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Kaiser Media Watch Blog - December 1, 2015 to December 31, 2015

Kaiser Media Watch Blog enables John Kaiser to share online content from other media he deems interesting or relevant to Kaiser Research Online audiences. He collects links to such content and writes a brief explanation. The KMW Blog gets updated during the evening KRO update. After a week or so the current KMW Blog gets archived and a new one is started. Tweets are sent with a link to the item in the KMW Blog when it is of particular interest. Right clicking the JK header allows one to share or copy a link directly to that specific blog post.

Posted: Dec 11, 2015JK: The Four Structural Changes that are killing the Canadian Resource Juniors
Published: Nov 30, 2015KRO: Mines and Money London 2015 Presentations

The 13th Annual Mines and Money conference held in London November 30-December 3, 2015 organized by Hong Kong based Andrew Thake proved to be an excellent venue to hear different perspectives on the outlook for the resource sector, now headed into the sixth year of the worst bear market in decades, as well as strategies for coping with the consensus that while the bottom is being formed, we face another 12-18 months of sideways hell before a broad-based emergence is conceivable. I did not attend all the talks, so my observations about the general mood should be taken with a grain of salt, but what I did hear conveyed a sense of subdued resignation that until things actually do improve one should not have any near term expectations. What was missing was the talk prevalent at the end of each of the past two years that while the majority of companies are doomed, the new year would usher in a bifurcation where the serious quality juniors (and now also majors) would rise from a battlefield of fallen soldiers and march onwards, banging a drum of their own making. This was indeed my view during the past couple years whose wrongness would be annually captured by a video interview at PDAC, the big global mining conference held early March in Toronto. I thought I would fix that PDAC Curse in 2016 by saving myself the $2,000 cost to attend, but Peter Botjos, who manages to be present at every mining sector conference, including the Silver Summit's debut in San Francisco organized by Marin "My Generation" Katusa, intercepted me and twisted my arm, ensuring the prolongation of the bear market for another year.

The opening talk at Mines and Money turned out to be my Analyst Insight: What will be the savior of the junior sector? thanks to London's horrid traffic which delayed the arrival of Dambisa Moyo whose Keynote Economic Address promised to tell the audience "So what's next for the global economy and what are the implications for the mining industry?" (Not positive) My presentation, which was allotted 20 minutes, first focused on the serious structural problem created by the broken Canadian capital market. The Canadian capital market as far as resource juniors are concerned is broken because of four key structural changes of the past decade, most of which were ostensibly designed to "protect investors". What these changes have accomplished is the destruction of existing investors for the benefit of an imaginary future investor. Most of these structural changes are irreversible, and threaten to destroy the eco-system of the Canadian resource junior venture capital market unless reforms are under-taken which make it easier for companies to raise capital from a much broader pool of investors while bypassing the financial sector. This blog will focus on these structural issues. The second part of my Mines and Money presentation touched on where we stand with the four core narratives that drive the resource juniors. The third part, which represents a private sector solution to one of the structural problems, I presented on December 1, 2015 as Briefing: New Exploration and Discovery Business Models. That presentation outlines my Outcome Visualization System which I hope to have operational some time in 2016. On December 12, 2015 Tom Allen's HoweStreet.com posted a 40 minute audio interviewe with me by Jim Goddard, Killing Canada's Junior Markets, which covers similar ground as this blog .

