we can pick and choose which ones we actually fund – we don’t have to participate in every one of them, and in fact, haven’t participated in every one so far.It is a different way for us to do it, as typically we’ve always been the front men running our own ship, whether it’s a particular jurisdiction or a particular commodity or a particular idea. In this case, we weren’t the first men running, so we partnered with the first man running.

 

Brian: Warren Buffett is famous for saying, “You must learn from mistakes, but they don’t have to be your own.” I was wondering if you could parlay that into the 20-year history of Altius.

Are there any lessons in particular that stand out to you?

Chad: Absolutely. It’s all lessons. I’ll focus on my side of the business, exploration and project generation. In the last bull cycle, we made $200 million plus through our project generation efforts. How did we do that?

We took geological real estate that we had generated with boot and hammer prospecting and came up with big context and big ideas. Then, we effectively sold it on to a third party. In the case of where we made the money selling on to a third party, it was a market participant. What we did is we exchanged geological real estate which is generally illiquid for shares in a fairly liquid company on a stock exchange, versus up until that point in time, let’s say the first 10 years of Altius, we spent a lot of our time doing exploration deals with major miners.

Though that gave us a lot of technical credibility in the product that we generated and we were able to attract those third party endorsements, it was an illiquid business. What I mean is that even though you did a deal, you weren’t able to monetize your minority residual stake in the assets.

So the big learning experiment that we had when we look back at the last bull cycle is related to the way that we made money, it was actually trading geological real estate for shares. So when we enter this bull cycle, I don’t know that I’d call it a bull cycle yet, the phone started to ring. All of a sudden, here we were as an exploration group, we had assembled projects in nine jurisdictions globally from 2012 to 2016, when nobody gave a crap about the mining resources business, and certainly weren’t doing exploration. We were able to waltz into world-class jurisdictions, build meaningful land positions, generated a lot of geological real estate, and basically we sat on it and waited for the market to turn.

Since that time, we’ve sold 54 (working on 57!) projects and 17 different agreements in less than 24 months. It’s been extraordinary. I didn’t think it could get so good for us. Every deal we’ve done, except for one that we haven’t announced yet, is that we took our geological real estate, we’d trade it for shares in a third party junior company, or in special circumstances, we even facilitated the IPO of new entities.

Where at the same time, though, where did we end up? We ended up with a big share position in a company that now held the assets that we generated, while at the same time we retained blanket royalties to the underlying projects. Long term sewed up in terms of the mining operations, we get kicked back on our royalties, while at the same time, we’re so early into the cycle we’re effectively getting seed stock in juniors that go to explore our projects.

So these positions expose us to discovery opportunity off of our balance sheet, on somebody else’s balance sheet, at the seed level. It’s beautiful! So if you look at our juniors portfolio today, we’re sitting on 27 juniors with a value of about $65 million at the end of September.

I can’t make a promise, but I’ll say to you I have extraordinary belief that that $65 million will be worth the market capitalization value of the entirety of Altius, roughly $600 million, through the cycle.

We’re seeded up on the right deals, at the right time, in the right commodities and right projects that those things are going to deliver value.

It’s a cyclical business, you need to be able to, to some degree, trade those cycles. We’ve been able to create fundamentally long-term royalties that punch through the cycles, that we can realize on over 10, 20, 30 year increments. At the same time, we’re getting seeded up on equity that we can monetize and put a big surplus of cash into the bank, so when the market rolls over again, we can put it to work.

So, really, it was about realizing it’s all about liquidity and timing.

 

Brian: That’s a great answer.

The ramifications of confirmation bias should be a major concern for all investors, as human nature dictates that we love to reaffirm our beliefs with confirming evidence. As a manager, the same concern can be said for “yes” men; people who continually support the boss regardless of whether they think they are right.

Personally, in my career as a manager in steel manufacturing, I quickly learned how important it was to surround myself with people who weren’t afraid to tell me what they thought about the projects that were being proposed or the direction that I wanted to take.

In your experience, how important is it to find or listen to disconfirming information?

Chad: The resources sector more than in any other, you shouldn’t run with the herd. You have to go against it.  The reality is that this business in general – exploring, mine development, mine construction, mine production – is extremely tough and tedious.

Additionally, you’ve got to realize that there’s a lot of different tiers and categories of humans that benefit from a story advancing versus not advancing. So, a lot of times, you’re always encouraged to keep spending and spending and spending, because to some degree it’s the mentality to keep things going.

We don’t get into that type of philosophy. We’re a group that sticks to our guns, and believes in our own reasoning and rational. At the end of the day, it’s about relying upon your own technical expertise and surrounding yourself with the right people that are willing to give you the right opinion that is unbiased, genuine and legit.

The resource sector is like no other, it is feast or famine, it’s a herd mentality. To succeed you have to genuinely and truly be a contrarian.  You have to be a no man versus a yes man.

 

 

Concluding Remarks

Altius Minerals is the cornerstone of my personal portfolio and will remain that way for the foreseeable future. In Altius, I see minimal downside risk outside of a broader market crash, which, in reality, would negatively affect just about every company’s share price.

Further, the upside potential from their project generation business looks very promising. First, looking at their development stage royalties projects: Excelsior Mining’s Gunnison copper project, Alderon Iron Ore’s Kami project or Evrim’s Cuale project, there is a lot of potential cash flow that could be soon flowing in Altius’ direction.

On the exploration side of their equity portfolio, you have Adventus Zinc Corporation (ADZN:TSXV), Aethon Minerals (AET:TSXV), Antler Gold (ANTL:TSXV), and Sokomon Iron (SIC:TSXV) to name just a few. Additionally, you have their latest spin out, Adia Resources, which is partnered with De Beers in the exploration for diamonds in Manitoba.

There are no guarantees in life, however, I believe that if you look at the short and long-term prospects of Altius, I think you will agree that they look tremendously bright.

 

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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 Altius Minerals, Adventus Zinc Corporation, Aethon Minerals, and LIORC. All Altius Minerals analytics were taken from their website and press releases.  I have NO business relationship with Altius Minerals or any of the other companies mentioned in this article.

Whether it be financial, political or social, there’s the potential for any decision we make to be fueled by emotion. In particular, when participating in a high risk, high reward area of the market, like the junior resource sector, it can be lethal to your odds of success.

In my experience, those who can use arithmetic as their primary “truth” are the best at eliminating bias and reducing the amount of emotion contained in an investment. Today, I have for you an interview with a man who uses arithmetic to construct, what I believe, is the most compelling argument for gold that I have ever heard.

This man is Trey Reik, a Senior Portfolio Manager with Sprott USA. Reik is a commentator on gold markets and monetary policy, including policies and actions of global central banks, global conditions for money and credit, and factors affecting supply/demand conditions for gold bullion.

I first heard Reik speak at the 2015 Sprott Natural Resources Symposium in Vancouver, British Columbia. From then on, I’ve always paid attention when I’ve heard or seen the name, ‘Trey Reik;’ there’s a lot you can learn from him, especially when it comes to his commentary on gold.

Without further ado, a conversation with Trey Reik.

 

Enjoy!

 

 

 

Brian: In my view, we live in a society of paradigms or bias that lock us into thought patterns that keep many of us blind to other alternatives – alternatives that may be more efficient or beneficial.

 In reference to financial markets and in particular gold, in your opinion, how does one keep an open mind and see through paradigms and their own inherent bias?

 

Trey Reik: I think that a lot of what’s been going on, at least in markets since the turn of the millennium, so the 2000s, is that we’ve hit a period in which central banking has become probably the most important variable on the investment landscape, and I would add much more important than it should be. This has really cast a prism or a rose-coloured glasses view of what’s really going on in the world. It has, I think, relieved people and investors from reality, to a great degree.

Let me just back up a teeny bit, and talk about it from the perspective of gold. Number one, I’ve given probably 1,000 presentations about gold over the 15 years in which I have been covering it, and I’ve never once convinced anybody to buy gold. I don’t expect to change people’s views today any more than I did yesterday or last month. Number two, gold’s a funny topic because almost everybody has an opinion, generally unburdened by a real strong command of any relevant underlying fundamentals or facts. Third, gold has more investment queues than any other asset with which I’ve been involved over my career.

Some people think it’s an inflation hedge, some people think it’s a deflation hedge. Some people think gold is a risk-on trade, other people would look at it as a risk-off investment. When we have stress in the financial system, some people would view gold as a safe harbour. Other people would still favour the US dollar, although far fewer than would have made that determination say, in 2008. Given the negative reflexive relationship between the dollar and the US gold price, you could actually have a situation where stress in the financial system has a reflexively negative impact on gold.

Now, I went through all of that because my gold thesis is a little different than most. I don’t really think gold has much to do with CPI-type inflation. The way I would pose this is  that if the price of hedonically adjusted hot dogs in Houston goes up, why would you buy gold? I don’t really see a strong connection there. Another way to look at inflation is if the prices of goods and services go up for healthy reasons, like a strengthening economy, I’m not really sure the price of gold should go up any faster than say, thumbtacks. If the inflation is of the monetary sort or variety, then I think gold should logically do a lot better.

