3 Questions to Ask Every Junior - Nick Hodge

00:00:10 Nick Hodge: My name is Nick Hodge today we're going to talk about three questions that I ask every company that I'm potentially going to invest in or cover in my newsletters. Those newsletters are all listed here. Outsider Club is a free daily - a resource stock digest is a free resource for retail investors looking to invest in the resource base. We cover a lot of quality stories there and give free information. Interviews with Executives and post content from other outlets as well as having third party experts on there.

00:00:41 I run some paid services as early advantages as a weekly paid service, focusing on early-stage speculative investment sector agnostic, although I tend to lean towards the resources of it. In Nick's notebook I provide private placement opportunities for accredited investors to invest privately in primarily resource companies again. At these conferences there are a lot of companies. It’s tough to figure out where you should put your capital.

00:01:13 When the companies are here they're promoting themselves, obviously that's their job they all have the best management team, the best project and the highest chance of success when you're talking to them. How do you separate the wheat from the chaff? That’s what the series of questions that I've come up with is, there's three overarching questions I'll discuss today then each of them have a subset of questions that you can branch out and ask companies.

00:01:35 These are the questions that I've determined really get to the heart of the matter evaluating a resource company, specifically a junior resource company because I’ll be honest it's a tough space to be - it's inherently risky. You know the way some companies structure themselves it honestly doesn't lend a very good shot for retail shareholders to make money out of it.

00:01:59 You know if you hold cheap shares you can make some money. The first question you really have to ask is “What's the share structure?” I put a picture of a guy sweeping up some cheap paper here because you really want to find out“Who owns all the cheap paper?” I think that's the first question you want to ask. It's really important when you're investing in a company or you're talking to a company or you're looking at the slide deck. They normally have a share structure slide, it will say:

00:02:24 “How many shares are outstanding? How many warrants are out? Having the options what does that translate into?” Fully diluted. I think it's really important to find out who owns what shares at what price. That's something that's typically not in the slide deck. That information is provided in something called a cap table.

00:02:43 You want to ask the company to see their full capitalization table. You want to know who owns what shares at what price. How many warrants do they own? When do those warrants expire? I put just a quick example in here- these were two companies that are presenting here at the show or at least the boots here that requested a meeting with me. The first thing I do when I receive a request like that is I look at the share structure, it's the very first question I ask.

00:03:10 Here are two companies trading around a similar market cap with one valued at 8 million and one valued at 10 million. The company A there only has 38 million shares outstanding, while company B has 135.3 million shares outstanding. While they have similar market caps you can see how the share price is differentiated there because obviously the company with more shares out at a lower share price to equal that same market caps.

00:03:35 You know right off the bat for me I would view company B as not having a tight share structure. In fact I probably wouldn't even take a meeting with them unless I knew the management had a very strong track record or I knew the project or I had some past connection with it. Because a share structure like that makes it inherently tough for the share price to appreciate - while it may trade a lot of volume there's also going to be a lot of selling especially if there are cheap shares out.

00:04:00 Then the problem can be compounded when you add on warrants. These are the stem questions that you should ask from the first question. “What's the share structure?” Well you should also ask “what prices were shares sold to raise capital? Is there a lot of what's called Chi paper out there even below a penny or a penny or a couple of cents?” Then those people who own those cheap shares are inherently incentivized to sell earlier rather than later.

00:04:29 I mean it’s human nature if you have one cent shares then the stock goes to five cents well that's quite a smart return. It's tough to pass up selling even a little bit of your shares to bank that profit. People that have those cheap shares selling onto the volume to typically retail investors as what creates the stock just staying in one place not being allowed to appreciate. Did the past finance things include warrants?

00:04:58 When companies do these private placements to raise capital typically they offer what's referred to as a sweetener in the form of a warrant - either a half warrant or a full warrant. Well you want to know that because down the road when that paper becomes free trading after the typical four month hold time there’ll be some selling into what they call that warrant’s overhang. You want to know the dates of when those warrants expire.

00:05:21 These are questions you can ask the company. They should know the answers to these right off the bat, if not it’s normally in the press release whenever a company puts out a press release that they close the private placement. It will say “these shares are subject to the four-month hold period normally expiring on X whatever the date is”. You want to make note of that in your in your file for that company.

