Tuesday 18 December 2018

It is wise to listen to billionaires - Part I

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:
  1. "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%."
  2. "If you’re going to be building a public company, go for size. Don’t waste your time on little things."
  3. "You can have a deposit that has 100 million ounces like Pebble (Northern Dynasty). It’s almost a goose egg of value if you can’t permit it and if you can’t make it work....I’d rather have 1 million ounces of high-grade gold than 100 million ounces of really, really low grade that you can’t make money on because that’s worth nothing."
  4. "This is a cyclical business. I know it’s going to change. How could I be even more exposed to the turn? How could I build value that’s going to come when the markets turn, when the bear market turns into a bull market? I don’t know when it’s going to happen but I know it’s going to happen."
Pretty simple, really.  Don't waste your time with small projects and don't waste your time with bad jurisdictions.  If you're going to take the risk, the big reward better be there.  The junior mining market is littered with mediocre projects that aren't going anywhere, yet management teams continue to spend money on them to justify their own existence.

Also, buy good projects with massive leverage when prices are low - timely advice given the market carnage we are currently experiencing (more on this in a future post).  Timing is important, as is patience.  This is why I keep reiterating my favourable outlook on copper (although I just took a tax loss on my Turquoise Hill position and moved it into First Quantum).  Valuations in the sector are attractive at the moment and the underlying fundamentals are very supportive.  This limits downside while positioning me for a potential bull market run.  Sure, there is risk that China demand for these metals will slow due to trade tariffs, but that is why prices are low.  I think the US and China can work through the trade issues.  Even if they don't, China has a multitude of tools available to keep economic growth strong, and one of those is ramping up infrastructure spending.

One last point made by Ross Beaty also caught my attention: "We had joint ventures with every company under the sun because if I could use someone else’s money on properties that we had exposure to, I felt that was like a zero-cost option on discovery. That worked because out of all those dozens of projects, we really only made one major discovery" (emphasis mine).  Mineral exploration is tough and requires a lot of capital.  The odds of finding a large discovery are small.  This is why I shake my head when investors trip over each other bidding up explorecos with a few good drill holes.  In the end, most of them won't amount to anything.  But, the rare one will be worth billions.  That is why I call exploration stocks lottery tickets.  Trade them on the discovery hype and then hold a reasonable size investment to see if you hit the jackpot.  Similar to the lottery or any game of chance, the dumbest thing you can do is go all in with a big investment.  This is in keeping with the words of another billionaire, Warren Buffet, who said "Do not test the depth of the river with both feet."

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