A former small cap research analyst looks for value in the Canadian junior mining sector and shares his experiences, thoughts, and rants. The blog is free and for information purposes only, so should not be construed in any way as investment advice.
Subscribe to this blog
Follow by Email
Would you rather...
Receive one of the following:
$16,000 US dollars
1,000 ounces of silver
13 ounces of gold
500 pounds of cobalt
5,400 pounds of copper
Whatever your fancy, the valuations are all currently about the same.
The pullback in Bitcoin I noted a week ago, which looked substantial at that time, now looks like a minor blip on the chart. Exponential action!
Was Thursday's high on Bitcoin the top? Probably not. People don't seem to learn, so history repeats itself again and again with bubbles (lots of bubbles documented here). Below is a chart for one of the first documented bubbles, tulip mania. One thing I've learned from bubbles and market crashes is that the decline in price when a bubble pops is typically several times faster than the exponential rise up. So, when the Bitcoin/cryptocurrency bubble pops, it is likely going to be mind blowing! If 20% daily gains and losses are normal for Bitcoin, a sharp selloff is going to look like 40 or 50% in a day. You see, many of the speculators buying Bitcoin now probably acknowledge that this is a bubble and they are betting that they can get out quickly with minimal losses. Usually that is not the case. Something will trigger a gap down, servers will crash, and losses will be staggering for those who jump in too late.
Bitcoin seems to have gained some legitimacy with futures now trading on the CBOE. My view remains that Bitcoin is a bubble that will crash. The only question is when. Tulip bulb prices could not be justified at 10 guilders, yet they went to 60. Bitcoin could well go to $50,000 or even $100,000. All I know is that something unexpected will trigger a sudden and sharp collapse. We will know the top is in when we see a 50% drop. History repeats itself.
While Bitcoin had a stellar week, precious metal and base metal prices took a beating. Who wants tangible assets when you can now get cyber assets? Metals have to be mined and then stored in warehouses. Cryptocurrencies can be "mined" using computers and stored using Blockchain. So what if they are constantly being hacked, waste massive amounts of electricity, and if most of the computing power resides in China and Mongolia?
In classic fashion reminiscent of the dot com craze and marijuana mania, failed mining companies and even a failed biotech are rushing to become Blockchain or cryptocurrency companies. In many cases, all it takes is just the announcement that you intend to get into the sector that can move your stock. And, in some cases like Routemaster Capital (TSXV:RM) and Vogogo (TSXV:VGO), you don't have to mention anything publicly and you claim no material changes while your stock shoots up on volume right after you raise money at low prices. A classic case of "investors" chasing returns, which usually does not pan out.
Call me old school, but I still like metals and mining (and fundamentals). Bitcoin will likely be gone in a decade, but all of our electric, autonomous vehicles will still be using lots of copper, zinc, cobalt, lithium and nickel. I especially like zinc in the short-term, as inventories are hitting critically low levels. I think zinc prices will soon start another run up and if I had any Bitcoins I'd be selling them and buying zinc mining stocks.
When a person in the mining sector has built multiple successful companies and made over a billion dollars doing so, listening to their advice is a no brainer. Ross Beaty is such a guy, having built Pan American Silver when he saw an opportunity in silver and Lumina Copper when he later saw an opportunity in copper.
Rick Rule recently did a great interview with billionaire Ross Beaty. The interview is worth a read given Ross' success in the mining sector. Here are the key statements I want to highlight for investors and managers in the mining sector: "This business is all about high risk and high reward...In public markets, given the fact of outsized risk, you want to be looking for things with outsized returns like 100% or 1000%.""If you’re going to be building a public company, go for size. Don’t waste your time on little things.""You can have a deposit that has 100 million ounces like Pebble (Northern Dynasty). It’s almost a goose egg of value if you…
Yesterday saw another significant M&A transaction being announced in the mining sector, with Pan American Silver acquiring Tahoe Resources. This deal comes less than two months after the merger announcement between Barrick and Randgold, which was well received by the market.
Drain the Swamp!
I'd like to see a lot more of these deals announced because hopefully they will help clean up the mining sector and provide investors with some long overdue returns. While the broader market has seen a tremendous bull market over the past decade, the mining sector has been stuck in a quagmire. Not because of metal prices and not because of demand factors, but because the sector has done an extremely poor job of creating value. In large part, this is because some companies or management teams have been exceptionally good at destroying value. Public companies are supposed to make investors money and the mining sector has been atrocious in this regard.
Markets don't like uncertainty because uncertainty equals risk. For this reason and US dollar strength, we've seen metal prices plummet over the past few months. This uncertainty stems from the escalating trade war situation between the US and China, the big fat pig with an insatiable appetite when it comes to metals consumption.
Ironically, despite the recent metal price weakness, large mining companies have never been so eager to acquire large new copper assets. Lundin (TSX: LUN) is still looking to acquire copper assets, after it lost Nevsun (TSX: NSU) to Zijin. BHP (ASX: BHP) just acquired a 6.1% equity stake in SolGold (LSE: SOLG), which is advancing a big copper porphyry discovery in Ecuador.
South32 (ASX: S32) is also looking for copper exposure. South32 already has a $150M JV deal with Trilogy Metals (TSX: TMQ), the base metals spin out from NOVAGOLD (TSX: NG) that has two large copper assets in Alaska that are infrastructure-challenged. The challenge in finding …