Top Investor Reveals Key to Finding Profits in Junior Resource Stocks

Wed, Apr 4, 2012

We’re just two weeks away from the expense-account-fueled excess of the Prospectors and Developers Association Conference (PDAC).

Top Investor Reveals Key to Finding Profits in Junior Resource Stocks

This year didn’t disappoint. Open bars, unlimited guests, and $400-a-night hotels were once again the standard this year.

The always thoughtful Tommy Humphreys asked at the time, do junior mining CEOs deserve first class treatment?

Most of these exploration companies are venture operations, with no revenues, and, frankly, little prospects of ever achieving any. Exploration companies are the stem cells of the mining world – it all starts with them – but many of these stem cells should and will die in the dish.

A friend of mine who was coming home from the PDAC in Toronto yesterday tipped me about a certain CEO riding in business class. I won’t name the guy, but he’s involved in a proxy contest with a dissident shareholder over misuse of corporate funds, no less.

My friend overheard someone ask the CEO whether it was his shareholders, or his personal account, paying for the ticket. (A business class ticket from Vancouver to Toronto is about $4,000 compared to about $800 for economy).

“The shareholders paid for this; I deserve to fly business class,” the CEO said, apparently.

I like flying first class too. But, in my opinion, the only CEO’s who have a right to First Class seats are those who are producing for shareholders AND if it’s a long-haul flight.

The situation is all too common in the Venture world.

Peter Thiel, co-founder of PayPal, early investor in Facebook, and many other early stage ventures, made a great point about CEO pay and success:

The lower the CEO salary, the more likely it is to succeed.

The CEO’s salary sets a cap for everyone else.  If it is set at a high level, you end up burning a whole lot more Smart Money. It aligns his interest with the equity holders.  But [beyond that], it goes to whether the mission of the company is to build something new or just collect paychecks.

In practice we have found that if you only ask one question, ask that.

There are some great examples.

For example, Pretium Resources (TSX:PVG) has XX number of employees and its total salary expense for the most recent quarter was $218,469. And Pretium is a company with a major discovery, a $1.48 billion market cap, and assets of $518 million ($16 million cash).

The TSX Venture is where fortunes can and will be made. But only when the odds of success are in your favor.

Keeping an eye on CEO pay, the company’s cash burn rate, and more will help keep the odds in your favor.

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