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 thank you I'm Charlotte McLeod with the investing News Network and here today with me is John Hansen he's a private investor who has been investing in the gold and silver mining companies for 21 years thank you so much for joining me it's great to have you here oh I'm delighted to be able to participate this is going to be fun it's going to be fun and just for our audience a little bit of context on how this conversation came about so you ended up meeting one of the partners

at in at pdac and he told me that I had to talk to you about your due diligence process for looking at companies in the mining sector so I reached out to you and luckily you said you were okay to come on and talk us through it so we're going to get into that but before we do I thought maybe you could tell us a little bit about your background and how you got interested in the mining sector okay well um my education was in engineering and then I got a master's degree in business and um I was

co-founder of a Manufacturing Company back in the 1970s with two other engineers and our company manufactured stained glass and um so that was very successful we patented a new way to produce the product and uh it was a glass 1 8 inch thick by two foot by four foot sheets we made all different colors mixtures of colors and textures and I managed that business for 25 years as the president and the plant manager and the chemist also and in 1999 I chose to sell my interest and retired after a couple

years so that my last paycheck was in uh 2022 or 2 2002 it made so that was the 21 years and so then after that I I had money to invest because I sold my interest in the business and um and I got interested in silver and uh began reading about that and of course the price of both gold and silver was very low in 2002 um silver uh was about five dollars an ounce a gold was um maybe 300 something in that range but my primary units at that point was in silver so I actually bought a lot of silver bullion at that

point for five dollars and uh and then in 2011 when the gold silver ratio became very low uh it was down to 33 which is a very low number I actually traded some of my silver for uh gold bullion and I bought the uh some uh gold Maples which I still own so and then of course things changed in 2012 and instead of a bull market we had in 2002 and 12 where I I made a good deal of money investing in silver miners I became more interested in Gold because it wasn't as depressed but during that decade I didn't do particularly well as

I don't think money most other people did either but now we're in a new phase and so I'm excited again and um and was very sorry that the pandemic happened because I I started to get interested again in buying miners in 2020 and um and went to the resource investment conference in Vancouver at that time and also this Metals investor Forum thing with newsletter writers and that's where I met Sean tufford who was doing investor relations for ordin and of course Sean is then how I he and I spent

the weekend here at the recent pdac and he uh went around and introduced me to all kinds of people one of which was your Chris Smith so um that's how that connection happened yes okay thank you for for sharing your background I think that helps us understand a little bit about who you are and why you're interested in mining so now I want to get into your due diligence process and where I want to start is you have a particular way of quantifying risk and reward so we'll be bringing up your chart on the screen

here but if you can walk us through your strategy there okay well of course the uh the real issue that we uh work with in making a decision about an investing or lots of other choices that we make we're always whether we recognize it uh overtly or not we're evaluating the potential reward and also the probability that that reward will happen and so what I wanted to do was to find a way to quantify that and I actually learned a technique called expected value Back in 1970 when I was in the

business school and I've used it ever since and then basically what I'm doing is if I'm looking at a particular Mining Company I will assess what I believe will be the result of that investment over a two-year period and what would be the best result that I could imagine and then I project what I think the probability of that investment of achieving that result will be multiply the two together and get a number called the expected value and so if you look at the chart when we plop it up you c an see I'll describe on

that chart um six different situations that you couldn't would encounter in investing in gold and silver and then I'm doing an estimate of what I think the best potential result would be for example the one at the top will be exploration type mining companies okay and so that I might put in a uh expect the very best expectation that I could achieve which would be 20 times my money and but the other thing I'm assuming going into this is that the gold price will appreciate over the next two years

from 2000 to 2500 per ounce so that's that's built into this okay and so then you'll also see on that chart where then I'm saying well what is the probability of that happening and my assign a five percent probability and that's probably high because it's very rare for companies to go out and be successful from the beginning for so many reasons I mean there could be a good project and uh but if they don't find a lot of gold right away they could run out of money and that happens more often than not

because the market isn't very strong and and there's now in fact hundreds of mining companies propping up that all want to go out and drill holes and find gold and silver and so they've all got this this same wonderful story that they're all trying to convince you to give the money so there's a lot of competition for the money and um so anyway that's why I think the probability is so low end the experience that I've gained over the the 20 years I've been doing this and learning from

other people so that's the first item on the top then the one at the bottom is the lowest risk version of how that and that would be the royalty uh and streaming companies which I noticed like Frank Nevada Royal gold uh Wheaton precious metals and uh and and that is absolutely the lowest risk primarily because they're not even Miners and they're actually investment bankers and so they have much less risk in the invite and invest in a lot of different projects so they're very well

