​Investing In Mining – Is It For You?

In one of our recent podcasts, we talked to Sprott US Holdings' CEO, President and experienced investor Rick Rule about his thoughts on investing in the mining industry. His view, and it's a commonly held view for many good reasons, is that "investment is paramount to survival in the mining industry." Certainly many junior miners without operational projects to fund their activities find this out the hard way when a bust happens or commodity prices take a dive. He also pointed out that since cannabis has been legalised in some countries, some former and possibly inexperienced management teams and junior miners have shifted their focus to capitalise on investment opportunities to be gained in that industry instead.

Given that investors can just as easily lose money investing in the mining industry as they can make it, what should they be looking out for when it comes to potential investment targets? Well, according to Steve Rosewell, executive chairman of Makcorp, a company that specialises in data collection for investment purposes, there are several things to watch out for. One of those is what he terms 'lifestyle companies'. These are companies where a quick study of their financials reveals that almost all their expenditure goes on 'administration and staff'. Invariably he's found that some of these companies may for example have a jet setting CEO who spends a lot of time using company funds to attend overseas mining functions and very little on actual mining activities. As he puts it, ensure you're investing your money in a company where it's being used to fund actual exploration and/or mining activities, not the lifestyle activities of its staff.

Obviously not all companies that are spending up big on administration and staff at the apparent 'expense' of mining and exploration activities are up to 'no good'! As Rosewell points out, companies with final stage projects may be waiting for mining licences, environmental approvals, finance and so on. Even those with not so advanced projects may be waiting on tenement approvals or are actively looking for projects. Either way, they still have to pay their staff. The trick here though is to go back through their previous financial statements because if they do have final stage or exploration projects on the go there will be evidence of money having been spent on them. However, if you find that quarter after quarter, year after year, there's significantly more money ie 80 – 100% of it, being spent on admin and staff, then the chances increase that you're looking at a so-called 'lifestyle' company. In which case, it pays to avoid investing in them!

Rosewell also recommends doing your due diligence on the directors of the company. A director for example who has left a trail of bankrupt businesses behind him/her is probably a good warning sign. Whilst everyone makes mistakes, and one failure shouldn't be too much of an issue, a whole string of them is a major concern. They're either incredibly unlucky or they're more interested in setting up pump and dumps than long-term viable businesses. Either way, avoid unless you want to be involved in yet another one of their 'failed' business attempts!

Other investing experts like Rick Rule recommend sticking to companies involved in the early stages of large Tier 1 and 2 projects. These are projects where the size of the reserve, its grade, and the metallurgical and operational costs involved make investing worthwhile. However, even when these stars are aligned correctly, the experience and track record of those charged with getting it out of the ground and selling it profitably over the long-term can still make or break a project. History is littered with instances where large, experienced miners have bought out projects started by junior miners who subsequently found themselves ill equipped to make a go of things. Furthermore, high grade doesn't always equate to more profitability either, not if it costs almost as much as what it will sell for to dig it up and process it. In these cases, looking for companies processing lower grade resources via low cost extraction and processing methods may provide a better profit margin and ROI.

Where the project is located can also matter. Some of the most resource rich areas on the globe are also in areas where there is civil unrest, dictatorship governments, regular terrorist activities, or very strict environmental laws. These can turn a potential multi-million dollar project into something that's not worth much more than the paper its written on, and certainly not a viable project in terms of sinking investor cash into. So in this instance, looking for projects in jurisdictions that are mining friendly, have well-established administrative processes in place to support new mining projects and a transparent permit system is key to making a good investment decision.

Other factors that will influence how attractive a project is, is its likelihood of success. By this we mean considering things like – how far along the permit path is the project? How complete are the economic and financial feasibility studies? The more advanced these are, the more information there will be available for investors to use when making decisions about whether to invest or not. After all, the figures may look great on paper but if no one has done a feasibility or economic study yet, or begun producing the documentation needed to obtain the required permits, there's always a chance it won't end up getting the green light. Unfortunately though these activities require funds so it's a bit of a catch-22 situation, particularly if the management team behind the project is inexperienced.

On the other hand – the above scenario may work out very well for investors if the management team is highly experienced with a good track record of successfully bringing projects into full production. That's why you'll find most investment experts telling you to focus on the management behind the project. Who they are, their experience, and their past history of successes (or failures) will give you a very good 'feel' about whether or not a company is going to make a good investment choice. After all, as we pointed out earlier, there are plenty of projects that look very promising but may never get off the ground because of inexperienced or incompetent management teams. This is particularly the case with junior miners. Just don't be one of the investors caught out by the lure of big numbers on paper that don't come backed up with genuine, honest, practical experience.
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Friday, 21 February 2020
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