ResourceClips provides up-to-date articles and critical investor information on junior mining companies to help investors in the Canadian sector. The interview discusses challenges facing junior mining companies, including poor management and a regulatory environment that has become more difficult, as well as the need for majors to acquire juniors to replenish gold reserves as discovery becomes harder. Investors are advised to carefully scrutinize management track records when investing in juniors.

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Grandich On Gold Stocks
Part 2 of an August 16 Interview
~By Kevin Michael Grace - August 22 2011
Q: There’s been a tremendous rise in the price of silver, a tremendous rise in the price A: Well, you rely, unfortunately, on people who are telling you that, for the most part. But there
of gold, and yet the junior gold and silver companies continue to be hammered in the are ways to do serious due diligence. If someone has been the CEO of nine juniors, and none
markets. Why? of them ever developed a deposit worthy to be sold or became a mine, maybe you want to
ask yourself why you think their tenth is going to be lucky. Juniors are burning matches, they
A: There’s a combination of things. The junior market, despite the much higher metal prices, don’t really have any real assets, they’re not making profits in any way, so they’re always raising
has never recovered to the activity level that it saw 10 or more years ago. Part of that is be- money, and the institutional investors who do the bulk of the private placements seek out top
cause the type of business that was done back then in the brokerage community has changed management. Maybe not so much in finding mines, but successful in keeping their share price
dramatically. Back in the 1990s, a typical mining show would have a hundred or so brokers fully valued so the dilution is kept lower.
there. They’re gone now; they disappeared many years ago in the US and in the last few years
began to disappear in Canada. The brokerage community went from a commission-driven I’d like to see private placements go back to at least a one-year hold. And one of the new
type of business to an asset-gathering-driven business. There were also a couple things on things that’s happened in the last few years is that institutions are flipping warrants. They can
the regulatory side. I think the four-month private placement hold has been a deterrent to the get back their money by selling the stock and just keep the warrant, so if the warrant ends
market. Before companies know it, shares are coming on the market, and they’re almost like up in the money, that’s how they make money on their investments. This is another thing that
congressmen, always trying to run their next election. They’re always trying to deal with paper has brought more stock to the sell side. There’s not a lot these little companies can do in four
that has just become free trading, and that has put a cap on prices as well. months to greatly expand their story, and yet they’re going to have all these shares become
free trading after four months, and most of those investors are in the sell mode. Long-term in-
The regulatory change that was welcomed after Bre-X also took away a lot of what used to be vesting is no longer what it used to be, and that’s hindered the junior resource market, despite
the sizzle in the market. This was certainly a net good, because it took a lot away of the shy- the metal prices going a lot higher.
sters and the games that were played, but the promotional end of the business was seriously
dampened. Then you have the reduction of commissions filtering down to the penny junior Q: If the world is mad for gold, and the majors aren’t discovering the gold anymore,
market. People used to buy 10,000 shares of a 60-cent stock and pay about $300 or $400 but the juniors are, wouldn’t you expect this discrepancy to balance out?
commission. Now they pay as little as $9.99 or $19.99. Therefore, those who used to hold have
become more active on the sell side. And a lot of money that used to filter down to the junior A: Well that’s the hope that us bulls will have to have—that gold continues to be in demand and
market now flows directly into the metal ETFs. majors cannot continue to replenish the reserves, so that when juniors do find significant gold
deposits they will be worth that much more.
