Essays November 2011

The life and times of James H. Stonehouse

Rocks ‘n Docs: A Life in Healthcare and Precious Metals Investing

James Stonehouse

It’s a little after 6 am, and I’m pre-occupied by an overnight news release concerning one of my Argentinian gold mining investments where the government has abruptly advised that future export revenues derived from mining operations would have to be repatriated into Argentinian pesos before distribution overseas.  On the news, the company’s shares plunged 20% in one day (a misunderstanding; this was rectified the following day, and now everything’s just swell). I’m also poring over new core assays from a start-up mine in Burkina Faso in West Africa, and coming to terms with a non-brokered private placement for a significant gold exploration holding of mine in Colombia, the share price of which I believe will appreciate by over 500% within the year. By 7 am, I will have reviewed all the news releases obtaining to my portfolio, examined the intraday European markets and North American futures markets, have read the lead stories in Bloomberg.com, reviewed the fabulous Globeinvestor.com site, reviewed gold, silver and other precious metals prices and trends on Kitco.com, and reviewed the Stockhouse.com “bullboard” for investor commentary on any number of mining stocks. Then, I start my real job in healthcare executive search, which has everything to do with hospitals, biotechnology, medical devices and physicians. By what strange journey has this unlikely co-existence of two utterly different worlds come about?

While my career in the healthcare sector is still a work-in-progress, there is a deliberate architecture to the montage of roles and challenges I have undertaken and met.  As a freshly-minted graduate of the University of Toronto’s Masters in Health Sciences (Administration) program in the early 1980’s, I contrived to apply myself – to the extent I could manage exogenous variables giving shape to one’s career – to four “quadrants” of professional service: institutional/hospital senior management; healthcare operational consulting; leadership of a healthcare co-ordinating and planning agency; and, finally, healthcare executive search (to be fair, this last dimension was not foreseen in my salad days after graduating from the program, but became an aspiration realized in 1998).  By delightful coincidence, the name of the executive search firm with which I am now associated is Four Corners Group; perhaps the alignment of the firm’s name with my four professional quadrants is kismet, or perhaps just serendipity actuated. In any event, I have the honour of working with some very talented people who founded the firm, and the delight of working with my Healthcare team of Lorraine Manners and Pamela Colquhoun who are, quite simply, the best.

I have had the good fortune to have been associated with great hospitals (West Park Healthcare Centre and University Health Network), large consulting companies (both PriceWaterhouseCoopers and KPMG), and was honoured to serve as the inaugural CEO of a teaching hospital and university service delivery consortium (the erstwhile London Teaching Hospitals’ Council, succeeded by the merger of Victoria Hospital and University Hospital to form London Health Sciences Centre). However, after leaving University Health Network in 1996 (it was then called The Toronto Hospital), I embraced a fundamentally different, self-directed, direct-drive compensation model that continues to this day – in contrast to conventional employment.  In essence, I derive no salary, and 100% of my search-related commission  compensation is “at risk” (there is no ceiling, but a very hard floor!) And, I wouldn’t have it any other way.

I made two fundamental decisions at age 38 (when I deliberately opted for the “self-employment” route):   a) to become self-reliant in generating my livelihood vested in healthcare professional services, optimizing income to support a reasonable standard of living and, b) to provide for my future by aggressively investing in equities in the “extractive sectors” (primarily precious metals mining and,

vestigially, energy).  In essence, a) fuels b). My investments in b) grow through the sequestration of disposable income earned from a), but especially from unrealized capital gain (i.e. escalation in portfolio value through appreciation in the price of the shares held).  It’s a reasonable economic model provided that a) provides the wherewithal to meet living expenses with a surplus for investment, and one has the requisite knowledge appertaining to b) to generate sustainable and substantive portfolio growth.

At this juncture, a predictable pause……when I mention my economic model to most people, especially part b), the response is most often a resounding “Huh?”, followed by “Why mining?”  “How could you possibly acquire the technical background?” and “Where do you find the time to pursue this passion?” I’ll respond to those three questions in that order, but must first declare my own “prime directive” underpinning this wealth-building model: gold. I am an unreconstructed gold bug, without apology, without equivocation. Gold is money, a real store of value – not a fiat currency carrying counterparty risk. It is intrinsically valuable, indestructible, cannot be printed, and enjoys global acceptance. While gold has aesthetic and limited commercial applications, its chief virtue is that of an investment asset. Gold has history on its side.  Gold can be owned in several ways, but I confine myself to equities (junior, intermediate and senior gold miners/explorers) and bullion (many believe the dastardly James Bond villain, Auric Goldfinger, who had a penchant for gold bars and shellacking gold paint on beautiful women, was a complete nutter, but I thought him brilliant and prescient; sadly, he met his demise by being unceremoniously defenestrated from his private jet by Mr. Bond at movie’s end). Goldfinger would have been delighted to learn that the metal he coveted, being worth about $30 per ounce at the time of the movie in 1964, is now worth about $1750 per ounce (gold pricing is volatile, so this is approximate); moving further ahead, in the decade 2001 – 2011, Goldfinger would have been happy to see that the Dow Jones Industrial Average escalated 33.16% over that 10 year period, but gold appreciated 451.3%.  With respect to the connection to healthcare, Goldfinger

