Thom Calandra: taking calculated yet extreme risks in mining
Thom Calandra: taking calculated yet extreme risks in mining

The Gold Report: Thom, you've been able to identify some tenfold-return candidates in Ghana, Colombia, Sierra Leone, Quebec and Ethiopia. What creates a candidate that can give you a 10x return and how does one find these candidates?
Thom Calandra: Karen, I've been a financial journalist for 30 years. I've focused entirely on natural resources for the past 12 years. I'm also a very heavy investor and I do some investor relations on the side. That combination gives me the ability to meet people a retail investor might not. I like to think I know most of the companies out there with interesting projects.
I've always had my favorite jurisdictions, but my one overarching rule is--and I know this is going to sound bizarre--ignore geopolitical risk. I'm not here to determine where the gold, silver, copper or platinum price is going. I'm here to find extremely undervalued prospectors and producers. By ignoring geopolitical risk, for example Colombia in 2007, I was able to get stuff cheap. Same thing with Ghana in 2002.
Ignoring geopolitical risk doesn't mean there won't be a price hit if there is a government change in mining doctrine or a revolution. Tanzania tax talk concerns me right now, for instance. But it does mean you're going to get in a lot cheaper than if you invest in a more mature economy.
TGR: That infers that the primary reason these companies are so undervalued is the geopolitical risk.
TC: Karen, it's absolutely the perception of geopolitical risk. Let's take Colombia. If you told someone you were going to Colombia, they would think you might be coming home in a body bag. The same applies now for Sierra Leone, Cote d'Ivoire or Liberia. Often perception of risk is not reality. The only way to find value in any investment class is to set aside the macro risk, whether it's geopolitical, investment, currency or any other larger factor.
TGR: What other risk factors do you evaluate when investing in junior mining?
TC: The higher the stakes are in commodities, the more likely there will be fraud. Investors need to be on guard when investing in natural resources more so than when investing in a biomedical company, for example.
There are at least seven mining or prospector risks: geopolitical risk, bad luck, geological risk, fraud, broad investment risk, incompetence and the risk of the commodity markets themselves. I will never invest in any natural resources project unless I get to walk it. I learned my lesson with a tiny Mozambique company called Noventa (NTA:TSX) in the tantalum space; I still own it, but now, after almost running out of money, the London-traded shares are a fraction of what I paid. If I walk a project, I like it, I know the people, and I can understand the structural geology, then I will invest. If I can't go see it, I'm not in.
TGR: To what extent do you think there is purposeful fraud in the metals marketplace?
TC: There's an old joke that natural resources, more than any other industry, have a high probability of companies going to zero, yet they keep coming around the racetrack again and again. I constantly come across companies that have been resurrected from the ruins of a silver mine in Colorado, a potash operation in Saskatchewan or a failed uranium operation in South Africa, and now they're a gold company, a molybdenum company or an iron ore company.
Natural resource businesses are so susceptible to being resurrected because the startup costs are far lower. Someone can more or less start up these companies out of a file cabinet and put them on an exchange. I'm most wary of the Over-the-Counter Bulletin Board dirt-bags in the U.S. and the hundreds of companies and millions of dollars of cheap paper that gets created for seed investors everywhere. Still, I do respect the regulations that Australia and Canada have in their markets.
TGR: What have they done differently than the U.S.?
TC: The NI 43-101 process has become much more rigorous in Canada. The various regional exchanges in Canada, even though they're not well coordinated, do a good job of monitoring press releases, websites and the information that's filtered to investors. Regulators in Canada could do a lot more, but they are more aggressive and attentive to the issues that affect natural resource investors. Australia is similar: very proactive on protecting The People. Also, no four-month hold on private placements, so people will back mostly entities that are a long-term hold and not a four-month trade with warrants on the side.
TGR: Since so many companies come back around the track, wouldn't one of the highest potential risks for investing in the sector be management?
TC: Totally. There is a saying that anyone in this business has many faces, and very few people in this business--whether they are geologists, bankers, financiers or mining engineers--have 100% approval from everyone you ask. There are a lot of rivalries and intense competition. Lots of trash talk. There are a handful of investors, bankers, financiers and geologists whom I trust and who are respected by 99.9% of the people whom I vet them against. That's where I start in my due diligence.
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