A Proven Framework for Constructing a Winning Precious Metals Portfolio

• Create a 1 to 10 ranking system to evaluate precious metals companies, with 1 being the worst and 10 the best; a rank of 10 is impossible
• Key factors to look at include the track record of the management team, the scale of the project being pursued, and whether the company has a well-defined exploration plan
• For early-stage junior miners, investors must limit the number of companies they own to the number of hours per month they can dedicate to thoroughly researching each company
• Gold could triple or quadruple in price due to unsustainable govt debt levels and the need for currency debasement
• Own physical gold as insurance, shares of major gold miners for upside potential, and for those with very high-risk tolerance, a small number of carefully selected junior miners

An Investor Framework for Evaluating Precious Metals Companies

Our 1 to 10 Ranking System

At the core of our approach is our 1 to 10 ranking system, with 1 being the worst and 10 the best. We have never given a 10; defined as a company trading at half of liquidation value with a high probability of doubling its net asset value within 18 months and offering 10-fold return potential within 5 years.

A rank of 9 is also very uncommon. Currently, we have 6 companies scoring 9 on our website. A rank of 7 denotes a solid buy, while a 5 is a "neutral" rating for a company that may be worth holding if it offers optionality to an out-of-favor commodity that may appreciate in value. A neutral rating could be appropriate for dividend-focused investors even if a company is too conservative for a speculator.

It's important to understand that most of the roughly 3,000 junior mining companies would fall into the 1-5 range, with more than 2,700 receiving these lower rankings based on their fundamentals. Given this distribution, investors can begin to appreciate the importance of being highly selective when venturing into the junior mining space. Our sweet spot is the 6 to 8 range, where our efforts are concentrated.

Key Evaluation Criteria

When analyzing precious metals companies, focus on 3 key factors:

1. The Quality of the Management Team: Look first at the track record of the CEO and the board. Are they serially successful in this industry, or is this their maiden voyage? While a lack of experience doesn't guarantee failure, based on the historical odds, speculators should back seasoned management teams that have created value in the past in the same industry and avoid financing a company's "maiden voyage. It's not enough for management to have succeeded in the mining industry in general - their experience needs to be relevant to the specific challenges. If somebody says, they've been successful in gold mining, but that success is due to operating a producing, high-grade gold mine open-pit in French-speaking Quebec, while the task at hand is exploring for copper-gold porphyries in high-altitude, deep veins in Peru - while they may have been a success, that success is completely unrelated to the task at hand. On the (w)hole, it's like a proctologist approaching a dental problem!‍
2. The Scale of the Project: Go big in early-stage exploration projects. The most common fallacy is the story that says, 'I'm going to find a small mine, use the cash flow to grow without dilution, and bootstrap the next BHP.' That's a wonderful story, but is doomed to failure more times than not. If you're going to take big risks, you have to take them in search of big rewards. Specifically, there has to be a legitimate target that could encounter a deposit with $2-5 billion in recoverable reserves and resources at today's commodity prices. Small mines have big risks and make small money. Why would you do that?‍
3. A Well-Defined Exploration Plan: Finally, look for companies with a clear "plan" to add value through exploration. Exploration company building involves answering a series of unanswered questions. Ask company CEOs to define their value-creation thesis, how they came up with it, what facts support it, the proposal to test that thesis, and the most important unanswered question they're trying to answer, fully 80% don't have an answer. In other words, they don't have a plan. And if you don't have a plan, you don't know for certain where you will end up.

Portfolio Construction

For investors convinced of the bull case for precious metals, you'll need a framework for constructing a portfolio with varying risk levels:

• As a baseline, investors should own physical gold and silver bullion as "insurance."
• For leveraged exposure, investors can own shares of a carefully selected handful of major precious metals miners with strong track records of profitably growing their businesses.
• Investors with very high risk tolerance can invest in a small number of elite junior mining companies, but limit the number of holdings to the number of hours per month you can dedicate to thoroughly researching each company. Avoid "story" stocks and focus on companies with proven management teams pursuing large-scale deposits.

The Appeal of Royalty and Streaming Companies

A royalty is a right to a percentage of the revenue generated from a mining operation, without exposure to rising costs or operational risks. The royalty business is the best business model in the mining industry for investors who want the upside of the resource sector but don't want to take on operating risk.

The two primary risks in the royalty & streaming space are companies overpaying for royalties and "me too" companies that lack the scale and competitive advantages to generate strong returns. When you're buying a royalty for more than it's worth at current commodity prices, you have to be buying it for some optionality, and you have to believe that exploration and development will increase the value of that royalty over time. The other risk is the very small, sub-scale royalty companies where their cost of capital is too high, and the costs of being a public company are too high relative to their royalty portfolios.

The Bullish Outlook for Gold

Investors like Rick Rule are unabashedly bullish on gold, believing the metal could triple or even quadruple in price in the coming years. "I'm a little surprised that gold prices are as low as they are, because I lived through the 1970s, and what inflation and stagflation look like, and that the only way out of the fiscal situation confronting the US and many other countries is the debasement of the currency.

He compares the current setup to that of the 1970s, a decade that saw gold soar from $35 to $850 per ounce as inflation raged. For the purposes of this discussion, two-time frames to talk about 1982-2022, with very strong U.S. dollar hegemony and falling interest rates, and a sea change at the end of 2022, when interest rates began rising. The rising interest rate heralds the beginning of a new era. The circumstances in front of us - the debt and deficits in the US - before. You won't cut spending, because that's not what voters will tolerate, and you won't raise taxes too much, so how do you get out of that? You debase the currency's purchasing power - you devalue the debt by printing money. That's what happened in the 1970s, and it's what we'll do this time around.

Every precious metals bull market is led by gold, as "the most motivated buyer is the fear buyer, and the gold buyer is the fear buyer." Also expect silver to outperform once the bull market gains steam. Silver will lag, but it will go farther and faster once the narrative is established and generalist investors come in. When that generalist money comes into such a small market, it literally can't be contained.

The Investment Thesis for Gold

• Negative real interest rates guarantee a loss of purchasing power for safe-haven assets, driving demand for gold as an alternative
• Central banks are buying gold to diversify reserves away from dollars, providing a strong floor for prices
• Retail investors remain significantly underinvested in gold at 0.5% of portfolios compared to a historical average of 2%, setting the stage for substantial price appreciation if sentiment shifts
• Economic conditions mirror the stagflationary 1970s, a decade that saw gold rise over 20-fold
• Investors can gain exposure via physical gold, shares of major miners, and, for those with very high-risk tolerance, carefully selected junior miners

This approach to precious metals investing combines a rigorous analytical framework with a keen eye for the most attractive risk-reward propositions. By focusing on the quality of management teams, the scale of the projects being pursued, and the soundness of a company's exploration plans, you'll be able to identify the most promising opportunities in a sector rife with lackluster performers.

It would be wise to adopt elements of this due diligence framework in navigating the precious metals space and to heed the call for patience and position sizing when venturing into the high-risk, high-reward world of junior mining stocks. For those seeking a more conservative approach, own physical precious metals as portfolio insurance and invest in a basket of well-managed royalty and streaming companies.

Underpinning this investing approach is a belief that gold is in the early stages of a powerful bull market, driven by the same forces that propelled the metal higher in the stagflationary 1970s. The easy money may have already been made with the metal's advance from the $1,100 to $1,900 per ounce range, The potential for gold to triple or even quadruple as the consequences of reckless monetary and fiscal policies become more apparent. Investors positioned in physical bullion, select major miners, and a thoughtfully constructed portfolio of junior companies will generate substantial wealth in the decade ahead.