In my profession of engineering, we use a lot of checklists. There are hundreds of details and code requirements that need to be remembered when designing building systems, and checklists serve as a QA/QC check to make sure we've covered all the bases. If a mistake is made or if something gets left out of a design, then we will add it to our checklist to ensure that we don't forget it on the next project. The following is my mental checklist for the DD process. This is not intended to be a comprehensive list, so if anyone else can add to it please feel free to do so.
1. Review the Corporate Website - This is the obvious first step since it is so easy. I estimate that 9 out of 10 companies can be weeded out simply by reviewing their website. For example, I don't invest in pure exploration companies so merely by reading the website I can determine quickly whether or not the company merits additional research. With juniors, however, one must be careful because a very fancy website can give one an overoptimistic impression of the company. UC Resources comes to mind (www.ucresources.net
). They have one of the best websites I've seen, but further research revealed lots of details that turned me off.
2. Search for the company on websites like Kitco, Mineweb, Resource Investor, etc and read the articles that come up. Beware of pump jobs (RI is bad about this). This is a good way to come up to speed on major company events and will also reveal some bad news that is buried or missing from the corporate website.
3. Google the top management and directors. Specifically you are looking for bad history here. You will find good history on the corporate website. Good management is important, but I'm coming to the realization that good assets are more important. Lesson learned: I didn't buy Lionore a year ago because I didn't like or trust their management. If you don't understand why then you haven't read their 2005 annual report. Ultimately, however, their assets carried the day and I missed out on an amazing share price appreciation.
4. Ask your friends (preferably ones with long experience in the industry) if they know management and directors. One must have a network to work with here, which is why it helps to get out to conferences (which I will cover below).
5. Check SEDI - www.sedi.ca
- for Canadian insider holdings. The annual proxy statements issued just before the AGMs are also an excellent source for this information. Are you willing to invest your money in an equity if the CEO owns "NIL" shares? What about if the CEO owns 80% of the shares and the Board of Directors combined owns 2% of the shares? Both of these scenarios are common.
6. Look at the chart - I don't really do TA but I do try to note how news flow has affected the stock price. If the price has gone down considerably but all the recent developments have been neutral or positive, it may be a good entry point. If the price has spiked up high (such as is the case with many base metal companies right now) without justification then beware. It is very difficult for any company to build intrinsic value at a rate of more than 20-30% a year on a sustainable basis without overleveraging (hitting big drill holes is the exception here). What you have seen in the past few months with base metal equities is purely due to commodity futures speculation. Personally, I prefer to buy on big corrections.
7. Talk to Investor Relations - you will be suprised how helpful IR people can be even for retail shareholders.
8. Make SEDAR.com your homepage - If you have made it to step 8 then you are starting to get serious. SEDAR (and its USA counterpart EDGAR) will become your favorite site for DD. When you are reading a financials release, forget about reading the summary (yes...it is almost always a summary) press release. Wait for a day or two till it shows up on SEDAR. All the dirty details are in the full SEDAR filings. Look for the "Annual Information Forms" which are extremely valuable, perhaps more valuable than the annual reports. Also, NI-43101 technical reports and feasibility studies are available on SEDAR. Your financial valuation should be based on data obtained from SEDAR - not from the corporate website which could be out of date or likely omits important information.
9. Review the Stockhouse messageboards. There is lots of good info and discussion on these messageboards. Just beware of people who pump harder and harder the higher the stock price goes. This is not rational behavior - it is pure emotion or, worse yet, intentional deception.
Note that all of the above can be done from the comfort of your home. The items below require more effort/investment:
10. Attend investment/trade conferences and/or AGMs. I attended the PDAC conference earlier this year and was ever so glad I did. I'm looking to attend another conference this fall but haven't decided which one yet. This is a great opportunity to meet management of companies and build a network of contacts.
11. Meet management - There is no substitute for meeting someone face-to-face and looking them in the eye. If you are a retail shareholder like myself, you will need to combine this with #10. If you are an accredited investor then you should schedule a private meeting prior to participating in PPs, etc.
12. Tour operations - This one is difficult for the retail shareholder. I haven't been able to do it yet for a mining company. In my experience as an engineer, however, you can tell a lot about the quality of industrial operations by touring the plants. I think accredited investors should insist on this also.
13. For large investments, hire a consultant, geologist, etc - Yes I'm a consulting engineer so I'm somewhat biased towards this. However, if you are looking to invest hundreds of thousands or millions of dollars in something that you are not an expert in, doesn't it make sense to spend 1 or 2% to get an unbiased professional opinion?
Well it is getting late and my mental checklist is exhausted. If anyone can add to this, please do so.