In Pursuit of Profit People Are More Important Than Properties Rick Rule
Published in August 2, 2017on
00:00:09 You will notice Trump in the title, that wasn’t intentional in terms of high quality people but it does get attention. One of the things that many accomplished speakers in finance try to do is they try and begin or end a speech with quote from Warren Buffet. It's an old technique. It works extremely well. You get to bask in the reflected glow of Buffet. He says lots of smart and funny things particularly because I'm beginning so early in the morning and I need to borrow some credibility. I'm going to begin with a quote from Warren Buffet that goes to what we're going to be talking about this morning. It goes like this.
00:00:49 "If you want to win basketball games, it helps to have a couple of seven footers." By the way there's no return on pygmies. When we think about people in the mining business, the way that the mining business performs, the way that your investments perform in the mining business makes this particular topical. If you look through the length and breadth of mining industry promoters in the world, there's a few seven footers and there are literally tribes of pygmies. Winning the game is as much about hanging out with the seven-footers and ducking the pygmies if that's possible as anything else.
00:01:34 Let's begin. I'm going to use another age old speaking technique on you this morning which is to make you sick at the beginning of the talk and then try and resurrect everybody by the end of the talk and make you healthy.
00:01:47 The first part of the talk will be about why not being incredibly selective in the mining business is suicidal. My suspicion is looking out at the audience and seeing the gray hair or in some cases no hair. These are lessons that you've already learned. I'm going to repeat them anyway because they're useful to you.
00:02:09 The odds against success in mineral exploration and mineral development are incredible. It's an unbelievably cyclical business meaning that the best property around in a bull market becomes just another dog in a bear market. Success often takes a couple of cycles. That means that you and the management team have to have the staying power to go through the good times and the bad times.
00:02:40 Most exploration efforts of course fail. I love to make the exhibitors sick by reciting the statistic I learned in my second year at University British Columbia with regards to the probability of success and expiration. I learned 1 in 3000 mineralized anomalies becomes a mine and that was of course in 1970 when there were still some projects around that you could literally stumble over outcropping projects. My suspicion is despite the march of technology that the odds of gotten worse not better. Worldwide week make about 20-25 economic discoveries a year. Sadly I was in university of more than 40 years ago that suggested about what? 800 of the pieces of low-hanging fruit have already been stumbled upon.
00:03:25 The basic value of proposition if you will in junior mining is that you take a 1 in 3000 chance to get at 10 to 1 return. Arithmetically, that makes a BC lottery look like a really, really, really good deal and then of course there's the fact that as we touched on earlier. Those few successes often take more than one cycle which means that you get excited about the success in 2009 and a great market. You get sober with regards to the success in 2014 when the management team that has it can't finance it and despite the fact that you choose well you lost money.
00:04:02 The person that replaces you of course in 2014, 2015 may do extraordinary well in 2017 or 2018. That one success may be useful in the context of constructing probability curves in mining but if you still lost money, it's a small consolation to you. I made you sick and now I'm going to make you a little bit sicker before I start making you well. I hope everybody had their coffee this morning challenge a bit.
00:04:34 My estimation and we've done this statistically as well as we could at Sprott looking back over 30 years is that any point in time in the cycle 80 percent of the listings are valueless. Valueless. People say to me in a good market like this. This thing only has a $5 million market cap. It's cheap. What's it worth?
00:04:57 The market cap is just what it selling for. What's it worth? Often you find that the company has a couple of recycled projects that have failed through three prior bull markets. It has a $1.98 in the Treasury. It's spending $100,000 a month. It's difficult to understand why three worthless properties, negative cash flow and no cash assets are worth anything. It's important to remember that any point in time in the business probably 80 percent of the listings are valueless. It doesn't mean that they don't go up in a bull market. It means that they're valueless.
00:05:36 In fact making you sicker still, any year that I've been in the business, if you merge every junior company in the world, the Australian listings, the AIM listings, the US OTC listings, the Canadian listings, if you merge them all there's about two thousand of them I think now. If you merge them all together into one company, Junior Explorer Co, in a very good year this company would lose $2 billion.
