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Henry Bonner

Ruthlessly Cut ‘Hope’ Stocks and Those That “Have Nothing and Can’t Spend Money [to Create Value]”: Brent Cook

Brent Cook worked with Rick Rule analyzing early-stage resource stocks back in the late 90’s and early 2000’s.

Brent spoke with Tekoa Da Silva at the Prospectors and Developers Association of Canada (PDAC), a major industry conference for mining and exploration companies.  

Brent explained what he looks out for in the juniors and why you should never ‘buy the waterfront’ of resource stocks.

I followed up with him to find out what he really thought of the companies in the resource sector now.

He said many companies are just holding onto the hope that a recovery is imminent. They’re not trying to create value, but instead are counting on investors’ belief in a resource rebound to keep their projects alive, raising just enough money to pay bills and salaries each year. If the market turns around, “they will basically bring out their old dog properties once again,” Brent explained.

PDAC was full of companies presenting their projects, but light on people looking to invest. Brent recounts: “What I noticed was that investors were really missing as a group. There were still folks selling their companies, their properties, or their products. But there were very few people who were actually in a buying mood.”

Investor advantage

This market is “better than it has been in a long time” for small resource investors, says Brent. Investor interest – including from ‘sophisticated’ investors and industry players – is low, which could mean there are buying opportunities in this market.

He sees the individual investor’s advantage as being able to enter and exit positions easily, whereas institutional investors or larger mining and royalty companies are ‘locked in’ for the long haul when they take positions in small exploration and development companies.

Right now, as many past acquisitions and investments are still haunting major investors, they are less willing to put capital into exploration and development. Their reticence opens the field to individual investors.

Do-nothing companies

Remain cautious in small resource stocks, as many companies are practically out of cash, but haven’t closed up shop yet. They’re looking to scrape by on investors’ hopes, but lack either cash or an attractive exploration program that might create value.

The overall quality of companies remains mediocre, says Brent. The sector is still carrying a lot of ‘dead weight’ companies with non-viable projects and no money to do anything meaningful:

“I would say 60% of the companies on the venture exchange (where many small-cap resource stocks are listed) are not viable. They’ve got nothing and they can’t spend money on exploration.”

Abandon ‘hope’ stocks

Judge companies on their merits, not on your faith in the underlying commodities.

“My suspicion is this year is a good year to be acquiring projects, acquiring companies very selectively. What’s really important is to know what you’re buying, what the company’s target is, how much it’s going to cost them to advance that project and when they’re going to have to raise money again. Then follow it in detail and cut bait as soon as things go wrong.

“One of the hardest lessons I’ve learned is that once your investment thesis goes from, ‘This is what we need to see,’ to, ‘Well, that didn’t work. But I hope the next drill hole works,’ or ‘I hope something happens’ -- when hope is your investment thesis -- you have lost your money.

“Most of these projects aren’t going to work. So you got to find the fatal flaw as soon as possible. If you can’t find that fatal flaw, stay the trade.”

P.S.: Want to read more about how to find potential flaws in small resource companies? Click here to view Brent’s Guide to Telling ‘Right’ from ‘Wrong’ in the Exploration Business. You can also download Rick Rule’s Natural Resource Investing Guide click here.

 

 

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