Investing News recently chatted with Rule about what makes prospect generators such a successful breed among junior exploration companies and how he picks his winners.
For many junior exploration companies, challenging markets have made navigating the already difficult project finance routes all the more daunting. Not so for those companies led by top-notch management with the foresight to adopt a well-proven approach: the prospect generator model.
Rick Rule, president and CEO of Sprott U.S. Holdings, has long championed the prospect generator model and has been quite successful in picking the right horse. Investing News recently chatted with Rule about what makes prospect generators such a successful breed among junior exploration companies and how he picks his winners.
The most important factor in any resource exploration company, prospect generator or not, is talented management and technical teams. “Success in junior exploration is more a function of people than property,” said Rule. “Most of the value in a company is in the intellectual capital and talents of the people rather than its assets.”
It takes real skill to successfully maximize the number of exploration chances while at the same time minimizing the capital expense of testing projects. “The ideal prospect generator generates three or four investment ideas a year and then uses other people’s money to do the heavy lifting of exploration,” explained Rule. “This leaves the intellectual capital free to generate new exploration prospects which will in turn be tested again by other people’s money.” The goal is to increase the odds of a discovery by building a portfolio of properties which is basically a bag of lottery tickets financed by other people, he added.
From an investor’s perspective, one of the things Rule really likes about the prospect generator model is the high level of due diligence completed at the property level when a junior joint ventures with a world-class miner. Because the interests of the third-party company are in lock-step with that of the junior company shareholder, such due diligence far exceeds that of a self-side brokerage firm.
“I love the fact that a world class mining organization, such as Barrick (TSX:ABX) or Rio Tinto (NYSE:RIO,LSE:RIO,ASX:RIO) or BHP (NYSE:BHP,LSE:BLT,ASX:BHP), has done some of the due diligence for me when I invest in a project generator,” stated Rule.
The inherent success of the prospect generator model has become even more apparent during this latest bear market. “The weak lack of funding available for exploration has made the prospect generator an integral part of the value creation chain in the mining industry,” said Rule. “As more and more major mining companies have outsourced, if you will, or downgraded their exploration capabilities, ironically, the importance of prospect generator has increased rather than decreased.”
For those interested in prospect generators as an investment, Rule suggest not putting all of your eggs in one basket: “First of all, you don’t construct a portfolio of one prospect generator. The idea is that you build a portfolio of somewhere between five and ten.” Rule himself has at least fifteen prospect generators in his portfolio, including Altius Minerals (TSX:ALS), Almaden Minerals (TSX:AMM), Riverside Resources (TSXV:RRI), Eurasian Minerals (TSXV:EMX,NYSEMKT:EMXX), Lara Exploration (TSXV:LRA) and Transition Metals (TSXV:XTM).
“These are teams that have the right amount of technical expertise and financial acumen,” said Rule. “They have managed to attract major joint venture partners to do the bulk of the heavy lifting in the exploration side of the business, leaving the generators to do what they do best which is prove up, for a limited amount of money, geological concepts to the extent that they become active and relevant exploration targets for larger organizations.”
For a full list of the prospect generators in Rick Rule’s portfolio, interested investors can send a request to firstname.lastname@example.org.
Rick Rule will be moderating a webinar, “Investigating the Project Generator Model”, on Thursday, June 16, 2016.
Register today for this live webinar here.
Update: See the full webinar recording here.
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Securities Disclosure: I, Melissa Pistilli, hold no direct investment interest in any company mentioned in this article.