Expert: Steven Taylor - 5/21/2009

Question
QUESTION: Hi Again Steven,
So you mentioned before that Exploration and Development companies don't have earnings and don't have sales. And I ask myself, why should such a company survive and receive a steady source of funding? After all, mineral exploration doesn't really bear fruits.. It is far way different from hi-tech startups and I can't see its potential of becoming a big company. Right?
And regarding the "shell" stocks you mentioned - you said that one can't trade these stocks for a while. How do I recognize such a company before it is being untradable? And most important, how can I follow its status while it is not being traded to see any developments around it?

ANSWER: Actually Yaacov, I think your feelings about mineral exploration is backwards. Yes, it is more difficult to find large deposits these days, but demand for most metals has been growing and shows no signs of stopping. New technology for finding, extracting, and processing metal ores has allowed areas that were previously explored or overlooked to now be hotbeds for new exploration. Since mineral deposits are usually quite small in actual area, it is not unusual for previously explored properties to have completely missed the richest zones. Plus, thanks to political changes around the world, many previously unexplored countries are now open for business.

Small mineral exploration companies can find promising deposits for comparatively little money. A few million dollars can go a long, long way. You can't really say that in high technology startups. Also, most smaller mineral companies don't become large companies because the large companies acquire them long before that. Intel can continue to make and develop semiconductors forever. But, natural resource companies cannot - they constantly have to find new sources to replace what they produce daily. If they don't, they are out of business. Mineral exploration is a never ending cycle. It is not unusual for the biggest mineral finds in the world to have been made by a "penny stock" company. But, it is unusual for a public high-technology penny stock to have developed some of the most popular technology.

Regarding shells, if you buy a company that you know is a shell, you have to expect that at some point it will announce a merger (usually a reverse takeover) and the trading in the stock will be halted for a long period of time. There is usually no warning whatsoever. When it does happen, you either have to subscribe to a news service that will carry any news released by the company, or ask the company to put you on their release list - most will E-mail any news that is released.

---------- FOLLOW-UP ----------

QUESTION: I'm starting to get the picture. So, it is not so different from startup companies after all. In high-tech startups, which is a field I'm very familiar with, the invested money goes particularly for salaries. Many high-tech startups don't have the need for special instruments (something which seems mandatory in exploration companies, right?). If so, then it seems that keeping an exploration company alive should require more than a few million dollars. How many employees (approx..) are there in an exploration company? Are they payed a minimum wage? Isn't there highly expensive equipment needs for these explorations?

Shells.. How do I know which company is a shell company? Is there an organized list published? Does it has something to do with the NEX?
"..usually no warning.." - Sometimes there is a warning? How can I trace such?
Thanks Again,
Yaacov Marko.

ANSWER: Mineral Exploration companies are actually pretty different from start-up companies in most other fields. Most have zero employees - only officers and directors, most of which receive no salaries - at least in the beginning. Compensation is mostly options and some consulting and/or management fees, which are usually billed out quite low in order to preserve capital.

Most junior mineral explorers have no mineral exploration equipment at all - it is all done on a consulting basis. Same with other services, including office and regulatory requirements. They only pay for the services they need, when they need them. For instance, my primary business is providing consulting services to development and exploration stage companies. Large companies have specific staff to do the same services I perform, but smaller companies have neither the staff nor expertise, nor need for a full-time person. Later, as they move more from exploration into development, they will often add some staff as the levels of business activity requires more day-to-day handling, but a large percentage of specific or technical work will still be done on a consulting basis. Take a look at TSX and TSX Venture listed exploration companies - overhead is usually not nearly as high as it is for companies in other fields. The best companies run lean and mean, in order to put as much money as possible in the ground. Take a look at the financial statements, especially the cash-flow statements, and you can see where most of the money goes.

A public company without active programs can limp along on spending $20,000 or less per year to stay alive. Take a look at the NEX companies, which are mostly companies without active operations (although some are in-trouble companies trying to reorganize). Not all "shells" are on the NEX, and not all of the NEX would be considered a shell. However, the one class that is absolutely always a shell is the Capital Pool Companies, all of which have no actual business and were formed to merge with an operating business.

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QUESTION: 20,000$ a year is about the cost of the fees to stay public?
What kind of consulting you give these companies? Is it in a specific exploration field or just a general consulting regarding business organization? In the TSX Venture there are many other listed companies other than exploration companies, right?
If so, then will it be true to say that seeking for money investment, then investing in exploration companies, other than different kind of companies in the TSX Venture or NEX, will more likely have a chance of high revenue?
And if seeking for chances, should I seek in the NEX rather than in CVE market?
Thanks Again,
Yaacov Marko.

Answer
$20,000 a year is a ballpark figure, and many companies are able to do it for less. The major portion of that is accounting/audit fees, with transfer agent/exchange fees and regulatory compliance costs bringing up the rear. My consulting is regulatory compliance - my primary clients are Canadian companies trading in the US. People are very surprised how little it costs.

The TSX Venture goes through cycles. The original Vancouver Exchange was almost all mineral exploration. It merged with the Alberta Stock Exchange which was mostly mineral and oil and gas exploration companies, and later they rolled in listings from the Canadian Dealer Network and the Montreal Exchange, which were a mixture of resource and non-resource companies. When the internet boom took off, hundreds of companies abandoned their resource business plans and tried to remake themselves as internet companies. Among the exploration and development stage companies, you always have some that chase the next hot thing.

I think you have to ask yourself why you want to invest in these companies - what are you looking to do. Do you want to go after developing companies that you will hold on to for a long time to see if they make it or not, or do you want to make shorter-term trades based on market movements? The investing strategy for the two types are very different, and you need to evaluate them in very different ways.

NEX traded companies are either "shells" or reorganizing companies. If they are a shells, it is almost guaranteed they will either go through a prolonged trading halt (any merger would likely be considered a change of business by the exchange, and automatically halted while the exchange reviews the merger) or be suspended and/or delisted from trading (if a capital pool company doesn't complete its "qualifying transaction" within a specified timeframe, trading is automatically suspended until they do). If you have the time to wait and can afford to have money tied up, you could look to those types of investments. If not, I would suggest you look elsewhere and seek out other types of investments.