Tuesday 3 October 2017

Buying junior mining stocks can be like buying lottery tickets, but it shouldn't be

I've received a few emails in the past week aggressively pumping Los Andes Copper (TSXV:LA), so I thought I'd check it out even though these shamelessly promotional articles are almost always a huge red flag.  My message to mining investors is that they should run the other way when they see articles or emails written in single sentence paragraphs and using over the top, bullish language.  Here is why - if a Canadian lottery was paying these promoters, here is what they might say:

The Canadian government is giving away huge sums of money and every citizen is entitled to participate for as much as they want!

Not only can you make huge returns on your money, but the proceeds are absolutely tax free.  Where else could $10 get you millions of dollars...tax free!

Yet, not everybody has picked up on this lucrative opportunity yet, so investors should jump in as fast as they can before the masses get involved.

Of course, what they would fail to mention is that the odds of actually winning are millions to one and that the odds of winning are in the government's favor.  Lottery tickets are not good investments and should not be a part of anybody's retirement strategy!

The sad thing is that I see enough of these promotional emails and articles that some investors out there must fall for them.  Some junior mining investors don't realize that buying shares is very similar to buying lottery tickets.  The odds of investing in a property that turns into a mine are against you.  To make matters worse, there are characteristics of the junior mining sector that make it an ideal environment for scammers and cheats.

The purpose of this blog is to help non-technical investors understand the junior mining sector a little bit better.  My plan is to provide posts to help investors navigate the minefield that is junior mining, or to scare them enough that they don't lose their hard-earned money.  In the near future, I'll provide a checklist I use when evaluating junior mining companies to hopefully shift the odds of success in my favor.

The blog will also provide an outlet for me to vent about the aspects of the junior mining sector that really tick me off.  From an insider's perspective, it is disgusting to see how much money is wasted by mediocre companies with projects they know are substandard just because it provides them with employment.  The junior mining sector is the least efficient sector I have seen in my 25+ year career because capital certainly does not go into the highest quality companies and way too much money goes towards stock promotion.  The reason that this aggravates me is that I now work as an investor relations consultant to junior mining companies (full disclosure: my clients are Tinka Resources (TSXV: TK) and West Kirkland Mining (TSXV: WKM).  I will only work for a company if my research indicates that it is a worthy investment with an attractive risk-reward profile and I refuse to be overly promotional when pitching companies.  My mantra is that I want my clients to under-promise and over-deliver in order to make investors money over time.  The challenge is that we are competing for a limited pool of investment dollars against other companies that have no problem over-promising and under-delivering.  Investors falling for the promotions need to realize that they are effectively buying lottery tickets and the only way they'll "win" is if the company gets lucky and actually has a major discovery.  Like the lottery, the odds of that are high.

I told you there would be some ranting!  Anyways, back to the example of Los Andes Copper.  I spent less than five minutes looking at it and here are my observations:
  1. The recent drill results hit some major copper-moly intercepts with nice grades like  506.0 m @ 0.57 % Cu, 357 ppm Mo and 1.1 g/t Ag (0.67 % CuEq) in hole V2017-10.  Sounds great, right?  The newsletter writers certainly made it seem so.  Unfortunately, this intercept started 486 meters down the hole and this was a pretty steeply drilled hole (75 degrees).  Why is that a problem? These are only good grades for a large open pit operation and anything this deep is too deep for a pit.  Just think about how much would it cost and how long it would take to pre-strip the 400 meters of waste rock on top of the mineralization in this area; also, as the pit goes deeper, the sides will get pushed out into unmineralized rocks, further adding to the amount of waste and cranking up mining costs by hundreds of millions of dollars.  Using my lottery analogy, this intercept is like getting all of last week's winning numbers on this week's ticket.  You're not getting a prize, sorry.
  2. A PEA on the Vizcachitas project was completed in 2014 and it confirmed my suspicions.  The initial capital was $2.9 billion dollars.  At $2.75/lb copper and $13.64/lb moly, the after-tax NPV was a meager $274 million with an IRR of 9.5% and a 6 year payback.  Those are not good rates of return for such a massive investment, so this project is not likely to go anywhere until metal prices are much, much higher.
So, after five minutes of looking at Los Andes I decided it was not a good investment for me despite the company's large mineral resource and my positive outlook for copper.  Could the share price go higher?  Sure, if copper prices go up, but then every other copper stock out there is also going to go up.  I would rather invest my money into something that has a lower valuation and more potential to become a mine with at least a 20% IRR at today's metal prices (and at least 30% on a PEA).  I'm looking for value and this isn't it.

Even though I quickly ruled Los Andes out as an investment, I did a bit of extra digging for the sake of this blog post.  I noticed that Bahamas-based Turnbrook Mining Limited owns over 58% of the outstanding shares of Los Andes Copper and has been its biggest backer.  I've never heard of Turnbrook Mining, so I dug a little deeper and discovered a link between Turnbrook and the Panama papers.  As per this Reuters article and this translated CIPER article, Gonzalo Delaveau, a director of Los Andes Copper, was a key Chilean figure who got tangled up in the Panama Papers.  Mr. Delaveau resigned as the president of the Chilean branch of Transparency International (a German-based organization that seeks to monitor and root out corporate and political corruption worldwide) when they Panama Papers revealed that he was an intermediary to a number of the offshore companies identified in the Panama Papers, including Turnbrook Mining.  I have no clue whether there has been any wrongdoing or not, but I have no idea who is behind Turnbrook Mining and where their money and assets have come from.  My investment strategy is to try to find high reward potential with relatively low risk. Los Andes seems like low reward and high risk.

If anybody from Los Andes Copper reads this, I'm sorry to pick on you in my first blog post.  My view is that you wasted money paying biased newsletter writers to hype your story to make it sound better than it really is.  That is not serving your shareholders well and it takes capital away from other projects with better economics that should be advanced.  Oh, and you should remove the paid research report from your website because the regulators take the view that it has to be NI43-101 compliant if you disseminate it and that report is not compliant!

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