00:05:43 That's the same company as company A and B in the previous example now it includes fully diluted. I added the warrants in there. You see the company A that had a tighter share structure still only has 52 million shares outstanding fully diluted. The company that had 130 million shares outstanding also had 50 million warrants outstanding. When you get to nearly 200 million shares outstanding on a six sum company, that's a definite red flag for me.

00:06:09 I want to see fewer shares outstanding for sure. I just throw these funny things in here when I see a company like Company B in the previous example. I would say “Well you're all out of whack man your share structure is all out of whack.” This is the second question - we want to know what exactly is it that you guys want to do, there's many various stages in the in the resource space. You know there's exploration, there's development, there's prospect generation, there's streaming companies there's producers mid tiers.

00:06:51 You really want to hone in on what exactly is the goal of your company. Why, what are you going to do with my capital when I give it to you? Where in the cycle are you? This is a fact - only one in 1,000 targets is going to become a mind. You're looking at a company who says they're in the exploration stage. They're looking to make a discovery. If they're talking about selling this project, turning it into a mine well it's probably a bit premature to be talking about things like that.

00:07:21 Make sure they're specific about exactly what it is they want to execute. What are they going to do with your capital? What are they going to do with your capital that's going to drive value? If they are an explorer you want to say “Well how many drill holes are you going to put in? Then when are those drill holes going to be put in?”

00:07:39 “When do you expect to have them essayed? When do you expect to have results out? How is my capital as a shareholder going to translate into catalysts that you're going to produce as the company I'm investing in?” This is a chart that’s frequently attributed to Brent Cooke. I'm not sure if he was the first one who did it or not. You want to know where in this cycle the project that you're considering investing in is.

00:08:09 You know if it's early in the cycle, pre discovery is its exploration that's typically a time. If they do in fact make a discovery then the stock can ramp up quickly because it goes from having no asset to potentially having an asset or a resource. Then you want to develop the resource and it goes into the permitting stage and it becomes a little bit less attractive. Again some of the stuff is just human nature right so once they make a discovery that's really exciting - the stock goes up.

00:08:34 They start to prove it. They get a 43-101 resource. We learn how economic it is and that's also exciting. Then you get what's referred to as the orphan period on this slide where they go into permitting. They're getting ready to develop it. They're waiting for permits. It's just inherently not as you know “sexy” of a story.

00:08:54 You need to be mindful of that as an investor because lots of things in life they come down to herd mentality and groupthink. This has been the proven life cycle of not only a mining company of its stock in its valuation. Be mindful about the company that you're looking at - where they are in this cycle.

00:09:22 It's okay, not everything's going to be a mine. If everybody's telling you they have a mine well we know that only 1 in 1,000 are going to become a mine. Just be skeptical of those saying "all we have a project it’s going to become a mine it looks really great you know. The infrastructure’s in place this is how we're going to exit.” It's not quite that easy, I'm telling you just to be skeptical.

00:09:44 This is the last question. It's “Do you have the expertise to do what you say?” They passed the test of the share structure. They passed the test of explaining. What are they going to do with your shareholder capital? Why, what the goal of their project is as well? Can you do what you say? I always just make up an example on the spot.

00:10:04 Let's say a company is exploring for gold in Quebec. Well, if their team is staffed with people who have primarily expertise in developing mines in South America that may be one red flag. You want to see a track record of management that has done what they're doing before, right? I would like to see maybe some management or board members that have found gold in Quebec before just as one arbitrary example.

00:10:34 How much of their attention is on this project? You know red flags, we talked about share structure - a lot of people, and I don't want to demonize Vancouver you'll hear about Vancouver, the guy who's CEO of company A is also now director of Company B and C and consults for Company E. By the way have you heard about this new deal that I'm pursuing? For me if I want your attention on the project that I'm investing in, I'm investing in you as a management team.

00:11:05 I'm investing in the project that you're pursuing. If you have four or five other things going on, how much of your attention is really going to be on the project that I'm investing in? I think you need to evaluate management at all levels of their track record. What they're saying they're going to do now. How many other state’s plates they have spinning because one of those plates in my experience is going to drop.