might also happily adduce, with tongue firmly in cheek, that gold is the plating, at least in Ontario, on the industry-dominant (hospitals and community-based providers) $36 billion defined benefit pension plan, HOOPP (Healthcare of Ontario Pension Plan).

Forecasting gold prices is a mug’s game. Sage advice in investing is “be right, and sit tight.” With respect to gold, the trend is your friend, and the upward trajectory of gold prices speaks eloquently. It is my contention that outsized and unrecoverable sovereign and personal indebtedness, overleveraged banks (most specifically in the U.S. and Europe), and the dubious manufacture of collateralized debt obligations and derivative “assets”  packaged by avaricious and feckless parvenus in certain swaggering U.S. financial institutions assure boon times for precious metals, gold in particular.  It is against this invidious backdrop that I choose to build wealth through managing a portfolio of precious metal equity investments all on my own. I break conventional wisdom averring that, at most, one might consider having 10% of one’s portfolio investing in precious metal equities, bullion and bullion funds/ETFs. O.K.   Not for me. Try 90%. How does that work for you? Go big or go home.  I talk my book and book (invest) my talk.

When I get passionate about something, I go the distance (I hope this characterizes my enthusiasm for and diligence in the executive search business). With precious metals and mining, I began indiscriminately reading everything I could lay my hands on.  The mining exploration and production business strikes me as very real, possessing a certain quiddity and inherent excitement, related to the thrill of discovery and the creation of an economic mining operation.  The study of mining and geology affords an education that draws so many things together – geologic science and metallurgy, engineering processes, sophisticated financing techniques, geopolitics, legendary prospectors and carpetbagging scalawags. I was determined, with a confidence borne of my own woebegone ignorance, to learn about the mining industry so I could become a better-informed, and more successful investor.

I vividly recall attending my first “PDAC” (Prospectors and Developers Association of Canada) meeting at the Metro Convention Centre in Toronto several years ago. This is the largest mining industry meeting in the world, with about 27,000 delegates in attendance hailing from the world over.  Having previously only attended the Ontario Hospital Association’s annual jamboree/cavalcade, HealthAchieve, at the same venue (a mix ‘n mingle punctuated by meetings of high purpose and solemn piety befitting the importance of healthcare and those who serve within the industry), PDAC’s charm was its astonishing size, infectious optimism and scope, coupled with the fact, years ago, I knew absolutely no one present (things have changed considerably on this front). Hundreds of mining companies and suppliers are in attendance, and the bonhomie of the convention is replete with booths, booze, and bosoms (urban legend has it that some attendees have Toronto’s escort industry run off its proverbial feet – not a sanctioned event!). But I digress….. PDAC is spectacular and is a tribute to Canada’s leadership in the mining world.  Attendance is free, if one registers as an investor and passes on the adjacent trade show which is intended for genuine rockheads, boasting the newest in recirculating drill technology, core cutters and semi-autogenous grinding mills. Senior management are in attendance at the company booths in the investor portion of the show, in lieu of crapulous rent-a-shill sales types often encountered at trade shows, and you can truly “talk rocks” with those in the know who actually have skin-in-the-game.

Other sources of mining and related investing abound. I would not miss an issue of The Northern Miner and Investor’s Digest, weekly and biweekly respectively. Business News Network (BNN) has done this country a great service, covering the complete business spectrum, and they pay particular attention to the extractive and agri-biz sectors encompassing mining, commodities, fertilizers and energy with thoroughly knowledgeable hosts and guest interviewees.  Technical training opportunities in mineral exploration and mining engineering abound, for both lay investors and mining professionals, usually integrated into major resource conferences held in Vancouver, Toronto, Montreal, San Francisco, New York, London and Hong Kong.  Most every major mining conference hosts several “short courses” including one devoted to mining essentials for investors. For me, I was especially keen to learn how to interpret core drill samples related to a mineral deposit, and further understand the economic feasibility of advancing a highly prospective discovery into a producing mine. Textbook resources include Mining Explained: Discovery, Extraction, Refining, Marketing, Investing published by The Northern Miner and Dr. Robert Stevens’ excellent Mineral Exploration and Mining Essentials.

