The transition from junior explorer to mature producer isn’t easy, with a success rate that stands at less than 1%.

Which is why we reminisce on the winners. Like Woodside, which famously went from running out of cash as a junior explorer to becoming our biggest oil and gas producer.

Or Sandfire Resources (ASX:SFR), which in 2009 discovered what would later become the world-class DeGrussa copper-gold mine, rapidly transforming its fortunes from a 4c penny stock into a ~$1bn mining company.

 

Learning to pick winners in the ‘school of hard knocks’

Rick ‘The Contrarian’ Rule spent 10 years as boxer, before picking up work as a bouncer, then bar owner while at university in Vancouver.

Rule says this bar was the epicentre for Vancouver’s nascent financial community; the brokers, and the promoters.

“I learnt about resources twice; once during the day with my professors, who really didn’t know very much about it, and once at night from the movers and shakers for whom I would pour whiskey and ask pointed questions,” he says.

“I learnt how the real industry worked.”

Rule says most of the small cap resources sector is “bad and ugly”.

“If we assume there are ~2500 junior mining companies worldwide, my suspicion is 2000 of them are valueless,” he says.

“Maybe 200 are of some value, but what’s interesting is the rest — between 5-10% of the companies return such great results they add legitimacy the whole sector.”

“There are some companies making important discoveries. Meteoric (ASX:MEI) is an example.”

We are entering a nascent resource boom, Rule says, one in which the ‘good’ resources stocks will shine.

Weak investor sentiment in the first half of 2023 also means there are a bunch of cheap, good stocks out there right now.

“What has attracted me lately is as the pricing of the whole industry moves lower, the prices of all the good, the bad and the ugly move lower,” Rule says.

“And the fact that the good are becoming cheaper is always a good thing.

“A year ago, I said I was concentrating my efforts on the senior miners, which appeared to offer a better value proposition.

“But it would seem the proposition is moving back to the juniors.”

 

Rick’s Rules to finding a 10-bagger

1. Find management that know what they are doing, and believe in what they are doing.

“I’ve become very attracted to people first,” Rule says.

“You find that success doesn’t distribute itself equitably. You will have people and teams who exhibit success after success after success, while most people experience no success whatsoever.

“A management team that understands the process of creating value, has a reasonable chance of doing that.”

Rule also makes sure they have a track record of success in a job similar to the one they are doing now.

“It might be that an Australian managing director has prior success operating a gold mine in the eastern Australian goldfields,” Rule says.

“But the task at hand is exploring for gold, rather than producing. And they are exploring for gold in young rocks in Spanish-speaking Peru.

“That means that the success you boast of is not relevant to the task at hand.”

A management team that understands the process of creating value, has a reasonable chance of doing that.

Rule also wants management to have skin in the game.

“I look to management teams that are large owners, partners in my investments and not employees,” he says.

“And I want them to have paid for the stock.

“I want their compensation to be mostly in the form of capital gains. Skin in the game is really important.”

 

2. Small mines mean small returns.

Rule says many people sell the dream of looking for small mines and scaling up; something that rarely happens as advertised.

“I have found that small mines have all the risk inherent to big mines, but small mines can only ever make you small money,” he says.

“If I am taking big risk, I want to make big money.”

Rule is looking for projects with ~$5bn in recoverable in situ resources.

“If someone comes to me with a 250,000oz target, I will politely tell them I am not the right prospect for them,” he says.

“If someone tells me they have a legitimate 1.5-2Moz target, I am all ears.”

As a speculator you will make more bad decisions than good decisions. You will lose money on more transactions than you will make money on, Rule says.

“But one 10-bagger, one 15-bagger amortises a whole bunch of [losing] trades, if you have the psychologically staying power to play the game.”

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