Thursday, December 17, 2015

Review of The Big Score: Robert Friedland, INCO, And The Voisey's Bay Hustle by Jacquie McNish

A friend of the blog who is an up-and-coming resource magnate sent us a copy of The Big Score, which is about Robert Friedland and the discovery of the gigantic Voisey's Bay nickel deposit in Labrador. (It's the same deposit in which Altius Minerals holds a royalty interest.)

Robert Friedland was a mining stock promoter and is known as the guy who taught Steve Jobs the "reality distortion field". (They met at Reed College when Jobs worked for a time on Friedland's commune / Apple farm.)

Here is the recipe for making money the way Friedland did in junior resources:

  1. Get a huge potential mineral resource practically for free [pdf] from the Canadian government, by staking claims. 
  2. Trade the claims for most of the stock in a shell company traded on a Canadian exchange.
  3. Raise money for the shell from resource investors, at a price far higher than the nominal fees you paid the Canadian government for the claims.
  4. Use some of the money to do your mineral exploration work, which is required to keep your claims active. This plan assumes that you find a huge mineral resource at this point, like the nickel that Friedland's prospectors found, but that is not necessarily required.
  5. Now that you've found the huge resource, raise more money at a far higher valuation. One good idea would be to sell stock to a major mining company so that it is invested (literally and psychologically). Also be sure to stake a vast swath of claims around your discovery; if you don't, another mining promoter will, which will dilute your "brand" so to speak.
  6. Continue exploration activity that will help justify a higher resource estimate and higher valuation. Start thinking about roping in a second major mining company by selling them stock (or signing a joint venture or mineral marketing deal) so that they are invested too.
  7. Now it is time for the auction! If you chose the major mining companies well, they are short on reserves and management will feel they can't afford to lose the auction. (But if that's the case, they probably found you.)
  8. Act crazy in the negotiations, maybe like Khrushchev ("Мы вас похороним!"). That way the buyers will do some of the negotiation for you by thinking on their own, "If we ask for that, we'll get the shoe!".
  9. Read Barbarians at the Gate for how to conduct the auction. They're never over until rounds and rounds of bidding. If the mineral resource is big enough and the companies are desperate enough, the company you sell to should go bankrupt (or at least share price collapse) within a few years after "winning" the auction.
  10. If you took stock in the acquirer for tax reasons, be careful holding it for too long. Do you really want to own stock in a company that "wins" auctions for commodities in the ground? Remember, if they were smart they would be selling the stock they bought in you in step five, not buying more, so that they could maximize shareholder equity, not market share!
Note that some of these are Friedland-proven "best practices", and some are things he should have done. Read the book to find out.

4/5.

13 comments:

glennchan said...

My take is that he just got lucky. One of his original ventures was in underwater mining/excavation, which is just stupid. Another one was Galactic, which was an environmental disaster. Then there was Diamond Fields Resources... a company looking for kimberlites and diamonds. They got really, really lucky and discovered Voisey's Bay, which does not contain any diamonds at all.

In mineral exploration, somebody is going to get lucky and make a lot of money. The same is true for people who buy lottery tickets.

James said...

My take is that he just got lucky.

On the other hand, another company he founded discovered the Turquoise Hill deposit in Mongolia.

whydibuy said...

Resource stock promotions have always been a big business on the TSX for as long as I can remember.
Resource promotions are the promoters favorite scam as you can make any kind of valuation claim and exaggerate the mineral deposits ( if any ) assessments with help from scam geology pumpers whose reports can be tailored for the promotion co. .

A U.S. one that just imploded was Miller ( MILL ) which was a obscure little oil well co that bought the remains of Forest oil for 2 mil at auction ( no one else would even put in a bid ) and immediately reassessed the value to 250 mil. It was interesting to watch this promotion in action and at one time, they had the stock up to 8.00 which I think was a value of 500 mil.

Another was Houston American oil (HUSA )who had a claim in South America which was promoted as a whopper field. Only thing was that it was a cast off from South Korea oil who abandoned the claim as useless. They had all kinds of happy stories about nearby fields producing great volumes. As always. That promotion got the interest of Mark Cuban who shorted that scam at its peak of about 20.00 share.
Resource pumps are so common I don't even notice them anymore.

CP said...

Correspondent comment:

"you gloss over some of the sketchier/funnier stuff (paying all the boats to look busy while you wine and dine the investors in style), and selling cheap stakes to analysts and other big people at the investment banks that will promote your stock. You are focusing on the resource part a little too much (and ignoring how difficult and interesting it is to find a world class claim) and less on the weird intricacies of Canadian business (see quote on back cover of book)."

