The below was the intro to last weekend’s intro to the weakly, with some necessary brushing of grammar in a couple of places but aside that, as was:
When push comes to shove, all an exploration stage junior mining company has is a story to tell. Also true for many development stage mining companies, but for our purposes we focus on exploreco companies because it’s true for them all. Ultimately, if your company has no financial income from operations and goes about its normal business ¿ burning cash in order to prove up a mine, your company needs funds from shareholders and perhaps debt holders in order to fund operations. Therefore, to fund your company you need to convince people to give you their money and for that, management of an exploreco makes its offer: A story.
Don’t get me wrong, put starkly it sounds as though all junior exploreco CEOs are out there telling tall tales all the time and that is not the case. It may well turn out that the person giving you spiel tomorrow morning is a saint, the story in question is great, a few years later everything the CEO told you in 2021 comes true, everybody gets rich. Or it could be a story backed up by a mountain of hard data, for example when you deliver a drill assay NR to the market, or a 43-101. Or it could be more subjective and based on what we might term in the widest sense, “Optimism For The Future”. Those are also often perfectly legitimate statements, such as a simple confirmation that your drill program is on budget and time and a mention that the results should be back in X days. Or they may be more promotional, for example a company adds a photo of a promising drill core to the NR before we know the lab assay results.
Et cetera. We could continue with several other nuanced examples but to cut to the chase, we note that the level of human subjectivity added to any company’s story will affect its image and, ultimately, its share price. It’s the most effective tool for promoters and marketers too, for example perhaps the world’s best in our sphere, Robert Friedland: He’ll make all the marketing and promo noise in the world in the early stage of one of his mine developments, as (once he and his are on board) it makes business sense to get the equity price up early, then fund the project with less dilution. Robert Friedland gets serious market attention when he starts pushing one of his projects, because he has a track record of success and when the storyteller is trusted, your story is far more valuable. However, Reputation Management 101 states that it takes a long time to gain trust, a short time to lose it. The word of Friedland is trusted for good reason, but when an exploreco says one thing and does another, or when it has weakness in its story it doesn’t address, or when it prefers to obfuscate rather than clarify, those without the reputational back-up of The Ivanhoe Guy can see their rep dissolve to nothing in quick time.
By all rights (and in any normal business sector), Orezone (ORE.v) would launch an internal inquiry into last week’s obvious insider information trading, which would lead to the names of the leaker(s) who is (are) then dismissed with cause. It would be straightforward to achieve, all it takes is a company-wide meeting where the CEO informs staff the company will go to the time and expense of tracking trade IDs of the buyers Monday morning, in order to see if there were any unusual patterns or unexpected names showing…and if anyone would like a chat in the next 24 hours, they know the number. However, we know nothing will happen. The company knows what happened is illegal, it also knows the regulatory authorities are toothless, ineffective and lacking in any preventative authority so if they say nothing and you say nothing and we say nothing, it will all quietly go away. Leave that attitude to stew for a decade, which is exactly what Canada has done, and your reward is a stock market nobody trusts, populated by increasing numbers of companies that didn’t float on the market to raise capital, but to distribute it (to themselves, and oftentimes immediately).
Which brings us to our lot, that of the junior investor. As a matter of fact, The IKN Weekly tends to be read by a readership that’s been around the block at least once and understands the pitfalls of the sector. You don’t need to read Weekly or blog to know there are plenty of dubious, untrustworthy, even plain outright scam companies out there and when scam CEO knows the punishment for laying on the charm and BS is non-existent while near-term profits for nasty tactics often excellent, what happens next is not rocket science, either. Simply put, we work in a sector of bad actors and always will. The law does not punish them, the market rulebooks do not punish them, their peers turn a blind eye and impunity is the result, not just of the truly bad and nasty boys and girls who have always been attracted to mining (like moths to flames, reading some Mark Twain will tell you there’s nothing new here) but also the “Casual Corruption” referenced in last week’s blog post, it becomes the “the way it is”. These companies and their officers are never punished, so they do it because others do it. They do it because it’s easy money and nobody notices. They do it because, even if some mouthy idiot with a blog in South America does notice, they’ll get away with it anyway.
As a retail investor, what to do?
ESG now stands for ‘Eric Sprott Governance’: Call me a sentimental fool if you must, but the more I thought about the obvious insider info trading followed by implausible denial from Orezone on Tuesday morning, the more Eric Sprott’s actions against Michael Collins a few days previously came to mind. As you may remember, from either the event or last weekend’s intro, after what can only be described as pulling a fast one on the shareholders of Crescent Resources (CRES.cse), its CEO Michael Collins was immediately fired from his other CEO job at Exploits Discovery Corp (NFLD.cse). It was clearly the action of someone highly influential to NFLD and the whole nascent Newfoundland Gold Rush, but also a decision-maker with power and enough plain common sense to act swiftly. Sherlock Holmes was not required for this one, here’s how we put it in IKN628 last weekend:
“…Collins got the swift and clean boot, replaced by a board member with the “Canada mining stalwart” image. Considering the close relationship CRES had to NFLD, this move is a clear message on how seriously Eric Sprott is taking the nascent 21st century Newfoundland gold rush and how he wants its image to remain squeaky clean.”
