Are markets efficient?
It may be that there are still some academics somewhere who want to duke it out on this question.
But as far as junior mining goes, the answer has to be a definitive ‘no.’
For a start, there’s the vexed question of what a given asset is actually worth. No one really knows until it’s sold, and even then it’s not clear, as commodity prices change, markets move one way or another and unforeseen problems arise.
But from an active investor’s point of view the question of timing poses even more imponderable questions.
How is it that the market can value a mining company much more highly on one given day than it does on another? The answer is sentiment.
This runs in several recognizable patterns across the life cycle of a junior mining company, and has recently been modelled in something called the Lassonde curve [https://stonenews.eu/visualizing-life-cycle-mineral-discovery/], after famous mining entrepreneur Pierre Lassonde.
The thesis is straightforward enough.
- To start with, you’ve got your greenfields ground, without a discovery. There may be something there that’s tickled the fancy of a geologist, or there may be a discovery nearby. Either way, someone raises some capital to go and have a look. Typically, at the very early stage, this takes place off-market, in what’s known as rounds of seed-funding. The company then lists, deploys the capital, and starts putting out newsflow. So far so good. If you believe in the team behind the company, tip one, now is probably the best time of all to invest, as nothing’s been done, the hype is still probably minimal, and there’s still plenty of value on the table.
- At some point, enough data will be gathered to allow for a drill campaign. First, though, the company will have to find the money to pay for drilling, which is typically far more expensive than other types of scientific survey. Since that’s likely to involve a further capital raise, and that in turn is likely to be at a discount, the market is likely to mark down the shares. So, tip two – if you think a round of funding is on the way, sell or go short.
- But once the new money’s in, the action really starts. At this point, there’s the prospect real value might be created. And it’s the prospect of the value, rather than the value itself that tends to excite the market. So, ahead of drilling and during a drilling campaign, shares get bid up. Often, when results start coming in, they correct, and in some cases they return to the levels they were at before the drilling even took place. So, tip three, buy ahead or during a drill campaign, but be ready to sell before the results come out.
- This cycle of capital raising and drilling can be repeated many times, but at some point a successful company is going to move on to building a resource and putting an economic value around it. At this stage in its development a company moves on from the purely speculative, and lots of the hot money exits and moves on to the next thing. But those who know a thing or two about the economic valuation of a project and the prospects or otherwise of actually building a project now start to take an interest. Share prices can still go up and down on newsflow, but also become more sensitive to the given commodity prices. Now is the time to buy for the medium term, as the company moves towards putting together a definitive feasibility study and demonstrating that its project will actually be able to make somebody a great deal of money. Will it be existing shareholders? That is one of the great conundrums for junior mining company directors – should they develop projects themselves, or hold out for an offer for a bigger company. Tip four, buy and hold as the economic evaluation process gets underway, and try to back companies that look as though they can go it alone if required.
- Once economic viability has been established, a new value point has been reached. Now, a company has to go out and raise significant amounts of capital for construction. Or else, sell. Again, the market is likely to dip at this point, as fears of dilution get the better in the short-term of anticipation of the long-term upside. But investors need to have a keen ear for the beating of the jungle drums, as now is the most likely time for a bid, and if one comes in, maybe others will too. Depending on the wider commodities environment at the time, the bids will get more and more generous, but it’s also possible if times are bad, that it may come in below earlier highs. Which harks back to point one – it’s always hard to know what a project is really worth. So, tip five, watch the wider commodities market and levels of mergers and acquisitions activity in the sector, and buy, hold or sell accordingly.
- If a company takes a project into construction, this is generally time to sell, in the short-term. That’s because all the value’s already on the table, and there’s still execution risk. Also, not much is going on, and the mining market likes to see activity. This is why companies that are in construction on one project like to put as much news out as they can on other projects, if they have any. Tip six, look to sell during the construction phase.
- Once in production, a project can more easily be judged on future cashflows, and the investor in junior mining has, if he’s still around, been transformed from a supplier of speculative capital to a longer, steadier presence on the share register. At this point, watch to see if companies choose to repay investors with dividends or to reinvest cashflow into new expansion projects, and then invest to taste.