GENERAL ARTICLES

So You're in the Market?

WILFRID SANDERS January 1 1937
GENERAL ARTICLES

So You're in the Market?

WILFRID SANDERS January 1 1937

So You're in the Market?

GENERAL ARTICLES

WILFRID SANDERS

Better read this before you gamble any more of your savings or salary on Dazzle-’em Gold

ACCORDING TO the estimate of a man whose lifework it is to handle market figures accurately, as much as $60,000,000 changed hands in Canada,

via listed and unlisted mining stocks, on a single day during the height of the mining boom last summer.

The boom is still booming. The 1937 figures may be just as astronomical.

That $60,000,000 turnover is not a typical day’s trading. But the fact that there were such days, and may be such days this year, shows the tremendous hold mining has secured on Canadian imagination. It represents about $6 per day for every man, woman and child in the country. In 1935, Canada’s national income was about $1.30 per capita per day !

This $60,000,000 is big money. But it is not Big Money. In other words, it is, in the main, the aggregate of the savings of small people—the wage earner, the housewife, the professional man, and the fellow who shares your driveway.

To these people, last year, went hundreds of thousands of ornately printed certificates, showing that they were part owners of some bush-girt, rock-ribbed piece of land in the North.

For these certificates, many Canadians paid money they could ill afford to lose. Yet experience shows that if half a dozen of the 2,000 odd new companies formed last year pay dividends, it will be a phenomenal percentage.

The Lucky Few

VWTiAT IS the psychology of this eagerness to rush in ’ V where financial angels fear to tread? Is it only the fool who rushes in?

Gallantry, in any event, would preclude classifying as fools those feminine devotees who throng the brokers’ offices with their knitting and their chitchat, dropping stitches and comments on the market with equal aplomb; taxing the patience and ingenuity of nice young customers’ men with their opinions and questions.

No niceties of etiquette, however, prevent us classifying as a fool the man who eagerly hands over $50 or $100 on the strength of some “hot tip’’ of vague origin while his wife makes her coat do for still another winter.

Those who are attracted to the market during a lx>om period are not usually looking for an investment. The mine-conscious public is not investing its money on a yield basis, but is speculating in the hope of appreciating its capital. This is why most of the sudden sharp gains take place* in cheap unlisted and non-dividend paying stocks.

Take a look at your daily paper. Extricate, if you can, the financial pages from the clutches of your wife. Most papers, particularly the financial weeklies, publish on the

quotation page the high and low mark reached by every listed stock during the year. These two columns contain the real clue to the fascination which the mining market has for the public.

You will observe that you might have purchased stock in O’Brien Gold Mines for 34 cents a share in January, 1936. If you had, you might (saddest of words) have sold it in July at $7 per share.

Again, you might have emulated the true story of the young Toronto clerk who for two years had wanted to marry his girl. I íe had saved only $200 from his $30 a week salary. Ilis intended, unfortunately, insisted on a nest egg of at least $1,000 before she would consent to undertake the responsibilities of homemaking. Gloomily this young man estimated that at the rate of $100 per year, it would take ten years before he could marry the girl of his choice. But —

Last July a salesman of the company employing the frustrated fiancé mentioned that he had received a tip on Francoeur Gold Mines. It was, said the salesman, “due for a rise.”

The young man had never bought a share of stock in his life, but he thought about it during the night and in the morning had decided, without telling his girl, to “take a flyer.” Timidly he got in touch with a broker, and bought 900 shares of Francoeur at the market price of 21 cents a share. This cost him $189, practically his whole stake.

If the probing fingers of a diamond drill in Northwestern Quebec had not encountered a few feet of mineralized rock, this youth would have had to postpone his marriage indefinitely. As it was, the story ended happily. In less than thirty days he had sold his Francoeur at $2.05, and received, for his $>189, about $1,845.

He got married.