Now, over the last 17 years, gold is up in 14 of those 17 years and has amassed a compound annual return since year end 2000 through year end 2017 of just about 9.5%. Actually, 9.65%. Over the same 17 years, the compound annual return of the S&P 500, including reinvestment of dividends was 6.32%. Gold has significantly outperformed the S&P with reinvestment of dividends for 17 years and is up in 14 of the 17. Now, if gold is up in 14 of the 17 years, it proves my point that it’s not related to some of these knee-jerk reactions that get ascribed in the press all the time to gold investors. In other words, we’ve had periods of inflation and periods of deflation over that timeframe. We’ve had round trips in equities and commodities. We’ve had yields on both the short end and the long end, largely falling over the timeframe, but we even had periods like June of ’04 to June of ’06 where the Fed raised rates at 17 consecutive FOMC meetings and quintupled the Fed funds rates from one-percent to five-and-a-quarter-percent, and gold went up during that timeframe by as much as 86%.

My point is, for gold to do as well as it has for so long, posting the best performance of any global asset, there’s obviously something more going on. I think what that is, is that at the margin, we have about $280 trillion now in global financial assets, and each year, in my opinion, my thought experiment, if you will, is that a very small portion of that global wealth seeks a home in hard assets, things that can’t be debased or defaulted upon, things that can’t be printed. That’s why fine art, in my opinion, has done so well over a period that has not exactly been exhibiting breakneck growth, but nonetheless, the art market’s been on fire. Things like Honus Wagner baseball cards, fine Bordeaux wines, all that kind of stuff has done really, really well.

Gold has benefited, I think from that migration. Each year, we have a different rate of migration from the financial asset pile to things like gold, and in certain years, that migration may have even reversed, like 2013, for example. The whole gold thesis is about that rate of migration going from say 1/10th of 1% to say, 1/2 of 1% ’cause 1/2 of 1% of $290 trillion is $1.45 trillion. The available gold stock is about $2.8 trillion. $1.5 trillion isn’t going to get into $2.8 trillion without a serious price dislocation.

When you talk about paradigms or things being misleading or that type of thing, although that’s a leading, almost political kind of question, I think the biggest misdirection, I think, of markets is the degree to which certainly over the past three years especially, but over the last 17 years, how big a part of financial asset valuations has become central bank policy.

Now, to back this up to two weeks ago, I think most of the market still believes that this disturbance that we had is–just as when we had the crisis of 2007, ’08, and ’09—the  first words out of people’s mouths are always, “It’s contained.” Just as we thought in 2007 that the disturbance was limited to subprime mortgages, we are currently, I think, a large percentage of folks would say that the current disturbance is limited to a very small group of perhaps leverage, but certainly a short bet on the VIX. I look at it very differently. I would suggest that after nine years of ZIRP and QE, but 17 years of egregious central policy and interventions really starting with Mr. Greenspan, the entire financial system has been imbued with this short-volatility way of looking at the world. I’m sure given your situation, that you’ve read Chris Cole’s stuff from Artemis, but he’s the Michael Burry of this trade. You remember Burry was the guy that figured out the subprime-short trade for Scion Capital in the movie The Big Short. Coles is, I think, the Michael Barry of this trade. If you’ve read his stuff, he estimates that there’s about $2 trillion-worth of short-volatility exposures.

He’s got it all broken out in the stuff that he’s written. If you have about $2 trillion of exposures left, we haven’t even really started to scratch the surface of re-pricing things back to reality. I would say that in an environment of 0% interest rates and QE, we’ve lost the ability to assess the demand for anything.

People who laugh or criticize gold, like Warren Buffett–here’s a guy, he’s got more financial assets, paper assets than any other human being on the planet, or I guess Jeff Bezos might be up there with him now.Warren Buffett, who has more to lose from gold doing well than any other person on the planet, and ask him what he thinks about gold? But yet we do. When we do, he says, “Well, if you take all the gold in the world and you fit it on a tennis court, you got this big lump of gold and then in the other, box B, you could have five General Motors or GEs, and all the farmland in America, and you’d still have a trillion dollars leftover. Who wouldn’t pick box B?” The answer is anybody who thinks box A, which is all the gold in the world, is going to go up faster than box B.

We have a system where people think they have these franchises and these moats and all the stuff that Buffett writes about, and impenetrable franchises, but in fact, the denominator of all of these things, the unit of account, even if you’re talking about cash flow, is dollars. The one thing that is not stable as a unit of account is dollars, so no one really has any idea what the value of any of these franchises are.

If we normalized rates, and we took say, Fed funds to, well what’s normal anymore? We took them from 1% to 5.25% as recently as 2006, but if we took them to 4-5%, and we took the 10-year Treasury yield to eight percent, would the financial systems still be intact? I think the answer is no.

Until we can normalize rates, we don’t know what the list of Buffett’s companies–the Nebraska Furniture Mart and Wells Fargo and he just sold his IBMno one knows what the demand for anything is at these companies with this much monetary debasement.

 

 

Brian: Since 2008, I have personally suffered from being too pessimistic on paper currencies, mainly the U.S. dollar and risk in the broader market.  Depending on perspective, this view both made me and cost me money.

Now, 10 years later, I have taken time to reflect on my investment choices and believe that bias or the so called “gold bug” in me prevented me from having a clearer picture of what was actually happening in the world.

However, I still believe that there is a price to pay for the massive amounts of money printing and low interest rates we have seen over the last 10 years. To me it is a “when” not “if” question.

My question for you is, has the “when” already occurred in the gold market? Meaning, realistically, should investors view the current gold price around $1300 USD/oz as the payback for the QE and low interest rates, or is the “when” still to come?

 

 

Trey Reik: I do believe there is no empirical equation that could generate a gold price that really means anything. The gold price is the reciprocal of your comfort with the financial system, the dollar, and central-bank stewardship. If you’re of the opinion as an investor that those three are fine, gold really serves no purpose. If you are like me, of the opinion that all three of those are deeply in doubt, meaning the value of the US dollar, debt levels, central bank stewardship, etc., then gold is a mandatory investment.

It doesn’t really matter if the price is $1,200 or $2,300, if those three issues are still a problem, you need to have gold in your portfolio. That’s what I was saying earlier; I have three litmus tests for when gold is a mandatory portfolio investment. I was sharing the first with you, which is whether you could normalize rates and then you have to decide what normalizing means. Let’s even call it 3% on Fed funds. I don’t think we can get there without a financial calamity or 6-8% on the 10-year Treasury. If you could normalize rates without big impact, gold’s role may have diminished.

The second litmus test would be if we take the ratio of debt-to-GDP, for the last 100 years the ratio of debt-to-GDP in this country has averaged 140-170%, except for two events. The depression and the Alan Greenspan/Bernanke/Yellen era. In the first example, we had GDP fall 50%, the debt remained constant, so the ratio got up to like 260%. FDR had to devalue the dollar and confiscate gold in the US and make it illegal, for what turned out to be 41 years. In the current environment, which is a numerator event, we’re just piling all this debt on top of relatively stable GDP. If we don’t get that debt-to-GDP ratio back to say, 200% from its current level of about 370%, goldwill remain a mandatory investment.

The reason is, that in order to get that ratio back into balance, the only two options are default or debasement. Each time the markets try to choose default, the Fed steps with QE1, QE2, QE3, Operation Twist, etc., and they will again. We’re either going to have 20 trillion or so of credit in the United States go away, or the other way to look at this is household net worth.

In March of 2009, household net worth, which is the Fed’s measure from Z1; basically it’s stocks, bonds, real estate, minus debt. Household net worth in March of 2009 was $54.79 trillion, GDP was $14.09 trillion. Today, household net worth is $96.94 trillion and GDP is $19.5 trillion. GDP has gone up $5.4 trillion from $14.09 trillion to $19.5 trillion, and household net worth over the same time period has gone up $42 trillion from $54 trillion to $96.94 trillion.

This means that over the past—let’s see, March of ’09, and now we’re in March of ’18, so the past nine years, household net worth has grown 7.77 times, or call it eight times faster than GDP growth. Now, the one thing I know for certain is you can’t grow wealth eight times faster than output forever. Once again, is gold necessary? Have we had the ‘when’ yet? Absolutely not. In the household net worth type of multiple to GDP, if you look at the 40’s, the 50’s, the 60’s, the 70’s, everything really through the 80’s, we used to have about a 3.5 times multiple to GDP and savings, is what household net worth should be.

Probably 30, 35, 40 trillion dollars worth of household net worth has to go away to get the system back in balance. This is like litmus test number two. We either need $20 trillion in credit, or $30-35 trillion in the combination of real estate, stocks, and bonds, (minus debt) to go away to bring the system back in balance. Until that happens, I think gold is a mandatory portfolio component because, once again, the only two options are default or debasement.

Then the third litmus test would be if we could get back to some sort of normalized GDP growth, and once again, we’re debating these days what “normal” is. Trends, capability, normal, say 3%, used to be 3.5%. We used to accomplish 3.5% growth with a savings rate, very importantly, in the 8-10% area. That would be healthy growth. It wouldn’t require the non-financial credit expansion that is now necessary to keep the debt pyramid from toppling, which is on the order of $2 trillion a year. Again, to review the three litmus tests would be normalizing rates without crashing the financial system, rationalizing the excess paper claims in the economy, whether it’s debt or the household net worth, and the third would be normalize GDP supported by savings as opposed to non-financial credit creation.