Taylor Conant said...

CP,

A couple questions:

1.) How cynical do you think he was in going through this "recipe"? For example, do you think he had a purposeful intent to engage in dubious, high-pressure, marginal business practices from the get go, or was it that he was involved in a dubious, high-pressure, marginal business and simply reacted to his circumstances piecemeal and looking back in hindsight it seems like an artful recipe of malice?
2.) Imagine you had such a "recipe" with an appropriate opportunity before you to apply it-- could you do it? Could you get yourself to do it? Or do you think you'd purposefully walk away from a "sure thing" due to the moral reprehension?

CP said...

One thing to keep sight of is that his company did find a huge, valuable mineral resource.

So while many of his business practices seem (at the very least) unsavory, and I wouldn't choose him to manage my money, he's not a value destroyer like George W Bush or the management of RadioShack.

CP said...

Only about 15 percent of drugs that begin clinical trials are ever approved by the F.D.A., one investor tells me, but along the way there is plenty of opportunity to hype, and as another investor says, “The beauty of biotech is that nobody is ever prosecuted for inflated claims” meant to lure investors.

http://www.vanityfair.com/news/2015/12/martin-shkreli-pharmaceuticals-ceo-interview

CP said...

This whole topic is right up Glenn Chan's alley:

Ways to inflate/deflate oil and gas reserves
https://glennchan.wordpress.com/2015/11/30/ways-to-inflatedeflate-oil-and-gas-reserves/

Mine economics explained
https://glennchan.wordpress.com/2015/07/08/mine-economics-explained/

Figuring out the skill of mining CEOs
https://glennchan.wordpress.com/2015/04/22/figuring-out-the-skill-of-mining-ceos/

CP said...

Mining: who are the sharks and who are the fish?

Norman Keevil of Teck Resources strikes me as unconventional and entrepreneurial in the way he ran Teck. He made a great investment in Diamond Fields Resources, which would later turn into the Voisey’s Bay nickel mine. By buying a stake in Diamond Fields, he gave the company credibility that would help Robert Friedland sell the company to Inco at a very high valuation. However, since Keevil stepped down as CEO, Teck isn’t quite as well-managed as it used to be.

https://glennchan.wordpress.com/2014/09/03/mining-who-are-the-sharks-and-who-are-the-fish/

CP said...

Smart fraud

Estimating a resource (e.g. oil, gas, minerals, etc.) is inherently subjective. Because of this, there is room to be overly optimistic. Many management teams in the resource sector have figured out that they can pressure their reserve estimators into delivering inflated estimates. The interesting thing about this is that management can blame the engineer if there are problems with the estimate. Management can basically get these engineers to lie for them without having to take any responsibility for those lies.

https://glennchan.wordpress.com/2014/06/10/smart-fraud/

CP said...

If a junior miner funds something other than its flagship deposit, watch out!
https://glennchan.wordpress.com/2013/12/22/if-a-junior-miner-funds-something-other-than-its-flagship-deposit-watch-out/

How to bury material information if you’re a junior miner
https://glennchan.wordpress.com/2013/11/26/how-to-bury-material-information-if-youre-a-junior-miner/

CP said...

Why would anybody want to invest in independent oil and gas?

"The current situation doesn’t make a lot of sense to me. The management teams at these companies don’t give investors enough information to value the assets. I think that investors would demand such information. They should know the historical and projected decline curves of their company’s assets (for each basin the wells are in). This is very basic information that investors need to perform their due diligence."

https://glennchan.wordpress.com/2013/12/10/why-would-anybody-want-to-invest-in-independent-oil-and-gas/

CP said...

How would a sociopath fleece investors in mining?

"A sociopath would try to have a senior mining company buy out their company. Some seniors may do this if they can pay for the purchase in overpriced shares (or they may simply do this because the CEO was duped into making a dumb purchase and surrounds himself with yes men). The wonderful thing about this is that the senior miner has a vested interest in perpetuating the lies. If any feasibility studies were overly optimistic, the senior miner is unlikely to correct that. For example, Cliffs continued to repeat the lies about how Bloom Lake’s cash costs would be $35/ton after buying the deposit. Any fallout from the fraud will be delayed and likely will not stick to the perpetrators. By the time the lies are uncovered, most people will have forgotten about those responsible and won’t connect the dots."

https://glennchan.wordpress.com/2013/11/11/how-would-a-sociopath-fleece-investors-in-mining/