By Henry Bonner
Sprott Global Resource Investments Ltd.
Key points: What can a Doctor in Economic Geology tell you about a mining project? Basically, whether the company is a legitimate attempt to create value, or just a shill for a management team to get paid a salary. That greatly lowers the number of companies of interest. But it won’t tell you when to “buy” or “sell.”
Dr. Neil Adshead joined Sprott Asset Management LP in early 2012 as an Investment Strategist. He is based in Vancouver. His primary role is to incorporate his extensive theoretical and practical experience in mineral deposit geology, mineral exploration and mining into investment-related decision-making across the Sprott organization. After earning a Ph.D. in Economic Geology in 1995, he spent ten years working for Placer Dome subsidiaries – at the time, one of the largest mining companies in the world – in Canada, Australia, and Papua New Guinea.
For the seven-plus years sandwiched between Placer Dome and Sprott, Neil worked as the Vancouver-based senior mining-exploration analyst for a San Francisco-based investment firm.
Neil provides extensive insight internally after reviewing published technical information and he frequently visits multi-commodity exploration and mining projects around the world. I spoke with Neil to ask for his insight into the process of analyzing exploration and mining companies with the goal of identifying investment opportunities for Sprott’s clients.
“In a multi-disciplinary technical industry like mining, it takes an in-depth knowledge of the process of discovering a deposit, development and permitting requirements, and operating a mine to see the full picture. The challenge is to understand what can go wrong, and attempt to forecast the scope and likelihood of success of an exploration, development or mining project,” Neil begins.
As Rick Rule has explained to readers and investment audiences, the key to investing in small junior exploration companies and broader natural resources equities is to identify divergences between the price of an asset trading on the market and the intrinsic value of that asset.
This is why Rick and the Sprott organization decided to bring in experienced analysts with strong credentials in exploration and mining, such as Neil and our in-house geologist at Sprott Global Resource Investments Ltd., Andy Jackson.
“With junior mining plays, our main objective is to assess the geologic merits and economic potential of a mineral property through its life cycle. This is what is referred to as the study of ‘economic geology’ – the discipline of assessing the potential for the profitable extraction of minerals from naturally-occurring deposits,” Neil explains.
So how far can you go on pure ‘deposit quality’ analysis? What are the limitations of this technically-driven approach to investing in junior mining plays?
“We provide an overall view on whether a company’s property portfolio is worthy of investment, low quality, or somewhere in-between. But we stress that these opinions are not the same as making a trading recommendation.”
Is there something more to the picture?
“Whether we ‘like’ or ‘dislike’ a junior mining company is not the same as an unequivocal ‘buy’ or ‘sell’ call,” Neil responds. “Firstly, every investor has different investment objectives, risk tolerances and liquidity needs. Also, other external factors, such as the current position in the business cycle, overall market sentiment, corporate capital requirements, as well as our view on relevant commodity prices, will have a significant influence on whether to trade or wait.”
So, according to Neil, many outside factors add to the risks and opportunities of investing in natural resource equities. Over the last two years, Neil points out, the market has sometimes punished our best efforts at being realistic, well-informed, value investors.
These external factors may be a threat to some of your resource stocks today, Neil warns: “Development-stage companies can be sitting ducks waiting for ‘black swans,’ such as unforeseen permitting changes handed down by regulatory agencies. Another ‘black swan’ is the announcement of an increase in capital required to develop a mine.”
Finally, some investors overlook the fact that ‘financial models’ are only useful when the inputs and assumptions are valid. In some cases, as Neil says, it results in “garbage in, garbage out.”
“To borrow an insightful quote, ‘all models are incorrect; some are useful.’ The same is equally apt for resource estimation models,” which means that no model will prove a theory on its own.
“We use many resources and contacts across the industry to gather information on mineral potential, management teams, geopolitics, metallurgy, mining and any non-technical risks such as political obstacles, environmental requirements, etc. This is all part of a multi-pronged due diligence exercise on the key components of a junior mining company.”
“This exercise alone will not tell you what companies to buy and sell today, but rather, which companies are legitimate investment targets when timing aspects are appropriate, and which ones are to be avoided whatever the overall investment climate.”
Dr. Neil Adshead joined Sprott Asset Management LP in January 2012. Prior to working at Sprott, Neil was a senior mining analyst for more than seven years at Passport Capital LLC, a San Francisco-based global investment firm. Previously, Neil spent ten years at Placer Dome subsidiaries. He received his Ph.D. in Economic Geology from James Cook University of North Queensland, Australia, in the mid-1990s.
Note to U.S. and International, Non-Canadian investors: To learn more about ore deposits take a look at our educational series, “Ore Deposits 101,” from our in-house geologist Andy Jackson. Also view our gallery of site visit photos here.