Unless you have basically all of those, or even two out of three, gold is still a mandatory portfolio investment, in my opinion. Which is, by the way, why even though it never gets any accolades, it is the best performing asset and is up in 14 of the past 17 years. That’s going to continue until we get the system in better balance between claims on future output and the future output itself.

 

 

Brian: Is there an event or series of events that would have to occur for you to change your mind about the long-term fundamentals of gold?

 

Trey Reik: One of the reasons that I’m as confident as I am is I’ve spent more time thinking about the underlying fundamentals than most human beings. There’s a lot of people that invest in gold for lots of different reasons, as we already discussed, but I’m not in that group. I’m investing in gold for a very specific tenant, which has to do with monetary variables and the claim on future output. There’s just too much paper claim out there. Until those imbalances are solved, one way or another, and I’m suggesting the only two solutions are default or debasement, there isn’t any other solution.

Well, the third solution would be we grow into it, but in order to grow into it, even if we had GDP at 10% for each of the next eight quarters, it would take GDP from $19.5 trillion to maybe $22 or $23 trillion, and that can’t support $66 trillion of debt any more than $19.5 trillion. Further, if the variables that I just gave you in the last 17 years hold anywhere remotely true, when we get GDP up to $22 or $24 trillion, the debt won’t have remained constant. It would  probably be up seven times faster than the GDP growth. You can’t grow out of it, you’ve got to have default or debasement. These imbalances are so profound that I’m not swayed to change my mind at all, even by periods like September 2011 to December 2015, when the high tick for gold was 1911 down to 1050 because these imbalances are still there.

Over the past 17 years, by the way, people always ask when’s gold gonna do its thing? Or why isn’t it doing better?… My response is always, It’s the best performing asset on the planet for 17 friggin’ years. I’ll be fine if gold keeps performing just like this, you know what I mean?

 

 

Brian: Yes, absolutely.

 

Trey Reik: Now, you mentioned the currency thing. I believe all fiat currencies have become an extension of the US dollar. Currency people have to pick one of the seven or five, or however many you want to say there are. That’s a shell game, and that’s all fine. It has gone on much longer than I would have thought possible. It is amazing that 2008 was 10 years ago, and here we are, but things are starting to change.

People talk a lot about the dollar and this is just an interesting thing, if you take the 10 worst market days in each year and you look at those 10 worst market days, you’d have 50 if you looked at five years. From 2008 to 2012, the 50 days when the DOW dropped at least 100 points, the dollar tended to rally on those days. During those days, dollar index rallied 80% of the time and an average 0.6% on these bad days.

Now, if you look at the next five years, from ’13 to ’17, and we look at the 10 worst days for the DOW, the dollar fell on those 50 days an average of .3 and it only rose 26% of the time. What I’m saying here is we are and, by the way, what happened on those 2,000 point days, I think fiat currencies are starting to fail. That’s a bench-clearing statement, but I think it’s true. We are in the early stages of a potential currency collapse, and so we may be getting “there.”

 

 

Brian: In your opinion, is the investment thesis for only gold the same as the thesis for only gold mining companies?

 

Trey Reik: The thesis is the same, but the deployment or the execution is obviously tricky. Gold is the best performing asset on the planet, as I mentioned, since 2000. Gold equities have had three big runs. The three big runs in gold equities were November 2000 to December 2003, , May 2005 to March 2008 and then November 2008 to September 2011.

Now, ironically, each one of the three was within a month or two of exactly three years. I believe that gold equities provide unparalelled alpha when the faith in US financial assets is being recalibrated. We never want to say stocks could go down, so I’ve come up with that phrase.

If we look at November 17th, 2000, through December 2, ’03, the GDX was up 342%, the S&P was down 22%. The next three year period, the GDX was up 185% and the S&P was up 10%. Then, in the third, it was 309% versus 39.70%. Now, if we compound the advance of the GDX in those three periods, which by the way, is nine years out of the past 16 years, it’s a little over 55% of the time you get a compound performance of 5,081.61%. The coincident performance of the S&P, to the day, was 20.39%, which means that gold equities outperformed the S&P by a factor of 249-to-one in nine of the past 16.5 years.

Now, the problem is the corrections between those advances measured negative 36%, negative 76%, and then after the last advance, negative 86%. If you compound those declines, you get basically 98%. That’s why gold equities in December of 2015 were trading below where they were at the end of the first of those three advances, where they were in December of 2003. The GDM in December of 2003 was at 799 and we got down below, I can’t remember the number, but it was much lower than by the end of ’15. Are they motivated by the same investment thesis? Loosely, but the key with gold equities is, as I think you learned after 2016, neither gold nor gold equities are a permanent investment. They serve different roles.

With what we call the jaws-of- life of the inverse correlation between the S&Ps, since October of 2012 through to today, never having been wider. The last time it was this inversely correlated, gold stocks was like 1996 to 2000, and we all know what was happening then. When people get dumb about US financial assets, gold stocks have a tendency to get left for dead. Then, when the inevitable correction comes, and there were two since 2000. The first was 50.5%, second was 57%. As I’ve proved in the prior example, gold stocks have a tendency to provide among the best alpha available in any asset class.

While I think it’s been necessary to have a good bullion allocation consistently in the last several years, I think that now would be an example of the time period where it’s also incumbent to have a representation in the equities themselves. It’s because of the alpha provided if we have one of these recalibrations of faith in US financial assets, and secondly, simply because of the inverse correlation, which has opened to such an egregious degree between the S&P and gold equities.

 

Brian: It has been a pleasure Trey, thank you very much for taking the time to answer my questions!

 

 

Concluding Remarks

The world’s politicians and a good portion of the mainstream media would have you believe that the actions carried out by the world’s central banks, mainly QE and low interest rates, saved us from the depths of what could have been a much worse situation in 2008. In my opinion, this couldn’t be further from the truth. While, it has taken longer than I have expected, there will be a price to pay for this poor monetary policy and, unfortunately, for those who are blissfully unaware, they will be rudely awakened, one day, when the market re-adjusts.

In my discussion with Reik, he cited three Litmus tests which can be used to gauge whether gold is currently a mandatory investment within your portfolio. Ask yourself:

• First, is it possible to normalize interest rates?
• Second, can the debt to GDP ratio be reduced back to historical norms?
• Third, is it possible to get back to normalized GDP growth?

If you can honestly answer even one of these questions with a ‘yes,’ first, I’m surprised and, second, maybe gold isn’t a good investment choice for you.  In my mind, Reik presents a compelling thesis for the investment in gold and gold equities, making it a “when” not “if” investment choice for your portfolio.

For those interested in purchasing the physical metal, yet would prefer the convenience of purchasing it through the stock market, I highly suggest checking out the Sprott Physical Gold Trust, which is traded on the NYSE under the ticker PHYS, or the Sprott Physical Gold and Silver Trust on the TSX under the ticker CEF.

The Sprott Trusts offer a few advantages. First, they differ from bullion funds, in that all of the bullion owned by the trusts is held in the trusts’ allocated accounts in physical form. Second, all of the Trusts’ bullion is stored at the Royal Canadian Mint, a Federal Crown Corporation of the Government of Canada. Thirdly, for U.S. non-corporate investors who hold units for more than one year and make a timely Qualified Election Form submission, gains realized on the sale of the Trust’s units are currently taxed at the long-term capital gains rate versus the maximum applied to most precious metals ETFs and physical gold coins.

Additionally, I highly suggest following Reik’s market commentary by subscribing to Sprott’s Thoughts, one of the best sources of financial commentary in the resource sector. Also, I highly suggest attending the Sprott Natural Resource Symposium in July, where you will be able to see and listen to Reik in person, along with a fantastic group of speakers which includes Rick Rule, Doug Casey, and James Grant, to just name a few. I hope to see you there!

 

 

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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(s) and sector that is best suited for your personal investment criteria. Junior Stock Review does not guarantee the accuracy of any of the analytics used in this report.

People are, by far, the most important facet of any business. This is especially true in the resource sector, as mining is a risky investment even when the best people are involved in the project. You might be thinking, ‘but I have to pay a premium for the best people.’ Well, that may be true sometimes, especially if you were unable to buy the best people during a bear market.

It’s my contention that, over the long haul, investing in the best people will always put you in the best possible position to succeed. But, don’t take my word for it; here’s a quote from Rick Rule, President and CEO of Sprott U.S. Holdings, from an interview I did with him a few months back:

“The truth is, if you have the guts to invest in bad markets, you can buy the best properties and the best management teams very cheaply. In the market that we are heading into, a bull market, however, other sets of circumstances are true and I would suggest to your readers, unless they are prepared to devote a minimum of 20 hours per week to their speculative portfolios, that they give up the optionality associated with new management teams and focus on investing around the best of the best, even being willing to accept those premiums.” ~ Rick Rule – Junior Stock Review Interview

Today, I have for you an interview with Brian Dalton, CEO of Altius Minerals. In my opinion, Dalton is as good as it gets when it comes to people in the resource sector, and this is the biggest reason why I am a shareholder of the company. Recently, I had the chance to meet with Dalton and to ask him a few questions, learning a little more about the company and the man leading Altius Minerals.

Enjoy!

