Mickey Fulp – Project Selection

In this episode, Mickey Fulp the Mercenary Geologist sits down with Maurice Jackson of Proven and Probable to discuss one third of his investment thesis which is focused on Project Selection. This is a great foundational interview for speculators in the natural resource space. We will address Flagship Projects. Mickey will discuss the selection criteria on identifying quality from sales promotion. We cover specifically whom to speak with and what to ask to identify the best value proposition for your portfolio. Mr. Fulp will also touch on gold, silver, copper and uranium grades that capture his attention. Rich in content, clear and concise. Great educational tool for the lay investor.

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VIDEO

AUDIO

TRANSCRIPT

Maurice:  
Welcome to Proven and Probable where we focus on metals, mining and more. I’m your host, Maurice Jackson. Joining us for a conversation is the Mercenary Geologist, Mickey Fulp. Sir, welcome to the show.

Mickey: 
Thanks for having me one again, Maurice.

Maurice: 
Mickey, in our last interview we discussed part of your investment thesis entitled: Power of Two, which we have listed on our education tab for our subscribers. In that interview, you covered structure, people and property. Today I’d like to focus more on the property side of your thesis, and on behalf of our subscribers, we’d like to have you address some important foundational topics that are paramount for speculators in the natural resource space.

And Mickey, I know you enjoy informing and educating the laymen, and to help them become a better and more successful speculator in the junior resource sector. Therefore, can you share, is it possible to maintain a conservative approach as a speculator in junior mining companies?

Mickey: 
Absolutely. An unequivocal yes on that question. This is arguably the highest risk, highest reward venture capital market in the world, so you must in my opinion take a conservative approach to buying and selling these stocks, and it’s not that hard to do. I mean, look at it. There’s 1450 mining and engineering companies listed on the Toronto Venture Exchange, and the Toronto big board, and so the trick is to reduce those down to something you can evaluate and decide what you want to be an owner of.

So, I have methodologies. First, to reduce that to five percent, so that’s less than a hundred companies, and right now I own about two percent and around 30 companies. And that’s pretty typical for me, so you’ve got to be able to do that and I take that as a conservative approach. You’re eliminating 98 percent of these companies and then we apply the Power of Two to trading methodology, which is a very conservative approach.

Maurice:
Now, part of the evaluation process I want to ask you, do you use the database called SEDAR?

Mickey:
I probably seldom use SEDAR except for company filings, and that happens when their websites are complete where they don’t have the notice of their annual general meeting, or their financials or their management and discussion analysis, commonly called an MDNA. So, I do not go to SEDAR unless the website is incomplete. SEDAR would be the acronym for system for electronic document analysis and retrieval, and it’s exactly equivalent to what is called EDGAR in the U.S. I should mention that a website that is probably more important to me is called SEDI, S-E-D-I, and that’s where you can look at insider holdings and trades, and that’s very important.

Maurice:
When it comes to projects, we often hear companies convey they have a flagship project. Can you define for us what is a flagship project?

Mickey:
That’s the one that’s most prospective and where their dollars in the ground should be going, so I think it’s fundamental that every company have a flagship project, or in case of larger companies, several flagship projects.

Maurice:
Alright. Now, does the duration it takes for the company to find this flagship project factor into your decision, or are you more concerned that once they identify the flagship project and their ability to make it come to fruition?

Mickey: 

Well, I generally would not speculate in a company that did not already have a flagship project, unless it was a so called prospect generator, and I’ve soured on that model quite robustly during the downturn in metals space. I’m no longer enamored with the prospect generator model, but certainly the time frame that it takes to advance a project is critical because a junior generally has a five to seven year lifetime before they restructure, go bankrupt, roll back, kick out management, start all over with a new project. For that reason I’m not usually very fond of big projects, such as porphyry  copper projects where there’s only one exit strategy, i.e. sell to a major mining company, and that process to get it big enough generally takes 10 years, so most juniors, unless they have very savvy management, should not get into that space, in my opinion.

