In this episode, Mickey Fulp the Mercenary Geologist sits down with Proven and Probable to discuss the ‘Power of Two’ thesis which will serve as a foundation for speculators in the Natural Resource Space. Mr. Fulp outlines his 3 fundamental criteria that have provided him success and why they are imperative for speculators that wish to participate in junior mining companies. This episode is to serve as an educational tool and is not investment advice.
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Maurice Jackson: 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. Thank you for joining us, sir.
Mickey Fulp: Thanks a lot, Maurice. Good to be here once again.
Maurice Jackson: Mickey, earlier this year, you conducted a presentation discussing the generational shift that occurs every five to seven years with regards to new speculators in the natural resource space. This is why we’re delighted to have you on our show today to share your investment thesis which is aptly entitled The Power of Two.
Now Mickey, give us a background on how you derived this thesis, The Power of Two.
Mickey Fulp: Yeah. Let’s go back to this idea of new speculators, generational shift, what I actually said that every 4 to 6 years, we have a metals cycle, a boom and bust metals cycle. Every 8 to 10 years which is equal to half generation, generation is usually thought to be 18 years, you have two new groups coming in. You have another group of let’s say, 35 to 45-year-olds with disposal income and looking for speculative investments plus you have a new half generation of soon-to-be retirees who realize that they can’t live on their Social Security checks, their 401Ks, their RSPs, their IRAs. et cetera.
So you have two groups that come in looking for more speculative investments. Going on to the Power of Two, I first got involved in the junior resource sector in the early 1990s. I got about 25 years of speculating in this junior resource market, venture capital market. And the broker I had who still is a good friend of mine and was a long time broker of mine, introduced me to the idea that when a stock doubles, you sell half and take your money off the table. And you go back and do it again with another stock. So that’s the basis of the Power of Two.
Maurice Jackson: And Mickey, I noticed you used the word speculating here versus investing. For the lay investor here, can you discern the difference between the two for us?
Mickey Fulp: Sure. An investment is something that returns capital to you on a regular basis. So for instance, a real estate contract that you sell where you got an 8% return on the debt, that’s an investment. But the junior resource sucks and in particular and even playing stocks in the market unless you’re collecting dividends from a blue chip is not investment. It’s pure speculation. So you need to be prepared or you should be prepared to lose all your capital in any of these speculations.
Maurice Jackson: Now Mickey, when you’re looking at a junior mining company, you have selection criteria. I’d like to break that down a little bit here beginning with structure. What specifically are you trying to identify?
Mickey Fulp: Well, for any junior resource stock, I want a tight share structure. And it is one of the three criteria, major criteria that I judge or evaluate juniors. Tight share structure, meaning that insiders, family, and friends have skin in the game and own a significant amount of the stock. Some people would refer to that as stock held in strong hands. And that is one of the main criteria for speculating in a junior.
Maurice Jackson: Now Mickey, we heard the term stock float. Can you explain that to us, please?
Mickey Fulp: Yeah. Stock float is generally the stock outside of what I just talked about. Let’s call it held in strong hands. In other words, people that either are not inclined to sell. They’re there for the long term or they have the company’s best interest in mind and the shareholders. So the stock float would be the public float of people that trade, the speculators such as generally ourselves unless you’re in early on a stock.
And so, you take the total shares outstanding and you subtract everything that would be held by insiders, management, family, and friends, perhaps institutional funds, and that gives you what is commonly called the public stock float. And that’s where most of the liquidity would come from.
Maurice Jackson: And what percentage are you looking for specifically?
Mickey Fulp: That’s a very difficult question. It depends on the company. But you certainly want to find a company, let’s say maybe 50% on average of the shares outstanding are in the public float. That’s enough to generate good liquidity because as we all know, volume in a stock is what generally causes the stocks market capitalization or share price whichever way you want to look at it to increase.
But you also want to have a significant number of shares held by people who are not inclined to sell, who are in for the longer term.
Maurice Jackson: And Mickey, you mentioned speculating earlier, for someone who is new to the space, can you shed light on why there are so much volatility with junior mining companies?
Mickey Fulp: Yeah, because they are basically worthless. They are based on pure speculation. They have a project in junior resource spec or projects in which they raised equity capital and put that into the ground in an attempt to make the deposit larger or bigger or higher grade or whatever. But they have no real value. They don’t produce revenue.
In fact, some people argue that the projects which they list on the left side of the balance sheet as assets are actually debits that should be a list shown on the right side of the balance sheet because they used money and they generally do not return for a significant number of years if they do at all. Most – about 95% of these juniors ultimately fail.
So from that point of view, this is a very speculative environment. I dare you to find me a junior resource stock that in any running 52-week period does not have at least a double from its higher and its low. Therefore, the Power of Two given that idea that they all double in 52 weeks or less from their lows than it is incumbent in us to buy them when they’re low and sell them when they double.
Maurice Jackson: Very well said. Let’s focus our efforts now on the people. Why is this element so crucial for listeners?
