Saturday, 9 May 2015

Rick Rule - Mathematics of a Resource Portfolio

Another Interview with Tekoa Da Silva - Transcript

Notes below:

  • You can shift the odds in your favor by participating in exploration efforts that are run by absolutely A-quality explorationists or participating in exploration activities that take place in areas that are unpopular
  • Very, very, very focused. The truth is that a limited number of people enjoy most of the success and so focusing on people who have enjoyed success in the past is important. Another thing that’s very important is focusing on potentially large discoveries. A small discovery has all the risk of a large discovery but yields a small gain.
  • Sole-risk explorations speculation in bear markets like these can work fairly well because the competition that you face in trying to buy a company after they’ve made the initial discovery, after they’ve had a successful drill hole, can be very low.
  • Prospect generators ........They don’t often need money. But they need money more often in poor markets where it’s tough to find joint venture partners than in good markets. So for accredited investors that have the opportunity to participate in prospect generators and can magnify their wins with warrants -- particularly long term warrants -- this is probably the best way to participate in exploration speculation statistically.
  • If you’re in a market where you get a discovery-grade drill hole, that is economic widths of potentially economic grade, one of the wonderful things that can happen in a bear market is that the discovery is greeted by the market with a yawn and you have the ability to analyze the information.......a luxury that certainly isn’t available in good markets......These are the market conditions where speculation on sole-risk exploration -- particularly for more advanced projects, what I call “successful efforts” -- works.......One of the things that happens if you’re doing “successful efforts” exploration rather than generative or “grassroots” exploration (on prospective targets that have seen almost no prior exploration) is that you have a lower probability of failure. The magnitude of your win is also reduced though.......The upside that you’re going to enjoy with any individual success will be less than the upside that you would enjoy with a grassroots virgin discovery with a smaller market capitalization. But it’s a very viable speculative technique.
  • ......all ounces aren’t created equal. A four-million-ounce gold deposit of very low grade in remote terrain with bad metallurgy is a science project. A one-million-ounce deposit that’s accessible, that’s fairly high-grade and is mineable might turn out to be extremely viable.
  • .... In a circumstance like today where the expectation for the market is failure, the probability that a portfolio of 10 fairly advanced-stage projects is going to pay off for you is higher, simply because the probability of higher mineral prices and the better market is greater in bear market bottoms than it is in bull market tops.....You get to add in to this investment “stew,” if you will, optionality. That’s the idea that a deposit that isn’t economic in today’s prices could be economic at higher prices.You can make money with a deposit that returns to favor even though it’s uneconomic. 
  • ......deposits that our geologists have visited and where we’ve interviewed managements, where we know the companies fairly thoroughly -- where I would suggest that there’s a 75 or 80 percent chance of each of them becoming a mine........This again is a situation that only happens in very, very, very poor markets. Usually in a good market if you have a deposit that is likely to be a mine, the market capitalization of the company assumes that it already is a mine and all of the economic gain is taken out by the frothiness of the market. It’s only in markets like these where you can find high-probability advanced-stage exploration deposits that would appear to be reasonable economic speculations too.
  • The discount in today’s market that I would use personally is probably zero. This is a very, very, very un-frothy market and rather than being so concerned arithmetically with the discount, what I would be much more concerned with personally would be insider ownership -- that is whether or not the people running the company acted as my partners or my ‘employees’ (because their only stake in the company was their salary). Parenthetically, I prefer partners. I also look at their track record of success and what their undeveloped project pipeline is and what the brown field’s exploration potential around their existing deposit is. In other words, I’m fine not to get a spectacular bargain on their existing operations, but I want to get a fair bit of upside baked in the cake for free.
  • Say you were taking more risk than that, like if you wanted to buy the small-cap and mid-cap growth companies and your rate of return expectation was 15 percent, a number you got from the Wilshire Index perhaps. I think that you need to be prepared to lose in that set of circumstances 25 or 30 percent of your money if things don’t go your way. It’s very important that you put your return expectations in the context of your capacity for risk. How much can you afford to lose both financially and psychologically? That will give you some idea of the orientation and distribution of assets by risk in your portfolio.

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