Maurice:  

Now, what are some red flags that usually catch your eye on a flagship project?

Mickey:

Well, you can change a lot of things, but there’s two of any project that you cannot change. We can mitigate engineering. We can do this and that, but you cannot change the geology and you cannot change the geography. So, those are two of the first things I look at. I look at the metal. I look at the geology. I look at where it’s located. I look at the grade. So, those are very key criteria.

Maurice:  

Now, Mickey, I know you like to filter the truth from promotion, so I have a two fold question here. Do you accept the information presented on a company website, and what features must a company flagship project have to attract your attention?

Mickey:

Well, I think I would generally give a company, a new company, I’m looking at the benefit of the doubt, but my so called BS meter is set pretty high, so I can recognize things that are wrong and dig for more information a lot of times from the website. Features that a flagship project needs to have, well, it’s got to be the right metal, something I’m interested in. That generally amounts to a metal or a commodity that is traded in U.S. dollars on a world market with futures and options. It would need the right geography. I am very adverse to geopolitical risk.

I avoid probably at this stage about four out of five countries in the world, because we’ve talked about this before, I think, about geopolitical risk and I generally do not play in Africa, seldom in Asia. I do accept the Americas, certainly North America, Canada, Mexico, U.S., select countries in Latin America, specific countries in Europe, Scandinavia, for example. So, from that point of view you want to have an advance project with the right metal, high grade, infrastructure, not remote, the right management, et cetera, a variety of factors.

Maurice: 

Alright, we’ll get to grade here in just a minute for our listeners. Two fold question here again. Do you prefer speaking to investor relations, the CEO or the geologist and can you share specific questions that you like to have answered, and why is it important for speculators to take a proactive approach such as yours?

Mickey: 

Well, I seldom talk to IR except to set up a meeting. I need to talk to a technical person, and if that’s the geologist or an engineer that is not the CEO, that’s fine. If the CEO’s a banker or ex-broker or an accountant, I certainly want to involve the highest level of technical expertise in a company. A lot of times the CEO’s a geologist or an engineer.

Specific questions, jeez, I have so many that I ask people. I would encourage people, listeners, to go to my website and look at the subscription base. It’s free and if you’re free as subscriber, I can give you access to my company and valuation template.

Maurice:    

And with that being said, Mickey, please share that website for us.

Mickey:

Mercenarygeologist.com. So you go there on the left side. Click on my … a banner right underneath my mugshot, and you give a name and an email address. You can fake your name. I don’t care, but you have to give me a correct email address, and then you have access to all our content, and my stock picks. If you send me an email after you’ve done that with evidence that you are a subscriber, i.e. a notice you receive from us, I’ll send you the company evaluation template.

Well, on behalf of all of our listeners, thank you.

Now, this question here may be slightly geared to the financial side, but let me ask you this as well. How important is the net present value known as NPV?

Mickey:   

Well, an advance project that has gone to pre-feasibility or feasibility studies, it’s paramount. I generally would not look at a project or a company that does not have an NPV much greater than a CapEx. I’m usually looking for one and a half or two times the CapEx for me to have continued interest in the project.

Maurice: 

And what about the internal rate of return, also known as IRR?

Mickey: 

Well, that’s also paramount and that’s the same sort of criteria … comes hand in hand with the net present value in any rigorous financial analysis. So, I’m looking for projects that have a 20 percent or greater IRR, internal rate of return, after tax, with a reasonable discount. Five percent discount is not reasonable. You can’t build a project anywhere in the world at five percent discounted dollars. No one will loan you money for a project at much less than 10 percent, 10 to 12 percent. These companies that run five percent discounts are just trying to make sub-economic projects look better than they actually are. So, running pre-tax NPV’s and IRR’s makes no sense, because you’re going to owe taxes on it. For every failed mine, bear in mind, there was a positive feasibility study.

Maurice:   

Now, for the lay speculator, let’s talk about grade. And we hear this often when we hear an issuer and discuss their grade, but can you give us at least a baseline when you’re looking at gold, silver, copper and uranium?

