Interrogating Management Teams - A Rule Classroom Essential

It is the last day of 2023!

Looking back, was there room for improvement in your speculative journey in the mining & exploration sector?

Were you satisfied with your level of due diligence and did you pick up the phone enough and talk to management teams?

As part of the due diligence process, not nearly as many retail investors call management as many recommend. Press releases, websites, corporate presentations, and interviews are all valuable, but there's a unique aspect to picking up the phone and getting unfiltered answers from management.

Now, what questions should you ask?

Focus on company-specific inquiries that might arise during your due diligence process. But for an initial meeting, Rick Rule provides some great insight on how to guide the conversation.

If you've been involved in this field for a while, you're likely familiar with Rick Rule. Nonetheless, his Rule Investment Media channel on YouTube deserves a larger audience, particularly his Rule Classroom webinars with Albert.

Today, we'll delve into the fundamental questions Rick outlined in “Rule Classroom: Interrogating Potential Investments”.

This is not a new video, but it is a very important one.

Despite the title's suggestion, Rick emphasizes that this process isn't about hostility; it's about seeking clarity. It's essential to remember that if you're interested in a prospective company, fostering a healthy relationship with management that encourages open dialogue is crucial.

Recognizing that not everyone might have 40 minutes to spare for this information-rich conversation, we've condensed the key points for you.

Please note that this isn't a verbatim transcript or approved by Mr. Rule himself. Our aim is to offer essential insights to assist investors and speculators in becoming more successful self-directed investors.

Initiate the conversation by building a personal rapport with management, and don't hesitate to commend their achievements or company. Approach the discussion in a friendly manner as you want them to be comfortable during the questioning period.

Rick suggests allowing them to conduct their candid presentation or pitch as they are programmed to do this. Following the pitch, the deeper questioning can commence.

Begin gradually by asking, 'Could you share your professional background?' and inquire about their past successes and experiences that qualify them to address the company's direction and objectives.

It's crucial that their previous experiences align with the nature of the company they oversee. For instance, managing a major mining corporation differs significantly from leading a lithium exploration venture in Argentina.

Feel free to ask about the team, but generally, you know why an individual is in their role based on their title.

What Rick suggests as a great next question is to ask about the directors. You might ask:

'Could you elaborate on each director's contributions and how they were chosen?'

Inquire whether they were chosen for particular tasks or possess specific skills or connections that benefit the company.

They should have all been selected with a specific purpose, so before the meeting, ensure you have studied their bios and have a list of their names handy.

Rick emphasizes the importance of maintaining positive engagement throughout the conversation to avoid creating a standoffish atmosphere.

This next phase of questioning is pivotal as it assesses management's honesty and their grasp of the company's mission for creating shareholder value.

Slightly paraphrased, you might approach drilling down to the big unanswered question like so:

‘I found your pitch insightful and I am beginning to understand the human dimension of your company. But in your own words, what's the key unanswered question crucial to shedding light on the asset and enhancing its value?’

Following this, consider asking:

• ‘How was this question identified?’

• ‘Could you elaborate on your approach to extracting this answer and the anticipated timeline?’

• ‘What financial resources are required to address this unanswered question?’

As the conversation naturally progresses from discussing the funds needed to address the main unanswered question, the next pertinent query would be:

'What is your current financial standing?'

or

‘How much cash do you have?’

Their response will indicate whether they actually possess the necessary funds to answer the big question. Following this, you can delve further with more specific inquiries:

• 'Where do you plan to acquire the necessary funds?'

• 'When is the financing planned, and at what approximate price?'

Understanding the financing price is crucial as it significantly impacts the attractiveness of your entry point.

While Rick doesn't explicitly mention this, if they don't provide an approximate price and you're still interested in the story, it might be prudent to wait until this specific unanswered question becomes clearer.

Mining and exploration ventures seldom unfold as planned. Given the multitude of variables and the unpredictability of nature, there's always the looming possibility of dwindling finances.

What Rick emphasizes is a management team's ability to be honest and clearly identify failure and halt operations before exhausting all funds. In an industry where share structure holds paramount importance, ensuring management prioritizes this is crucial.

The subsequent question might revolve around:

‘What would constitute a failure for you?’

If management has effectively addressed your inquiries thus far, it's essential to acknowledge their compelling narrative and commend their responses.

However, as a retail investor, it's crucial to recognize that you won't be their sole source of funding. They'll need to effectively communicate their story to attract other investors. Therefore, you might ask:

'Could you outline who your target audience is and what makes this audience particularly suitable for funding this endeavour?'

Understanding their target audience and the rationale behind it helps evaluate their communication strategy and aligning with potential investors suited for their venture.

By this point, express gratitude for the discussion and aim to clarify a specific point of contact. Avoiding reliance on the elusive 'info@' email address is crucial.

'I find this story compelling, and there's a strong possibility of me becoming an investor, but I intend to be actively engaged. Could you specify who will serve as my primary point of contact within the company?'

Ideally, this individual should be both willing and capable of offering comprehensive insights and explaining the nuances behind press releases. If feasible, having the CEO as this point of contact would be ideal.

Then hit them with this:

‘In the course of asking these questions, it occurs to me that I spent an hour studying this company while you spent years bringing this all together.

I want you to tell me the three things about this company that keep you up at night. Tell me the three things that bother you the most and what you’re doing right now to reduce my risk.’

Then you can finish with ‘Thank you very much, that was very illuminating.’

Remember, this is an interview of the management by you, not the other way around. Similar to any interview scenario you've experienced, it's courteous to provide the interviewee with an opportunity to pose questions. You can phrase it as follows:

'I've posed several questions from the perspective of a potential investor. However, what are 2 or 3 critical aspects about the company that I might have overlooked or should consider in the future? Clearly, there are important elements about your company that deserve further attention and inquiry.'

This approach allows the management to offer insights into key aspects that might have been missed in the discussion and encourages further exploration.

At times, in instances of miscommunication or dissatisfaction with their responses, it's important not to let crucial points slip away. Rephrasing questions politely can clarify without assumption or blame. Rick elegantly frames a possible way to phrase this, as he often does:

“Perhaps I did not phrase that question correctly. The information I am looking for is [this] and I don’t understand from your answer how it relates to the question I was trying to ask.”

Ultimately, these inquiries aim to deepen comprehension, offering you valuable insights to make well-informed decisions.

While it's advisable to watch the entire conversation, for those who prefer reading, we hope to have encapsulated the essence of this valuable video.

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