 

 

Altius Minerals – TSX:ALS

MCAP – $625.7 M (at the time of writing)

 

As of October 31, 2017

Common Shares Issued – 43,187,291

Fully Diluted – 50,743,614

Annual Royalty Revenue – Last 12 months – $60.1 M

Total Debt – $70 M

Cash – $29 M

Equity Portfolio – $84 M, including $10 M convertible loan to Champion Iron

 

 

 

A Conversation with Brian Dalton

In my opinion, one of the biggest issues facing most people is their lack of self-awareness. Whether it be in their investments or their personal lives, many people either have no idea or are prone to lying to themselves about where they are strong and where they are weak and, thus, typically fall short of their goals and aspirations.

Dalton, however, appears to be very in-tune with his own strengths, as well as those of his team. Altius Minerals has been very successful over the last 20 years because they have played to their strengths and,  therefore, in my opinion, are in a class of their own when it comes to the mining business.

Quoting Dalton from an interview he did with BNN on February 28th of this year,

“We don’t see anything in our skill set that would make us suitable to run major industrial operations, but we can evaluate projects that are going to work, and their future, and their exploration potential” ~ BNN

This is a very introspective comment, one that has proven to be very advantageous for Altius and its shareholders.

 

For those who aren’t familiar, Altius was founded by Dalton and the rest of the team while they were in university. Playing to their strengths, Altius’ business plan is to buy or stake exploration properties in the midst of crisis, which can later be sold in a market upturn, while keeping a royalty on each. Additionally, Altius has used proceeds from these sales to purchase a diversified portfolio of mining royalties from producing mines.

In my conversation with Dalton, I asked about the origins of the company and how they built a tiny junior into the sector’s first diversified mining royalty company.

Brian Dalton: “When the market started to get better in 2001 and 2002, we had a bit of a head start on everyone because we’d stayed busy right through the downturn.  The market got behind us and we were first able to buy a royalty on Voisey’s Bay in 2003. It was a really big bet for us costing $10 million dollars, which was essentially our full market cap, but we felt comfortable with it.

The market continued to get stronger and stronger and all of these early exploration lands we’d been buying in the downturn, which we had bought really cheap, suddenly became what everyone wanted. The market wanted to pay for exploration land and we were able to make an awful lot of money over the course of that cycle just by literally monetizing the value of the exploration land, all the while keeping our royalties.

Fast-forward to about 2011 and the end of the big bull run in the market, and we found ourselves with a lot of cash, over $200 million. I can remember we started the cycle with less than a $1 million market cap. The most important thing to remember is that these were profits, not money we raised in the market selling our stock.

From here, we wondered what we should do as a business model, we had been building up a big portfolio of royalties for our exploration properties, but now we had this cash. We said, ‘let’s buy some production stage royalties as well and fill out a whole portfolio which would include production stage, exploration stage investments.’

It took a while when that strategy was first started, as the market was really hot, price expectations for the commodities were off scale and everything was just hot, and then boom, everything died, exploded actually.  Suddenly, every mining company in the world looked as though they were going to go bankrupt and it was chaos.  Many believed that it was over for the sector.

At which point, we said, ‘OK, it’s probably about time.’ So we put all that money to work and we borrowed on top of that and we bought 14 more royalties through that period, right through the carnage. That’s the period between 2014 and 2016.

We had a diversified approach, we bought potash, copper, iron ore, zinc. We basically created the first real diversified mining royalty company.”

 

For me, jurisdictional risk is an interesting subject because everyone has their own criteria for what constitutes risk. For most, jurisdictional risk is most closely tied to the politics of the country in question, or the politics of a neighbouring country.

Question – How do you view jurisdictional risk and how does it affect Altius’ investment strategy?

Brian Dalton: “Most would look at our portfolio and the places that we work as pretty low risk. I use a really simple rule of thumb. More or less, would I be willing to put someone there and feel comfortable, am I able to sleep at night and would I visit there with my kids? If I am able to get through these points, I’m usually pretty good. Now, that’s a very high level, the basic kinds of risks.

Generally, we like to make most of our investments when things are in true, utter chaos and crisis. It turns out that when money turns off, it really turns off everywhere. We tend to use the downturns as an opportunity to get into the best places.

As it turns out, the best places are the places where money returns to first. We’ve never felt the need to chase a lot of political risk to find value because we find value just by buying in the right part of the cycle.

Oddly, what we thought was the lowest risk of all the acquisitions that we have made, be it exploration or production assets, according to commentary or how institutions would have risked it. The absolute lowest risk assets were a bunch of things in Alberta that we bought, which turned out to be the biggest political disaster you’ve ever seen. You can never get it right. To me, right now, Alberta has more political risk than the Congo, I am not saying we are going to the Congo, but that is the kind of thing we’ve got.”

NOTE: In 2016, Altius recorded an impairment charge of $72 million as a result of the Alberta provincial government – NDP – committing to end coal-fired electricity generation by 2030.  One of their large coal royalty assets – Genessee – is expected to produce well beyond 2030, and the impairment charge was the deduction of those years of projected cash flows that are cut off because of the government’s decision.

 

 

In October of this year, I had the chance to visit western Newfoundland. The purpose of my trip was to visit two operating mines in the northwest portion of the island, near Baie Verte, and an exploration project in central Newfoundland, just south of Millertown. (Site Visit Article Series – Part 1, Part 2 and Part 3)

During my visit to Rambler’s Ming Mine, I spoke to Larry Pilgrim, their Chief Exploration Geologist. In our conversation, Pilgrim said that there were enough prospective targets just in the Baie Verte Peninsula area to last him 3 lifetimes.

Question – What do you think about Newfoundland and Labrador as a destination for mining? How much mineral potential does the province have?

Brian Dalton: “It’s still pretty wide open. The thing about Newfoundland geology is that there isn’t anywhere else, that I know, with that size of an area, that has as many different geological terrains and environments. It is the proving ground for plate tectonics, it records everything.

In the past year, we’ve made discoveries in Northern Newfoundland for a type of mineralization that nobody has ever looked at. Two years ago, everyone would have said that Newfoundland is the last place you will find silver. What do we do? We go into an area we shouldn’t, and find a bunch of silver. Up in the same area, someone’s come up with a new style of gold mineralization, which had never been conceived.

Is there still upside potential in Newfoundland? You better believe it. Newfoundland has been a happy hunting ground for us for 20 years, and I could see another 20 there, too.”

 

 

In my view, we live in a society of paradigms or bias that lock us into thought patterns that keep many of us blind to other alternatives – alternatives that may be more efficient or beneficial.

Question – Whether it be financial, political or social, in your opinion, how does one keep an open mind and see through paradigms and their own inherent bias?

Brian Dalton: “I guess it is just experience, when you do something enough times and it works. Sometimes, things just don’t feel right and when you go the other way and it works, those things have a way of compounding over time.

The things we did in the first cycle that were clearly contrarian were the things that were the very best things we did. So when it came down to 2015 and 2016, when every headline out there was predicting the end of the mining industry as we know it, everyone is going to go bankrupt, then you step back and say, ‘everybody can’t go bankrupt. It doesn’t make any sense.’

So this must be an opportunity, I’ve been here before. The same goes for the exploration side of things. When every major says their exploration budget is zero, there must be opportunity there. This stuff becomes self-fulfilling.

The challenge that most people have is even when the fellows running the mining company believe there is a great opportunity and now is the time they should be doing it, and they have the conviction to do it, they don’t have the means.

Alternatively, at the very top of the market, prices are going and going up forever more. That’s when their shareholders are screaming at them to build, and they’re giving the money to do it. So it actually becomes one of those things where, you get in trouble if you don’t respond to the demands, and you end up doing the wrong thing, which will ultimately, probably, get you fired. So they’ve got no choice but to do it. Which then leads to two or three years after the price gets paid and then they get fired, pretty thankless.”

 

 

 

Question – My last question pertains to the future of Altius; where do you see the company in 15 years?

Brian Dalton: “15 years, I think this cycle could be that long. The cycles are getting longer because of the time it takes for the industry to switch from depression to optimism and then to euphoria. Our basic business plan for this, we started in ’97, saw the bottom in 2000 and a top in 2011. So around 2016 would be one full cycle for all of us.

We look at ourselves now as going into our second cycle. We have gone from a million dollar to 500 million market cap, burning money to making, you know, 70 or 80 million annually. We’re not planning to change much. There’s things we’ll try to do better, there are lessons that have been learned.

By the end of the next cycle, I just hope to see us in a similar position. We went to the top of the market and were smart enough to go long cash, at that point, and when the inevitable happens and the next big crisis unfolds, we were there and we were able to seize it.”

 

 

Before ending the interview, we did a few rapid fire questions; bull or bear?