The working capital range chart above is a year end snapshot of the financial health of the 1,233 TSXV listed and still trading juniors classified as resource sector oriented. More than half the resource juniors have negative working capital. The chart below shows the total in positive and negative working capital for juniors in various price ranges. The $2.5 billion owed by TSXV listed resource juniors will never be paid back in cash unless that junior gets taken over by a deeper-pocketed company. These "zombie" companies - so-called because they no longer have the means to function but are nevertheless very "resilient" - no longer matter. What worries me is the $1.6 billion in positive working capital being hoarded by the remaining 549 juniors because they see no easy way to replace those funds with new equity financing. Some say it is just a "cyclical" problem, a problem heading into the sixth year after a brutual capitulation washout that took down the solid producers during 2015 as China's growth both slowed and started to transform into less raw rmaterials intensive forms of consumption. Zombie bashing is pointless. Much more relevant are the structural changes that threaten the entire resource junior eco-system with extinction. At the end of 2015 I trimmed my Spec Value Hunter Portfolio and compiled a new 2016 Bottom-Fish Watch list of 100 resource juniors. Species extinctions caused by environmental changes do not take place overnight; the more resilient individuals can still flourish though over time their numbers dwindle. The 2016 SVH and Bottom-Fish lists are unprecedented in terms of assembled talent and the investor's cost for access to that talent. In two years the market will look back on these lists with either amazement at the upside they delivered, or tears that a century old Canadian institution was starved to death. I am not just referring to the institution of publicly funded resource sector venture capital; I am also referring to Canada's historical role as a training ground for mining industry professionals - be they geologists, engineers, metallurgists, technicans, or geophysicists.-Canada may have top-notch post-secondary schools, but for them to churn out top-notch professionals, large enrollment numbers are needed. And large enrollment will only happen if the bottom three quartiles have a reasonable prospect for a related job. The resource junior eco-system attracts both mediocre and exceptional professionals; big mining companies skim off only a small percentage of each year's graduates. Once students understand that enrollment in a mining related program is an all or nothing gamble, even the most talented students will look elsewhere rather than risk ending up jobless because they failed to make top of class. China relies on state-owned entities to employ its mining professionals. Australia relies on its public venture capital market of about 700 resource companies to keep its mining professionals employed. Ottawa needs to wake up and smell what the banks and their regulatory buddies are doing to the resource juniors. Spec Value Hunters and Bottom-Fishers, however, should be thankful, especially if they are new to the junior resource gambling game and not gaping from the sidelines with empty wallet in hand.The surviving juniors are feeling the pressure. Not all will expire worthless like those warrants stockpiled by Jabba the Five Year Warrant Hutt. My approach is to sound the alarm about the structural problems, and go all in with bets on the survivors arising from the 2015 wasteland.

Structural Issue #1: suitability and the client relationship model

The first structural change to hurt the resource juniors is the "client relationship model" which requires every full service broker to profile his/her client and judge the suitability of each "investment" for that client. What this amounts to is a war on single company security ownership in favour of structured products where risk is diversified across a large number of securities. These can be mutual funds, index funds and ETFs. The key is to avoid the catastrophe risk associated with each corporation. One need only think of Volkswagen for a recent example of catastrophe risk that was absolutely unquantifiable by even the smartest financial advisor unless he or she was a hyper-conspiracy theorist. Single company ownership, even if it is a rock solid blue chip, has become dangerous. Just consider the risk that some big profitable service company with a fantastic reputation becomes the TARGET of a massive hacking attack that creates an infinite financial liability? How about our very own mining sector where industry giants such as Teck have been brought to their financial knees by huge macro-economic shifts?

It is possible that if you think and research deep enough, all these catastrophic outcomes could have been predicted. That creates a litigation liability for every financial advisor who dares to let a client own an individual stock rather than a structured product where everything disappears in a statistical blur. Through CRM the regulators have created a litigation timebomb for financial advisors who insist on stock-picking. In the case of juniors which by definition are "high risk high reward" the courts see only the "high risk" part when the "high reward" outcome fails to materialize (which by their nature is most of the time). Buying a junior is not equivalent to making an investment; it is the placing of a bet on a very rewarding outcome that is highly uncertain. That is called gambling, a term the financial establishment recoils from with horror.