I said this story ends happily. Perhaps it won’t. This young chap has the idea that he earned this $1,845; that in some vague way it was the result of shrewdness. His adoring bride is also convinced that she is married to a business genius, whereas, as a matter of cold fact, she is married to a fairly efficient clerk.

This case is not unusual. When the market is rising,

story endings may be happy. But an inflated mining market is like a drug. As long as the public keeps absorbing mining shares in large doses, everything is rosy. Then the saturation point comes and a selling wave starts. In the reaction, it is obvious that somebody will be left holding the worthless stock.

The writer has, in his office, a very revealing file. It is a file of defunct Canadian mining companies. There are some 3,000 of them, and the file is by no means a complete record. It does not include, for example, the thousands of syndicates whose units were bought by an optimistic public. But there they lie, these companies, grim relics of long past “golden eras;” the stark remains of the Cobalt silver rush, the Red Lake rush, the Porcupine rush, the Larder Lake and Kirkland Lake rushes, the Kenora rush, the Cariboo rush—rush, rush, rush !

Certainly some money was made in these fields by a lucky few. Much more numerous were those who lost. This is a file of unhappy endings.

The brother, fellow-worker or chum of the abovementioned bridegroom won’t see that file. More than likely they’ll all be tempted to put their $200 into the market. So the snowball grows.

Investment vs. Speculation

THE BOOM which lasted most of last year may be largely traced to the sudden rise of one stock. True, the conditions were right for a mining boom, but this one stock, in the opinion of most observers, was the spark which set the whole mining market moving. It was MacLeodCockshutt. On March 24, 1936, this stock was quoted by dealers at 11 cents per share. By May it had passed $5 per share.

It takes only a few moves like this to get John J. Public and his nephew scrambling into the market, looking not where they leap.

If John J. were playing the races he would never think of putting his $2 on a horse without consulting a form chart, or at least making some enquiries as to the odds.

There are, of course, classes of mining stock which cannot be compared with the hazards of horse racing. Canada has her Lake Shores, her Norandas, her International Nickels, all of which are established mines with tremendous ore reserves, capable management and most of the attributes of investments rather than speculations. They are mines which have become efficient business enterprises.

Unfortunately it is not, as a rule, this type of stock which attracts the man on the street. It is the very instability of the cheaper stocks that attracts him most. The man with the small amount of money to gamble with is the one

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who is looking for big profits. The corporation or individual controlling large sums of money is content with small percentage profits.

One of the most successful of Canadian market men has built a private fortune by maintaining the utmost respect for the small profit and the odds of the mining game.

A Form Chart

yA FORM CHART is not an infallible

*■ clue to the winning horse. Neither would a mining form chart, if one were possible, be an infallible clue to the winning stock. Hut it would help.

Let’s see what sort of form chart we could draw up for mining.

(1) In a racing form chart, stress is laid on the owner or manager of the horse. More than ever, is this important in mining.

This does not mean, of course, that a capable management can make a mine out of a moose pasture. Hut a g(xxl management can, and does, see that your hard-earned money actually is s]xnt. in development work at the projxTty, and not all on Hay, St. James, or West Pender Streets. Moreover, a good management will see that this development is directed along economical and effective lines.

It should never be forgotten that Lake Shore Mines, the greatest gold mine on this continent, was brought into production with an authorized capitalization of only 2,000,000 shares, $1 par.

How can the layman tell a capable management from an incapable one? Only by investigation. If you don’t trust your broker to help you on this, there are in

Canada established financial journals whose records can give a very good indication as to the background of the men who are behind any organization.

(2) If the management is capable, the company’s capital will be spent on development. You may be able to obtain from the company, if it has been in operation for some time, an audited income and expenditure account which will tell you how the directors have spent other jxiople’s money.

(3) Capital structure is important. Is the authorized capitalization unnecessarily large? Remember Lake Shore and its 2,(XX),(XX) shares. If more than half of the authorized capitalization has gone for vendor’s stock and bonuses, tread lightly. Ask for proof that the vendor’s stock is ixxiled, and is not free to oppress the market before the property is put into shape for production.