Gold – Agnostic

Silver – Bullish

Copper – Mega bull! Geology driven supply challenge which is the best force possible to have at play

Nickel – Very Bullish

Zinc – Very Bullish right now

Iron Ore – Super Bullish

Uranium – Short-Term Bull, Long-Term quite pessimistic

Lithium – Bullish that it becomes a real commodity, Bear short-term on price

 

 

Concluding Remarks

People are what make companies successful. Investing in the best people, in my opinion, helps tilt the odds of success in your favour. From my conversation with Brian Dalton, I believe I received a good glimpse into Altius and the man in charge. I left with a few takeaways; here’s a summary of my thoughts:

• Be contrarian, don’t follow the crowd – There are two major points in my life when I have been contrarian; first was putting 2/3 of my net worth into the junior resource sector in 2014 and 2015. Second, was leaving my 10 year career in steel to pursue a passion – investing and writing. During those periods in my life, a number of people told me I was crazy, and at times, I thought I might be.  Sitting here today, I can say that both moves rank among the best decisions I have ever made in my life.
• Newfoundland and Labrador is a premier jurisdiction for mining today and will continue to be in the future – I highly encourage those who haven’t visited this province on Canada’s east coast to do so, and in the process, see if you can do a few site visits; it will change your perspective on investing in the resource sector.
• Stick with a long-term view of the market – Invest in the best people and give them the time that is needed to execute a plan. Having a long-term view will help weather the intermittent periods of bearish sentiment in the sector, as even in a bull market prices have periods of down or sideways movement.

 

Don’t want to miss a new investment idea, interview or financial product review? Become a Junior Stock Review VIP now – it’s FREE!

 

 

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(s) and sector that is best suited for your personal investment criteria. Junior Stock Review does not guarantee the accuracy of any of the analytics used in this report. I do own shares in Altius Minerals. I have NO business relationship with Altius Minerals.

“Choosing to think is man’s most powerful tool and greatest virtue, and refusing to think is his greatest danger, the surest way to bring him to destruction.” The Market for Liberty – pg.8

 

Exponential growth is said, by many, to be one of the most misunderstood mathematical concepts in the world. For those not familiar, exponential growth in a graphical sense looks like a hockey stick lying at a slight angle, with the blade standing upwards. Exponential growth is slow at first, but eventually, like the hockey stick, reaches a point where it spikes.

What’s my point? Exponential growth can be found in basically every aspect of our lives, and when that spike or crescendo is reached, major change occurs. Today, technology is rapidly advancing, bringing us closer to a completely automated world – sooner than we may think.

Additionally, governments have been printing money at unprecedented rates, racking up debt and enough inflation to completely destroy our savings in the future. Paraphrasing the late Richard Russell, in the future, it will not be he who makes the most, but he who loses the least.

Today, I’m going to share with you a recent conversation with Doug Casey, founder of Casey Research. In our conversation, we discussed the proposed Universal Basic Income (UBI), Casey’s thoughts on the future of education, the seed bed of oppression – culture, the rise and popularity of crypto-currencies, and finally, a look at his new book, Drug Lord.

Enjoy!

 

Brian: Recently, I listened to an interview with Elon Musk, in which he says that within the next 10 years, not only will cars be electrically driven, but they will be autonomous, which in his estimation, will eliminate the number 1 occupation in the world, driving.

The consequences of progression in technology will not only affect driving, but the entire manufacturing industry in general. This progression doesn’t happen overnight, but over time, our technological progression will have major consequences for our current economic and social paradigms.

Musk continues in his thesis and suggests that the solution to this conundrum is a Universal Basic Income, which would be given to everyone without a job.

What’s your take on a universal basic income as the answer to a potential unemployment problem?

Doug: The so-called UBI is one of the most stupid and destructive ideas to come down the pike in recent years. Why? It is, first of all, a matter of ethics. I believe that all welfare of whatever type should be abolished, because welfare is nothing but disguised theft from the people who provide the capital to pay the welfare.

Look, if you’re going to survive in the world– and the world makes it hard to survive—you want to see as little theft as possible. The more energy you have to devote to protect yourself from thieves, the less you have with which to produce. Or figure out how to improve technology to produce more efficiently. The main thing that allowed us to move out of the Palaeolithic era is technology. But in order for that to develop you needed capital—even if that was just a bit of extra grain and skins for the winter. To do that it’s incumbent upon each individual to produce more than he consumes. The excess, savings, builds capital. You can’t advance if you’re a “consumer”; you have to be a producer and a saver.

The whole idea of UBI is destructive, from an economic point of view. It would treat humans as consumers, not producers. But worse than that, it’s destructive from a moral point of view. Why should a person have to support somebody else? Voluntary charity is one thing. But making welfare public policy is actually anti-human. Every time and everywhere the results have ranged from bad to catastrophic. It’s corrupted everybody it’s touched, from blacks in the inner cities to Indian tribes on reservations, cementing those groups to the bottom of society. Expecting to get something for nothing, with no exchange, is totally destructive of character. It’s worse for the recipient than it is for the givers, and from the givers’ point of view and from the economic point of view, it destroys capital– it encourages consumption and discourages production.

UBI has become a meme in recent years. But it’s an old idea. Free bread and circuses helped collapse ancient Rome. Mao’s China and the USSR both had a UBI. We’ve had idiot savants like Bill Gates saying that it’s good and necessary– but it’s neither.

They say it’s going to be necessary because intelligent machines will eliminate most jobs and cause mass unemployment. Don’t worry about unemployment, because everybody on this planet, that’s seven and a half billion people, each have an infinite desire for goods and services. You or I or anybody could work 24 hours a day, seven days a week, providing goods and services for other people. It’s just a question of motivation, price, and your ability to give other people what they want.  They say that the UBI is going to be necessary because robots are going to do everything. But this argument is just an updated version of what the Luddites of 19^th century England were all about. They wanted to destroy the weaving machines that could produce much more cloth with much less labor. Stupid on many levels…

I’ve talked to UBI advocates, although alking to them is about as pointless as arguing religion with a born-again of some type…One of their favourite arguments is that when everyone has a fat guaranteed income, the masses will be freed up to create great art, think great thoughts, and invent new things. Just like the blacks in the ghettoes and the Indians on reservations do, I suppose.

UBI is just the latest cockamamie scheme from social engineers that want to reorder society as if other humans were just ants in their terrarium. Gates, Musk, and others appear to have very little knowledge  of economics or history.

The UBI is silly, destructive, unethical and has no redeeming value.

 

 

Brian: In an interview with Forbes, Mark Cuban said the following,

“The amount of change we’ll see for jobs in the next five or 10 years will dwarf what we’ve observed in the past 30 years, and that as artificial intelligence and as machine learning takes center stage, there will be a greater need for expertise in subjects such as English, philosophy and foreign languages.” ~ Forbes

Further, in an article written by James Altucher, he remarks that ideas are the true currency of the next Century.

Our current economic paradigm does not, in my opinion, pay back those who study the arts, but from what Cuban and Altucher suggest, it appears that they believe the future will be much different.

In your opinion, will it be a philosophical renaissance or are we headed for some other type of paradigm shift?

Doug: Well, to avoid confusion, let me say James Altucher and I are very much on the same page. Mark Cuban—not so much.

I guess it’s a question of the nature of education itself. As you may know, I don’t believe in the value of going off to college for 4 years; it’s usually just a very expensive way to piss away 4 of the best years of your life drinking and chasing the opposite sex– or I guess today I’d have to say maybe the same sex or the 48 genders that Facebook designates– while being inundated with unsound ideas from socialist teachers.

Few people even remember what they learn, since they’re uninterested in the material. Unless they’re taking science, mathematics, engineering, medicine, or the like, I encourage high school kids not to go to college. Chances are they’ll emerge burdened with a lot of debt and bad ideas.

As for what Cuban says about English, philosophy, foreign languages and so forth– these are things that you can and should learn by yourself. To start with, most schooling today, starting from grade school is just indoctrination. Education is something that you do for yourself, not something that anybody can give you or something that you can buy. I’m a great believer in auto-didacticism; most everything that’s worth learning is something that you can teach yourself.

The Internet today has all the world’s knowledge.

You don’t need the distraction of school. Historically– other than learning a specific subject in a disciplined atmosphere– the reason why you, went to college was for the values of western civilization to be transmitted. But, today, universities don’t do that—rather the opposite. They teach political correctness and cultural Marxism, which are antithetical to the traditional values of western civilization, and its historical culture.

 

 

Brian: I recently started reading The Market for Liberty. One quote that echoed what I have been thinking for a long time is the following,

“Because man must initiate and maintain the process of thinking by an act of choice, no one else can force him to think or do his thinking for him. This means that no man can successfully run another man’s life. The best thing one man can do for another is not to prevent him from enjoying the benefits of his thinking and productive work, nor to shield him from the bad effects of refusing to think and produce.” ~The Market for Liberty – pg.7

My question for you, is it the want or a need to control by a certain segment of the population, or is it the fear of living with the consequences of our choices, which has propelled us into a society that allows the government to have ever increasing control over our everyday lives?

Doug: For many years, I have been an anarchist. I want to define that word accurately. It’s simply a person who doesn’t believes in political coercion—“no ruler”, that’s what the word means. It certainly doesn’t mean violence, it doesn’t mean chaos. It means taking responsibility for yourself and your own life. The Market for Liberty is a fantastic book. It explains how an anarchic society would work from a practical point of view, why it would be freer, less violent, and more productive than any political system that we have today. To me, the essence of this is learning to be responsible for your own life. Not blaming things on anybody else, but recognizing that when you’re born, whether you’re a member of the lucky sperm club and are born rich with great parents, or just the opposite, that you own and control your own life.

It’s all a matter of personal responsibility. Life is like a poker game. You can be dealt a pair of aces or you can be dealt an unsuited two seven. You’ve got to play the cards the way they are, and to do this, you’ve got to have an attitude of personal responsibility, and allow and expect other people to also actualize themselves.