In his keynote talk on December 2, "What are the critical questions that all good investors should be asking when evaluating which junior mining stocks to invest in 2016 as the market starts to turn?", Rick Rule dwelled on the downside of an "investment" in an "asset" that is really a "research and development project". The downside of any risky venture is a 100% loss, something to which Rick Rule has a very strong aversion. During one of the panel discussions he declared that he is only interested in the "best of the best" and voiced his frustration over the enormous gulf between his bid and the ask demanded by the "best of the best". The realization overwhelmed me that Rick Rule is going to miss the boat and have to grab the oars of a dinghy stranded at the dock if he wants to participate in the uptrend which only the "best of the best" will create. Rick Rule is not a gambler because he does not take on exposure to an outcome he cannot control. At best he is a momentum chaser where his Ben Baruch motto of making all his money selling too soon serves him well. The general outlook that the resource sector will trend sideways at best for several years makes it unavoidable that any "investment" in a resource junior is a naked gamble.

The financial establishment also loathes gambling and consequently treats the resource juniors as never suitable for older clients, namely those 55 and older, who also happen to be the only demographic group that has any concept of what a resource junior is all about. This older demographic is also the only place where there is lingering interest in resource juniors; the younger generation seeks its gambling entertainment in other venues such as FOREX and ETFs where liquidity and volatility offer short term trading gains and losses. Compliance departments crunch down on financial advisors who follow their older client's instructions: "never mind what the client wants, by virtue of his or her age it is not in their interest to take on any identifiable risk such as the catastrophe risk associated with a single company". And if the clients so insist they have de facto classified themselves as emotionally "irrational", clinically "suffering from early dementia onset", or just plain educationally "ignorant". Historically the financial sector and the resource juniors have collaborated to victimize these groups, but it is only recently that everybody aged 55 and older has been classified as a member of one of these groups. Do older people want to be protected from gambling in high risk high reward juniors? If so, I find it very puzzling that America's casinos are chock full of elderly gamblers.

The suitability bludgeon of the client relationship model is destroying the smaller brokerage firms that specialized in venture capital, which is wiping out the financial sector as a gateway for capital. The bigger brokerage firms will still be able to finance juniors, but only through their institutional clients for whom juniors need to have a certain minimum market capitalizations and an advanced project. (I heard one story that a flow-through fund has ended up in a near panic because the minimum market cap is $50 million, of which there are almost no juniors with a Canadian project interested in a flow-through financing.) This is a problem for discovery exploration oriented juniors which have modest market caps and projects easily vaporized by the next drill program.

One might argue that this is just a cyclical thing, that the brokerage industry will rediscover the resource juniors when we are back in a secular bull market. But that argument overlooks the bigger trend which is the emergence of robo-advisory accounts where a computer algorithm manages a client portfolio based on the client profile and a pool of pre-approved and risk classified investment products, many of them created by the financial establishment which collects a "royalty" on those products that boosts the very low asset management fees that the highly competitive robo-advisory market is inflicting on the financial establishment for the (how unusual!) benefit of the client.

The writing is on the wall for financial advisors. Their future role will be to "gather" clients into the fold, keep those profiles up to date, and maintain the client as a member of the fold by schmoozing that client on the golf course or other luxury venue. Pardon me, somebody is whispering at me, "don't I know that this is all that financial advisors to high net worth individuals have ever done?" Well, in my three decade career I have known financial advisors who have functioned as samurai warriors for their clients. What is happening today is that the financial advisor is being marginalized in favour of a robotic system which never engages in any local rogue corruption. In the future all corruption will be carefully controlled from upstairs with many layers of legal obfuscation so that the juice sucked from the clients will never look like some slasher carved up the client with a butcher knife.