Maybe so, but on further thought I may well owe Mr. Sprott an apology for selling him short last weekend. Taking into consideration the swiftness of the axe, Eric Sprott had already made a decision about what to do in these circumstances, or what lines would have to be crossed in order for him to act on a moral basis (underlined as important). Indeed, Eric Sprott used his position of high influence on NFLD, CRES and the wider NewfieRush patch, to make a moral stand against the deliberate decisions of its CEO to loot company assets.
And it is a most welcome turn of events. A man who has forgotten more than most know about the sector, Eric Sprott realizes as much as we do how toothless Canadian regulatory authorities are. Their range and scope are limited, often you’ll fine their “desire to go after the big fish” is limited (let’s say) and the snail’s pace at which it operates means perps are normally long gone with their ill-gotten gains before anything happens. By way of another mirror, Canada compares badly to its neighbours in the US SEC, an entity that actually puts people in jail for lying and cheating as a certain David Sidoo knows very well, the type of Vancouver shark who gets awards in Canada and just desserts when they come up against an unbendable system of justice. Sidoo highlights the greater point of how Canadian securities law is lax, badly imposed and even when applied, no form of deterrent to the increasing numbers of ne’er-do-wells and securities fraudsters. When was the last time you heard of a Canadian executive in jail whose first name wasn’t Conrad?
But back to another famous name; Eric Sprott is certainly a benevolent force in mining, as despite his occasional Old Uncle act he is a man of the utmost integrity as anyone who has been close to him will quickly attest. Billionaire, activist, and still driven by mining, an upstanding family man of the old school, as de facto rule-maker and applier of a new covenant of moral behaviour on mining I can think of no better candidate. Therefore, when Eric Sprott moved against Collins a chilling effect went further than merely the C-suites in Newfoundland, as I imagined last weekend. With his fingers in dozens of junior pies and strategic investor-sized positions in most, those that would line their pockets at the expense of shareholders are likely to think twice if Eric Sprott is now going active.
As I thought further about Orezone’s obvious, blatant insider trading on Monday in light of Sprott’s moral stance, I realized I’d sold him short in the note of IKN628 last weekend. If executives of mining companies go unpunished for the type of underhand, self-serving move made by Michael Collins, others will do the same. In a sector with no obvious no moral compass brought to bear by the regulatory bodies, it’s now up to investors to get active and make their presence felt via their feet, or wallet, or voting block. I am not Eric Sprott and neither do I want to be, but on due consideration on Tuesday morning I decided to become a follower and supporter of Eric Sprott’s moral lead on mining. As we do not have governance, we must choose self-governance or none at all and in this case, not only should we cheer that Eric Sprott is willing to take the responsibility and become an activist shareholder in order to weed out bad practices, but it’s time to join his side and add our little lot to the cause. Every little counts and with a little momentum, it would do a lot more to “Save Canadian Mining” than a derisory ban on the short uptick rule*. Therefore, let me be clear: On Monday, Orezone (ORE.v) shares flew higher on no news, due to a prima facie case of buying on inside information. When I addressed the company on the issue, its responses were defensive, indignant and difficult to believe, as if seasoned Vancouverites had never even imagined there were bad actors in the mining sector. On the other hand, I was informed how my questioning was insulting to them (how could I even imagine such a thing). It was tooth fairy level, a large red flag to add to the numerical evidence already staring us in the face on Tuesday via ORE’s price chart. Therefore Tuesday lunchtime, I sent out the Flash update (see Appendix 1), liquidated my position in Orezone and took profits. I will not return to ORE.
As for the future, this position is now house policy. Call it the “New ESG” (Eric Sprott Governance) if you like, with junior mining CEO Collins’ just reward from Eric Sprott a blueprint for self-governance by shareholders, with a view to cleaning up the mining sector and helping others sponsor the good guys (and stay away from the bad guys). Therefore and going forward, if any junior mining company held on these pages is discovered acting in blatant, self-serving or illegal ways (e.g. Orezone last week), first the IKN subscriber base hears about it, then the shares get dumped immediately. I’m also aware of some of the pitfalls of beginning this type of Zero Tolerance policy against juniors and it might not be great for business, but longer-term I hope people will realize that to get on these pages, a mining company has to do things the right way.
*FWIW we need more access to shorting, not less. If Canada’s stock regulators made it easier for retail to short junior mining stocks, the sector would have another tool for effective self-governance 🙂