Diversified so very minimal risk although there is some risk because some of them invest in projects that don't work and then they lose their investment but that's fairly uh fairly rare so and then there's another group in between so if we look up that chart maybe we can talk about that you can ask me um about that and why I have what I show what I do all right we've talked about the top end of the risk reward and also the bottom end but of course there's the middle so let's take a look at how that looks

the next risk category below Explorer is explorers that have sufficient drill results to convince investors that the project will become a mine but they don't have any 43 101 or or uh pea preliminary economic assessment numbers and whatever and so I'm giving them the probability of that one as 20 but with the six times appreciation okay then the next one is um where they have a 43.1 and a pre-feasibility study management team that's obtained Drilling and permitting and financing and the production in in

two years with growth potential and then I'm saying well that potential well that one is four times with a 50 probability okay so the probability is getting bigger as we go down then the next one is one that's in a company that's in production and has potential to increase by two to three times their production and I'm also giving that a four times with a sixty percent probability and then there's another one uh here small royalty company with top management and strategy and I have a

particular company in mind when I'm saying that because I don't only know one and that's before times with sixty percent and then um so in other words that would be a 2.4 uh expected value then there's a producers whose primary growth is by acquisition and I say the probability of that would be 75 but only a double only two times and then the bottom one is the large royalties and I'm giving a uh a gain of two and a half times but with and ninety percent probability probability

so that would be like a 2.25 number so the ones of course that I like are the ones over over two and uh I I should maybe also explain how I use that in terms of telling people when they ask me okay if I'm going to get into investing in these kind of companies how should I approach that and and basically what I do is is talk about it in terms of the risk pyramid okay at the very bottom what I don't show there is gold and silver bullion that's the or the only risk then is the price of gold and silver and and and you

and you really want to start there and that's the the Bedrock that's where you want to preserve your wealth and and uh and just as an example of how powerful that is primarily with gold which is the wealth preserver as an interesting statistic that I ran across where it said that in 1913 110 years ago when the FED started um the price of gold was 22 and the price of oil was one US dollar so a price of an ounce of gold would buy you 22 barrels of oil at that time this year the recent gold

price has been in the 1850 range say approximately and uh the price of oil has been in the 75 or 80 range if you do the math that's about 23. in other words over 110 years the most important commodity in modern civilization which is oil has been able to produce an ounce of gold has been able to produce the same in other words that's wealth preservation and that's why you want to own gold silver is more volatile and more of a speculative investment in my opinion and the reason for that is that

silver is unique in that it is the only metal that we take out of the ground for which the amount that's produced every year is not price sensitive and you may say well because everything else is of course you know when the demand goes up the supply goes up and vice versa that's not true in silver and the reason is that 70 of all the silver produced is a byproduct of something else so if you're a copper producer and the price of silver goes up you don't produce more to get more silver you just

focus on the copper so that's why that you see such volatility in the silver price so so this risk reward this is the first step for you when you're doing your due diligence you also have analysis that you do on market cap and gross margin and again you have some charts that we will put up on the screen you've done this for gold miners and you've done it for silver miners so I was hoping you could talk us through how you do this calculation and what it tells you about these companies that's

important for you to know absolutely and and I should mention that the the expected value calculation is actually the the last thing I do I do all the other analysis and research before there and then it's then and then it becomes then a way to actually have a proper input into what I think I might expect would be the best outcome but I have to do all the other homework first as well as the probability that that might be successful again because I have to know all the other things about them

and their circumstances and every one of the companies are different so that's why it becomes the last thing okay so um in terms of the market cap to gross margin analysis um what I do for each company I go to the corporate presentation and mo these days with the internet being what it is every company even small ones have a very good corporate presentation that tells you all about them how many shares are outstanding and fully diluted I always use fully diluted and then at the time I will find the share price and