I’m totally opposed to any form of social engineering, or so-called world improvement. In an anarcho-capitalist society the law would be very simple: “Do all that you say you’ll do, and don’t aggress against other people or their property”.

 

Brian: I recently read an article entitled, Twenty Observations of Liberty and Society, by Jayant Bhandari.  Bhandari tells the story of his transition from life in India to his new life in the United Kingdom (UK). The contrasts which he observes, I think, are summarized in his final point,

“Every little bit of totalitarianism in our minds, however benign it may appear, helps to produce a complexly corrupt and coercive society, endlessly mirroring itself in the workings of the state. People should learn to see this connection. Libertarians should learn to see it. They should learn that the seedbed of oppression is not the state but the culture.” ~ Liberty – pg.53

Do you agree, is the seedbed of oppression culture?

Doug: Yes, Jayant is quite correct. There’s a movement called multiculturalism, which sees all the world’s cultures as co-equal. This is complete nonsense. About as foolish as saying an African village of mud huts ruled by a witch doctor is co-equal to New York.

But let’s try to be fair and objective. First off, all you have to decide what’s important. Which values are important? What do you want to see the world be like?

For me, it is things like freedom, liberty, science, capitalism, free markets, non-coercion, reason, individualism, voluntarism, and free thought. These things are closely related, are all the products of Western civilization, which originated in Greece 25 or 26 hundred years ago.

The other cultures in the world have different values, and they’re more often as not antithetical to Western values. I don’t consider other cultures co-equal. Most are backward, many are just degraded.

I do have respect for some aspects of Chinese culture; it’s brought a few things to the party. I’m a fan of Taoism, and some of Confucius’ thoughts. I’m a fan of their cuisine, of tai chi, and martial arts. But, other than that, there’s relatively little that Chinese culture has to offer.

Islamic culture actually brings negative, retrograde values to the world. Quite frankly, it’s authoritarian even totalitarian. It’s built on a foundation of religious dogma.

Indian culture– yoga is great, as is Indian food. But I don’t see much else of value.

After you look at those, there aren’t any other cultures that have done anything of value, to even be worth mentioning. We’d still be beating on the earth with sticks and eating each other if it weren’t for Western Civilization.  The culture of a country is more important than anything else. The politics, sociology, justice system, literature, values, and everything else arises from the cultural base.

Unfortunately, there are things—like multiculturalism– that are eating away at the foundations of Western civilization. And people actually think it’s good. People have been taught to think that Western civilization has been destructive and a bad thing. We are going to go back into the dark ages if its values collapse.

 

 

Brian: Thus far, 2017 has been the year of the crypto currencies, with Bitcoin headlining the surge of speculative cash flowing into the digital realm. In The New Case for Gold, James Rickards writes,

“The cashless, digital society is already here. Some observers are concerned about what they call “the war on cash.” Don’t worry – the war on cash is over and the government has won.” ~Rickards – pg.40

Firstly, do you agree with Rickards and, if so, what do you think will be the catalyst for the elimination of cash?

Doug: He’s absolutely right. Governments of the world tend to work together, as with FATCA. All bank and financial accounts have now basically become available to any government anywhere. There’s no more financial privacy, making it extremely hard to deny tax income to the state. The black economy is on its way out because of so-called “transparency”. Governments now know what you own and where it is.

Their next step is to get rid of cash, because they can’t track cash. It’s happening in Sweden, in particular, and it’s happening in parts of China. There is mention of getting rid of U.S. 50s and 100s and even 20s. They want everybody to use their smartphones, which are totally trackable. Or, at least, a credit card, with no cash, you have to save in a bank account; there won’t be any c-notes to hide under the mattress. You’ll become a total serf, where the government knows everything you have, has access to everything you have, and can take everything you have with a couple of keystrokes. Yhe trend  is horrible, disastrous, and it should be fought.

The funny thing about crypto currencies is they started out as hugely liberating. Bitcoin, is fiat currency like the dollar, but it’s better than the dollar because there’s no limit whatsoever on the number of dollars that can be created. Bitcoin is limited to 21 million. And the US government is going to be creating many, many trillions more dollars. As will the governments controlling every other currency in the world—they work together these days.

The U.S. government and other governments are going to be coming out with their own crypto currencies, which they’re going to try to force you to use. They’re going to try to slam the door on  Bitcoin and other free market crypto currencies. It’s another really dangerous and disturbing trend and, to me, it’s an argument for buying gold. Unlike paper dollar bills, which have no value in themselves, at least with gold you have a real asset. As crypto currencies become better known and more and more people start using them, people are going to start asking themselves questions about the nature of money, the nature of banking, and how central banks fit into this. Something they’re completely oblivious to right now.

It’s always a problem and a danger when government co-opts a new technology. But just like with gunpowder, the printing press, the Internet, and every other technology, the market will overwhelm them. Technology always frees and empowers the average person in the long run. The bad guys who inevitably congregate around government try to co-opt the technology and use it against people. But, in the long-run, technology is always liberating. I’m sorry to see cash go away—but it will be replaced by free-market cryptos and plain old gold coins.

 

Brian: Ever since I read Speculator last fall, I’ve been eagerly awaiting the release of the 2^nd book from the High Ground novel series, Drug Lord, and picked up a copy at the Sprott Resource Symposium in July.

I loved the book, having almost finished the entire thing on my flight home to Toronto. In particular, one pivotal moment in the story stood out for me. Setting the scene, Charles Knight, the main character, is called to the Capital Building before a committee of government officials to be chastised about the off-label use of Visioryme’s drug, Sybillene.

During this hearing, Knight courageously says,

“There are essentially four ways to deal with evil. You can bow to it, and let it rule you. You can pretend it doesn’t exist. You can try to run, and hope it won’t find you. Or you can confront it, and attack it. Only the last alternative has a chance of success of more than a moment.” ~Drug Lord – pg.244

With this book, was there a particular lesson or theme that you wanted to bestow upon the reader, and if so, what? Why now?

Doug: Well, one of the worst things that the US government has bestowed upon the world is the War on Drugs. It didn’t just start with Nixon in the 70’s, but long before, with the Harrison Act in 19xx, which regulated cocaine and opiates, among other drugs. In this book, we talk about both the legal FDA-style drug business, and the illegal DEA-style drug business. How it works, the morality of drugs– and the intelligence or stupidity of using various drugs, and the effects they have on the body.

We’re exploring the positive aspects of the drug world in Drug Lord—which is rather unusual. I believe in what Aristotle called the Golden Mean, which is to say moderation in all things. It’s like water or food. Too little food and you’re malnourished. Too much food and you become fat, killing yourself another way. It’s the same thing with many drugs. For instance, completely unbeknownst to most people, LSD in micro-doses can have huge beneficial effects. It’s a question of moderation. And that’s just one of the things that we’re trying to explore in the book.

Wait until next year’s book, Assassin. You’re going to love it. Our hero, Charles Knight, explores the techniques, the history, and the morality of assassinations, so in a way, Drug Lord is just a gateway drug to much more hardcore novels which are going to follow, starting next year.

 

Brian: That’s great, I really look forward to it. Doug, as always, thank you very much for your time and for answering my questions, it has been a pleasure.

Doug: Thanks Brian.

 

 

 

A Summary of My Conversation with Casey:

• Concepts such as UBI have been around for hundreds of years and have played a major role in the collapse of ancient Rome, Mao’s China and the USSR.  Simply put, UBI is destructive and will have a negative effect on the countries that adopt it.
• Education is something that you do yourself, it isn’t given or bought.  Quoting Mark Twain, “I have never let my schooling interfere with my education.”
• In life, you have to play the cards that you have been dealt, and to do this, you’ve got to have an attitude of personal responsibility, and allow and expect other people to also actualize themselves.
• The politics, sociology, justice system, literature, values, and everything else arises from the cultural base.  Given that culture dictates such important facets of our lives, it isn’t a stretch to conclude that culture is the seedbed of oppression.
• The cashless society is here, whether we like it or not. While this may initially be viewed negatively, rapid progressions in technology, such as crypto, ultimately work to free and empower the average person over the long term.
• Casey and Hunt’s  2^nd book in the High Ground Series, Drug Lord, can be purchased right now, follow the link. Drug Lord is a fantastic read, one that I recommend to everyone, check out my review here.

 

Finally, for those looking to protect their hard-earned money via internationalization, you have to check out Doug Casey’s International Man. International Man examines many topics, including off-shore banking, getting a 2^nd passport, off-shore gold storage, and digital diversification, just to name a few.

Additionally, for those poised to make money in the broader market and/or the junior resource sector, you have to check out the newsletters offered by Casey Research. Letters such as The Casey Report and The International Speculator help tilt the odds of success in your favour by bringing the expertise of their top minds to the reader. Check it out!

 

Don’t want to miss a new investment idea, interview or financial product review? Become a Junior Stock Review VIP now – it’s FREE!

 

Until Next time,

 

Brian Leni   P.Eng

Founder – Junior Stock Review

 

https://www.youtube.com/watch?v=A752Hg77m8o

 

Brian Leni: Hi. This is Brian Leni of Junior Stock Review. Today I have with me John Kaiser, of Kaiser Research. Hi, John. How are you?

