Bear77
As this podcast proves - https://rogermontgomery.com/mp3/2GB/06_october_roger_montgomery_talks_value.able__value_investing_with_ross_greenwood_on_2gb.mp3 (Source: What are Roger Montgomery’s thoughts on Silver & Gold? « ROGER MONTGOMERY) - Roger held both Troy Resources (TRY) and Silver Lake Resources (SLR) in one or more of his managed funds in October 2011 (in the gold space). Have a look at what happened to Troy after 2011:
Further Reading: Troy Resources (ASX:TRY) eyes recapitalisation – The Market Herald
And here's the chart of SLR:
While that mention in the Ross Greenwood podcast was basically the "kiss of death" for Troy, Silver Lake went up and did OK for 12 months, until November 2012 when they sunk like a stone. In typical form, RM stopped talking about Troy once they dropped, and he also went silent on SLR after November 2012. He has NOT had a good track record with many of his stock picks, but especially those in the resources space. He has a woeful record in resources.
I think the comment by @Noddy74 above sums it up beautifully - "Time to short Aeris. RM makes Jim Cramer look like a clairvoyant."
Well put sir! Love your work!
Back when RM was hyping SLR, and, believe me, he WAS hyping them, BIG TIME, he said that not only did they have wonderful metrics but a solid and smart management team whom he trusted to make the right capital allocation decisions to keep them heading in the right direction. While the gold price has a fair bit to do with the success of any gold miner, what crushed both Troy and Silver Lake were capital allocation and other decisions made by their respective management teams. In Troy's case, they were developing risky projects in very risky locations, and pretty much all of them turned pear-shaped, while SLR were empire-building, buying up a number of other gold mining companies and gold projects. The biggest acquisition was probably Integra Mining in mid-2012 for A$426 million (45.2 cents per share) which was a 43.6% premium to Integra’s closing price of A$0.315 prior to the acquisition announcement. That was too much to pay, and was the start of a massive negative re-rating of SLR by the market after their EPS started to decline along with other key metrics.
They have made other acquisitions along the way too:
- This year (2022), SLR aquired TSX-listed gold miner Harte Gold.
- In late 2019, SLR acquired EganStreet Resources Limited (was ASX:EGA).
- Earlier in 2019, they acquired Doray Minerals which owned the Andy Well and Deflector gold mines. SLR divested Andy Well the following year (2020) but have kept Deflector.
Growth via acquisition CAN work, but only if you do not OVERPAY. In terms of Integra Mining, Chris Cairns, who built up Integra, was no dummy, and he agreed very quickly to sell the company to SLR at 45.2c/share in 2012, because it was a generous offer that assumed that there was plenty more gold to be found in the tenements that Integra owned, and that the gold there would be economically viable to dig up and process. Things didn't turn out as rosy as SLR had assumed they would, and SLR's share price from late 2012 through to about 2018 showed that.
M&A is just one area of capital allocation where management can make some serious mistakes, but there are plenty of others. I'm not entirely convinced that Roger Montgomery places quite as much emphasis on the calibre of management at resources companies as I do. Resources are not like manufacturing and selling widgets (traditional manufacturing), because what you are producing has a limited supply of raw ingredients, i.e. limited to the deposit you are mining, and when that deposit is mined out, it's gone. Miners have to continually replenish their sources, i.e. in the case of gold miners, keep finding more gold that is economically viable to mine. You can always do that by buying other companies that have already done the hard yards and found the gold, but if you overpay, you can either reduce your profitability and EPS, or in the worst cases you can even go from profits to a loss-making business because your overheads (including interest and capital repayments on debt) become greater than what your gold sales can support. And you can make poor assumptions that ultimately don't prove to be correct, like assuming that a streak of positive hits during drilling will continue or will improve. So when it comes to Resources companies, the calibre (quality, track-record, etc.) of management is ESPECIALLY important, because they can absolutely make or break a company with one or two good or bad decisions. Especially M&A decisions - choosing what they will buy and how much they will pay, or choosing to instead concentrate on organic growth. And choosing when and how much to return to shareholders vs. reinvesting in their own business.
I've got something else I need to do now, so I won't go on, but in summary, I wouldn't take RM's thoughts on resources companies too seriously. His track record in the Resources sector is not good.
Regarding Aeris (AIS) specifically, I think what they're doing now is worth looking at, but their future prospects are probably more important. What they own seems middle-of-the-road to lower quality assets to me, except perhaps for their Stockman project which is currently at the DFS stage (they've already done a PFS). Stockman could become a decent copper/zinc mine, but they're unlikely to be producing anything there before 2025, and that would be if everything went perfectly to plan from here, so there's a fair chunk of risk attached to that, and a fair wait for a payoff as well. Because of that, I'm not seriously considering them at this point in time. They are way too early stage for me.