Wednesday, August 15, 2012
The false dischotomy of explorecos versus producers
Been thinking today about the "explorecos/producers" dichotomy. Frankly, I think it's an unproductive way to think. Here's why.
Look, explorecos are moose-pasture owners who are good at lying, and sell lottery tickets. And producers are companies that actually have a metal and are able to mine it more-or-less at a profit. But there are more than that in the world.
Buyout targets are not explorecos. They may still have some exploring left to do, but they already have a defined deposit, a good 43-101 with most resource in M&I, the metallurgy and process have been figured out, and there's at least a PEA giving a realistic value for the property.
Then, you also have near-producers. They have their own funny action on the market, with price shakedowns during commissioning, and strong accumulative upmoves as the project is de-risked and the mine comes closer to being a reality.
Then I guess there's a fifth type of mining company, the "prospect generator", which I refuse to even consider past this paragraph because I've yet to see one PG chart that didn't make me throw up. And yes, Brent & Mickey, that includes Almaden. The PG idea must therefore be wrong and I won't stoop to consider a wrong idea.
What are my opinions of each?
- underlying value of $0.00, since you don't even know if any good intervals are mineable - and if you doubt me, look at the market today;
- can give you a ten-bagger win, or a 99% loss;
- every stupid piece of news, every drill hole, affects the price somehow and you never know in what direction or even on what day, though apparently the insiders and the drill crew often do;
- your share of what little they have is even guaranteed to dilute over time - so really, "the last fool" is the guy who buys in first (*cough*-Lupaka-*cough*);
- frankly, unless you're a P.Geo you have no edge in that field, and even the P.Geos seem to strike out a lot.
- you can calculate a definite underlying value which should support the share price, based on a NAV or based on ounces in the ground, but it will also vary depending on how the market perceives the buyout risk in that mining space;
- generate next to no news, so all you have to do is follow the political situation surrounding the property;
- then they sit there for years and do nothing, until you sell your entire $60K position and the next day Eike Batista buys them out at a 100% premium, the bastard.
- you can calculate a definite & probably/hopefully much higher price target which should act like a magnet on the share price, based on the feasibility study and other economic facts;
- de-risking process should constantly add value;
- de-risking process generates a lot of news and leaves many opportunities for fuck-ups;
- problems in the de-risking/development process can give you a good entry point as the Tiny Dicks of Bay Street continually shake the tree to drive out retail (see RIO or SVL)
- should have a good long upward trend to share price, as de-risking takes it from the doldrums of a "buyout property" to a real company with (you'd think) profits and stuff.
- but at least they have a strong underlying value, the opportunity to apply FCF to organic growth, and have no reason to drop below chart support (with metals prices remaining constant) unless they do something stupid like try to merge with Astur or RX Gold.
- dunno why anyone should not have a core position of producers, unless they're sadists.
And then, within that, I guess you could say there are also hybrids: for example, BTO has 2-3 mines, depending how you count it, but they're also going to bring Otjikoto to production, and they also have exploration properties that probably won't majorly affect their price (but at least BTO has the money on hand to develop them without dilution, unlike explorecos).
And then on top of that, you can divide these companies up by metals. That helps, since each metal price is going to move based on different things.
gold - depends on Indian, Vietnamese and Chinese economic growth, and the American delusion that it has anything to do with inflation or the US dollar; thus exposed to the vagaries on bot hthe economic and the psychological front.
silver - depends on technology growth; extremely exposed to liquidity crises.
copper - depends on EM fixed-asset growth; extremely exposed to economically contractive crises.
zinc, lead, iron and other boring base metals - China's flooding the market anyway so who cares.
soft rock - seriously, why is Mickey Fulp the only analyst who even mentions phosphates, coal and lithium? Goldbug newsletter writers don't know any geology anyway, so why does a phosphate mine frighten them? Frankly it exasperates me. They dig crap out of the ground and sell it: write about them.
specialty metals - REEs and graphite are bullshit fads. Ignore.
The metal action will have some effect on the company's price, unfortunately. So a good day to buy gold miners may not be a good day to buy silver miners.
And, y'know what? Looking at what I've written above, ignoring the prospect generators, the 5th type of company to invest in would be the good ol' GLD or SLV ETFs.
They don't mine gold, they just hold on to it. But really, looking at the past year's action, do you have any good explanation for why anyone should have owned a miner instead of GLD or SLV?
And I guess you can add the streamers like SLW or SSL to the list, as a sixth kind of company to invest in.
I've been writing this post for too long now, I'm off to lunch. Make of the above what you will.