00:11:28 I talked about all of this from personal experience. Because you know as a newsletter writer it's tough to get sucked into the sexy stories - you're always looking for things to write about it. I'll be honest, when I first started writing about the resource base it's been nearly ten years ago now you take your lamps. You come to find out that not every company does what they say they're going to do; in fact it can be more nefarious than that.

00:11:54 They could be using you, in this case me, to provide liquidity. If I write up a stock I send it out to outsider club that has 300 thousand people on it - well that creates a lot of volume. You have to think “Well why does the company want to create volume? Is it because they want to sell their shares?” Going back to the cheap paper slide from the first question I don't want to be creating volume for companies to sell their stock.

00:12:19 You know into the volume that I create. I spend a lot of time on these questions figuring them out. I'll go back to the first question - who owns all the cheap paper - there is something I omitted to say on that first question. That's if they do have cheap paper - it’s one thing everybody likes, to have $0.05 shares or $0.10 shares. Really look if they've also put up money at higher prices.

00:12:38 I think this is a really important detail. I'm sorry I didn't cover it on the first slide. If they do have $0.10 shares and they're raising money it’s 60 cents. Well are you investing the same amount of money at 60 cents that you did at 5 cents? Are you just letting other people put in their capital at this higher price now? You really want people who believe enough in the project to say “Well I'm going to put in an equal amount of money at $0.60 that I did at $0.05.”

00:13:00 I'm not deluded out of my position because I believe that much in the project. Just in a wrap-up slide here, you want to look for good people who have done what they're doing now before and have done it successfully. Who have provided value to shareholders in the past, who have had success stories in the past where all people made money and not just the first people in the door. Tight share structures that allow the price to increase the fewer shares out the better at the asset is the risk. That the asset grows as the asset is proven.

00:13:36 It's fine to have a higher share count but that needs to be backed by something real in the ground. You can't start off looking for something with a share structure that's out of whack because it just doesn't afford the opportunity to build a real company, it becomes more of a paper flip deal at that point. That's pretty much what I just said - a plan to actually add value through serious exploration and development.

00:13:56 I want to invest in real companies that are doing real things in real jurisdictions with real people. I don't want to invest in paper flip deals or promotes as they call them - right oh this is a great story to tell. Well I like great stories; I like great assets share structure people better. That's all I have for today, just about right on time there. Some companies that I talked about yesterday that had boots - one is Skyharbour Resources, they passed muster on all these questions that I've just presented to you.

00:14:28 As Steven Quinton's in the back of the room with Midas Gold I always point them out it as becomes to my presentation - feel free to go ask him about Midas Gold. Shawn Thompson is sitting right here from Atlantic Gold. Who else are covered in my newsletter? Atlantic Gold has the only fully permitted financed under-construction open-pit gold mine in Canada, it's in Nova Scotia. We were just talking at lunch about the trend recently of majors buying out quality junior companies in Canada because they're just risk averse - at this point the gold has been stuck in this channel 11.50 to $1,300.

00:14:55 They’re looking for projects with safe jurisdictions. We just saw Integra or Eldorado take out Integra for 50 percent premium. Eldorado's primary assets were in Greece, Turkey and you can see how they're diversifying into Canada. Look at jurisdictions that are safe.This is Idaho Atlantic Gold's in Nova Scotia. Contact information is up there that's my personal email address.

00:15:24 I respond to everything I get, and Outsider Club is free to sign up for and it comes out seven days a week. Resource doc digest is also a free service where we really take deep dives into interviewing these companies. My partner Gerardo Del,if you go to that site you'll see that his interview style really peels back the layers of all these questions I've been discussing with you today. He and I have very similar philosophies when he interviews managements of these companies – he's always getting to the heart of the matter. “What are you doing with my capital?

00:15:51 How you advancing the project? Are you keeping the share structure tight? How much cash do you have left in the bank? When are you going to have to raise money again? What prices do you plan to do that? What are the catalysts for the next six months?”

00:16:01 These are all very important things. That's all I have for today, I have cards up here I'm welcome to answer questions, please talk to the companies that I mentioned. They’re what I like to consider the wheat from the chaff - that's where I'd spend my time investing. Thanks guys, I appreciate it.