John Kaiser: Hi, Brian. Good to be here.

Brian Leni: Well, let’s get right into it. I recently attended the Sprott National Resources Symposium, and when speaking to many attendees, I heard a lot of mixed thoughts on where the gold market was heading in the second half of 2017. Lower tempered expectations is usually the sign of a good buying opportunity in a market, something that I personally look for.

Where do you think the gold market is headed in the next six months, and is there anything we should look for to confirm this trend?

John Kaiser: Well, it’s very difficult to predict a trend in a metal such as gold, which is not subject to ordinary macroeconomic supply and demand drivers. There’s 5.6 billion ounces just sitting there in vaults, waiting to be sold and converted back into a regular currency so that people can do something with it. What drives the desire to tell or buy is very unpredictable. At the moment, inflation continues to be subdued in the United States, so the supposed main driver for a higher gold price is not really yet operative. We’re looking at a stock market that hasn’t had a serious correction since the crash of 2008, and a lot of anxiety that this may happen. Ironically, we’re seeing money flowing back into bonds, even though the yields are still extremely low. As we saw in 2008, if there’s a serious correction in the general market, that’s usually there’s a liquidity crunch, and we could expect gold to also be sold to raise capital to pay for problems that a sharp decline in equity prices has created.

Now, that’s sort of at the head winds for a higher price. We do, however, have a serious geopolitical situation. We have a president whose motto is, “Make America great again.” However, the stances and policies he’s adopted is actually accelerating America’s relative decline in the eyes of the rest of the world. That is creating geopolitical tensions. China and Russia are being sanctioned over the North Korea situation, which seems to be spiraling out of control. Even within the United States, we have the president fulmenting civil unrest by seeming to back neo-Nazi type sentiments. We have a split within the Republicans themselves as to whether or not they want to back this president. There’s a political crisis brewing, and that could actually stimulate the price of gold upwards, because it becomes driven by concern that the world is becoming unstable, that the reliance on the US dollar as a reserve currency, which by the way should already be seen as being in question by Trump’s push for isolationism, his attack on globalized trade, as on a globalized economy. That’s in essence saying the US dollar is not going to be that which the whole global economy depends on down the road.

There is this geopolitical factor, which could counterbalance any decline in the equity markets precipitated by some trigger event, and offset the desire to sell gold, and actually cause a desire to buy gold, and drive it higher. We are entering a very dangerous period, and I would say the bias for gold is more on the upside in the next six months, and not because of inflation, but more because of these geopolitical stresses that are evolving.

 

Brian Leni: Interesting. In my view, we live in a society of paradigms, or bias, that lock us into thought patterns that keep many of us blind to other alternatives, alternatives that may be more efficient or beneficial.

Whether it be financial, political, or social, in your opinion, how does one keep an open mind and see through the paradigms and their own inherent bias?

John Kaiser: I have this approach, which I call sort of a cost-benefit analysis. I say take any position, any policy, any trend, and ask yourself, “Who are the winners? Who are the losers?” In doing that, it forces one to look at it from the multiple perspectives. Not just that of the winners, but also the losers, and which forces one to say, “Okay, what would be the counter-policy, the opposite policy to this that would reverse the allocation of wins and losses?” Because most policies, most trends do create winners and losers. Then of course, one has to make a moral choice as to which side one wants, but in assessing any sort of a trend or situation, that is the way I like to approach it, so that I can see the different ways, and that of course allows me also to develop hedges, so that if things continue in this direction, what do I bet for? What do I bet against? And just in case it’s going to go in the opposite direction, where can I place a bet on that? You can do that with stuff like the whole climate change situation, the geopolitical situation. It’s really important to be able to look at it from both sides, from a cost-benefit analysis perspective.

 

Brian Leni: Excellent. My experience in the market has taught me that when I find a good opportunity for speculation, I need to risk enough capital to make it worth my while. However, I haven’t settled on a quantitative approach on how to choose the amount of capital to deploy into a position.

Firstly, do you agree with me? Secondly, can you share with us an approach to choosing the appropriate position size?

John Kaiser: Well, I look at all things as a gamble. I don’t look at it as investment. There are not guaranteed rates of return on anything. There are different degrees of risk. My own area of expertise is this high-risk resource sector. I tend to divide my capital into two categories: One is cash. That can be in t-bills or something like that, where it’s readily accessible, and the rest I divide up amongst very high-risk speculative resource juniors, and I create a mix of those based on these different scenarios. For example, if I think that China is going to become America’s enemy, I’ll look at metals where China is a dominant supplier, such as graphite, tungsten, antimony, rare earths. If I think that we are going to be in an inflation, in a geopolitically driven gold up trend, I’ll look for optionality plays, which would benefit from a modest increase of, say, gold going from 13, 12, $1200, $1300, to say $1600, $1700, which puts the project way into the money.

Then have at least 10 different positions, but be prepared to, when a story comes a long that is unusually interesting, if one of these different hedge positions starts becoming the one that’s in ascendancy, be prepared to move from the cash area, more amount into that particular slot and increase it, but never go like all in, and sell everything else, and put all your money. Have a flexible basket with multiple exposure, but be willing to let one of them become more weighted with exposure, and of course when things get high, start replenishing the cash component. If we get blindsided like we did in 2008, where the resource sector was roadkill as a result of these scrutinized mortgage-related meltdown, well, you know, the equity component gets cremated, so now all of a sudden you have like 90% cash. Not because you put it all in there, but because valuations are extremely cheap, you have this cash component available to redeploy and go bottom fishing, and rebuild positions that have become very good value as a result of a sort of across the board haircut that the markets have suffered.

 

Brian Leni: Nice. That’s a great approach. Well, paradigms and bias give us the basis for how we view the world. Emotion is the fuel that causes us to act without logic. The biggest lesson I have learned in my speculating career thus far is to act against the crowd, and buy when everyone else is selling, and vice versa. That’s a lot easier said than done.

Do you have a defined strategy that investors can adopt in some form, which works to minimize the role that emotion plays in their speculations?

John Kaiser: Well, one of the rules that I have is to never be right, and always be wrong. You accomplish that by buying things when nobody is particularly interested, as you suggest. Not necessarily when they’re falling, because when they’re falling, something is going wrong, and catching knives and anvils is not a smart thing to do. But after they’ve crashed on the bottom and done their little dead cat bounce, and have stabilized, research the fundamentals. Make sure they are still intact, and do what I call bottom fishing, value hunting.

Now, this requires patience, and I’m notorious for being way ahead of the curve on stuff, to the point that by the time I’m finally right, nobody cares, and those who have just jumped into the erupting up trend, they’re the ones who are the heroes. It’s something like that that has kind of happened with Noble Resources Corp, where poor Jay Taylor has been patiently covering this since 2013, based on this Wits 2.0 scenario in Australia, and they appear to have failed, and I kind of never liked it, but then something changed. I didn’t get the bottom. I mean, Jay was still there at the bottom, but I caught that erupting point, realized, “This is a new story. This is an emerging story.” So of course I get a lot of interest from people. Poor Jay. Of course, he’s been in it so long, it’s, “Okay. He’s finally right. Yeah. Yeah. Who?”

But when you are long a position such as, say, Jay Taylor is in, or, say, something like Scandium International that I’ve been in for a long time, or even the VAT Exploration, when they start going up, in most cases they tend to overshoot their value, but the value is like poor at the moment, but as the story expands and gets more fleshed out, and risk is removed, it’s going to go higher. You don’t want to sell all of it, and like sell it because the crowd is buying it. What you want to do is sell some. Not this silly “sell half when it doubles,” type rule, which with the kind of high-risk stocks that I invest in would be a disaster in the long run, because I’m shooting for five, 10 baggers, so you’ll maybe sell maybe 20% if it doubles, and you monitor it. But the important point I want to make is that I’m always wrong. I sell too soon, and I sell too late, but because I am selling in stages, and almost always miss the top, I nevertheless have to write a big check to the tax man at the end of the year.

Brian Leni: Yeah, which is the goal, right?

John Kaiser:  Yes. And because I’ve been wrong with everything that I’ve done, emotions get stripped out of it, because, “Oh, yeah, okay. I sold some. That’s why it’s going higher.” But never buy back in during one of those things. One of them, if you’ve sold some and it’s gone higher, just continue with that selling discipline. Never, ever buy back into a high-risk stock that has finally come to life.

 

Brian Leni: People are widely accepted as the most important facet of any junior resource company. Outside of a proven track record of success, in your opinion, are there any characteristics that are commonly shared by successful people in the resource sector? Characteristics that investors should look for?

John Kaiser: The people who have been successful almost have like now a self-fulfilling prophecy function at their work. When they come up with a new idea, the people who benefited in the past are quick to support it. They’ve also learned how to structure their deals so that the earliest tiers you have the people who have control over other people’s money. You insert them in there for preferred financing levels, so that down the road as the story evolves, these people will push the buttons to move other people’s capital into the market and expand it. It becomes a money-making machine, which is why I call these things machine plays. As long as these very successful people continue to deliver successes, this machine can go on and on. But the machine play itself can wear itself out, if management is not coming up with interesting stories.