multiply that and that gives the market cap our capitalization for that company at that point in time so that's the first item on that list then the other part is basically I'm calculating my version of what would be a price earnings multiple only I've got the price being the the market cap and the earnings I don't go into the effort of finding the the actual earnings because I don't want to spend all the time to go into Cedar and pour over the P L's and all that because every company that's

producing or even planning to be produced will provide us with what they call an all-in sustaining cost of production and they all do that now and you can find that very readily so I use that number and I will then multiply that number times the number of ounces of gold for example that they're going to produce and sell and so then that's my cost uh in total dollars and then I'll multiply uh in in the case of what you're showing 1800 gold price times that same production and sales number

okay and that will give me a gross margin that is the margin between and and I call it gross margin because that's not all the costs uh there's also going to be uh g a uh General administrative um legal and accounting and interest expense and uh offers or salaries all that stuff so that's an another increment in silver that would be about two dollars an ounce worth in gold maybe 150 an hour but something like that so but it's very convenient to do it this way because there's a lot of other stuff

that changes and it's a lot harder this is it easier and it gets me close enough to what I want to see to just use the all and sustaining cost so then I get this gross margin number and you'll see that then on that list and then I take and take the market cap in the numerator and the gross margin in the denominator and get a ratio and so that's the ratio that you're going to see on these charts also on the charts I'm showing what that all this data cost is and they also show

um in uh the uh yeah the only sustained cost which is uh for gold actually averaging around 1200 12.50 per ounce and that's so gold miners are making good money they're because it's 1850 so no they got it and they're making good profits and a number of the larger gold miners are actually paying dividends and so is the royalty so that's another reason for the people to buy it and hold the people they're getting something just to wait as well because they're making money in the silver side if you

look at the all this daily costs over there at 22 Silver there's some of those companies aren't making any money at all because they're on sustainable cost is like 19 but then you add in the GNA there's no profit there so that's why you are going to see on these charts where the multiple on the silver miners is over twice what it is on the gold miners and that's because the gross margins in the denominator and there's so little profit that it makes it look really skewed but

the interesting thing I did because I've been doing this a long time I went back in my files and I looked at the calculation for silver miners in 2011. and it was roughly the same ratio as what I'm seeing now on the gold miners because they were making good money back at that time when silver was 35 or 40 dollars so we'll see that on the charts when you show them how the the average because I'm taking all the all the gold miners and average out the multiple which is seven and a half and then I average out

the silver Miners and that's like 20. but and then I leave out one of the silver Miners and I'd love to talk about that one because it's very interesting and it happens to be my absolute favorite investment at the moment which I learned about and actually had a face-to-face meeting with the CEO at pdac and uh it's it's an extraordinary company yeah why don't you tell us about that one because I think that's that's something that people would definitely want to hear more about okay would you

like me to do that now please yes okay I just learned about this company in uh six weeks ago when a man named Rick rule had something a podcast deal called a silver boot camp and and he had different speakers on it and one of the speakers was the CEO of a company called Aya gold and silver a-y-a and uh so I thought I was so impressed with it that I bought quite a lot of it and it is up 30 in the last six weeks Silver's been doing well but the thing that is unbelievably interesting about that is that in all this time that I'm

investing in silver miners it is the only company that I have ever run across where 100 of their revenue comes from Silver if you'll look on the papers that I'm showing you it has actually on the left side the percentage of silver that is the revenue for the company and how percentage of gold and the average on those everybody else is like 50 is silver Revenue and and in Pan American silver which has silver in the name it's only 25 percent and of course a lot of the reason for this was that silver price was so bad

for the last 10 years but these miners actually went and got a gold project so they could survive or they went out of business I mean there isn't also only a few silver producers on my list because there aren't very many that even contain a complaint could say that they're producing silver but it's only like half of their revenue but this Aya it's 100 percent and so that you if you like Legend leverage to Silver and silver price then that's your thing but there's a lot of other things that

are interesting about it too and I'll be happy to talk about that but one of the things I like the location it's in Morocco which it may be in Africa but it's up in the northwest corner of Africa right close to Spain uh and it's a very stable country lots of mining going on there uh Morocco is the largest producer of phosphate which is very important in fertilizer and uh and and and then most of the border of it is the Atlantic or the Mediterranean uh oceans to the South there's a row of mountains called the