Another reason the financial advisor working for a brokerage firm is disappearing can be linked to emergence of the "family office", the new term for an in-house business that manages the affairs of high net worth individuals. The employees of the family office can be members of the family itself, or accomplished individuals who may once have worked as analysts or advisors for brokerage firms or hedge funds. Family offices operate their own accounts through online discount brokers such as Interactive Brokers which provides order execution on international markets. Hedge funds, which thrive on distinct trends and stable carry trades, have had a terrible year in 2015. Those that operate high frequency systems are seeing their opportunities to arbitrage inter-market inefficiencies shrivel thanks to competition. The only way HFT funds can make money consistently is by manipulating the inputs for the narratives media organizations publish that the market parses to identify the implied price direction. Heightening regulatory scrutiny of HFT will eventually focus on the process of manufacturing volatility and this form of market manipulation will end up useless.

Structural Issue #2: destruction of the venture capital market as a price discovery mechanism

Another structural change is the destruction of the market as a price discovery mechanism for the resource juniors. It used to be that stock exchanges were operated like a utility whereby the existence of a trading platform was treated as a public good. The real reward was achieved by operating as super-users of the utility who also controlled the rules by which paper was created and assets acquired. But during the nineties the idea of the stock exchange as a non-profit utility that facilitated profits indirectly was thrown out in favour of the "for-profit" model, which meant that the exchange operators could start to gouge their clients courtesy of their implicit monopoly. Naturally that engendered resentment among those parties who were not stakeholders in the monopoly, and so they lobbied the regulators to force the stock exchange which managed a "listing" system to allow other order execution platforms to "compete" for client orders. So instead of a simple system where all bid and ask orders entered the book in a queuing system where fulfillment was based on "first come first serve", we ended up with a fragmented market place with varying order fulfillment costs that encouraged brokerage firms to develop algorithms which could route a client order so as to incur the lowest execution costs. In principle, because such algorithms are guided by "best price" principles, that would be good for the client, but in practice those "savings" are scavenged by the brokerage firm. The real damage is insidious and thus not an easy topic for critics to beat the drum about.

By routing an order through a thicket of competing platforms based on obscure and arbitrary processing costs, which in some cases are actually payments rather than fees, the brokerage firm cannot serve the "first come first serve principle". In fact, if certain parties wish to shuffle paper among themselves and bypass independent orders parked in one or more of the order books, it can be easily arranged. What this does is undermine the market as a price discovery mechanism. When an individual decides to place an order for a certain amount at a certain price, he/she is doing so through a fundamental evaluation about the future value of the security and an assessment of the expectations of all other buyers or sellers with a disclosed presence in the market, namely the bid-ask order book. By visibly joining that collective order book the individual contributes intellectual property to the market, the compensation for which is a theoretical presence in the fulfillment queue for the price offered. However, this reward does not accrue to the individual because of the fragmented nature of the order book which does not honor the order submission queue. This subtle fact compromises the integrity of modern exchanges which do not operate utility style on a strict first come first serve order execution basis. Dark pools are another problem, as are in-house order matching systems that by-pass the competing independent "alternative trading systems" and the main exchange. These trades do not become part of the public record, which undermines the principle that the greater the volume at a price, the more reliable price is as an indicator of underlying fundamental value. This principle is implicit in the prohibition against "wash trades" between buyers and sellers who are not at arm's length.

This problem is of a long term, insidious nature which discourages retail investors from participating in the market. It is harmful but not devastating to the market as a price discovery mechanism based on order submissions. A much bigger problem is created by the regulatory decision to abandon the uptick rule for short-selling. This rule dictated that if you wanted to sell stock short, it had to be at a price higher than the last different price. The rationale for this rule was obvious. Fear is a more powerful force than greed. A short seller who leans into the order book selling stock he does not own triggers similar selling behavior by longs who see the value of their position vanishing before their eyes. Somebody who buys by taking out offers does not trigger an impulse by existing longs to buy more stock; a more common response is to refrain from selling. When a market functions as a price discovery mechanism it balances the willingness of the longs to sell and those who are not long to buy. This allows a symmetry which leads to price equilibrium. However, when somebody can sell stock they do not own on an unlimited basis at whatever bid proffers itself, the structure becomes asymmetrical. This asymmetry creates a downward bias in the market that is particularly bad where the security is of a venture capital nature where value resides in expectations about future value that entrepreneurial effort is supposed to create and thus is not measurable by any factual benchmark.