I don’t like it when it is they’re just jumping onto a bandwagon and saying, “Okay, lithium’s been the buzz for a while, so let’s cobble together some lithium deal and stuff it in some shell, and plug in all the right people, and then open it up and have all the newsletter writers pump it and bring in the retail crowd, and hang them with the paper.” I don’t like that type of story. I like management groups, which in addition to having all the technical skills for executing programs, are also looking for something new and different that doesn’t quite have the acceptance of the market, so the type of story that they are backing, I am interested in that. I’m not interested in somebody finally jumping on to, say, the silver bandwagon, and preaching apocalyptic doom, and saying, “We have all these worthless deposits that are going to be worth a whole pile of money.” Of course, it’s underpinned by foolish logic of inflation. “Socialist policies are going to make everything money worthless.” None of that’s going to make worthless deposits worth anything, because providers of the inputs, labor, energy, materials, they all pay the market price, which is going to inflate along with the price of the metal, which is only going to really inflate according to actual inflation.

That whole inflation-based scenario is complete nonsense, but if they are doing something interesting, something different, are looking at projects which doesn’t require a monster gold or silver price to go up, or looking with some new method for this, or in some new area where people have been afraid to go, these are the things that I’m looking for. Do they have coherent, interesting stories that then, matching with their proven track record and their technical capability? That’s when I get really excited.

 

Brian Leni: That’s a fantastic answer. Thank you for that. You gave a terrific presentation at the recent Sprott National Resources Symposium, one I’m very happy I attended. Among the topics you discussed, the one that really caught my attention was your new initiative, The Share Collective.

Can you give us a breakdown of what The Share Collective is, and how it will benefit investors?

John Kaiser: Well, The Share Collective arose from a frustration that I, as a newsletter writer myself, have experienced. One is, “How do I find these good stories?” Now, sure, there’s about maybe a dozen prominent groups, you know, with the Lundins, the Beatys and so on. But you know, the entry, it’s never very lucrative. By the time those stories are available to the public, there is not very good value. But there’s numerous other groups who may emerge as the next Ross Beaty. Projects that are interesting but unloved because nobody understands it, because there’s no audience, and there’s like 1200, 1500 companies listed on the Canadian exchanges, and on the Australian exchange. How do you filter through all of this? I mean, there’s only so many hours in a day for me basically to even get rid of the first 90%, and then to do due diligence on the remaining 10%. There’s not enough time for me to get this work done.

Then the other problem was, well, what is the size of the prize? This company says, “We have this target here in, say, Utah. We have an existing resource that kind of works at the current metal price we have, but we need to make it bigger. In fact, we see something here that’s potentially very big, but it requires exploration dollars. High-risk exploration dollars to make or break.” I ask, “Well, if you are successful, what is that worth?” You know, “Your company has a, say, a $10 million valuation right now, but is that fair? Is that good value? Should I buy it at this point?” What I developed myself was what I call outcome visualization, where I imagine, “Okay, what’s the footprint? What kind of deposit could be there, and what sort of grades could one hope for?” Then assuming we have, say, 20 million tons of 10 gram per ton gold, “Well, what would it cost to mine that?”

Then you look up the numbers for a mine that was depleted in 10 to 20 years, and you run the discounted cash flow model, and this is all very complicated. You get a net present value number, an internal rate of return. You need an Excel spreadsheet. You need to set it up. You need to customize it. It’s a huge pain in the butt. Most people don’t do it, but I do it, and all the analysts in the mining industry do it. You come up with a number, and then I have this uncertainty lags and says, “Well, this is just a target testing stage, so even if it’s worth a billion dollars at the end of the day, it’s fair value right now as 1% to 1.5%, which is like $10, $15 million bucks.” I say, “Well, that is how the market is pricing it, so I actually like this company.”

But again, with the first point I made, how much time in the day do I have to do this? And so what about my numbers on it? Nobody cares about it. Maybe I made a mistake or so. I came up with this idea, “What if we create a giant sort of calculation system in a website where the crowd ends up doing this, puts together those numbers, then shares all those assumptions and the outcome into the public stage, this space associated with that project? And everybody can look at it and sort of grumble about this number and that number, copy it, tweak it, change it, submit it, and all of a sudden you have an intelligent discussion going on by these anonymous members of the crowd, and you can suddenly see a distribution of what the expected outcome is.”

This is really critical for the market, because in the junior space, resource junior space, it has lost its audience. The brokers don’t play this network hub role anymore, where they call up people and tell them, “Oh, this is really great. You need to buy it. It’s going to be like a $10 stock.” That doesn’t happen anymore, and just looking at technical analysis, well, then you’re competing against the algo traders, so your ordinary retail investor has really no chance just doing technical day trading. The resource sector, because of its complexity, because of the public’s inability to see what would be the reward if everything actually becomes reality, it has killed the market, and I’ve created this as a way of reviving the market, making it easier for the crowd to handicap the potential outcome, to share in a public space, and then everybody can trade. You know, they can say, “No, this is BS. Wits 2.0 is never going to happen,” so they’re going to short it or sell it. Others will say, “No, no. This is going to happen.”

But all of a sudden you have the market trading becomes intelligent, rather than just being a random event where the algo traders have the upper hand, because they can always sell short on the down take, and crush the bid, and totally discourage the market. Now, you can actually see, well, given the consensus expectation, now it’s being pressured to the lower end, so now value hunters can come into the market, and it will even be the algos themselves who will see, “Okay, this is about as low as we can push this stock right now. Now we’ll go in there.” And you’ll get trading volatility within constrained ranges, backed by what I call the rational speculation model, and tied to the crowd’s expectations. Those expectations will, of course, adjust to new results by the company, so the company goes and drills, drills down dip, gets assays, starts demonstrating what the average grade is going to be. The crowd has to adjust its expectations always to the flow of fundamental data, so it’s dynamic in that sense. In the sense that we don’t know what the results will be. We have hopes and expectations, but we now, with this share collective, we have a means to track, “How is reality matching up to expectations?”

And more interestingly, what the share collective also enables is a second level of gambling. Not just gambling on what the truth machine’s going to churn up out of the ground, but also gambling on the behavior of the crowd. I mean, right now you can look at this Novo Resources Corp and its Karratha project in Western Australia. There’s three competing theories. One is that this gold nugget thing will never amount to anything. Another is, yes, it’ll amount to something, but it’s a local freak show. There’s maybe going to be 10 million ounces there, and who knows what it’s going to be worth. Then there’s the third, grander hypothesis, which is while this company has staked 10,000 square kilometers, and this is actually another version of the Witwatersrand Reef, which has over two billion ounces in it in these reef-style conglomerate bins, and this company has tied up probably two-thirds of the available stock and potentially owns the future of gold production.

You have these different scenarios in there, and the public can bet as to which one they want to support. Right now, we’re in the roller coaster stage of the market trying to figure out, “Okay, is this thing just going to be nothing, or is it going to be at least this 10 million ounce thing that suggests it could end up being worth maybe one to one-and-a-half billion? Or are we talking the off scale scenario where it could end up being a $50 to $100 stock that ends up supporting like a 10 to 15 billion dollar valuation, because this is the next Beric or Newmont in the making?”

Brian Leni: Yeah, it’s an interesting story.

John Kaiser: It is.

 

Brian Leni: Finally, for those looking to gain an edge in the resource sector, you need to check out John’s resource sector research portal, Kaiser Research Online.

What is the value proposition for Kaiser Research Online?

John Kaiser: Kaiser Research Online has two dimensions to it. One is, we have the whatever, 1500 Canadian and Australian resource companies in there. We have all their projects there. We track their financial status. We track the people. You can click on a people tree, and start seeing what other companies the insiders have been associated with, and there of course you look for the ones that are de-listed, and the best one are the ones that were de-listed because they were taken over at a premium, and of course the bad ones are those which simply died because management is incompetent. You have a way of figuring out something about the track record, without having spent the last 30 years watching this and knowing who is what. But the most important part of this dimension is, I have a search engine where you can put in company and project level criteria, and do a search which then displays all the companies with all the data, chart, and links to like the stock forums, and NCR, and all these things there so that you can do your homework.

This discarding, getting rid of them, 90% of the junk, and putting together a query of how you think the future’s going to unfold … You know, you think rare earth prices are going to go up, well who all has a rare earth deposit? Skip the companies that are hideously in debt, and then you narrow it down to that 10%, then you kind of do your own research. That’s the thing that costs $800 a year, or $250 every 90 days on an auto-renewal basis. The other part is, I am a stock picker, so I have my spec value hunter recommendations, which is anywhere from one to two dozen companies where I put out formal buy, buy and sell recommendations. These are the ones that I sift up. I’m like a super user of my own site. I filter through it and look for these things, and then cobble together a set of recommendations. If you pay the $250 on a non-auto renewal basis, you get 90 days of access to all the search engine, all that stock information, but then afterwards you get another 270 day access to just the spec value hunters, hunter stuff.

I have two audiences: Those who don’t really care what I pick, but use my portal as a research engine, and then the other is those who just want to follow my picks and don’t really want to do all this research on their own.

Brian Leni: Excellent. You know, there’s a ton of value there, and I suggest it to anybody who’s listening that they check it out. John, it’s been an absolute pleasure. Thank you very much for taking the time to answer my questions.

John Kaiser: Brian, thank you so much for doing this interview.