Conversations With Goldfinger #3: Brent Cook
There aren't many people who can say for certain that their words move markets. Brent Cook is one of those people. Both through his weekly writing in his newsletter Exploration Insights and in occasional public comments (such as his comments on Garibaldi) Mr. Cook has been known to move markets, sometimes in a big way. Despite following him for several years I still had plenty of questions to ask him such as how he found his way into doing what he does now and what are some of the biggest red flags that he looks for as an investor, naturally he became a no brainer choice for my summer interview series. During a tough year for the junior mining sector his portfolio at Exploration Insights is up about 10% year-to-date which is a commendable performance considering that most junior mining portfolio are probably down double-digit percentages at this point in the year. Without further ado here is my July 2018 conversation with Brent Cook of Exploration Insights...
Goldfinger: Great to be with you today Brent. Please tell us about how you came to do what you’re doing now and how you learned to become a successful junior mining investor.
Brent Cook: Up until 1997 I worked as an exploration geologist all around the world, mostly as a consultant. I had also been involved in feasibility studies, bank audits, the privatization of ZCCM and CVRD . I did a job in 1996 in Brazil where I went down and looked at a project, the project was total crap. I’m standing down there at this project in the rain with a bunch of alcoholic garimperos and the CEO flies in a group of promoters and the guy shows them around the property for 30 minutes and tells them that there’s gold everywhere. Then they go off fishing in the Amazon and spend the night in Manaus. I saw later that the stock more than doubled over the next month. I ended up writing a negative report and they didn’t pay me.
It was after that experience that I decided I better get a handle on how this other side of the business worked and stop hanging out with alcoholics in the jungle. I ended up getting a job with Rick Rule at Sprott Global Resources as their mining analyst. I learned a lot there from Rick about how the money side and the promotion side of the business worked. Then I worked with Paul Van Eden as his technical guy, then I went off on my own again. I ended up buying Paul’s letter in 2008, re-branding it as Exploration Insights and publishing that ever since. Two years ago Joe Mazumdar joined me at Exploration Insights.
Goldfinger: So you were doing due diligence on projects for major mining firms and then became interested in how the market side of the business worked?
Brent Cook: I had a desire to understand how the whole business worked. I was basically a geologic hit man for major mining companies and they would have me look at projects that they were interested in.
Goldfinger: This is interesting because your path to where you're at is basically the exact opposite of my path. I started from a macro markets perspective and you started as a geologist analysing individual mineral bodies and projects. Why is the mining business so difficult?
Brent Cook: I think it’s because there are so many angles you’ve got to analyze it from. There are so many areas of expertise and disciplines involved which makes it exceedingly difficult to get it all right. For example with geology, there are dozens of different types of deposits to understand, then there’s the metallurgy, then there’s the different types of mechanics needed to build a mine from pit slopes to water issues, the recovery rate, the overall cost to construct a mine, environmental issues etc. There are so many different variables and scenario options that one must get a handle on in order to grasp whether an ore body is economic and feasible. And bear in mind that the base of this mine pyramid is constructed on a resource estimate that incorporates a very small fraction of the actual ore body. Get that wrong and no amount of engineering can fix it.
Goldfinger: Can a retail investor, a small individual investor who has a full time job make money over the long term by investing in junior mining stocks?
Brent Cook: It’s certainly possible, there are some retail investors who do incredibly well. If you can get in at the beginning of a bull market you can do very well, but of course everyone looks smart during those times. I think to do really well over the long run you’ve got to have some sort of edge to put you ahead of the crowd. For example you’ve got to have a geologist to help you evaluate company NRs or a broker or friend who helps you spot the best deals. Or you’ve got to find a really good newsletter writer and follow their ideas. You also need patience, but the ability to cut bait immediately when your investment thesis fails.
Goldfinger: Do you believe that’s a viable strategy? Simply following a newsletter writer?
Brent Cook: Yes, I think so. Of course you want to do your due diligence and make your own decisions. Different letter writers have different strategies and areas of expertise. As an individual investor you have to determine your own risk tolerance and trade only according to what you can afford. However, following a top notch newsletter writer can certainly give an individual investor an edge in the market.
Goldfinger: As an investor who focuses on the specific intricacies of individual projects and companies how much attention do you give to the macro-market picture?
Brent Cook: I certainly pay attention to the macro because it affects market sentiment. Flow of funds is really important because it determines the overall direction markets are going, and fund flows are dependent upon market sentiment. However, the macro stuff isn’t something I can forecast better than anybody else. Right now I can tell you that there is hardly any interest in the junior mining sector, but the question is when is that going to change? I don’t really know the answer to that and I don’t think anybody does, despite claims to the contrary.