Should you need reminding as to why one should be heavily invested in precious metals, equities and bullion, Eric Sprott’s (hallowed be thy name) trenchant monthly essays (available on the Sprott website) illuminate the lugubrious macroeconomic context, as referenced earlier. The business sections of The Globe & Mail and National Post are givens, of course, and I would further recommend The Financial Times (London) Weekend Edition newspaper. Good web sites abound, South Africa’s Mineweb among them. If you are a Canadian reading this squib, you should be of good cheer.  While gold and precious metal equities are listed issuers on virtually all of the world’s bourses, our own Toronto Stock Exchange and TSX Venture Exchange, on a combined basis, is the largest lister of mining companies in the world, with over 1,500 issuers listed having a collective market capitalization of over $500 billion.

My passion for investing in gold and silver equities does consume some time. By any measure, I pursue investing off the side of my desk as my healthcare executive search “day job” is all-consuming, unpredictable with respect to travel, and stochastic with respect to workflow. The only tangible intersection of healthcare and mining investing that has transpired in my life of professional devotion to two solitudes, related to my conduct of the CEO searches for Timmins & District Hospital and Kirkland  & District Hospital – my travels through this magnificent gold-rich northern Ontario landscape were enhanced by the local knowledge several Board members brought to bear when I asked “what are the boys [the miners] saying down at Timmie’s?”  (Tim Hortons, located near the corner of the Trans-Canada Highway and Route 655).  Often, “boots on the ground” are far more reliable than the musings of the occasional tyro Bay Street mining analyst who may know numbers, but come up short on understanding deposit geology/morphology and mineralogy).  I am sufficiently disciplined to devote the wee hours of the morning to this enterprise, and weekends afford time for intensive due diligence on new prospects and portfolio rebalancing. Many have told me to start a blog; if my efforts could be monetized, I might do so. I have a little email “investor club” consisting of people seemingly keen to hear my latest mining company desideratum – and I’m careful to insert the required disclaimers and recitals, exhorting readers to conduct their own due diligence.

If you decide to dive into this exciting world, know your own risk threshold. For every successful junior precious metals exploration company, there are scores of failures.  This is an unforgiving world for the unprepared investor. The more conservative your risk profile, the more you likely would incline to intermediate producers and seniors, at the top of the heap (and some provide yield/dividends, if that is of interest).  On the other hand, dramatic capital appreciation is generally found within the juniors and select intermediates – but these contain the most risk and volatility.  Investor age and investment horizon, other holdings/savings, one’s pension situation, and one’s domestic circumstances are only a few other factors one must consider in cultivating a precious metals portfolio. I personally target an annual net rate of return of 20% or better (and this target has been exceeded handily over the past several years); this target cannot be achieved with excessive reliance on senior producers, nor can it necessarily be achieved with a portfolio wholly invested in junior explorers.

In finishing this essay, a news release has popped up advising me that one of my recent gold exploration investments in Colombia is reporting bonanza grades (115 metres X 7.57 grams per tonne) from a new hole in a “previously undefined structural corridor that transects the porphyritic-granodiorite intrusive and its host Precambrian gneiss, and gold mineralization is found in stockwork veins….which coincide with zones of variably intense phyllic alteration and silicification.”  As I finish this exciting news release portending a dramatic share price increase in the company in question (and, yes, this has happened, to the tune of 230% in one week), I ponder a $100,000,000,000,000 (one hundred trillion dollar) authentic bank note from the Reserve Bank of Zimbabwe, encased in acrylic, atop my desk. At best, when issued in Harrare in 2008 by the misbegotten Mugabe autocracy, this note would have purchased a loaf of bread. This promissory note reminds me, daily, of how fiat currency can be inflated into oblivion through reckless hyper-inflationary monetary policy, against which gold shines (gold really doesn’t go up in price; currencies devalue against it). I’ve placed my bets accordingly. Your move.

About the Author

James (Jim) Stonehouse is Partner, Healthcare and Public Enterprise Practice, at Four Corners Group, a diversified executive search firm headquartered in Toronto.

 


Comments

Cathy Hecimovich wrote:

Posted 2012/07/08 at 11:42 AM EDT

Very impressive. Jim is obviously a man of many talents, not the least of which is his literary skill.
I do agree with him on the benefits of investing in gold. It has certainly been a prudent investment choice over the past few years.

 

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