(4) How about the product? Gold, of course, has a ready market. But if the product is baser metal, what is the outlook for it?

(5) How about the location of the property in regard to transportation, power, and possibly other producing mines? Has the area been proved to be favorable to the deposition of minerals? If not, the sjxiculative element is obviously much greater.

(6) What is the history of this particular property? Today, with gold at $35 per ounce, many properties which formerly were not commercial successes have a chance. Perhaps, however, the property has been used for years as a meal ticket by the promoter.

(7) Development results cover a wide and complex field, and call for an extensive treatment beyond the scope of an article of this nature. In even the rawest of raw prospects, however, some work will have to be done before stock is offered the public. This might only consist of stripping or trenching the vein, which simply means uncovering the vein on surface from the overlying bush and soil.

If the engineering fraternity will just look the other way for a minute, we can compare a vein to the ham in an upturned sandwich. By trenching and stripping, the length of the vein, its width, and its average value on surface, can be ascertained. Obviously, the narrower a vein is, the richer it must be to pay a profit on underground mining.

This brings us to the question of samples or assays. To the seasoned speculator, grab samples, which are samples picked at random, or with an eye to richness, mean little. Grab samples are like ungraded eggs -something, but what? The only reliable assays are channel assays, obtained by chipping small channels across the width of the vein at regular intervals, and assaying them.

Prospective purchasers should insist on finding out whether assays quoted by the salesman are from channel samples or grab samples.

So much for the surface. It is, of course, only a beginning. But if one buys stock in a company whose property has seen only the above work, the chances of success are much less than in a more developed property. On the other hand, the return on one’s money, if the property is successful, is greater.

Given the above requirements, one should be able to look one’s wife square in the face, even if the property is a failure. “My dear,” you can say calmly, “at least we have had a run for our money.”

r"THE NEXT STEP, of course, is drilling, in order to find out how the vein behaves at depth. Another note of warning should be sounded here. In the past, particularly last summer and fall, too much faith has been engendered in the public breast by the assays from a few drill cores. Drilling does not prove the downward continuation of the vein. It merely indicates it, which is a different thing altogether.

Regard for the feelings of a large group of Canadian speculators prevents us from mentioning the name of the British Columbia projxirty which affords such a splendid example of the fallacy of depending too much on drill results.

In this particular case drilling had shown a wonderful enrichment at depth. Immediately shaft sinking was started. Up went the stock. Down went the shaft, down to the point where the drill had cut high values. They found the high values all right, one little pocket of them, lying cradled in miles and miles of rock. There was not enough to pay even the cost of the shaft.

Many cases could be cited to prove the unreliability of drill cores. The prospective shareholder should make sure that the drilling has been comprehensive and systematic enough to warrant any proposed shaft sinking.

After getting the shaft down, the lateral work in a well-directed company will be aimed at outlining or blocking out enough ore to justify a mill. Some promoters, knowing the effect of a mill announcement on the market, will make much ado about building a mill long before it is justified. Usually in Canada it is thought advisable to have at least two years supply ahead of the mill.

If a property gets under way with a mill (paid for) and at least two years ore supply blocked out, 75 per cent of its troubles are

over, and it should be in a position to pay back to the shareholder at least the amount of money he paid for his original stock. The public then can estimate the approximate value of the stock on a yield basis. There is still, of course, the element of speculation. Even if the ore reserves are beyond question, there remain such uncertainties as the future price of the metal, rising costs, labor and geological

troubles, with which the shareholder can amuse himself during the long winter evenings.

If mining is to be an industry and not a National Obsession, as it has tended to be in the past few months, it will need a sane approach. If you approach it in the same manner as you would a game of Bingo at a fall fair, it will have an equivalent respect for your purse.