The Rules of Value Investing in Junior Gold Stocks

Placing the term value investing in the same sentence as junior gold stocks is seemingly paradoxical.

In its conventional application, value investing is an investment philosophy first taught by Benjamin Graham and since preached by Warren Buffett, which involves buying securities that appear underpriced by some form of fundamental analysis. This can include stocks that trade at discounts to book value or companies with a low price to earnings ratio.  

Junior gold stocks represent a special breed of securities – companies which raise capital, fully intent on spending that capital despite no short to mid-term prospect for revenue generation. As such, fundamental analysis does not apply and traditional value investing is not a tool of choice. 

But in a more rudimentary sense, how does a junior resource speculator seek value? How does one find where the money will go next or where the money has yet to go?

Some speculators extoll the virtues of sticking to best in class management teams or specific deposit types. Newsletter writers often establish sets of rules or gimmicky acronyms to obey – follow the five P’s and you’ll never lose money…  

Rigidity of this sort that can work wonders during certain periods, can fast turn into your worst enemy. 

Example… investing only in juniors with the very best management teams and tier 1 projects was prudent and sound strategy in late 2019. Today, it necessarily means paying five to ten times higher prices for the same stocks, despite the fact that there still exists a stratum of companies trading at basement bargains. 

Not only do bigger potential gains exist by looking elsewhere, but it is also riskier to buy these ‘high-quality companies’ in the event of a pull back. After all, a lot more downside exists for a company that has just gone up five times, than a company that has yet to go up at all. 

A rigid and principled approach, therefore, is not the best one. Instead, an investor seeking value must be quite fluid and ever changing. 

Eric Sprott is the value investor of the resource space. I do not make this comparison solely for his standing as Canada’s best-known resource speculator, nor due to his billionaire status. Instead, it is because of his style of investing. Eric is forever tweaking, changing, and fine tuning his approach, not just to learn from past successes and mistakes, but moreover to stay one step ahead of the market. 

Yes, Eric has common themes that he consistently comes back to. He prides himself on being the first to invest in high-grade discoveries. This is what led him to capitalizing off of Fosterville with Kirkland Lake, to recently getting behind Freegold Ventures before its meteoric rise, and to our very own high grade discovery at New Found Gold (TSX-V:NFG). 

Upon closer examination you will find that despite following common investment themes, Eric is incredibly flexible in his approach. 

Sensing a tightening of the gold-to-silver ratio, Eric got big behind several silver names a couple months back. More recently, he has focused his capital on optionality plays in anticipation that gold prices may be ready to surge above all-time highs. Sometimes he writes big checks; other times he takes small punts.  

To achieve this kind of success in the resource space, you must throw out your principles, investing rules, and silly acronyms. Instead, keep pulse of what is going on in the market; look for what is still cheap. There is no single law to follow that is going to consistently lead you to the front of the pack in junior resource speculating. The landscape changes far too quickly.

The second consideration relates to one’s investor profile. There is a different fit for every investor. Much of this is tied to the size of one’s portfolio, but also relates to how much time an investor can commit to the sector. 

In my article earlier this week, I touched on just how difficult it is for Berkshire Hathaway to take a meaningful position in gold stocks. Even if Warren Buffett wanted to make a big bet on gold, the pathway towards returns is muted as the market capitalization of Berkshire Hathaway is ten times the size of Barrick Gold, the world’s largest gold producer. 

At $1B+ deployed, even Eric Sprott must pick and choose where to spend his time and money. This means investment thresholds. It also means that he cannot justify looking at many of the investments that smaller investors can. 

So the question is, what size is your investment portfolio? And, are you able to spend a good amount of time every day looking at deals and managing your portfolio? 

Financing companies is time consuming – reaching out, talking to management, finding out about financings before they hit the wire. By the time a good deal is press released in this market, allocations are long gone. 

If you have the time to commit and even a modest amount of capital to start with, the returns can be quite favorable. 

And fortunately for the little guy, the trickle-down effect in the mining space favors the juniors and micro caps on a percentage return basis. Those who are able to finance the juniors and micro caps directly can benefit greatly. Private placements have led to countless rags to riches stories in gold bull markets past and they will again. 

And that leads me to my third point – if you want to make real money in the junior bull unfolding, you must focus on private placement financings. One commonality can be found between every legendary investor in this space – warrants helped them get there. The leverage afforded by warrants makes investing without them unfair. 

In a junior bull market, the world’s best stock picker cannot compete with a private placement participant. Warrant coverage can increase your return by 50-75% per investment. This equation is exponential when you consider that the same dollar can be used to invest across many private placements over time. 

Therefore, if you want to make the big bucks, you must take the time to focus on finding private placement deals. There are services out there that exist to aid investors in this process such as Jamie Keech’s Resource Insider. Alternatively, an investor can venture out on their own. And, for a less hands on approach, Palisades Goldcorp was designed to provide investors with a totally hands-off approach. 

Remember that you must be accredited to invest in private placements. If you are not an accredited investor, once Palisades is publicly trading, investors will get the same benefit of investing through private placements by simply buying our stock. 

The above are just a few of the lenses that we apply at Palisades Goldcorp. Our investment strategies are constantly evolving. We spent the better part of the bear market focusing our attention on building our own companies – New Found Gold (TSX-V:NFG), Victory Metals (TSX-V:VMX), and Nevada King (private). 

Earlier this year, we started deploying heavily into junior silver plays – Aurcana Corp (TSX-V:AUN), Impact Silver (TSX-V:IPT), and Aftermath Silver (TSX-V:AAG). With this strategy, we have quintupled our money in 4 months. The silver space is now becoming a bit crowded and so we are adjusting our approach again. 

Palisades is now focused on investing in undercapitalized tier 2 and 3 plays, offering them financing on terms advantageous for our shareholders. This strategy allows us to acquire commanding positions in a sleuth of companies – companies bound to appreciate as the next tide rushes in and lifts all boats. 

When that window of opportunity closes, as it inevitably will, we will again alter course. 

All the while, we remain focused on our core holdings – sizable positions that can move the needle in a big way. 

I hope you found this article informative. Thank you for getting this far. If you have any questions, feel free to reach out! 

Until next week,

Collin Kettell
Founder & Executive Chairman
Palisades Goldcorp Ltd.