Mickey:  

Well, gold and silver grades are listed in grams per ton. And let’s do the math here. How many grams are there in a kilogram? 1000. How many kilograms are there in a ton? 1000. Therefore, a gram per ton is one part per million. It depends on the project, it’s location, it’s infrastructure, whether it’s open pit or underground, but generally I would want for what I would consider a deposit that’s going to make me look more than once. As a rule of thumb, greater than one gram per ton for an open pit scenario. Somewhere plus five grams per ton, depending on the mine, mining method. Five to eight grams per ton for an underground gold mining situation. There are no standalone silver deposits in the world, so you’re generally looking at gold deposits with a silver credit, or lead zinc deposits that a significant amount of revenue will come from silver. Silver is a bit irrelevant in a simple minded analysis such as this.

 

Copper deposits, uranium deposits, all base metals, all specialty metals are based in percent. What’s a percent? Well, it’s a part per hundred. A percent, so there are a hundred cents in a dollar, so a percent is one 100. As a general rule of thumb, for an open pit, a large open pit copper deposit … they’re way too low grade what you see out there right now. That’s why so few are being developed. I’m involved in a copper company that has grades of four percent in a poly-metallic deposit, and one to two percent along with cobalt, and in an open pit and underground large copper deposits. So, I think what you want to look for, every good geologist knows that grade is king, and for me it starts with grade.

 

A high grade … if you have high grade you can afford to accept the difficulties of mining and the problems that are not recognized in a pre-feasibility study. It gives you some margin for error, and as we all know, perfect does not exist in this world unless you’re keeping score on a true-false test or a multiple choice test, or a baseball pitcher can pitch perfect game, or you can roll a perfect game 300 in bowling, but perfect does not exist and perfect certainly does not exist in the mining industry.

Maurice:  

Well, Mickey, again, thank you for giving us your introspective into your investment thesis here. Last question here for you. What did I forget to ask?

Mickey:   

I don’t really know. You didn’t ask me about my Twitter feed. @Mercenarygeo we have 63,000 Twitter followers. We have 6500 subscribers to the website, and I would like to say that our interviews … I’m contacted by people from a different space that are in touch with you, so I really appreciate the opportunity to expand my listener and readership base through these interviews.

Maurice:    

Well, we certainly appreciate your time as well, Mickey. And last but not least, please visit our website, www.provenandprobable.com where we interview with the most respected names in the natural resource space. You may reach us at contact@provenandprobable.com.

Mickey Fulp, the Mercenary Geologist. Thank you for joining us today on Proven and Probable.

 

Thank you for joining us today on Proven and Probable. Remember to like and subscribe, for more conversations with the most respected names in the natural resource space. Check out our website at www.provenandprobable.com.

The information presented on Proven and Probable is provided for educational and informational purposes only. Without any express or implied warranty of any kind, including warranties of accuracy, completeness or fitness for any particular purpose. The information is not intended to be and does not constitute financial investment or trading advice, or any other advice. You should not make any financial investment or trading decision based on any of the information presented without first undertaking independent due diligence and consultation with a professional broker or competent financial advisor.

 

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The Information presented in Proven and Probable is provided for education and informational purposes only, without any express or implied warranty of any kind, including warranties of accuracy, completeness, or fitness for any particular purpose. The Information contained in or provided from or through this forum is not intended to be and does not constitute financial advice, investment advice, trading advice or any other advice. The Information on this forum and provided from or through this forum is general in nature and is not specific to you the User or anyone else. YOU SHOULD NOT MAKE ANY DECISION, FINANCIAL, INVESTMENTS, TRADING OR OTHERWISE, BASED ON ANY OF THE INFORMATION PRESENTED ON THIS FORUM WITHOUT UNDERTAKING INDEPENDENT DUE DILIGENCE AND CONSULTATION WITH A PROFESSIONAL BROKER OR COMPETENT FINANCIAL ADVISOR. You understand that you are using any and all Information available on or through this forum AT YOUR OWN RISK.”

 

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