Atlanta I think it's uh Atlas Mountains and South that is the Sahara Desert for like hundreds of miles so and to the E you know East is Algeria which is a very prosperous country so in other words it's a safe place and it's a Muslim country but but uh at least half of the legislators in their legislative body are women so it's it's not you know an Iranian type kind of Muslim country it's very European and uh yeah so enough about that but anyway that's why I'm excited

about that company and why then when I do my calculation of my expected result the best effective result times the probability I get over three okay that's really interesting I like that you have an example that can show exactly how this process works yeah I wonder if you want to talk a little bit more about so we've looked at your calculations and all these different things that you do we're kind of getting into now other elements of due diligence like management jurisdiction maybe you

want to talk a little bit more about that and some of the questions that you think it's important to ask of these companies oh absolutely and and I've always learned over my lifetime that actually the most important thing when you do analysis is not finding answers it's asking the right questions so then the then so then you really focus on that and you need to make a list that you refer to every time you analyze a new company and and so that you can make sure you don't forget any

so that's a discipline that I try to follow all the time because it's easy to forget them and it's also why I like to go to places like the pdac because then I'm on Prime with all the questions and I ask the management and I that I really like to do that whenever I can but I could go through the questions um of course management is an enormous item so I like companies where the management has not only done mining projects before but preferably they've done the same metal in the same general

location like maybe they've done all these projects that oh they're open pit projects in in Mexico I have a company that I like a lot called Monera Alamos nor they've done it before and then they are really good and they've done it in Mexico or it could be in uh Quebec or whatever but I like that another one you want to look at is location you you want to be very concerned about the country that you're going to go in you don't want to go into Venezuela or Russia or Argentina either I mean these are all

issues that are problematic and sometimes this kind of even changes one of my favorite companies was in Chile and it had a management that had done it before and in the same type of project and everything and and the government changed and the new government rejected their permit because they and the previous government said that they did all the environmental stuff just fine and they knew people uh bumped it and so I'm way underwater on that company so that there's a reason why I don't ever

put 100 on the probabilities but uh so that's the the location the other piece that's important is um do the people who are financially supporting this company uh do they have Deep Pockets are they going to be willing to Pony up for the next round of investing that's especially true with the Explorers because they if they don't find gold or silver right away or insufficient quantity and the Market's week then they go out of business and then that happens painfully frequently but then there's

also for example in gold is it an open pit or an underground project I very much prefer open pin because there's so much less risk in it you need to to do drilling you've got to do more drilling because you got to go deep deep whereas with the open pit you're only going down maybe a few hundred meters you're in the underground it's going 800 meters to a kilometer and so you got to spend a lot more money Drilling and you got to drill it tighter together and then if you're going to build a mine

the underground mines are going to cost you at least twice maybe three times what it would cost you for a similar amount of production so one of the things I look at in looking at developers is what is the amount of capex that is going to produce how much gold for example if I wanted a hundred thousand ounces of gold from an open pit I would not expect the capex to be more than 100 to 120 million and that ratio okay about so about a thousand to twelve hundred dollars when you do the math whereas the undergrounds are going to be

much greater than that and one of the things I worry about then when I see an open pit project that comes in with the Pea and that's two and a half times which I did recently and with one and I'm going oh my God what happened here and in fact I sold half of it already because when I talked to them at pdac I didn't get any good answers but that's another whole story but that's why I favor the underground open pit the other problem I get into is there's so many things that can go wrong underground one

of which is you can drill down and finally get below the water table and then you got problems with that you also have problems and you're you're boring down to get down to where the ore is and if the soils are are too loosey-goosey then they keep wanting to collapse and then you've got to build up a whole structure around that gets very expensive and then the other difficulty you get into is with with the underground the veins can be very high grade but they're too narrow and so that when you bore down when you

take the material out too much of it doesn't have any gold in it at all whereas with the open pit that they tend to be a lot of continuity so you can go over hundreds of meters and you're still going to have a gold grade that's between a half a gram and a gram so it's very continuous so you don't have to worry about that nor do you have to do as much drilling because the the is there's so much more continuity to those so I'm very much in favor of the of it whenever I can find a good open bit

