Legends Abridged - Eric Sprott

Eric Sprott made much of his money from financial services.  Sprott physical metal trusts, investment advisory services, lending, and the like.  However, there is no denying that he also has made a massive number of personal investments into individual companies in the mining space, that investors view an individual investment from Eric Sprott as a kind of vetting of the company, and that he is held with great reverence by natural resource investors.

Eric is pretty outspoken on market manuipulation, metals price prediction, and other topics.  I'm going to just cover his philosophy on how to invest.

Lessons

• Rotate Sectors As Sectors Change In Relative Attractiveness
• Royalty Companies Usually Outperform Steady State Producers
• Expanding Producers Can Outperform Royalty Companies
• Time horizon of 5 months not 5 years
• Steal value by recongizing something the market hasn't anticipated
• Look at the Data
• Look at Cut & Uncut Grades
• Jump To The Conclusion Early
• Metal Price More Important Than Management
• Investors don't have to use 43-101

Sector Rotation

Eric will move money from one sector like physical silver trust to another sector like silver stocks.  He's always looking for the best area to rotate money into.  He is constantly selling and buying things to chase opportunity.

0:22 You're legend in the business no questions there but you did sell a significant amount of the silver trust

Yes

Why?

Believe it or not there are times in fact even today I'm selling silver to buy precious metal stocks. I sold the silver trust to buy silver stocks, I'm selling shares in our company to buy gold and silver stocks, I'm selling even some art that I have to buy gold and silver.  I can guarantee you I have never exited the precious metal square whatsoever. I've never been in that cellar. I don't think  I've sold in my life a bar of gold that I own. I haven't sold a bars of silver that I own, but as a portfolio manager you have to bear where you gonna get their best action for your money so there'll be lots of times that we will reduce some sector. I think is one of the great times of course where the stocks are way more compelling than the underlying [metal].

Expanding Producers Can Outperform Royalty Companies

14:15 I had an interesting conversation I think it was here at Sprott Money with Joe Mazumdar of Exploration Insights and I also spoke with David Garofalo who I'm sure is a guy that you know and they both suggested that in a period like this where metals prices are flat but yet inflation is rising and so your input costs are going up that it's that's generally a better time for like a royalty company rather than a producing mining company what are your thoughts on the shares in general at this point?

Let me deal with the royalties first. Of course that's perfectly true because their costs don't go up and the proceeds stay the same essentially. They get the value of the gold with no cost so yes a royalty company is has better prospects going forward to get an outsized return versus a stationary, and I stress the word stationary, gold company.  Now, most gold companies aren't stationary. However, they're out looking and they spend a lot of the money that they generate from mining on trying to find new things. If you can find a mining company who's producing x and in three years he's producing two times x.  Yes on the x the guy who's got the royalties going to outperform them, but if if the guy with x goes to 2x the royalty company hasn't done that. They're sit there with their royalties and so there's lots of opportunity.

5 Months Not 5 Years

38:09 I would wish that the managements would think about what happened to the stock if i do this [acquisition] and some of us don't like to wait for the five years to to see it manifest itself.  We'd much rather see it manifest in the next five months so I just put that out there.

Short Selling

0:39 I've done lots of short selling in my life because I recognize there's anomalies in the market for example the nasdaq peak in 2000 the great financial crisis in 2008.

Steal Value

I think of this as make money by recognizing things the market hasn't priced in yet.

1:14 My core investment philosophy, it is going to sound odd putting it this way, you have to steal value.  In other words, you have to go and find an investment opportunity where it's incredibly inexpensive vis-a-vis the market.  If it's not inexpensive vis-a-vis the market you just buy the market.  So you have to go out and look for something that's particularly appealing that perhaps there's things that are likely to happen that the market's not prepared to anticipate yet but you can foresee that it should happen. For example if somebody's exploring and you know it looks like they got pretty good ground maybe they hit something and you've anticipated that.  [Maybe the] price of gold going up or silver going up, things like that that the market's discounting or perhaps even projecting. Things going opposite where you might think they're going and you have to learn to take advantage of those opportunities because of course the rewards are quite incredible.

Look At The Data

7:15 I think the best way is to find an undervalued investment vis-a-vis what's out there there's lots of data to use whether it's production per ounce, production per, market cap, resources per market cap, cash flow per market cap, orearnings per market cap.  Those are all the kind of milestones that one would use and if you can find someone that is arguably much much cheaper than the norm i think those stocks will certainly outperform in the medium term versus the regular market.  It's been my experience that you can find those situations. I remember buying Gold Corp back in 2000 when it was all of like $500 million market cap and i think it might have got up to something pushing $20 billion. Just as there were non-believers in the red lake deposit at the time and as it turned out it was a great deposit one could have kind of figured that out based on reading the annual report so if you do a little homework you can find things that that are incredibly um great investments.

