Financial Sense's
"Roving Reporter" Rob Kirby
at the Annual Convention & Trade Show
March 2-5, 2008 Toronto

Financial Sense  Home  l  Broadcast  l  WrapUp  l  Storm Watch  l  Precious Metals  l  About Us

I attended the first day of the PDAC convention yesterday with a very close friend. This friend of mine was kind and sincere enough to share with me the stellar results he had achieved in his personal investment account over the past 2-1/2 years investing in a basket junior exploration and resource stocks – he had doubled his money, making multi-six figure gains, over this period of time.

These results impressed me enough that I wanted to report on how, or, better stated – what he attributed these returns to? Specifically, I wanted to know what methodology, or system, he used to select the individual investments in his portfolio.

Here’s a precis of what my close friend has to say:

To get the big picture correct he uses Kirbyanalytics proprietary macro-economic research, Lemetropolecafe’s Midas daily market commentary and then he browses and reads articles at Financial oriented web sites like Financial Sense and always listens to Jim Puplava’s weekly radio show. As a filter – for a geological perspective and to narrow down to a short list which companies he invests in, he uses analyst Lawrence Roulston’s, Resource Opportunities, a subscription news-letter. 

Lawrence Roulston is a geologist, with engineering and business training, and more than 20 years of hands-on experience in the resource industry. After completing his studies at the University of British Columbia in 1975, Mr. Roulston worked as an analyst for the major mining company Cominco Ltd. He also worked in a management role for several years with a mid-sized Calgary oil group. In 1984 he became the vice-president of a group of mineral exploration companies. He was also vice-president of an investment management firm focused on the resource industry. From 1994 to 1997, he was president and CEO of a mineral exploration company. Since then, he has been a resource industry consultant and independent mining analyst. He began writing Resource Opportunities in 1998.

It just so happened that my friend was going to attend a “private – for subscribers only” one-hour seminar / Q and A with Mr. Roulston on this day – so I asked if I could tag along and sit in on the seminar to get a handle on what kind of “value added” an individual investor might expect of a paid stock analyst.

So here’s a run down of the material covered [I took notes] with 40 - 50 subscribers in an intimate setting in a break-out room at the Toronto Convention Centre:

   Lawrence Roulston speaking to subscribers at PDAC, 2008

Mr. Roulston, a geologist by trade, began with an economic overview to drive home a couple of major themes. He started with an acknowledgement that the U.S. economy was indeed slowing, but maintained that the U.S. economy should continue to “muddle through” with slow growth.

He explained that slower-growth in the U.S. has indeed slowed the engine of the global economy – China – but not derailed it. Roulston’s view is that while China’s growth has slowed, [likely down to 10.8 %] the prospect for resource exploration and development companies remained favorable going forward.

Copper

He began with a synopsis of the copper market. Roulston explained that with a current copper price in the 3.75 per lb. range – copper producers look extremely attractive. His reasoning is as follows: Given the global demand prospects, Roulston views the ‘downside’ in copper prices somewhere around 2.60 per lb. and the upside at perhaps as high as 6.00 per lb. over the next couple of years. He reasons that copper companies are being valued by most mainstream financial analysts on the basis of 1.50 per lb. copper – more in line with ‘historic prices’.

Roulston’s reasoning is that historic metrics are incorrect for evaluating future economic viability because of the future growth/demand prospects of China. He highly doubts that these historic prices are likely to be revisited. When one stops to consider the ‘fair market value’ of a copper producer – if you increase your model ‘sales price’ assumption of the output from 1.50 to, say, 2.50 or 3.00 per lb – the share price of these companies has a great deal of room to grow even if prices decline a bit or remain the same [using a constant P/E multiple].

To drive the point home, that of analysts using overly conservative biased data, Roulston pointed out that they use ‘artificially low’ pricing assumptions for mine output. They often, if not always, use the most current ‘high’ price for energy to extract the resource – energy being one of the biggest percentage costs in mining. 

Roulston attributes these biases in the mainstream financial analyst’s community to the historic, relative small cap nature of companies that dominate the sector[s]. He argues that large financial institutions generally conduct research in ‘large cap.’ and highly liquid names that are geared toward institutional investors. He also notes that these biases generally ‘skew’ the valuations of resource companies to the downside.

This creates a void in ‘coverage’ that specialists like Roulston ‘lever’ to drive their own value propositions to their clients.

Cobalt

In the same vein [pun intended] Roulston cited Cobalt – where analysts are typically using 10.00 per lb. when accessing the viability of a project when current prices being paid are in the neighborhood of 50.00 per lb.

Uranium

From copper and cobalt it he moved on to Uranium. While the price of uranium has ‘come off’ recently from about 130 per lb. down to the current 75 per lb. – Roulston views 70 – 80 dollar uranium as being likely good value. Here, he explains that uranium is typically sold on long-term-contracts which are currently being negotiated in the 95.00 per lb. range [well up from lower levels even a year ago] giving most uranium producers ample room to ring-up profits in the near to medium term.

