This article is a follow up to the “Lessons Learned During 2017: Lesson Number #1” article.

I know Brent Cook talks a lot about the importance of knowing what success “looks like”, and also the importance of a management team knowing what success looks like…

  • How accurate can a non-geologist rookie investor be able to discern if a junior explorer or early stage developer is going in the right direction?
    • How can he/she know when to bail?
    • How can he/she know when the prize Isn’t even worth hunting? (Thus every dollar spent has negative Expected Value)
    • How can he/she know when something is undervalued or overvalued?

A lot of these problems are eliminated if you invest in a company that is spear-headed by competent people with a history of successes that have skin in the game because:

  • They will probably know if they are really going in the right direction.
  • They will probably know if the prize is worth it.
  • They will probably know if the project is worth spending more money on.
  • Their Insider Filings will probably show when a company is under- or overvalued.

The Lundins are for example famous for swinging big in their exploration efforts, which means they are always looking for BIG deposits that a major would invest in or buy. Some of the latest examples are Red back Mining and Africa Oil. Kinross bought Red Back Mining and Maersk invested in Africa Oil.

They also know when to quit. Horn petroleum was a small junior company that was looking for oil in Somalia a couple of years ago. After drilling a few dusters and the security situation worsening, they decided to give up their efforts, but it didn’t stop there. After a while they raised some money and spun new assets into the company. Investors could basically sit on their hands and the Lundins kept the company going forward, thus giving shareholders another shot at making money, which is very rare in the mining sector.

Let’s take a look at a lets say theoretical growth company with a decent cash pile.

“Bad” management could potentially waste the cash on; drilling lackluster projects and/or acquiring bad assets and/or exploring their current projects in a poor way, thus destroying value. In that case, every dollar in the hands of this management team would likely have an expected NPV/cash transformation ratio below 1.

“Good” management would probably be able to discern if they are better off working/exploring on their current projects and/or being able to buy good assets which are undervalued. In that case, every dollar in the hands of this management team would likely have an expected NPV/cash transformation ratio above 1.

This means that cash does not equal cash in my opinion. Cash equals an opportunity to create value so why should that be fixed across the board?

$100 M in cash in the hands of the Lundins might have an EV of $200 M and $100 M in cash in the hands of “no goods” might have an EV of $50. When I look at and compare companies I don’t treat company A’s cash hoard as being equal to company B even though it’s literally THE (fixed) value metric we all use. It’s a bit of counter intuitive I suppose, but that’s what goes into my valuation process in some degree at least.

I have probably been influenced by my poker playing background which was all about risk/reward and thus Expected Value calculations. On that thought let’s do a little thought experiment:

What is $1,000 worth in the hands of a good poker player and what is $1,000 worth in the hands of a bad poker player? A year later the good poker player could have turned that $1,000 into say $50,000 and the bad poker player would probably have lost it all in under a month.  Is the value of cash the same in that case? The good player creates value (returns on investment) and the bad player destroys value (negative return on investment).

By looking at it this way one could say that any specific company’s cash hoard should have an EV multiplier that reflects the theoretical Expected Value that could be created in the hands of the specific management team and board of directors.

Horseman’s Cash to True EV Calculation:

[Cash] x [Management/Board Multiplier] = [True Expected Value] in the hands of the specific management team/board of directors.

Ways that competent and connected management teams and board of directors usually leads to better returns for shareholders:

  • Probably better geologists
    • Possible to pick up a good project “on the cheap” from a company that did not understand it (Fosterville for example).
    • Know better what and where to drill. (Higher success rates and more bang for the buck in terms of drilling costs/ounces found)
    • If they are looking to sell projects to majors they know what a “major project” looks like.
    • Will probably know early when they should discard a project that doesn’t meet their expectations (Anfield for example)
    • Higher success rate in terms of finding something big (Friedland)
  • Focused and efficient
    • Growth
      • Ross Beaty and Pan American Silver (Junior to second largest public silver producer)
      • Bob Quartermain and Silver Standard (Junior to a billion dollars market cap silver producer)
      • Rob McEwen and Goldcorp (Junior to one of the largest gold producers in the world)
    • Big sales
      • Lundins and Red Back Mining etc (Junior to a multi billion sale when it became a producer)
      • Robert Friedland and Voisey’s Bay (Diamond Fields) etc
      • Ross Beaty and Lumina Copper (Junior to multiple asset sales amounting to billions)
  • Better connections
    • Better at negotiating with local- and state governments (Fruta Del Norte, Lundin Gold).
    • Probably attract better people.
    • Probably more opportunities presented to them.
    • Probably more companies willing to be acquired since they appreciate the “good” team’s value creation skills.
    • Probably better access to capital and lower cost of capital.
      • Cheaper and easier to get money coupled with the competence to employ it that actually creates value.


  • The importance of a proven track record
    • Probably not in the habit of “cheating” investors.
    • Probably not in the habit of diluting away their stock into oblivion.
    • Probably not in the habit of lying (fewer negative surprises).
    • Probably not in the habit of taking on too many risks in this cyclical business.
    • Probably able to know when to invest/buy assets and when to sell/not acquire more assets.
    • They probably do what they say they will be doing (easier to do DD and evaluate the company’s future).


The bullet points presented above are just a few examples of the ways that quality management teams and directors often leads to better returns to shareholders than when one invests alongside poor or unproven people. Unproven people aren’t necessarily bad, but it takes a leap of faith and a lot of time to discern if the unproven people really are simply unknown stars.


The safest and surprisingly often also the most profitable way to invest in this sector is to simply follow the “smart money”.  It’s like having the cake and eating it too really. I can’t overstate how much the people involved in any given resource company affects the Expected Value (EV) calculation in my opinion. Competent people with skin in the game and somewhat recent insider buying is enough to make me take a hard look on any resource company. Remember, there are millions of reasons for insiders to sell, but only one really when it comes to buying. Namely that they think the share price does not reflect the value (Risk/Reward opportunity) of the company in question.


More articles covering additional investing lessons I have learned will be posted over the coming days.

Best regards,

The Hedgeless Horseman

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