Mickey Fulp: Well, it is all about the people, number one. If you do not have the right people with technical backgrounds, I prefer to see the CEO of these companies, the junior exploration companies run by geologist or an engineer with technical know-how and also with experience in the business. So I tend not to put money into companies that have rookies if you will, running them. I want to see experience and more importantly, I want to see success in the business. And success is hard to come by as we’ve already discussed in this business. So you’re looking with people who have technical backgrounds, are experienced, and successful in the junior resource sector.
An entrepreneur, a so-called entrepreneur who has taken three successive companies into bankruptcy is no longer an entrepreneur in my opinion.
Maurice Jackson: How about the technical team? If I have a background in copper, does that make me qualify for uranium?
Mickey Fulp: Not necessarily. But a good geologist and engineers would be experienced with a variety of jobs and interests in a variety of commodities. For example, I’ve got 40 years in this business and I’ve worked in most commodities that you can name off the top of your head. I know a lot. I’m a generalist. I know a little to a lot just about nearly every commodity that is mined on the earth from copper to gold, to uranium, to oil and gas, to water, to limestone, to sand and gravel, to the rare earths, et cetera, et cetera.
Maurice Jackson: Well, let me ask you this. Would you prefer a successful generalist or do you want someone that’s niche-specific?
Mickey Fulp: I think that depends on the people, the specific people. Certainly, someone that is niche-specific as you call it. For instance, someone that has spent his entire career exploring, developing, mining copper deposits is probably more suited to run a copper company than he would be anything else.
Maurice Jackson: Now, are there any standard questions that you like to ask management and directors and the technical team because I know you attend conferences and there’s a lot of fluff?
Mickey Fulp: Well, there is a lot of fluff as we both know, Maurice. I have a company evaluation template that anyone who is a subscriber to my website, free email subscriber. So the price is right. You can send me an email and I will send you the company evaluation template. It’s 4 to 5 pages long and there are lots of questions on it.
At the end of that, there are 3 or 4 favorite questions that I commonly asked the CEOs, the management. One of them would be for example, under what mostly likely scenario would cause your company to fail? If a CEO does not have a good answer to that, he probably hasn’t really evaluated his own company.
Another question would be what have you not told me that I need to know?
Another would be something like, you are competing with 1,200 juniors for my speculative dollars, what makes your company one of merit or the few let’s say 30 or 35 that I hold amongst those 1,200 companies?
So those are kind of the tough questions at the end of an evaluation.
Maurice Jackson: Those actually are very good questions. I have to use those as well. Finally, let’s discuss the projects.
Mickey Fulp: Well, one of them I borrowed from our friend, Bob Moriarty. And that’s the one about what have you told not told me that I need to know. So you can imagine Bob asking that question, right?
Maurice Jackson: I can certainly see him asking that. Let’s discuss projects. What criteria give you confidence in a project?
Mickey Fulp: Well, I am involved in juniors with a variety of projects all the way from grassroots exploration to small minors. So, there is a number of criteria. I want a good geological setting. I want a good geographical area with infrastructure or the ability to build out infrastructure that without rendering the project uneconomic. I want a good geopolitical jurisdiction.
I am increasingly cognizant and tend to shy away from areas with what I perceived as high geopolitical risk. For instance, for a resource nationalism. I want to go into an area that has or a country that has a mining history and understands mining. I want to make sure that there are not the radical NGOs that will oppose this project, et cetera, et cetera. So, a number of things, an infinite number of questions that come into mind when evaluating these companies.
Maurice Jackson: And conversely, what is just an automatic red flag for you?
Mickey Fulp: I think geopolitical risk is the thing that scares me off more than anything. We’ve seen this over the last couple of months. Tanzania changed their mining law. The Democratic Republic of the Congo has changed its criteria. South Africa has proposed new black empowerment rules. Guatemala had shut down Tahoe’s mining project in that country.
So, I am very fearful. I don’t know if that’s the right word or cautious when it comes to geopolitical risk. And as a result, I tend to only play if you will, in countries that I consider to be stable with a great understanding of the rule of law and with no ability to change the rules in the middle of the game.
Maurice Jackson: Mickey, on behalf of all of our listeners, we are most appreciative of your efforts in sharing your wisdom throughout the years. Before we close, what last word of advice would you like to share with listeners?
Mickey Fulp: In the general resource space, beware of frogs masquerading as princes because there are a lot of those.
Maurice Jackson: Yes, there are. And Mickey, if someone listening wants to get more information about your work, please share the contact details.
Mickey Fulp: I can be reached at [email protected]. The website is MercenaryGeologist.com. Free subscription service. I run a sponsor model so all my content including my stock picks is available to my 6,500 subscribers. And you can join 63,000 Twitter followers @MercenaryGeo.
Maurice Jackson: And last but not the least, please visit our website, www.ProvenandProbable.com where we interview the most respected names in the natural resource space. You may reach us at [email protected]
Mickey Fulp from Mercenary Geologist, than you for joining us today on Proven and Probable.
Mickey Fulp: Thank you, Maurice.
[End of transcript]
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