March 15th 2018 –
In 2015 the market capitalisation of the top 40 mining companies dropped 37%. Investors punished these companies for previous years of poor investment and capital management. This was unmistakable evidence of the bottom of the market, growth was non-existent, and investment dried up. The years building up to this had seen record prices for commodity and services. Companies desperately expanded their production, utilising risky green fields project to maximise profit.
The previous few years were the perfect time to invest, with the stocks of major mining companies down and people desperately trying to off load their projects to stay afloat. A commodity investor would have picked up a few distressed assets for a very low price. As they say, “buy when they cry and sell when they scream”. Since then the market has shown signs of an improvement with the investment in exploration increasing 15-20% in 2018.
Within the Prospectors and Developers Association of Canada conference (PDAC) with 25,606 people in attendance and hundreds of stands was an interesting mix of the good, the bad and the ugly. It was initially difficult to see through the fog of geological promises and political insanity which plagues so many prospects. After attending a few lectures, presentations and social networking events a better understanding of the market could be achieved.
The “Good” companies with extensively logged core and clear aims usually provided an accompanying lecture which the CEO summarised his attractive project. These provide a relatively safe investment; perhaps a buy now and sell in six months attitude surrounds them as people know their investment can be recovered. Not a bad bet but to a hungry commodities investor they may lack sufficient profit potential.
The “Bad” were companies who were plagued by one or many of the classic problems with the mining industry: lack of supporting infrastructure, uncertain or inferred geology and unstable or absent political order, which can bring major delays or failures to any project. Within this category also lie a sub-section of projects which include known geology, good infrastructure and political stability but suffer from a lack of drive. The owners would rather ride the commodities wave producing press releases annually to keep them afloat. An investor maybe paying for the air-conditioning rather than the mining.
The “Ugly” projects hold the greatest potential for profit and for loss. These consist of one, maybe two, bore holes or an equivalently limited form of geological surveying along with some historic mapping or data (like treasure maps, these can be a major source of information or a complete waste of time). The price for these high-risk projects reflects the lack of certainty, the investor is advised that it will take years to complete and during this time the project is exposed to other unpredictable events. Any serous commodity investor should include a few of these within their portfolio to provide long term growth.
To survive the massive PDAC conference it is sensible to initially research companies within an area of interest (investing in all sections of the commodities sector is difficult). Once done investigate the many stands, attend the many talks and the networking events. Identifying good people is vital to a good prospect. Then comes the options, invest heavily in one good project or spread the risk? As this is a Canadian conference there are a lot of Canadian companies and as a safe and secure country these are sound companies for investment. Unfortunately, everyone else knows this and it is reflected in the price. Perhaps the best investments at the PDAC were the new or emerging markets such as Japan or Namibia which offer good stable government and under explored geology. Other locations such as Mongolia and Afghanistan do hold enormous potential but equally high insatiability risks.
When to invest is always the major concern, If you want potential for quick spectacular gains, then perhaps your attention should be directed at legal cannabis and crypto currency. With the commodity cycle being at its lowest point, investors need long term plans especially with current pricing some of the companies on display the PDAC could provide long term yields.
Joshua Powell reporting from PDAC2018 in Toronto for MiningIR.com
Articles hosted at MiningIR.com are considered up to date and accurate at time of publication, but are not to be considered as financial advice. Always seek professional guidance.