Q: Marshall Auerback of Pinetree Capital told me most of these junior mining compa-
nies are very poorly managed. He said that the idea of return on investment doesn’t Q: There’s a company in South Carolina called Romarco, and they took a hit recently
seem to matter much to them. when the Army Corps of Engineers informed them of an additional yearlong regulatory
wait. Their mine, the Haile mine, began operations almost 200 years ago. Do you think
A: We have to recognize that juniors are really gambling, and that failure is the norm in that the regulatory regime in the United States and Canada is becoming more unfriendly to
business. We’re dealing with a business where despite all the best efforts, and hopefully a the mining industry?
good bit of honesty, the vast majority of people are not going to succeed. If you think about it
there are 1,000 to 1,500 active, listed juniors. How many mines will actually be discovered, A: The environment for people working in metals, mining and exploration has become far more
developed, sold and or brought into production by these companies over the next three to difficult. It’s happening in many places around the world, and that is one of the reasons per-
five years? A few dozen, perhaps. People who wouldn’t gamble at casinos or the racetrack haps that the price-to-earnings ratios that the mines used to be able to carry many years ago
are actively buying and selling juniors with the belief that somehow most of them are going to have been greatly reduced. Fifteen years ago, the argument I remember to explain why gold
be successful. I’ve said it so many times that probably it’s ad nauseam to some people, but mining companies had a 35 or 40 PE, and the market multiple was 15, was because they had
failure is the norm in our business. That’s not an excuse for poor performance, but I think it’s an a very lucrative operation—profits would be high, and every time gold went up $50 they could
extremely important fact that you have to begin when you’re in this area. see earnings increase 100%, etc. That doesn’t work for them anymore because costs have
become so high, and part of those costs is regulatory. That is something that is going to be with
One thing that Auerback is partially right about is that a lot of these juniors become lifetime em- us for quite some time and could even get worse.
ployment for management. Many of them are run by one, if not two or three people. Several of
these people, particularly if they’ve been around a while, have done more than one company Q: Do you think that with the need of the majors to replenish their gold stocks that
or recapitalized the existing company more than once. They are not companies where share- we’re going to see more takeovers?
holders have a tremendous amount of input on what takes place as big blue chip companies
may with influential shareholders. A: I think we’re going to continue to see a steady movement towards that. One reason for that is
there used to be a good-old-boy atmosphere among the majors. There were a dozen or so key
Q: Presidents of junior mining companies typically earn $10,000 dollars a month, ones; they all didn’t bother each other. They never made hostile bids against each other; the
plus they get all these options when the company starts. If the company’s share price world was big enough, and there were enough places for them to go without having to battle
triples or quadruples, they can sell those options, and they’ve made theirs. Do you each other. In recent years we’ve seen that attitude change. I think that’s going to become
think the option system militates against long-term success? more acute, because as we just noted, it’s becoming more and more difficult to find and
develop bigger deposits. I think hostile deals are going to be the wave of the future.
A: Without the options, I doubt that many people would take the risk. The options have always
been viewed as the main incentive for going into this business. I wish the average mining Peter Grandich is the founder of Grandich.com and Grandich Publications, LLC, and is editor
“
president got only $120,000 a year. Management of many juniors (including, I wouldn’t be of The Grandich Letter, first published in 1984. Grandich Publications, Inc. provides research,
surprised, some of the companies that I work for) is taking more than that, which in this day analysis, and investor relation services for certain of the companies featured in the articles
and age is a very nice salary, but I don’t think that’s ever going to change. To take a step back, appearing in its publications.
we have to recognize we’re dealing with a pimple of an industry. The entire size of our industry
doesn’t even equal the market cap of some of the major companies worldwide. We created
this word “speculative,” but we’re really gambling. Anybody who gambles should do so with the
expectation of losing all or part of their capital, but most people don’t. What I find all the time If someone has been the CEO of nine juniors,
at shows or talking to people who speculate in juniors, is that they don’t have the 5%, 10% or and none of them ever developed a deposit
15% max of their assets in juniors, they have 50%, 80%, 100%. They tend to be the people
that write the horror stories because, as I just stated, the odds are stacked against them to worthy to be sold or became a mine, maybe
begin with.
you want to ask yourself why you think their
Q: You read again and again that people looking to invest in mining companies should tenth is going to be lucky
seek out those that have good management. This is obviously true, but how do you
know whether a company has good management?
–Peter Grandich
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