The Phenom Conference 2018 is one of Eric's better talks for investors.  He gets into a lot of great stories and detailed numbers.  

Look At Cut and Uncut Grades

Sometimes the data is in plain sight, but realizing the importance of data and interpreting different than everyone else can lead to big investment returns.  Here Eric gives to examples in Red Lake and Fosterville where there were big differences in cut and uncut grades.  He was able to dig into that difference and made outsize returns because of it.

18:00 I should tell you that one of the things I learned by being a numbers guy and I learned this when Gold Corp discovered Red Lake and Rob McEwen had the audacity to show the cut grade at the Red Lake mine and the uncut grades. You know, that's kind of verboten right?  You're putting the uncut grade in here how do you get away with that? Rob was a bit of radical I don't know if anyone would know that but he was a radical okay and so the cut grade was one point two ounces and the uncut grade was two point one. Now I can guarantee the difference in profitability between two point one and one point two it's probably a factor of three or four and I can tell you that the analysts will use one point two because they're analysts. I don't have a very high regard for analyst personally, they're very rarely see things at a time works or forecast and here's Rob say the uncut grades 2.1 ounces with that in there but that in your mind no we don't do that we're not gonna do that. We know better than that.  So I went and visited Rob with his geostatistical guy and and it seemed obvious at the end of the conversation that the two point one was gonna carry. It would be two point one as it turned out it was two point two. Having had that experience now I go to foster[ville] I see these great and it's funny because I have a calculation in my hand of all the holes with all the grades and I did an uncut grade and the uncut grade I came up with in the new zones was 75 grams and our guys down there they used to cut off okay and the first cut of they use was 25 grams, the second one was 50 grams, and the third one was 75. Now you can see that's very scientific, okay 25 50 75 a lot of science went into that decision [sarcasm].  I kid him about that these are our deals down in Australia and I actually looked at every intersection and I saw that there was about a hundred intersections of over triple digit grades on over a hundred grams of 300 well you know what that's not anomalous that is not anomalous cutting is to get rid of anomalies well it wasn't anomalous and now we've got our grade at Swan up to 61 [g/t] but the point I'm making is the opportunity to figure this out was there all along. the stock was five or six or seven bucks we're announcing these drill results everyone's under estimating the impact of the results the stock starts moving up you know we're now at $27 stock okay five to twenty seven like yet that's four hundred and forty percent oh I'll take that take it for three [bagger] that's pretty cool all right.

Jump To The Conclusion Early

35:27 What's going on there and they're gonna do a circus drill program trying to extend strike. This is only down to 120 meters. Now let's put on the truth hats okay they're in the Abitibi, is it only going to go down 120 meters? Huh? Agnico what's a deeper they are down to like a mile underground. Like, how could it only go on here 120 meters. Sure, god, it's gonna go deeper than that. Of course they have some indications of a long strike and down below but they don't have enough drilling, and if they don't have enough drilling then they haven't made a case right? Wrong! They have made a case! That's the whole point, you got to jump to the conclusion early okay you don't get to have all the drilling and steal the stock! I sometimes describe my investment style I'm in the stealing business. I take data that tells me it's a steal because I want to steal things.

Metal Price More Important Than Management

8:16 Well of course Meb, the first thing is the prices of the underlying products. I know this is going to sound a little unusual but the prices of the products are more important than management. If the price of gold goes to $2,000 [per ounce] let's say it goes to $10,000 [per ounce] everybody with a deposit is going to look like a hero. I don't care how bad of management they are. So price is a very very important consideration.

Investors don't have to use 43-101

25:00 These 43 101s that these companies are forced to produce are always conservative because the guy signing off wants to make sure that the ore deposit is better than what he's signing off on. If you can look at the data, the numbers now and say well you know this is going to be a lot bigger than this report, suggesting you have a leg up on let's call it your competition.  Your competition is an analyst who's at a major institution who who analyzes by the rules.  He's got to use the 43-101. I'm an investor, I don't have to use a 43-101. In fact, I think 43-101s are not helpful to stocks. They tend to understate things, plus they stop at a point in time. Well, over time things get better. Typically in the mining business, I mean think of Red Lake, it's probably mining for 100 years Mccass has been mining for 100 years they they're finding more high grade now than they've ever found there. So you can't use something that stops in time and use that as your your benchmark. You have to let your mind kind of go there and see that it might get bigger.