Why Site Visits Matter
A Note From the Editorial Director: Today's Investment U is a little different. Instead of our usual essay, Investment U's Michael Shattuck sat down with Sean Brodrick to discuss one of the most important - but least-discussed - aspects of natural resource investing: the site visit. One of Sean's guiding principles is that seeing is believing, which is why you'll more likely find him at a gold mine in Mexico or a natural gas well in California than behind a desk.
It's a lesson that's more important today than ever, thanks to the oil and gas revolution made possible by a technical innovation that Sean simply calls The Invention. Sean has plenty to reveal about that, too. Just click here.
- Andrew Snyder
Investment U: Sean, you often say that "boots on the ground beat a fancy suit every time." Why is it so important to see a miner's operations firsthand?
Sean: Well, you can see if they're a liar, right? That's always one thing. Are they doing on the site what they say that they're doing? And some of the most interesting things come out. I mean, I remember one trip down to the Dominican Republic to visit one company when it became evident that the resource estimate they were making was expanding beyond what they drilled into. And they were just saying, "Well, since we found this much in this place, naturally it will be the same right here." You know, they were just making that assumption. When you see that kind of assumption, you don't want to touch it with someone else's money.
Another insight is that you find out the type of company you're visiting by the kind of people that they also invite to come visit. I remember one mining company that I went to visit and they had other analysts on [the trip], and I found out one guy picked his stocks through astrology. And I said, "Either I'm on the wrong tour or he is." Because, you know, I don't pick my stocks by astrology.
Third, you often find out how serious the management is on these trips. And you can spot big obstacles that maybe they don't want to mention - and that they aren't mentioning in all their press releases - but are still out there. If you see that, for example, it's a very long distance to any power lines and there are protesters outside with signs, which I've also seen, that makes you hesitant about actually putting money to work.
Investment U: When you do visit a mining operation, what's the first thing you look for? Who do you want to talk to?
Sean: Generally, what I'm looking for is, do they have the equipment, the people and the plan to actually accomplish what they say they want to accomplish in the next six months to a year? And if one of those ingredients is missing, you need to be very careful.
For example, yeah, they have plenty of money in the bank, and they're on a great piece of real estate, but their last geologist worked for a uranium company and they are actually prospecting for gold. You know, that's the kind of thing you can find out in a mining operation visit.
And yes, you always want to talk to the geologist. Anyone working for a mining company is an absolute optimist. They think they can take a barren piece of desert ground and turn it into a producing mine. And to think you can do that in any kind of situation, you have to be optimistic. But you have to find out if they are dreamers. Do they have realistic expectations in what they can accomplish?
So you have to speak to the geologist, who's almost always there on site. And if they have the project manager there, you definitely want to speak to him too.
Investment U: You're looking for evidence that the promises a company is laying out match up physically to the situation on the ground.
Sean: Oh, yeah. Because people can tell great stories about what they're going to do. I was at a place out in Nevada, where they honestly hadn't turned over a shovelful of dirt, and they told me they were going to have a producing mine there in the next year. Now on paper that might have looked good, but I knew that wasn't going to happen. And you know what? It didn't.
Investment U: Are there any recent examples of a site visit that changed your perception of a miner, for better or worse?
Sean: I'm not supposed to name names here, but just as an example, I will say that when I went out to visit Royale Energy (Nasdaq: ROYL), I saw something there that you can then extrapolate to other companies, so it's really interesting. When I was there on the site, they were doing drilling, and they had a new drill that cut their drilling time from 11 days to five days. When you can cut your drilling time in half, that isn't something that's going to be in the press release, really, but that tells you how that can really improve the picture for a company going forward. Even the people from the company... were surprised by how fast the drill could go. And it's simply because drilling technology is changing and so it's really speeding things up.
Investment U: What's something about a modern mining operation that would surprise people?
Sean: I'm sure many people don't realize just how large these operations can be. One example is the Pueblo Viejo Mine in the Dominican Republic, which is owned by Barrick Gold (NYSE: ABX). I was actually there visiting another company. And since we were there we went to visit Barrick.
You would be amazed at the size of the modern mines and the size of the modern machinery they use. It's just huge. Because... one thing you should realize is, the new mines that are going into production now are what they used to drive over to get to the old mines in the 1950s. But the general grade of the mines has gone down. So now they have to move a heck of a lot more dirt to get to the resource, and so the size of the machinery that's involved in these big open pit operations is just huge. I think it would really put anyone in awe just to stand there and see these mountains of machinery just whirling around you in a dance. Everybody has a job, they know what they have to do, they hope you're not in the way, and they are moving on it as fast as they possibly can. And so that's one of the interesting things you see about a large operation.
Investment U: When people imagine a mine they might imagine something with bearded prospectors and pick-axes...
Sean: You'll still meet these guys out in the field now! That's how many of them look. They're out in the woods for weeks at a time, 14 hours a day. The old-timey prospector isn't dead, he's just using a GPS now, a computer and all these new tools to actually bring mining into the 21st century.
Investment U: Great insights, Sean. Thank you.
Sean: You're welcome... and good investing.