00:06:05 In a bad year, it would lose $10 billion. What's the public exploration business worth do you think? Should it be 6 times losses, 9 times losses, 12 times losses? What's the correct price loss ratio? You get my point.
00:06:25 Why do we do this? Why do we do this? Why do we take a 1 in 3000 chance for 10 to 1 return where 80 percent of the starts are valueless and where the aggregate worth of the business is decidedly sub-zero?
00:06:41 The reason is that some of this population, a small part of this population performs so well that it adds legitimacy and sometimes even luster to a sector that's really truly populated by financial landmines. I'm going to argue today that the most important determinant for success is not properties, not assets but rather people. We learned earlier that if you were to value in a statistical sense the properties they have a 1 in 3000 chance of success.
00:07:17 In fact I would argue that from an accounting perspective most exploration properties are not really assets on a balance sheet. They're liabilities. They are an excuse to spend money with a low probability of return. Some projects deliver truly astonishing returns. I suspect everybody in the room has experienced a 10 bagger or a 15 bagger. A couple of you have experienced hundred baggers or thousand baggers. The nature of our business is that since even the best of us pick more stocks that fail than succeed.
00:07:57 The way it works is that the prophets that we make on the ones that succeed have to amortize all that's in and leave a reasonable rate of return so that we can repeat our mistakes over time. That has to do with people. How many people in the room are familiar with the work of an Italian social scientists, Vilfredo Pareto? Raise your hands please. Okay, many of you are not.
00:08:22 This is going to be participatory for a little while. How many people have heard the phrase 80/20, The 80/20 rule? Good, good so we'll blame Pareto but we'll deal with 80/20. 80/20 rule to summarize suggests that in any given task 20 percent of the population generates 80 percent of the utility in that task.
00:08:46 It's worth noting that the 20 percenters aren't necessarily successful across tasks which is to say that somebody who is 20 percent in something like pottery may not be part of the 20 percent in something like Nuclear Physics. You have to segregate by task. It turns out to be broadly true from lots and lots and lots of social science studies.
00:09:10 That in any given task, any given pursuit of utility, 20 percent of the population generates 80 percent of the positive utility. Remember this is a bell-shaped curve, okay? The first thing to remember is that there's this good 20, the 20 that generate 80 percent of the good. There's a different 20 in any population base. This is the guys that generate 20 percent of if you will the negative utility or in fact the aggregation, the aggravation.
00:09:41 Your first job in speculation is to hang out with the good 20 and avoid the bad 20 like the plague. We referred of the bed 20 as Capital Destroyers. We refer to the middle part as – what did Casey call those? The harmless mass and you can think about investing with somebody who's harmless when the probability is a 1 in 3000 chance of success.
00:10:15 Then on the far right you have the value creators. That 20 percent who do 80 percent of the work. What's useful about Pareto's Law, the 80-20 rule is that you can take the good lip. the good 20 or the bad lip the, bad 20 and you can align them through the same performance dispersal curve. They conformably align again. In other words, 20 percent of the 20 generate 80 percent of the 80 or 4 percent of the population generates 64 or 65 percent of the performance.
00:10:56 We have shown by we I mean Sprott statistically that the performance dispersal aligns at least one more time which is to suggest that 1 percent of the population or arithmetically 8/10 of 1 percent of the population generates 40 percent of the positive utility and a different 1 percent generates 80 percent of if you will the aggregate aggravated.
00:11:20 I'm going to suggest to you this morning that the most important thing that you can do as an investor or speculator is to search for the 1 percent. Search for the serially successful. There are other things that you can do in conjunction with this to be sure. We've talked earlier about contrarianism in the business. The truth is in very bad markets you can buy the 1 percenters at no premium over the merely harmless or the people who are in fact serial aggravators.
