Petaluma, CA –
The Gold Report: How does your experience in investment banking affect your decision-making?
Michael O’Brian: As an investment banker, I participated in the financing of hundreds of junior resource companies in many parts of the world, including many that went on to become very large and profitable. The one item that has always affected my investment decisions is people. The most important aspect of investing is the reputation and experience of a company’s chief executive.
TGR: You meet, talk to and get to know the executives before you make an investment in a company?
MO’B: I really do like to talk to the chief executive and get to know the people who are in charge.
TGR: What if you met the CEO, whom you liked and felt you could trust, yet the CEO didn’t have a lot of experience in the junior resource sector. How do you handicap that?
MO’B: I would pass on the opportunity in almost all cases.
TGR: What percentage of your portfolio is in resource equities?
MO’B: About 60%.
TGR: What’s your perspective on the economic crisis in Europe? Is the Eurozone destined to fail?
MO’B: The problem will get solved in the months ahead one way or another. However, there is no question that participation in the euro countries will change. That change will result in much lower long-term growth. This, in some degree, will have a negative effect on the U.S. and Canadian economies.
TGR: You expect a form of contagion?
MO’B: Yes. The problem is going to get fixed, but it’s going to take years to get back to normalcy.
TGR: Could the countries scrap the idea of a single currency and a single political entity?
MO’B: In my view, the euro will continue to exist, but there will be much lower growth throughout Europe. We will have to rely on emerging countries such as China, India and Brazil to pick up the slack.
TGR: Do you foresee stagnant economic growth like Japan has had over the last 15 years?
TGR: Is gold better served by chaos in the European economy?
MO’B: Gold is ultimately better served if there is a stable long-term European economy. Short term, there may be wide fluctuations with gold as Europe sorts out its current dilemma. We have problems in the U.S. as well. Gold is better served with more stable economies.
TGR: How are you using the daily market volatility to your advantage?
MO’B: I’m averaging down on certain investments that I believe to be seriously undervalued because of the problems. There seem to be so many traders and investors who have literally disappeared from the market, resulting in major investment opportunities for investors looking for long-term capital appreciation.
TGR: How often are you making transactions?
MO’B: I’m not trading every day. I will only come into the market as I see exceptional opportunities.
TGR: Where are you finding those opportunities?
MO’B: I like companies that financed earlier in the year, have cash in their treasuries, yet the prices of their stocks are trading substantially below their financing prices even when they are achieving excellent results as a result of exploration drilling.
When the markets return to normalcy, there is big potential for appreciation. There is also the potential for a number of these companies to be acquired by larger companies because they are so undervalued.
TGR: Do the companies that fit that description have liquid stocks?
MO’B: Yes, absolutely.
TGR: Is that key?
MO’B: It is important. There are opportunities that do come up from time to time with companies that do not have a lot of liquidity, but for the most part, I like to know that I’m going to be able to sell my position under any circumstances.
TGR: We’re starting to see an absolute bottom for junior equities in the resource space. How long before we start to see this sector rebound?
MO’B: We’re basically at the bottom at this point. There are substantial opportunities in today’s market.
TGR: What are some other factors you use to choose between these opportunities?
MO’B: I look for companies that can be successfully rerated as they add ounces from their major exploration drilling programs and, in some cases, feasibility reports that might be coming out. Also, I look for companies that are so undervalued that they have the potential to be taken over.
TGR: Let’s look at the commodities side of the equation. Is your investing strategy for juniors at $1,500/ounce (oz) gold the same as it is at $1,700/oz?
MO’B: It is the same. Quite honestly, it would be the same if gold were $2,000/oz.
TGR: How far would the gold price need to fall before it starts to affect your decisions?
MO’B: That price would be $1,100/oz. Equities are trading at such a low multiple presently that I am more inclined to be buying gold equities than gold.
TGR: What other principles do you strictly adhere to when it comes to junior resource equities?
MO’B: A company must either be well financed or have the capability during difficult periods to finance. I also take into consideration the location of the property and that country’s political regime.
Infrastructure is also important. Having a good handle on the infrastructure is going to be needed for production decisions down the road. This would eventually show up in a prefeasibility or feasibility report, but a company should have a pretty good idea from an early-investment point of view. I also like to know when and what kind of exploration drilling program is underway and how far out a prefeasibility or feasibility study is.
TGR: Do you need at least a preliminary economic assessment before you invest?
TGR: All things being equal, what type of project would you be most likely to invest in: gold, silver, copper, zinc or nickel?
MO’B: Quite honestly, at this time I am more inclined to be invested in copper, but I like gold and silver. There are other commodities that I like as well that aren’t as widely invested in, such as graphite and manganese. I’m always open to specialty projects.
TGR: Are you telling me you would choose a copper project over a gold project at this point?
MO’B: There are so many factors. I’d probably invest in both. Goldman Sachs came out recently with a report saying that copper may be unimaginably high in three years. It is very difficult to compare copper to gold because investors buy them for completely different reasons. It’s important to have positions in both.
TGR: What’s one thing you want to learn at every site visit of a mining project?
MO’B: What I get from most site visits is that I learn more about the management of the company. A properly managed site visit where the company prearranges to have its geologists and engineers at site to speak to the group and has a whole agenda prepared and followed in a timely fashion is indicative that the whole company is run in that same efficient way.
TGR: Do you like to have a look at the core?
MO’B: It’s interesting, but not crucial. I rely on what the geologists are saying about the core.
TGR: Could you tell us about a site visit that went wrong and how that experience kept you from becoming an investor in that company or prompted you to sell your shares?
MO’B: I remember one occasion in Africa back when I was financing companies. I was unimpressed with the way the whole event was arranged and conducted. As a result, we passed. As it turned out, it did not prove to be a good experience for the investors who did invest.
TGR: And it can be something as minute as not arranging things efficiently on the tour?
MO’B: That’s right. Or not having the right people show up, like the geologist or the engineer. These are important factors.
TGR: When you are not investing in resource stocks, you are an avid art collector. Is there anything you have learned as an art collector that you’ve applied to resources investing?
MO’B: Collecting visual arts is a passion of mine. My art collection has definitely appreciated in a fairly major way, but I have never bought art to sell. Collecting is something I enjoy. Art as a long-term investment is a major theme for me. I apply that same principle to my investments in the junior resource marketplace. I always take a long-term approach and add to my positions during market weakness. Whether it is resources or art, one should be investing for the long term. I am always looking for undervalued situations in both the art market and resource stock opportunities.
TGR: Thanks for your time, Michael.
Michael O’Brian‘s career in investment stretches back to 1958 when he worked with the Bank of Montreal as an inspector throughout British Columbia. He later served as an institutional and retail representative with Pitfield Mackay Ross, now RBC Dominion Securities; a director and vice-president of Canaccord Capital; and president and chief executive officer of C.M. Oliver & Co. Over the past 12 years, O’Brian has concentrated on investing in natural resources and technology companies. He was a major shareholder in Gateway Casinos Inc., which was started with a group of investors for $2 million and sold 16 years later for $1.3 billion. Today, O’Brian is a director of numerous private and public companies. He is also is an active supporter of philanthropic pursuits and an avid art collector.
Article published courtesy of The Gold Report – www.theaureport.com