Gold

On the gold front Roulston says that economic viability of projects tends to be based on model prices around the 500 dollar [long term] level, again pointing out that while costs of mining have increased from an industry average of perhaps 250 per ounce 4 – 5 years ago to the 350 – 400 range today, margins have increased markedly.

Iron Ore

Resource Opportunities is not a one-man-show. In fact, it’s a team of three individuals. Roulston has recently hired geologist, Marina Trasolini, with a specific mandate to analyze emerging opportunities in the Iron Ore Industry – one of Roulston’s picks to me the resource industry’s next darlings. Rounding out the team is Katy Jamieson on the business/editorial front.

Team Roulston [L-R]: Lawrence Roulston, Marina Trasolini, Katy Jamieson

Credits

Next up was the issue of credits. Roulston explained that most metals are not found in the earth’s crust in isolation. For instance, when mining for gold - gold is often discovered with recoverable amounts of copper. In cases such as this, in a primary gold mine – copper is sold at the prevailing spot price to generate a credit [subtraction] form the cost[s] of mining gold. In some cases these ‘credits’ can substantially cover or defray the entire costs of building a mine.

Balancing Risk / Reward

How many of us have heard someone say that, “they do not invest in companies of such and such a nationality?” Roulston addressed this issue by saying he uses no hard-and-fast rules in this regard. Here he cited the company European Mineral and a gold mine they operate in Kazakastan. The ‘value of credits’ at this particular project are of such significance that European mines gold for ‘free’. Here Roulston explained that, in his view, extra-ordinary value outweighs any perceived political instability.

In assessing jurisdictional risk in countries such as China, Roulston points out the investment community generally demands a ‘risk discount’ to invest in China. Yet, Roulston believes that resources investments in China should be receiving an ‘investment premium’ for the following reasons:

• Communist China’s government is demonstrably practical [they need the resources for their own growth] and incredibly entrepreneurial.

•  Companies that have encountered problems in China – in Roulston’s words – have largely done so due to their own ignorance of well defined customs and procedures.

The man should know – he’s traveled there on numerous occasions and has developed his own network of Chinese contacts.

Location, Location, Location

Another factor driving valuations – according to Roulston – is where a given resource company chooses to ‘list’. On this front he cited Silver Corp – and their intention to list on the Hong Kong Exchange. By doing so, Roulston argues, they will gain exposure staggering Asian wealth [mentioning that more than 100 billionaires reside in China]. For companies that see virtue of listing [or co-listing] on such exchanges, Roulston believes that multiple expansions [valuations] are likely too. Staying abreast of these developments is another tool in Roulston’s suite of offerings.

Are We In A Bubble?

When asked if the high metals prices we are currently experiencing are sustainable, Roulston’s response was as follows:

• Many metals used in industrial processes [silver, for instance] are used in such minute and unrecoverable quantities, in many cases their cost has little impact on end-consumer-demand.

• Citing the example of recent run-away platinum prices Roulston explained that Platinum Group Metals are primarily used in the automotive industry for emissions controls [catalytic converters] where the costs run approximately 70 dollars per car. He answered the question with one of his own: “If the cost of a G.M. car goes up by 70 dollars, is G.M going to stop building cars?”

Where Are We Headed?

On the topic of how the junior resource industry is likely to look in the near to intermediate term – Roulston suggested that consolidation is in the cards. His reasoning here: There are efficiencies to be gained by raising larger amounts of money – particularly in a world with staggering amounts of institutional funds looking to invest in ‘tangibles’ after the highly unpleasant experiences money managers have had recently investing in various forms of dubious derivative paper products. 

The gains to be had from consolidation and gaining larger scale and market cap give companies access to a wider institutional investor base. Here, Roulston points out that the big reason why we have not seen more of this already is this: Consolidation, at its root, implies making two companies into one, meaning two presidents and CEO’s become one of each – and who really wants to lose their job?

Roulston maintains that the value proposition [multiple expansion] will ultimately ensure this occurs all the same.

Being an experienced professional geologist Roulston is well qualified to provide commentary on individual sectors in the mining industry as well as to make company and geology specific recommendations. My friend believes that the nominal fees paid for professional unbiased advice offers a comprehensive suite of essential knowledge as a base for his own due diligence on his various investments.

My friend then takes and uses these ‘picks’ to serve as a road-map to navigate the floor of the PDAC – and do his own due diligence by asking intelligent and telling questions of the chosen ones. Not a bad idea when the convention floor is occupied by 560 different junior resource companies, ehh? 

You see, even when you pay for advice, investing is still hard work

Choose your investment advice wisely.

* The author has not been paid or granted any consideration by Lawrence Roulston or Resource Opportunities for writing this article. 

Financial Sense  Home  l  Broadcast  l  WrapUp  l  Storm Watch  l  Precious Metals  l  About Us

Copyright ©  James J. Puplava  Financial Sense ® is a Registered Trademark
P. O.  Box 503147 San Diego, CA 92150-3147 USA  858.487.3939