00:11:56 If you'll remember back two years ago to this conference in Ivanhoe Mines you had the most serially successful of the serially successful, Robert Friedland with three world class projects selling at a discount to cash. In other words the Enterprise value of Robert Friedland was sub-zero so certainly in addition to finding the serially successful performers. When you combine those serially successful people with already proven projects in very bad markets it's sort of a trifecta.
00:12:31 My suggestion is the start by segregating among the management teams that you have for the serially successful. The obvious objection to that when people criticize this talk and I give it another surroundings so as people say, "Rick, if you followed your own advice, you would have missed John Borshoff in Paladin. You would have missed Brian Dalton in Altius."
00:13:00 Those are in fact true that fact ignores all of the unspoken failures that I've had backing first-time promoters. The truth is that from a statistical point of view trying to capture the Brian Dalton's, trying to capture the John Borshoff across the length and breadth of a business where 80 percent of the listings are valueless is a fool's errand. One I've been dosed in many, many times. I think despite the success that I enjoyed with Altius and success that I enjoyed with Paladin, my suspicion is that they were as I say fools errands.
00:13:46 In fact when I look back over the course of my career, I've been extraordinary lucky maybe by accident early on in hanging out with seven footers, hanging out with serially successful people. I was from a professional point of view sort of adopted by Adolf Lundin at the ripe old age of 24.
00:14:07 If I think back in the course of my career Seymour Schulich, Adolf Lundin, Robert Friedland, Ross Beaty, Bob Quartermainif I had worked a lot less hard, if I had just done business with the best of the best and not on anything the rest of the time certainly the money that I would have made relative to the effort that I had expended would have been much, much higher. Now that isn't to say that I didn't have a lot of fun pursuing failure with hundreds of substandard promoters. I had an absolute ball. Most of my good stories have to do with the people who are serially unsuccessful not the people who are see really successful. We didn't come here for fun. We have our families for that.
00:14:50 I want to suggest you that Pareto's Law suggests that the most important thing that you can do is have the discipline to invest with the serially successful. Stop, just the serially successful. You know the names of the old school would be Lundin, Friedland, Quartermaine, Beaty, Clyde Johnson here in town. This isn't to say that they haven't had failures on occasion by the way.
00:15:20 Ross Beaty or not Ross Beaty. I'm sorry Robert Friedland first effort, Galactic was a galactic failure. Not for me. He took the stock from $0.50 to $20 mercifully from me for some reason. I was able to be a seller. He certainly experienced failure.
00:15:40 If you look back over the course of Robert Friedland's career or look back over the course of Bob Quartermaine's career or Ross Beaty's career or Lukas Lundin or Ian Lundin career. They have been serially successful. An interesting thing happens. There's this wonderful positive feedback loop when people are successful. They attract better people around them. If a high-quality person wants to go to work on an exploration team, the probability that the team will be funded means that the high-quality people are attracted to the high quality people. Anybody in the room know Doug Kirwin?
00:16:20 Kirwin is just an absolutely superb geologist. He's also a very nice guy, a good friend of mine. At one point in time when I was aggravated with Robert Friedland, not an infrequent occurrence or the last 30 years of my life. I asked Kirwin how he could stand to work for Friedland. How he could stand to work for somebody who was so intense that he would call you at 2:00 o'clock in the morning thinking of you would be pleased to hear from him. I said, Doug you've worked with this guy for 10 years. How can you stand it?
00:16:48 I'll never forget the answer. This is very instructive. He said, "Rick for the first 15 years of my career, people told me I had great ideas and Robert drilled them. If you care about exploration the fact that Robert was able to say to Doug Kirwin you need 5 million bucks to drill it. I'll go get you the 5 million bucks. Don't worry about it. Drill it and if you had a $5 million effort that was a failure, Robert would say failures the expectation.
00:17:17 It's the willingness to take risks that gives you the reward. Take the weekend off, regroup. Go find something that’s gets me the $5 million. You get the point of this?