For me and my partner Joe Mazumdar, we tend to focus on what we know and what we understand really well. That’s where we have an advantage. So although I pay attention to the macro I know that’s not where I have an edge.
Goldfinger: From your vantage point you believe there’s very little interest in the mining sector right now, however, we have actually seen some mid-tier producers (Wesdome Mines) and even some senior producers (Kirkland Lake Gold) perform well during these challenging last few months for gold. Do you have any examples of juniors from your portfolio that have bucked the market downtrend?
Brent Cook: Sure, we actually put out a mid-year update a couple of weeks ago and we are up 10% year-to-date. One example is Evrim Resources (TSX-V:EVM) which went from C$.30 at the beginning of the year up to C$1.70 and it is now about C$1.00.
EVM.V (Daily)
Evrim made what appears to be a discovery and obviously that is key. In any market if a company makes a discovery it’s going to do well because there are enough people that follow this sector that the stock gets noticed. Now the caution there is that there will be stocks that are purported to have discoveries but they really aren’t. New Nadina (TSX-V:NNA) was an example of that and it was pretty obvious to me from the beginning that they didn’t have anything there. As an investor in the junior mining sector you need to be able to determine what’s real and what’s not real, also what the underlying potential for a particular prospect is.
Goldfinger: You mentioned New Nadina which is a stock that rose on hopes of what assays would be well before they were released. The stock eventually crashed when the assays were released and the holes turned out to be dusters. How does that happen? How does a stock rise on hot air and achieve a $40+ million market cap?
Brent Cook: Well you see how things go on the CEO.ca chat board, people get in a frenzy over some of these NRs. I followed it (New Nadina) as soon as they put out the news release and I went through the data which was all based upon visuals and a theory. It was clear to me that this thing had a 95% chance of failure but when you read what’s on the chat boards you can see people pumping it and they get carried away and lose their sense of reality. As far as I can tell Garibaldi is a somewhat similar situation, although I would be happy to be wrong about that one and down a good helping of crow if I am. No doubt there are a few of your readers that are hoping the same.
Goldfinger: Ha! That’s probably true Brent. Garibaldi (TSX-V:GGI) is an interesting story because it rose from a few cents per share last summer to over C$5.00 per share within a few months, mostly on visuals. I’m not a big expert on the story but the stock still has around a C$300 million market cap and they don’t yet have enough data to confirm an economic discovery. So far there isn’t a ton of evidence to support this valuation, right? The market isn’t that stupid...
Brent Cook: Are you sure? I’m not so sure. It’s not apparent that Garibaldi has made a discovery based upon the data they’ve released and their data releases have been shoddy and poorly constructed for a company with that sort of market cap. It’s pretty poorly presented, although Dr Lightfoot makes a strong case for the conceptual play.
GGI.V (May 2017-July 2018)
Goldfinger: Next topic, what are some of the big red flags that you look for in the market? The sort of stuff that if you see it a skull & crossbones pops up in your mind over the stock symbol.
Brent Cook: If a company doesn’t present all the information from previous drill programs that’s a red flag to me. The company should also write an NR in such a way that anyone can understand it. It should also contain sufficient back-up details to allow a more technical person to go through the maps, sections and assays and come away with a good sense of the project’s potential. The thoroughness of how a company presents data is important; a company NR should be complete and competent, that in itself tells you a lot about a company.
Grade smearing is a big red flag for me and that’s a simple one to identify. It amazes me that companies still think they can commit obvious grade smearing and think they can still get away with it.
Another one is companies that aren’t focused and continue to jump from project to project, or have multiple projects across a bunch of different commodities.
Goldfinger: You’re talking about companies that have multiple projects and seem to have just jumped around to whatever commodity was hot at the time?
Brent Cook: Yeah, if a company has a bunch of projects that aren’t focused on a particular metal/commodity it suggests to me that they’ve probably been jumping around to whatever was hot at the time and they ended up with a portfolio of projects that isn’t focused. Some companies do this simply to be able to raise enough money to keep paying management salaries.
Goldfinger: What are the things that you look for that make you want to buy a stock?
Brent Cook: I’m looking for continuity and size; I want to see width in multiple intercepts and similar grades. I want to be able to join up the dots across a significant area. If a company releases assays for several holes and it’s something like 2 meters of 10 g/t Au, and another hole with 50 meters of .5 g/t Au, and another one with .5 meters at 80 g/t Au - that to me suggests there’s a real continuity problem. Ultimately, Joe and I are looking for an early discovery that will meet the needs of a larger mining company and get acquired.
I also want to see management that has a lot of experience and a strong indication that they really know what they’re looking for. Mineralization is always different in different areas, it takes years to really gain an understanding of mineralization in a particular area. A company should have a really good idea in terms of what they’re looking for, not only in terms of size & grade but also metallurgy, capex, etc. All of this stuff should be in the back of their minds in order to help determine if they’ve got an economic resource on their hands or not.
