Why are so many mining and resource shares down?

Posted By Robert On Tuesday, January 14th, 2014 With 0 Comments

Is it a case of “the majority of new companies are resource stocks, so active private investors have no choice but to fund them”, or a case of private investors just really lapping up resource opportunities – without recognition of the awful probabilities of profit?

The difficulty in turning a profit is partly down to the industry being exceptionally tough even for genuine resource companies, but I can’t find an explanation for the excitement investors have for them. Is it lack of consideration for the track record, or do investors realise and purposely do it for the “lottery ticket” style results?

I would have written something like: £2m oz of gold, $200per oz to get out of the ground, gold price $1200….no brainer.

What I didn’t understand is the timeline. From acquiring some licences to getting permits, 43-01 or Jorc compliant resource, raising money to build & building the mine, the timeline is ridiculously long. And expensive.

I don’t understand why feasibility studies take so long and cost so much, it strikes me as a racket. While everyone is sitting on their backsides waiting for the results…the board of directors/staff get paid, often by placings. I get a daily email from a mining journalist. Over and over and over again he will comment that the IRR of projects isn’t really feasible. All that money spent for 20% return etc.

Part of the problem is that costs go up during the process. A miner may start out in the belief he has $400 per oz all in costs but by the time the first pour happens….suddenly it’s $1200 and the economics of the project don’t work out.

WTI keep getting stung by falling copper price. Copper is getting more expensive to mine. They were so full of promise but the economics of their projects just doesn’t work. They did, they don’t now. All these years later and profit is just $521k. Whatever happened to the 20k oz copper per annum at 2-3-4k per oz profit. It’s not a badly run company.

I’m rambling. It has been a steep learning curve and I now better undertand that most investment is going to be on a 5-10 year time-frame with 50-80% dilution. If one can’t participate in the placings, and mostly we can’t, stay away from the stock until all needed money has been raised.

But wait. Money is half the story.  Medusa Mining maybe down because the new Government is looking to change the tax regime, NUS is down because the PNG Government pulled out of funding. OMI because they aren’t interested in creating shareholder value?

As to why the miners are having a hard time – in my view, mining sucks.

It’s hard work, it costs a load of money, it’s extremely capital intensive, it rarely turns a profit, and when it does it’s just a matter of time before reserves are depleted or something goes wrong. You have to accept the price of the given commodity. You spend the money first, and risk finding nothing. Then you have infrastructure, legal, licensing, political problems. And the shareholder usually picks up the tab via dilutions – more like a charity than a business?

Maybe it’s a matter of taste, but they’re not for me. They might do well in a speculative commodity rush like 2011 (in terms of share prices) – but loss making businesses are loss making businesses. We’re all looking to own parts of a business when investing in shares – you get what you pay for when something is losing money, never has made money, and most likely never will!

Having said all that…I have made money in the sector….just need to be fast on one’s feet and have the odd winner.

The view for the investor is that we must invest only in first class management that has the expertise to bring projects to profitablity.

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