The uptick rule was not abandoned because the regulators wanted to help short-sellers winch resource junior valuations down to zero. This outcome is an unwanted by-product of the desire to resolve the risk of violating a rule created by the existence of a fragmented order book. In a market where orders weave their way through multiple order books there is a risk that slight timing differences between different orders will allow orders to intercept bids and asks in a way that causes them to be in violation of the uptick rule. In the bigger markets the rationale for dumping the uptick rule was because clients were engaged in arbitraging between single securities and a variety of derivatives such as options and structured products such as ETFs and index funds. When simultaneously buying and selling in different markets it becomes an onerous burden to have to compute whether or not a trade would violate the uptick rule. With the arrival of computer based trading, also known as high frequency trading, it became physically impossible to vouch that one's executed order was not in violation of the uptick rule. So the American regulators abandoned the rule in the name of liquidity and efficiency of the market as a price discovery mechanism. Canadian regulators, as though programmed never to let a bad American idea to proceed uncopied, adopted the same rule without thinking how it might impact their venture capital markets.

The resource juniors could theoretically live with the abandonment of the uptick rule because there is a rule that in order to short sell an account must first borrow the stock, which can be very difficult for junior stocks which are not eligible for margin (almost all of them). A client's stock cannot be "loaned" by the brokerage firm without the client's permission if it is in a paid up cash account. The good old days where compliance departments would let an account be "overdue" so that it can collect interest for the firm and be settled for at a high commission through a blowout of positions are gone. To cope with the absence of borrowable paper in the junior sector the regulators allowed brokerage firms to establish "day-trading" accounts which are supposed to be flat at the end of the day. These accounts do not need to borrow stock in advance. They can sell short with impunity so long as the account is not short at the end of the day. This quirk has allowed a culture to evolve where computer assisted systems monitor the junior market for incoming capital towards which they scurry like spiders to intercept. The impetus for incoming capital could be company results that directly affect the fundamental outlook, bigger picture changes that change metal prices or the "geopolitics" associated with the project's location, or audience perception shifts achieved by media such as a newsletter tout or some other mass marketing phenomenon. In most cases the valuation implications are incremental, which should be reflected in a new equilibrium price if the market is functioning as an efficient price discovery mechanism. But when spiders who feel their web quiver rush in to intercept the capital and skitter back into their corners where they devour their prey, the net result is to strip capital out of the market without contributing any offsetting value, and in the process undermining the ability of the market to function as a price discovery mechanism.

Structural Issue #3: the fountain of unconnected dots

Another structural change is the ongoing legacy of the Bre-X fraud that humiliated Canada when the Busang gold discovery in Indonesia during 1995-1997 turned out to be an elaborate fraud that demonstrated the entire Canadian eco-system to be a conglomerate of buffoons and amoral accomplices. The 43-101 reporting system emerged to overcome the shame of that collective failure, for which absolutely nobody suffered any regulatory punishment. But the regulatory establishment has never overcome its own shame, possibly because ultimately it is the hand-maiden of Canada's banking establishment whose brokerage arms were the biggest cheerleaders of the Bre-X fraud. The Canadian regulatory establishment, bearing a sack-cloth of shame, has embarked on a penitential journey whereby it has adopted the view that the management of every junior is at the very least a latent criminal, and must be obstructed in its "criminal" pursuits in every manner achievable through a rule-book more than a foot thick. This legacy related culpability for which these civil servants seek redemption has engendered an unusual zealotry which generates reports of securities commission "analysts" gloating about having "fucked up" an imminent financing through a "timely" decision to scrutinize a junior's technical report or corporate presentation. The ensuing inquisition rarely results in a devastating downwards revision of corporate fundamentals, but it does result in show trials where company executives are forced to recant trivialities and confess their ignorance about a mountain of legal niceties apparently invented by an army of lawyers hoping to harvest lots of business facilitating compliance for juniors enmeshed in litigation mitigation that sucks up their time and capital at the expense of wealth creation. It is no secret that much of the regulatory establishment is populated by lawyers who lacked the competence to protect actual criminals from justice, and in their frustration have donned a cloak of righteousness that empowers them to persecute a class of "latent criminals", which is a lot easier to do than take on the real criminals that inevitably populate a corner of any market based system.