00:17:29 The people who are serially successful attract other serially successful people to them. They attract better projects. If somebody is vending a project and he or she is going to get an interest in the company or royalty or both, the high-quality project purveyors go to the high-quality entrepreneurs.
00:17:51 Similarly, in the quest for capital, believe me, if Ross Beaty calls me up or Bob Quartermaincalls me up or Robert Friedland calls me or Lukas Lundin calls me up, I'm going to answer the phone and if I can I'm going to get on a plane and I'm going to go lock the ability to give them the money. These people because of their reputation have a lower cost of capital in a capital intensive business. They have better access to properties. They have better access to people.
00:18:20 The fact that they have been successful, it doesn't mitigate it. It causes them to have durable competitive advantages over other people who haven't been as lucky, as hard working for at any rate as successful. I've begun myself the effort of trying to determine from my own experience with these people the traits that characterize them and make them different from other promoters. The reason that I do this will become clear a little bit later in the talk.
00:19:01 What I've really learned with the really serially successful people, I've been around Clay Riddell as an example in the oil and gas business, Mark Cressy in Australia in the mining business. Not just the ones I've named. The first is that these people are, I was going to say intensely. They're pathologically curious, pathologically curious. I'm not sure why this makes them successful.
00:19:27 I think it makes them successful because they aren't willing to accept present dogma. I think because they're curious they approach a problem from a whole bunch of different points of view. It's certainly true that many of the properties that become successful have had three or four approaches before the approach that made them successful came about. As I say, I don't understand necessarily why the fact that these people are intensely curious is a common trait amongst them. I just know that it is.
00:20:04 Of course they are really, really hard working and focused. The serially successful people, I mean Robert Friedland would be an example. When Robert Friedland is on his boat in the Mediterranean and everybody else is talking about the Cannes Film Festival or whatever people talk about when they're lounging, running a boat in the Mediterranean. Robert is on two different cell phones talking to people who are working with him or talking to people who might give him money.
00:20:37 He's always, always, always working. This is a guy who actually relaxes by making movies and building hotels. These people are very hardworking people and to be fair, when you spend time with these people they are very smart. Remember they're seven footers.
00:20:54 I have found that the fact that they are very smart is a less important determinant in their success or rather I've done business with some very smart people who were never successes. I'm not sure why but I lay it off to curiosity or hard work.
00:21:12 All these people are amazingly tenacious, amazingly tenacious. They take a project in good times, through bad times. They carry through the bad times back into good times. All of these guys when I talk to them they always make the joke about themselves. Yup, on that deal I work seven years to be an overnight success. They are amazingly tenacious people. That's an important lesson to because you have to be tenacious alongside them.
00:21:42 I was talking to Ross Beaty the other day about the successes that we have had investing in his enterprises going back almost 40 years now. Every one of them Equinox, Da Capo, Lumina, Pan American, every single one of them fell by 50 percent in price at least twice during the period I held them. You buy a stock at a buck. The stock goes to $0.50 before it goes to $10.
00:22:17 You have to be just as tenacious as they are. You have to understand that bear markets are really sales. Bear markets are the opportunity to buy goods on sale with the best of the best guys. If they're tenacious and that tenacity is going to work for you, you have to be equally tenacious. The other thing I found out and this is gratuitous. It isn't always the case but these people turn out to be extremely nice.
00:22:45 They in my experience are genuinely happy about the fact that they delivered value for their employees and delivered value for their shareholders. I remember some years ago when Silver Standard Resources then Bob Quartermaine's effort had gone from $0.72 to $40 getting an amazing letter from the receptionist thanking me for being part of the process that enabled her as a receptionist to buy a condo. Quartermainmade sure that everybody in the organization, everybody had options.
00:23:22 He didn't hoard all those options for himself. The secretary had 10,000 options at 2 bucks and she cashed in $10,000 options at 35 or $40. The consequence of that is the she was able to buy a condo. These people are nice in addition to everything else. They actually want to make you money. They want to build a mine. They want to employ local people. They want their shareholders to do well.
