Resources

It seems too obvious but many investors equate minerals in the ground with projected share price and then come up disappointed. The fact is that money flows to where actual returns are generated in a sustainable manner. The importance of this cannot be underestimated as it can hold the key to profitable investing .

This fact gets clouded during euphoric market events when all boats float in the rising tide. Investors see price rises in companies with non viable deposits and can fall for the trap that it doesn’t matter when they can be extracted or for what price. The drill result price spikes and over optimistic short term price rises in some companies attracts the attention of many investors. Sure you can make stellar returns if you buy early - sit and wait and sell during the spike. This is compounded if you can sell and jump into the next stock and ride the next spike.

However this approach is difficult and you may have to wait a long time for that spike or you may buy too early and have to endure paper losses for considerable periods of time before you get that spike.  The smaller stocks that act in this manner cannot attract the institutional and large investor capital flows required to build a major mining house no matter how large their resources might be in some cases.

Some other useful questions can be quickly listed.  Is the deposit close to infrastructure, can the company raise sufficient capital to develop the mine, will the commodity mix within the deposit enjoy sustained price strength? Is the Sovereign Risk or Country Risk a problem? Look at Zimbabwe and areas that freeze over for most of the year or other locations that face continual inundation.

Let me illustrate the crux of this message another way. It is a bit like the punter who goes to the race track with $200 hoping to turn it into $20,000 - and usually loses all.  Compare this with the professional punter that takes $20,000 to the track and comes home with $22,000 on a regular basis. This is the guy that makes the money because he makes sure he does not lose money. The smaller punter takes big risks on long shots and comes home with nothing or a big return – and returns to the track again and loses it all anyway on a regular basis.

Let me spell it out another way – the company with low cost production from a long life mine that has an economic scale (or size of) deposit will be the best longer term investment.  Yes in this case resources in the ground count. The factor obscured in this case is that some ounces are more profitable to mine than other ounces. This fact is well illustrated when you compare the wide disparity between various Enterprise Value per ounces ratios and other such comparisons (NPV et al) used in an attempt to make sense of share price valuations.

This picture is simplistic and the research required to be successful goes even further than this. This is not a criticism – it comes down to interpretation – this is my point. These resource measurements, NPV’s and EV’s etc are a useful measure if used correctly with a wider understanding.

Sure the gold in this deposit is the same as other gold but it comes down to how much profit will be made and even more importantly when for the larger investors.  Large investors are accompanied by large investment or capital flows which equate to demand and this pushes up share prices over sustained periods of time – equals a positive sustained price trend. This is where the big money is made as illustrated by Mr. Buffett.

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Neil Charnock is not a registered investment advisor. He is an experienced private investor who, in addition to his essay publication offerings, has now assembled a highly experienced panel to assist in the presentation of various research information services.  The opinions and statements made in the above publication are the result of extensive research and are believed to be accurate and from reliable sources. The contents are his current opinion only, further more conditions may cause these opinions to change without notice. The insights herein published are made solely for international and educational purposes. The contents in this publication are not to be construed as solicitation or recommendation to be used for formulation of investment decisions in any type of market whatsoever. WARNING share market investment or speculation is a high risk activity. Investors enter such activity at their own risk and must conduct their own due diligence to research and verify all aspects of any investment decision, if necessary seeking competent professional assistance.