In practical terms the resource juniors are burdened by a monstrous load of regulatory paperwork that seems exclusively designed to serve the purpose of preventing litigation on the basis of failure to follow a mindless maze of disclosure rules that do little to edify the public about what has happened and what might still happen. I continue to be shocked by MD&A reports that are more than ten pages long but nowhere explain what exactly the company does. Most of an MD&A report's mandated content is accounting and legal content that means zilch to shareholders, but which potentially represent an opening for mindless litigation that enriches nobody but lawyers. The image I included in my presentation is a photo of the information circular Golden Arrow's Joe Grosso has to send to shareholders to secure approval of a deal that sets the stage for an exit strategy regarding the Chinchillas zinc-silver project in Argentina. He threatened to mail me the four inch pile of legal mumbo jumbo, but relented when I suggested that forcing me to transfer this door-stop equivalent of junk mail to my recycling bin would force me to treat Golden Arrow as a scurrilous contributor to global warming. It is interesting that some juniors are taking the extra step of turning their MD&A reports into a sort of project diary where a paragraph is added each quarter to the project “diary” that explains what has been accomplished since the last quarter. This is not at all mandated, but it is very helpful in enabling one to research the projects a junior still regards as active. I find it far more helpful than the legal and accounting boiler-plate that represents the bulk of most quarterly MD&A reports. In fact, the emptier of useful content I find a junior’s MD&A report, the quicker I give the company a thumbs down with regard to further research, because this is the sign of a life-style junior whose management has chosen to just follow the mindless rules of the regulators.

The irony is that although the Canadian regulators force enormously detailed disclosures upon the juniors under the 43-101 reporting umbrella, very little of it enables investors to connect the dots with regard to what the junior wants to accomplish. There are long time gaps and big expenditures between 43-101 technical reports during which the company management is forbidden from making "forward looking statements" that quantify what it is trying to accomplish through an exploration project, and the extent that results are matching up to those internal expectations. A lamentable aspect of the resource junior sector's history is the scarcity of something called "economic geology", which is the process of visualizing what an exploration target could yield in terms of a physical deposit, and estimating what such deposit would be worth in discounted cash flow model terms if turned into an optimal mine. It is amazing how few juniors engage in what I call "outcome visualization", a scoping study which does not describe what is already known to be in the ground, but what needs to be in the ground if the exploration program is to end up a success. It is a dynamic process where the geologists assess everything that is known about a prospect, come up with plausible grade hopes in the context of known analogues, and inquire if the target footprint has enough physical room for an orebody to be present. This is a dynamic process because each batch of results changes what is possible in terms of a deposit, forcing a rethink about what to do next. Each exploration play is a scientific hypothesis that the market should view as true until proven otherwise by exploration work. In the current market, of course, the glass is worse than half full, and every exploration play is treated as a dud until proven otherwise. That negative psychology will eventually flip, but the problem today is that the market lacks any easy means to determine what that potential outcome might look like. The easiest way would be for management simply to spell out in concrete terms what they hope to find, what it would cost to mine, and what it would be worth as a mine. Obviously this would involve simplifications, but given the extreme uncertainty during the early stages of an exploration cycle, the simplification does not matter.

