Insider Tips and Veteran Insights from 30-year Junior Mining Stock Pro Michael Kosowan

Key Concepts

• Junior Mining Sector: Companies focused on exploration and development of mineral resources, often with higher risk and potential reward.
• Prospect Generator Model: A business model where a company focuses on generating exploration projects and then joint-venturing or selling them to larger companies, thereby mitigating risk.
• Graham Dodd Principles: Fundamental stock analysis principles focused on intrinsic value, margin of safety, and value investing.
• Brix Scam: A significant scam in the junior mining industry in the 1990s that led to increased regulations and damaged investor sentiment.
• Sentiment: The overall attitude or feeling of investors towards a particular market or sector.
• Founder Shares: Shares issued to the founders of a company, often at a low cost basis, reflecting their initial risk and contribution.
• Capital Markets: The markets where financial instruments like stocks and bonds are traded.
• Jurisdiction: The geographical location of a mining project, which significantly impacts regulatory environment, infrastructure, and political risk.
• Porphyry Deposits: Large, low-grade copper and gold deposits often associated with volcanic activity.
• Tier One Project: A high-quality mining project with significant potential for economic viability and large-scale production.
• Alpha Component: The excess return of an investment relative to its benchmark, often sought in early-stage projects.
• Risk Management: Strategies employed to minimize potential losses in investments.
• Exit Plan: A strategy for selling an investment to realize profits.

Summary

This transcript features an interview with Michael Kasawan, a seasoned investor and former mine engineer with extensive experience in the junior mining sector. The discussion delves into his career trajectory, investment philosophy, and insights into the current state and future of the mining industry.

Genesis and Early Career

Michael Kasawan's journey into mining began in Northern Ontario, where he witnessed the wealth generated by the industry. He pursued mining engineering, working for established companies like Inco and Placer Dome. His early experience involved valuing junior properties and understanding the operational challenges of feeding large mills, highlighting the liability of a 35,000-ton-per-day mill and the need for continuous, economic ore supply. Despite his technical background, Kasawan found himself drawn to the financial side, driven by an early fascination with stock market analysis and valuation.

The Brix Scam and its Aftermath

Kasawan recounts his experience in Indonesia post-Brix, a significant scam in the 1990s junior mining industry. He emphasizes that while Brix, valued at approximately $4.4 billion USD at its peak (equivalent to $8.8 billion today), was a scam, its primary detrimental impact was on investor sentiment. The scam severely undermined confidence in the sector, creating a pervasive skepticism that hindered exploration funding. Kasawan likens mineral exploration to the R&D unit of pharmaceutical or high-tech companies, requiring a significant leap of faith from investors. He notes that the junior market was revived by commodity price upswings, a trend he believes is relevant today.

Transition to Finance and Rick Rule's Influence

The fallout from the Brix scam, coupled with his inherent interest in finance, contributed to Kasawan's pivot to the financial side of the business. A pivotal moment was his recruitment by Rick Rule, a prominent figure in resource investing. Kasawan describes his interview with Rule as unconventional, with Rule's sole question being about his sales experience, to which Kasawan responded with his past experience selling barbecues. Rule, then operating Global Resource Investments (GRI) in Southern California, saw Kasawan's potential, particularly his interest and knowledge of the industry, and was willing to train him in sales. Kasawan built his client base from scratch at GRI, leveraging the firm's reputation and his own growing success. He highlights that his early career net worth was negative due to student debt, underscoring the wealth-building potential of successful junior mining investing.

Investment Philosophy and Key Success Factors

Kasawan's investment strategy, particularly during his time with Rick Rule, heavily favored the prospect generator model, which he believes effectively modifies risk. He also applied Graham Dodd principles to the speculative mining space, focusing on fundamental value. He identifies several key factors investors look for in junior mining stocks:

• Geological Potential: A discovery in hand, being on trend to a discovery, or holding strategically important ground coveted by senior companies.
• Leadership: Belief in the CEO's vision and capabilities.
• Iconic Investors: The presence of well-respected investors like Eric Sprott or significant corporate ownership (e.g., Agnico Eagle).
• Insider Ownership: A strong indicator of conviction from company insiders, especially in a low-sentiment market. Kasawan uses the analogy of the Roman army, where leaders were on the front lines, to illustrate the importance of management having "skin in the game."

