|
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 has 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 any 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 wrong reasons still means winning?
The classic verbiage for this same 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 90ies 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?
By : Sean
Rakhimov
Editor, www.silverstrategies.com/
| 
