 Investing in the Mining Sector
Sean Rakhimov
April 12, 2005
Editor: Silver Strategies
There are many ways to make
money and mining is certainly one of them. When I say mining,
I mean the entire sector, large and small producers, prospectors,
exploration companies, independent geologists and so on. Who
else benefits from mining? PR and IR services, investors and
everyone in between, who one way or another have a stake in the
industry.
You won't find any stock tips
in this article so if that's what you're looking for, read no
further. I just felt like sharing some observations about peculiarities
in relationships between junior resource companies and their
investors.
Real Companies
What makes a company real?
In my view it's when the company does what it says it will do.
Any company. Isn't that the first principle of staying in business?
Suppose you sign up for a phone
service but your phone doesn't work. What do you do? I would
call up the phone company (using another phone) and ask them
what the problem is. Suppose they convince me that the problems
were temporary and have been resolved and my phone would start
working shortly. Suppose it does start working, but only half
of the services promised by the company and paid for by you are
available. What would you do then? I would start looking for
another service provider but just to be sure, I would place another
call to my current rotten-unreliable-unethical phone company
to hear their story about why they are not doing what they said
they would. Most likely, within days or weeks I would switch
to another service, one that is not as bad. Some people are more
patient than others but eventually everyone would figure it out
and move on. It's common sense. And if you had enough sense to
dump the company, why shouldn't others? Pretty soon the phone
company would be out of business.
Now let's look at mining companies,
particularly the juniors as they have more to prove and offer
a greater potential reward. You go to a mining show and get pitched
several dozen fabulous stories. You pick some you like better
and buy some stock. Then you watch. If the company does what
it said it would do, then your "arrangement" is in
tact.
If you find that the company is squandering your money on anything
but what they promised to do, then you follow the scenario above
and try to find out the real story. At some point you should
make up your mind and move on. Sounds simple, doesn't it? Indeed,
it need not be difficult. Granted, there is much more to picking
AND dumping a mining company. But the real problem is you, the
investor.
Do you have to be an expert
in phone companies to choose the one that works for you? - No.
All you have to do is rely on your experience with the company
and use some common sense. Of course, that would be over-simplifying
things so let's look at what happens in the real world.
Tell 'm what to do
For one thing investors like
to tell resource companies what to do. They call, write and fax
companies they invested in and say things like:
- Well, why aren't you working
on this property?
- Why are you doing this and
not that?
- I think you should do a financing
at THIS price!
If you are not one of them,
don't be surprised. A lot of this goes on with junior exploration
and mining companies. Why? Because juniors are at the mercy of
the investment public. They need to raise capital to survive.
But so is the phone company, at the mercy of its customers. No
customers - no phone company. On one hand it seems logical -
if you own a piece of the company, however small, you should
be able to voice your opinion. On the other hand, what do you
know about mining or exploration? Has anyone ever called up his
phone company and said:
- I think you should run this
cable from here to there! or
- Why don't you price your long
distance service based on this criterion?
Now that would be stupid, wouldn't
it? Perhaps why it doesn't happen a lot.
In most cases a company that would take your advice about their
business probably does not deserve to be in your portfolio in
the first place. (That is assuming you're an average Joe and
not a seasoned professional, because pros know better anyway).
To be sure investors influence
public companies of all sizes. A recent example is Disney. But
none so much as junior mining companies. So next time you want
to call your favorite junior explorer and give them a good yell,
ask yourself: do you really have something of substance to say
or are you just looking to blow some steam because the stock
that was supposed to make you rich just took another 2% hit?
The resource game
I have heard from mining executives
that Silver Standard has changed the way investors look at companies.
Let me disclaim right now that I own shares of Silver Standard
and think the world of it, but this essay is not about Silver
Standard. I had to use the company's name in order to refer to
its model of accumulating resources and to make it easy for readers
to follow.
My understanding is that mining
companies feel continuous pressure to expand their resources
because otherwise investors punish the company (by selling its
stock). I have been investing in the sector for several years
and believe that this argument has some merit. Resources are
widely quoted by both companies (that have them) and investors.
They are often used as a measuring stick to size up the company.
But let's go back to our example with the phone company. If one
phone company employed a new business model and became successful
through it, does that mean all its peers should follow suit?
If all mining companies jumped into the resource game would they
be successful too? Let's assume 20 different companies found
a lot of resources. Made discoveries, proved them up, bought
some on the cheap, etc. What would that mean? That there is an
abundance of resources "in the ground"? Would they
all be successful then? I think not. I think the price of the
resource (in this case silver) would tank and so would the stock
prices of these companies. If you own a lot of what a lot of
others own a lot of, guess it's not worth much. Incidentally,
exactly what's happening to the US Dollar.
Then again, it's highly unlikely,
as silver is a consumed resource, much like oil, and supply of
it is finite. Yet, who is to know for sure how much of that stuff
is sitting in the ground waiting to be found? My point is that
the resource game is not necessarily good in itself. Companies
are much better off sticking to their own business plan and do
what they do best.
In the past several months
a swarm of juniors jumped into the uranium game. Many - only
because they knew investors would get suckered into their stock.
Watch those same companies and/or people behind them do it again
when the next craze rolls around. Do I blame them? No.
Suckers are always fair game for those who know how to play them.
Uranium is a good investment and is here to stay. But as an investor
you have to question the motives of newly converted uranium plays.
Are they for real?
Does winning for the wrong
reasons still means winning?
The classic verbiage for this
argument is "Do you want to be right or do you want to make
money?" The commonly accepted answer is "make money."
Call me dumb, I always believed in the opposite. Making money
when they are wrong (about the market or investment choices)
is what created so many genius investors during the tech bubble
of late 90s and more recently in US residential real estate.
It also creates a number of class action suits from "mislead"
investors in the aftermath.
Give you an example. I sold
my house in 2002. Since then real estate prices in the area went
up some 30%-50%. Boy, do well-wishers feel sorry for me! And
do I feel sorry for them! They argue that I missed out
on the opportunity to make good money and seem to be right. Well,
by 2002 I was convinced that the housing market in my area was
overpriced and therefore would make a poor investment from risk
stand point. Needless to say I made up for "missed opportunity"
and then some in the resource sector, which I view to be less
risky. But even if I hadn't made any money since 2002 it would
still have been prudent to get out of an overly popular sector.
So, yes, one could and some
did make money in US real estate in the last couple of years.
But, in my opinion, they did so for the "wrong reasons."
Investing is about managing risk, they say. What does that mean?
Before all it means taking your money out of overstretched markets.
It's the proverbial "right thing" to do. Then worry
about where to park it.
Who am I to defy the Wall Street
wisdom? Why don't I want to make money even while being wrong?
Because dumb luck is hard to reproduce. You may get lucky and
make some money, but if you're wrong, you're wrong. The fact
that you made money does not make you right. If anything, it's
likely to make you even more arrogant and careless.
Think about a pro athlete who
gets lucky in the current round and somehow makes it through.
What are the chances of that happening again?
April 11, 2005
Sean Rakhimov
editor: Silver
Strategies
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Information
contained herein is obtained from sources believed to be reliable,
but its accuracy cannot be guaranteed. It is not intended to constitute
individual investment advice and is not designed to meet your
personal financial situation. The opinions expressed herein are
those of the author and are subject to change without notice.
The information herein may become outdated and there is no obligation
to update any such information. The author, entities in which
he has an interest, family and associates may from time to time
have positions in the securities or commodities discussed. No
part of this publication can be reproduced without the written
consent of the author. ©Copyright 2004-2010 by Sean Rakhimov.
All Rights Reserved.
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