Lobo Tiggre: Using Data to Play the Pre-production Sweet Spot

- February 26th, 2020

Lobo Tiggre of Louis James LLC shares three new ways he’s honed his data on the pre-production sweet spot.

Longtime followers of Lobo Tiggre are likely familiar with the pre-production sweet spot (PPSS), a specific timeframe when first-time mine builders often see major share price gains.

For the uninitiated, the premise is relatively simple: Companies tend to experience significant upward momentum from the time they make a construction decision to the time they reach first production. And investors who go along for the ride can enjoy the benefits as well.

The general concept that company share prices go up during this period is not new, but as far as Tiggre is aware, he was the first to quantify exactly how large those gains can be. He first did so while writing the International Speculator newsletter at Casey Research, and then duplicated his work after launching his own company, Louis James LLC.

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Now he’s done additional research, honing the approach with new findings. Speaking to the Investing News Network, Tiggre shared three new PPSS points that came out of his recent work. Here’s what he had to say about the latest data and what it means for maximizing gains once a company makes a construction decision.

1. Choose your own exit point

The main point Tiggre highlighted was that he no longer thinks first production, also called first pour, is necessarily the best exit point for a PPSS play.

“Before we focused mostly on first pour as the exit point,” he said. “(We knew) it was possible to hang on a bit longer and maybe get a little bit more gains. But the gains are significantly better if you hang on to commercial production this time.”

For context, Tiggre’s data shows that of the 115 first-time mine builders he looked at, 91.3 percent succeeded at building their mines after making a construction decision, with that number rising to 94.8 percent when mines built after a takeover are counted.

The average gain from a construction decision to first pour is 98.11 percent, and the average gain from construction decision to commercial production is 113.8 percent.

“I’m not saying that I’m now going to just categorically wait for commercial production to be declared, but it gives me an alternative exit point,” he explained.

“So if things seem to be going well, instead of just saying, ‘Oh, it’s first pour, we’re out even though this thing’s doing great,’ I can say, ‘Well, it’s doing great and all the indications are that it should really work … so I’m going to hold on for commercial production and see if we can get more out of this one.'”

Tiggre did caution that holding on until commercial production is a fairly large commitment, with the average time from first pour to commercial production clocking in at 170 days. There’s also the risk that a company will encounter problems during that first pour to commercial production phase.

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The point, he said, is having more choices. “We still want to have clear entry and exit points; that’s part of the beauty of it. But we’d have some flexibility on the exit, where we can perhaps maximize gains a bit more depending on the circumstance given this alternative exit point in commercial production.”

2. Go big or go home (usually)

As mentioned, Tiggre’s PPSS data shows that the average gain from a construction decision to first pour is 98.11 percent — but for the five top companies among the 115 he looked at, the average gain is a whopping 745.5 percent.

With his new research, he took a stab at identifying unifying factors between those five companies. Among other things, he examined correlations between net present value, internal rate of return and deposit size and grade, all with the aim of finding a reliable way to catch these lucrative opportunities before they happen.

Those calculations didn’t yield a definite method for picking out PPSS plays that will experience those outsized increases (Tiggre is still working on that). For now, part of what’s interesting to him is the differences between the top five.

“It is interesting how two of the top five performers are not gold and silver. One of them is copper, and one of them’s uranium,” he said. “It really impresses me that two of the top five … were not precious metals things. So you really can’t just say, ‘Oh, this is only for gold and silver companies.'”

Tiggre also said that he did notice one similarity between the biggest losers in the collection of companies he looked at: size.

“I made material progress on improving the averages simply by removing the small mines,” he said. “You know, it turns out that that the conventional wisdom of go big or go home — the data bears that out.”

Case in point: When Tiggre cut out companies whose annual throughput equivalent was less than 50,000 ounces of gold, the average gain from construction decision to first production increased to 101.9 percent. It rose to 136.2 percent from construction decision to commercial production.

That doesn’t mean every small mine is a bad bet. But, said Tiggre, “It would it will take a lot to get me to bet on a small little mom-and-pop-size mine.”

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3. Don’t forget due diligence

In closing, Tiggre emphasized that while the PPSS offers a high chance of success, it’s not a surefire thing. That means those using the strategy still need to do their homework — and that’s why he’s not afraid he’s making himself obsolete by putting his investment formula out there for the world to see.

“A lot of people look at the PPSS numbers, they get all excited — and rightly so. I mean, they’re amazing numbers,” he said, noting that at this point he’s fairly confident he’s analyzed most, if not all, of the companies that have taken the journey from construction decision to production since the 1980s.

“But it seems like (people think), ‘Well, thanks for telling me, now I don’t need you anymore. I’ll just go buy all these.’ Well, the reality is you could still get hurt doing this,” he said.

“Quantifying the potential risks here is something that I didn’t publish in any of my previous research, so there’s a little bit more balance there,” Tiggre explained. “I’m not saying you can just close your eyes and throw darts at the board here and not worry about it.”

That fact is driven home by looking at the losses seen by the five poorest performers of the 115 companies that Tiggre considered. From construction decision to first pour, they saw losses of 83 percent, 76 percent, 69 percent, 67 percent and 57 percent — far from the average gain of 98.11 percent.

When asked if there are any specific qualities to check for when vetting potential PPSS plays, Tiggre said that general due diligence principles hold.

“I do think that the general quality issues matter. If you’re backing a team that’s fly by night, you know, long history of shareholder lawsuits, that kind of thing, you’re asking for trouble,” he said. “The kinds of things that a savvy investor would always look for are there.”

Click here to access Tiggre’s latest PPSS data.

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Securities Disclosure: I, Charlotte McLeod, hold no direct investment interest in any company mentioned in this article. 

Editorial Disclosure: The Investing News Network does not guarantee the accuracy or thoroughness of the information reported in the interviews it conducts. The opinions expressed in these interviews do not reflect the opinions of the Investing News Network and do not constitute investment advice. All readers are encouraged to perform their own due diligence.

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