Rick Rule’s morning keynote on December 2 drew quite a crowd curious to find out what questions he would ask in a ten minute conversation with a junior. He disappointed the audience right away by warning that he would not divulge the "secret sauce" Sprott uses in its investigations without a fee. He talked about getting the junior to distinguish between "what is" and "what could be", what the plan would be to confirm "what could be", and whether or not the management had the skill-set to execute the plan. It was all quite frustrating because he could have presented a set of questions such as the above "elements of an exploration story" which I use when interviewing a junior. Fortunately, as Rick tried to bolt from the stage at the end of his talk he was told there was still time for a question, at which opportunity I immediately jumped. I asked him, "in light of the restrictions imposed on company representatives in terms of concretely articulating 'what could be' as defined by applying the discounted cash flow model to a deposit converted into a mine, how does he coax a monetarily quantified potential outcome out of management, and once he has that "number", how does he price it given the uncertainty of the project stage?"

The first part of the question was a softball, because somebody like Rick Rule with serious check writing ability can simply demand that the company executive spell out the economic geology calculations management has already internally conducted for their exploration target. Unless there are microphones present or suspicious looking lurkers nearby who might be working for the "forward looking police", he would either get an answer or not. If not, it would be because management has simply never engaged in such an exercise and is a member of the life-style class which would be horrified by the work a serious discovery hole would entail. Rick might ask a few further questions to see how effective management might be at mounting a stock promotion that enables investors to make money by "selling too soon", but the interview would already be over. Now if he did get an answer, one might think that the next step is to explore the plausibility of management's vision of "what could be" relative to "what is" so far. But that would entail a detailed geological discussion that would extend well beyond the ten minute interview. That is a task Rick would relegate to his geologist, somebody like Neil Adshead who would engage the company's geologist at a later time. The next most important question for Rick would be whether or not there is an investment opportunity if the potential outcome is plausible. The second part of my question was the hardball aimed at extracting Rick's "secret sauce".

Assuming management's potential outcome is plausible, and exploration could yield a discovery that might be worth $1 billion on a discounted cash flow basis, how would Rick price a bet on that outcome? The answer to this question would not come from management, but from whatever mental "secret sauce" calculation Rick applies to that uncertain outcome. The next question would be what price for that bet is implied by the market. Rick would already know the answer because among the first things the interview covered would have been the fully diluted capitalization of the company and the net interest in the project. The price for the bet would be fully diluted times stock price divided by net interest, which might be, let's say $20 million. How that number compares to the secret sauce number Rick calculated for a bet on the $1 billion potential prize would determine whether he sets up a followup meeting between the company and his geologist. If his secret sauce number is lower, he would not be interested. If it is similar he would be interested and check with his geologist's schedule. If the secret sauce number is significantly bigger, he would check with management for the earliest possibility of a meeting with his geologist. The IPV chart above shows Rick’s secret sauce in action.

Much to everybody's disappointment, Rick was onto my secret sauce extraction strategy, mumbled about the unfairness of having only 45 seconds to answer a question that requires an entire dissertation, and directed the audience to my web site (Outcome Visualization) where they could find my version of his secret sauce, which is encapsulated by the uncertainty ladder below. The uncertainty ladder is the key to assigning a price to the value of a potential outcome based on the type of information that will be available at the exploration stage of a project.