Goldfinger: What are your thoughts on insider buying? How important is insider buying to you when you’re looking to make a new investment?
Brent Cook: I think it’s useful. However, insider selling is more indicative. I view it as just another data point and I don’t put too much weight in it unless it is really noteworthy in terms of size.
Goldfinger: Can you give us a couple of stocks that you like right here, right now?
Brent Cook: I was at the Sprott Conference in Vancouver a couple of weeks ago and I offered two stock picks during my keynote address. The first one is Evrim (TSX-V:EVM) and the second one is a new company that was spun out of Almadex called Azucar (TSX-V:AMZ). Azucar was spun out at a valuation of C$100 million and the market cap is now C$45 million so it’s down more than 50% since the spinout. Newcrest Mining invested C$19 million at C$1.00 for a 19.9% stake in Azucar. Azucar has a very large copper/gold system in Veracruz, Mexico. There’s lots of smoke and they’re going to put a lot of work into this project. That’s one that I really like at current levels because the risk/reward is attractive.
Azucar Minerals (One Year)
Goldfinger: Ok, time for a controversial question. What is your opinion of paid promotions? Especially the type of promotions in which companies might pay hundreds of thousands of dollars to aggressively blast a hyped-up promo piece out to a wide audience of retail newbies?
Brent Cook: I think it’s generally an embarrassment to the sector. There’s a fool born every minute and some people need to learn the hard way.
Goldfinger: Do you believe there is a need for companies to pay for some promotion to help get their story out to a wider audience? Do you care if a company you own pays for promotion?
Brent Cook: To some degree yes it does matter. The company’s objective is to raise as much money as they need at the highest share price that they can. So you do need to get your story out there and it’s not so easy to get a story out there when there’s thousands of other companies wanting to do the same thing. That means you’ve got to differentiate yourself somehow. I’ve read some sponsored posts that were really quite good and full of quality information and analysis. Then i’ve seen some stuff where it was clear the only purpose was to generate a short term spike in the company’s share price. So basically I think promotion is needed, but it is overused and sometimes abused.
Goldfinger: Great answer. And the final question, can you tell us about your weekly newsletter Exploration Insights?
Brent Cook: I thought you’d never ask! Well it’s run by Joe Mazumdar and myself, we’re both exploration geologists who have worked all over the world. Joe actually has an advanced degree from Colorado School of Mines and also James Cook University in Australia. The letter is about what we are buying, selling, and avoiding with our own money. No one ever pays us to write anything ever, the only way we make money is either from subscriptions to the newsletter or by making money in the markets.
I think it’s an honest letter, at least it’s the best we can do. It comes out basically every week and I am proud of the work we do.
Goldfinger: Tell me how you do your buy and sell recommendations. Do you buy or sell before readers or do you wait until you’ve published the newsletter and only then get in or out of a stock?
Brent Cook: For the most part we publish the letter on the weekend and we publish a price range that we are interested in buying a particular stock, then we come in and buy for ourselves after the letter has been published. However, there are some times in which there is news during the week or in the middle of the trading day and we will publish a buy/sell alert, on those occasions we are in there buying or selling along with our subscribers. We generally wait until we put out the letter and sometimes that’s caused us problems because the stock moves and we can’t get in at the price range we cited.
Goldfinger: What is your selling discipline? Do you ever put out sell recommendations on a valuation basis, not due to negative news?
Brent Cook: Yes, we do that often. For example with Evrim Resources our cost basis is C$.15 and when it reached C$1.38 I wrote in the letter that I’m taking some money off the table. With that big of a gain I felt it was the prudent decision to take some off the table even though I am still very bullish on the story.
Goldfinger: Do you have a rule for when to sell? Also, do you ever add to positions at higher prices after you’ve already gotten in?
Brent Cook: We will often add to positions after they’ve risen because the story has gotten significantly better. We don’t have any concrete rules as to when to sell. We might double down on a double in the share price or we might sell ½ of our position on a double. It depends upon the specifics of the stock.
Goldfinger: Exploration Insights is either $140/month or $1680/year and it is published weekly along with buy/sell alerts during the week. You can subscribe using this link and I can attest that it is one of the must have newsletters for serious investors in the junior mining sector.
I especially liked the concept of buying more at higher prices when the story gets better, I don't think this tool is in most investor's playbooks. I also thought more deeply about the concept of "competency and completeness" of a company's NRs and how it reflects upon the company as a whole (and as an investment), I will be reviewing my portfolio using this criteria over the next few weeks. We'd like to thank Brent for his time and insights, until next time.
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