Regarding founder shares, Kasawan stresses that founders should not grant themselves excessive cheap paper unless they are taking on all the initial risk. He emphasizes that founders must be willing to put up capital at critical junctures. He also advocates for "less is more" when it comes to executives being involved in multiple deals, as focus and dedication are crucial for company development.

Psychology of Junior Mining Speculators

Kasawan discusses the psychology of junior mining investors, noting that clients often resent selling winners too early due to a fear of losing profits. He contrasts this with the forgiveness often extended for losing investments. This highlights the ongoing balance between fear and greed. He believes that most investors are reasonable and that moderating risk is key. He cautions against hubris in speculative stocks.

Transition to the Issuer Side

After a 14-year career with Rick Rule, Kasawan transitioned to the issuer side of the business, driven by opportunities to build junior companies and contribute to their capital markets and marketing efforts. He acknowledges a steep learning curve, as running a junior company involves numerous moving parts beyond just raising capital. The CEO must wear many hats, overseeing operations from top to bottom.

Qualities of a Junior Mining Executive

Kasawan prioritizes principles and reasonableness in junior mining executives. He looks for individuals with a clear head, strong thought processes, and realistic goals. He also assesses projects based on their strategic importance, geological potential, logistical feasibility, and the potential to add value through exploration or new technology. While salesmanship is a factor, he prioritizes a strong geological plan and model over a charismatic salesperson, believing that a good project can sell itself.

Ownership Models: Outright vs. JV

Kasawan sees room for both 100% ownership of exploration targets and joint ventures (JVs). He notes that JVs, often seen in prospect generator models, moderate risk by leveraging the balance sheets of senior companies but may result in lower potential returns. For those seeking "home run" opportunities, taking on more risk by swinging for the fences with outright ownership is necessary. He personally prefers to focus on specific projects after thorough homework, aiming for significant discoveries.

Personal Portfolio and Investment Stage

Kasawan holds approximately 10 outside deals in his personal portfolio, believing that spreading too thin dilutes analytical focus. He primarily invests in early-stage projects seeking the alpha component and believes the current bull market allows for mistakes due to a rising tide that can lift less successful ventures. He notes the industry's need for new discoveries, with senior companies rationalizing operations and seeking high-quality, tier-one jurisdictional plays. He anticipates a need for creative and innovative ways to bring deposits online quickly, including reducing bureaucracy and increasing access to capital.

Current Involvement and Future Outlook

Kasawan discusses his involvement with several companies:

• Eminent Gold Corp: He is involved due to the jurisdiction (Nevada), the "big home run potential" at Hot Springs, and the acquisition of the SELTS project, an analog to Anglo's Silicon discovery. He highlights Nevada's favorable regulatory environment.
• Torque Resources: He notes that Torque took time to find the right project, eventually acquiring assets in Chile. The Santa Cecilia project is now joint-ventured with Goldfields, recognizing the need for senior involvement to carry out thorough exploration and development.
• TDG Gold Corp: As Chairman, Kasawan is involved due to the project's logistical importance, geological potential, and established social license. A recent major discovery on their boundary, the second-highest grade porphyry in British Columbia, indicates significant growth potential along a fault trend. The proximity to major infrastructure and producers like Freeport-McMoRan and Cantoro is a significant advantage. Kasawan acquired his substantial TDG holdings by purchasing shares from a junior company that previously owned the project, and he has continued to buy shares during major financings, demonstrating his conviction.

Kasawan reiterates his advice to "not be afraid of the gain" and to "let your winners ride," as winners can offset numerous losers. He believes the market is still in its early days, citing low sentiment and limited capital as indicators. He sees the merger between Tech and Agnico Eagle as a sign of market bottoms rather than tops. He emphasizes the challenge of finding the right companies and sticking with them.

Conclusion

Michael Kasawan's insights underscore the importance of a disciplined, long-term approach to investing in the junior mining sector. His career, spanning technical and financial roles, highlights the value of combining geological understanding with sound financial analysis. He advocates for a focus on quality projects, strong management, and a willingness to let winning investments run, all within a market he believes is poised for significant growth.