Whether or not Rick was suggesting that his secret pricing sauce is similar to my not-so secret pricing sauce I do not know. Perhaps his secret sauce is imaginary. But the real point of the discussion is the restrictions that the regulatory system imposes on management with regard to talking about something that does not yet exist, which is what every venture is all about. Since the regulators are never going to make it easy for the management of a resource junior to spell out their vision in economic geology terms, it is perhaps a waste of time even bringing it up. But the reality is that the resource juniors no longer have an audience for discovery exploration projects because the public does not know how to visualize a potential outcome and price a bet on that potential outcome. This is a problem for Rick Rule, because he specializes in seeking out good speculative value on the assumption that he can capture the arbitrage when the market re-prices the stock so that it represents fair speculative value. I do not think the regulators will ever allow the management of resource juniors to articulate their outcome dreams. And that leaves Rick Rule stuck with good speculative value bets that simply turn into bad bets when exploration work kills the geological hypothesis without the market generating an anticipatory speculation cycle. One can just see the regulators chortling from the sidelines, "Rick Rule thinks he is so smart scooping up good value, but he is really a schmuck buying lottery tickets". But there is nothing the regulators can do about private individuals "connecting the dots" to create their own version of management's internal "scoping study", and sharing that outcome in a public space where everybody can examine the assumptions and judge the plausibility of the potential outcome relative to the 43-101 enforced disclosures provided by the company on its web site. Get enough members of the "crowd" to visualize potential outcomes for a project and share them with everybody else, and we end up with the basis for a consensus potential outcome that can become the reference for the market's valuation of a project. Rick Rule cannot build something like the Outcome Visualization System because he owns a brokerage firm which operates under the regulatory system. There are good reasons why he evaded my question by directing the audience to my solution to the problem.

Structural Issue #4: exterminating the juniors by blocking the fund-raising channels

Even if something like my Outcome Visualization System became a reality, the fourth structural change is turning into a deadly problem for the resource juniors. That change is the shrinking of the gateways through which capital ends up in a corporate treasury where it can be deployed to sustain the management team and fund the exploration programs it designs for its "value creation" strategies. There is an effort afoot to make rights offerings easier to conduct, but rights offerings, which are popular in Australia, usually exclude participation by shareholders resident in the United States unless they are institutions. Most of the resource junior financing during the past decade has come through the private placement mechanism whose main channel is the "accredited investor exemption". An accredited investor is somebody with a net worth in excess of $1 million not including the equity in the primary residence, or $200,000 earned income during the past two years with reasonable expectation that such income will continue. That leaves a very large pool of potential placees in the United States, but it badly shrinks the Canadian pool of eligible placees. The situation is aggravated by the CRM whose "suitability" hammer discourages financial advisors from steering their "accredited investor" clients into resource junior private placements.

Nevertheless, it is still possible for investors to track down a resource junior, offer to participate in a private placement, and tick the "accredited investor" box in the paperwork. With a trickle of financing from dubiously "accredited" investors still keeping a badly wounded junior resource sector alive the regulators, led by the Ontario Securities Commission, have escalated their war on the Canadian resource junior eco-system by imposing a requirement that investors accurately complete and submit to the public company an incredibly invasive questionnaire about household finances. I have reproduced images of the three page document below so that everybody can experience the reaction of nearly everybody who has recently contemplated doing a private placement in a resource junior. The universal reaction in this age of identity theft and financial predation has been a "hell no, I am not wasting days to gather all this information so that I can give it to a party the regulators treat as a latent criminal". The regulators will argue that they are imposing this requirement to protect non-accredited investors from the impulse to fib about their net worth for the opportunity to lose their money through a private placement purchase rather than by purchasing open market stock sold short through a brokerage firm managed day trading account. Their real agenda, however, is to deter bona fide accredited investors from funding the resource juniors through private placements. This is a travesty that nobody in the Canadian junior sector dares complain about. And for good reason. More than half the TSXV listed resource juniors have negative working capital totaling $2.5 billion. Until this gets paid back or vaporized through paper debt settlements, none of these zombie companies will be in a position to undertake any productive activity that requires regulatory approval. The entire attention of an army of regulatory employees is now focused on the remaining half of resource juniors who are sitting on a rapidly shrinking pile of $1.9 billion in working capital. If anybody associated with any of these juniors so much as squeaks a complaint, the wrath of these chortlers will descend upon that junior and destroy whatever that junior is trying to accomplish. The Canadian resource junior sector is undergoing a catastrophic failure that a turnaround even in all the four core narratives cannot stop. The simple solution is to abolish any restriction whatsoever on the right of a Canadian resident to invest as much as he or she pleases in a company through a private placement. This will, however, only help if something like my Outcome Visualization System becomes a reality.


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