project that's the one I really focus on is that you have less capex you have fewer potential problems and so that's my own bias not that there aren't phenomenal underground mines out there but my experience is I have not made much money on underground projects unless you're investing in one that's already producing and they've proven that everything works but uh it's a a number of issues there so the questions you get into and then was they say that when you look at a company is what's the

width of the of the veins that hold the metal so you want to know that you want to be aware of that as well as the soil conditions and availability of the water and then the infrastructure is there roads there is there power there is there water there and and how remote it is I mean one of the things I've learned is I'm very skeptical of investing in companies in like the Northern Territories in Canada because they're so remote you have to fly in people have to fly in diesel you have to fly an earth it's extremely

expensive so and and year round is is difficult to do unless it's an underground then you can kind of make it work but I don't like those very much I'm much happier being in places like Nevada and Mexico where you can basically work 12 months a year more or less I mean there's Monsoon periods in Mexico where you can't work and there's some snow in Nevada but they're much easier places to work I think that's those are some really good questions I think if people are

making their list that's a really good place for them to start I want to go on just a small tension and ask you about when you decide to sell so your crunching numbers you are asking questions and you told us a story about how when you didn't get the right answer to a question you sort of have the shares that you owned I think this is one of the hardest things for investors to do is to make that decision to get out because you know you might think that there is still more to come maybe it can turn it around so how do you

approach that uh-huh well I have to confess that not only is it hard for other people but it's been the hardest thing for me it's not easy and and and you sometimes get in love with a particular company because if you really like the management it's doing really well but you really need to it's so individual also what is what is your need for money as a person okay um you may have different life circumstances and all of that and and so that's that all ties into it the other thing is what is your macro economic

Outlook what do you see as where things are going right now I see that we're headed into a significant inflationary period that could very easily last for 10 or 15 years and that's because of a number of things it's because of the demographic shift of the world's population it's because of the enormous amount of debt that has been built up in the personal corporate and government levels and and particularly with government levels that we're not going to be able to defeat

inflation by doing what Paul Walker did in 1970s in the 1970s the U.S GDP the debt to GDP ratio was 30 percent today it's 120 percent if you raise rates high enough to defeat inflation now the government will go bankrupt they can't the interest expense will be so large so it's not possible so it's in the way that the U.S government got out of that predicament after World War II was to basically hold interest rates down and and let inflation rip for a number of years to where the ratio of debt to GDP then the

economy grew because you had a growing population so all the things were right for that to work then they're all wrong now so that's where my uh primary focus is and and I'm trying to to follow that and and make sure that that's still on track am I still right about that I'm quite sure at this point that I am and that we're going to start to see a major uh Improvement in the gold and silver prices as a result of all that so I would expect if we look at historically what gold and silver bull markets have

done uh for example in 2002 to 2012 um gold went from 300 to 1800 right about six times silver went from five dollars to forty some dollars or eight plus times and um I expected and it was even more extreme in the 70s but that's because we came out of a period where Americans couldn't even own gold from 1933 to 1971. so there was a lot of demand for it but what would happen this time I think we would probably do at least as much as what we saw between 2002 and 2012. in this next period up which would mean that uh we

could expect the gold price to go if we look at the bottom as eleven hundred dollar gold in 2016 something like that and it went up six times you could see six seven thousand dollar gold as a peak and and and even more than that with silver because it's so uh depressing now uh and it will do a greater than that but um on the way up I would be selling some which I didn't do very well I did I did some internally because I took a lot of money off the table before the market went down on the toilet in 2013. but uh

so it is it is smart to take off money take off 10 this year and 10 next year even as you think it's still going to go up you really need to do that I think not try to you know ride it all the way and and that is not a smart thing to do I don't think is uh take profits along the way and uh and keep writing it it's it's going up and everything works but still take money off then the challenge though Charlotte you know so you take the money off so then what do you do with it and and then that is in itself is a

challenge but you know over the centuries families have maintained their wealth by holding gold and property and so maybe you buy some more gold but maybe you buy some some farmland or good real estate that you don't have any debt on but that would be aware to put the money but that's that's the Big Challenge and these inflationary environments you say sure I'm going to take money off the table but then what do I do and uh so yeah it's a it's a challenging time but investing is always challenging but

that's for me what makes it fun well thank you so much for joining me John it was great to hear from you once again I'm Charlotte McLeod with the investing News Network and this is Dawn Hanson thank you