00:23:46 It isn't necessarily all about them. The final thing that I've noticed about these guys is that they buy once and they sell once. They don't trade their stock. They're not in the paper business. All of the serially successful guys use Capital Markets to build companies. They don't use companies to create Capital Markets opportunity for trading. The Lucas Lundin's of the world might sell options from time to time. Bob Quartermainmight sell options from time to time as a consequence of fairly low average salaries relative to the industry.
00:24:25 What you find is that if you look at their Insider statement will you don't need to look at their Insider statement. They never sell stock. Their idea is to use Capital Markets to lower their cost of Capital relative to their competitors to build companies and when they can no longer add value to sell those companies. The list that I just gave, you don't sell stock or if they do sell stock they sell it all at once at the end of the exercise the same time that you sell their stock.
00:24:58 I'd given you some names Robert Friedland, Lucas Lundin, Bob Quartermain, Ross Beaty, the interesting thing about that or the challenging thing about that I guess is that sadly they're all my age. You might have this cycle with them. The challenge is going to be to find the next generation of the serially successful people. The Challenge is going to be to identify – I think the challenge for you all, the challenge for me too because I'm not going to check out this market.
00:25:33 The challenge I think is going to be to find the 35 year old and the 40 year old and the 45 year old, the people who have been in the business long enough that they have already been successful more than once. Where you can identify that they're serially successful but also were they don't have a premium associated with their name that in the good markets that allow us to have the courage to buy they don't become too overpriced.
00:26:00 Of course in very bad markets like the one we just went through you can buy the best of the best no premium whatsoever. Most people don't have the courage to buy in 2015. Congratulations to those who did.
00:26:10 In markets like this, the question is going to be who is the next generation? This is where the discussion becomes iterative again as I had promised. What I'd like is for people in the audience to think who are those people in the 30s or 40s that they have experienced success that they think they'll express , that they'll enjoy some success with in the future.
00:26:31 I can think of a couple here in town. Amir Adnani who I think some of you know. Probably Ivan Bebek and his partner Sean whose last name escapes me. Thank you.
0:26:49 Who else? Anybody have any idea? Marco Day? Good choice, good choice. We're all in this together. Anybody else have any names? Young people have been serially successful. Who do you think is the next Ross Beaty? Marin Katusa is an astonishing promoter.
00:27:06 I am allegedly his mentor. I learn stuff from him every month. Anybody else? I think this question that I've – yeah. Did you have one? You were just stretching. Okay. I think that this question that I posed is maybe less interesting than some of the other questions that you think about in the context of walking around the exhibit hall like what's the next drill hole going to do. How does the stock get from $0.25 to $0.37, whatever.
00:27:35 It's a more important question. I would ask you to think about your investment successes and failures in the last 20 years. I would ask you to segregate what you've done well and what you've done poorly and my suspicion is if your experience is anything like mine, that to paraphrase Buffett hanging out with seven footers and avoiding pygmies is the single most important thing that you can do. Interestingly I think we're coming to a generational change in mining.
00:28:08 The folks my age will leave a couple different ways. Some of us will be less interested, the others would go out in a box. The truth is that the torch is passing and having the ability now to do what I was able to do in my late 20s and 30s that is find the young seven footers and go through 40 years with them. I think will really be a determinant about the financial success and also the enjoyment that you get from this business.
00:28:37 Ladies and gentlemen I hope this has been useful to you. Yes sir. Do you have a question?
00:28:46 The gentleman mentions Keith Baron as one who had a success checked out and probably has other success in him. This is what you have to be doing now. This is what you have to be thinking about. who are the Next Generation and how do you play?
00:29:01 It's probably the most important – quick. The gentleman mentions Brian Dalton who runs Altius. This is unique. He's been serially successful in one company. It goes from strength to strength and you're right of course.
00:29:19 Ladies and gentleman thank you very much for your time and attention. I hope this is useful. I hope you use it in addition to it being useful.
00:29:25 Thanks. Bye.