The resource industry has long been seen as risky for investors. Filled with juniors looking to make a name for themselves with a discovery, the sector offers diversification, but isn’t necessarily for the faint of heart.
There have been some notable winners over the years, but for the last decade or so most generalist investors have stayed away from mining stocks. This is despite an increasing number of commodities hitting record-high prices or coming close to record-high prices in the relatively recent past, including gold, copper and zinc.
At this year’s Vancouver Resource Investment Conference (VRIC), Jay Martin, president and CEO of Cambridge House International, convened a panel to explore where the smartest plays in the mining sector are right now.
His guests for the event were Adrian Day, president of Adrian Day Asset Management; Willem Middelkoop, founder of the Commodity Discovery Fund; and Rick Rule, proprietor at Rule Investment Media.
Is the bottom in for mining stocks?
Although prices for base and precious metals have been elevated over the last several years, this hasn’t translated into much interest in mining equities from new investors.
Quite the opposite — during the two days of VRIC, many participants noted that mining stocks are undervalued.
Against that backdrop, Middelkoop sees strong opportunities. “We’ve already reached the bottom. I see a lot of bottoming patterns also in the charts. If you study the markets from a supply and demand perspective, from a fundamental perspective, there are certainly shortages arising. Uranium is a great example — we have some kind of short squeeze, and this could develop into copper, silver or other metals. There are great bargains to be found,” he said.
Speaking about gold, Day said he sees the smart money moving into the senior companies first.
“When the gold stocks start to move, it’ll be the big-cap stocks that move first. Not only do they move first, (but) they’re more certain to move,” he said. Day suggested that if gold were to reach a price point of US$2,500 per ounce, companies like Agnico Eagle Mines (TSX:AEM,NYSE:AEM), Barrick Gold (TSX:ABX,NYSE:GOLD), Franco-Nevada (TSX:FNV,NYSE:FNV) and Wheaton Precious Metals (TSX:WPM,NYSE:WPM) are all but certain to rise.
At the same time, Day emphasized that he doesn’t want to diminish juniors — he sees incredible value, but his strategy is more focused on the companies that have cashflow and strong balance sheets, and for him those are the seniors.
Strategies for uranium as price takes off
Noting a particular focus on uranium at this year’s edition of VRIC, Martin moved the discussion along to gauge the panelists’ thoughts on the energy mineral, which is currently above US$100 per pound.
Rule was quick to answer with his belief that the ‘easy money’ has already been made, but also said there is still ‘big money’ to be generated in the sector. In his view, the market was bound to improve. When the breakeven point for uranium companies was US$60 and it was being sold for US$20, something had to change.
“At US$100, the price doesn’t have to go up. It’s a strange mark on human cognitive ability that when the price has to go up nobody cares, but when it has gone up everybody cares,” said Rule.
Adding to Rule’s point, Middlekoop spoke to the fundamentals of the uranium market.
“The last real bull market was around 2007, and then we reached US$140. In today’s money, that would be well over US$200. So I think we are in the very early stages of a bull market in uranium,” he said.
Diving deeper, Middelkoop sees a serious uranium shortfall coming, and no easy solution for demand, all set against a tense geopolitical backdrop that could continue to drive the price higher. This is setting up a good scenario for investors who have been waiting on the sidelines, but Middelkoop also suggested that investors not wait too long.
Focusing on discoveries, he said, “If you look at the best uranium discovery, it has to be NexGen Energy (TSX:NXE,NYSE:NXE). It seems a bit expensive now because it ran up to C$10 — that’s a C$4 billion market cap now — but if you do the math with these numbers, once NexGen Energy is in production they will produce 20 percent of all uranium worldwide, and this could be a C$30 to C$40 stock.”
As a counterpoint, Day urged caution, although he conceded that the wait for uranium to take off has been long. “I’ve been in this business a long time, and when people start asking me if the train is about to leave the station, you’ve got to jump on now before you miss it. That typically is a warning flag, to be honest,” he said.
How to evaluate mining stocks
There are many ways to evaluate investment opportunities, and the panelists shared some of their best tips.
For his part, Rule said his focus has always been a people-first approach. “There is 1 percent of the population in junior mining that delivers 40 percent of the return. So you start hanging out with them,” he said.
The first thing he suggested is to get to know the people, then look at the scale of what they are finding.
“Great big deposits always give you surprises, and the surprises are always good. Little deposits give you surprises and they’re mostly not so good,’ he told the audience at VRIC.
Finally, Rule encouraged investors to get to know their holdings. “If the people in the audience here would spend one hour per month for each holding in their portfolio, and the attention to balance sheets, income statements, insider filings, reserve reports … they would improve their investment performance manyfold,” he said.
Finding himself in disagreement with the people-first strategy, Middelkoop put the quality of the discovery first. He appreciates the science and the definitiveness of drill results, and gave the example of Ivanhoe Mines (TSX:IVN,OTCQX:IVPAF) Founder Robert Friedland, who didn’t have a good reputation at the start of his career.
“He only built himself a great name because he was involved with a great discovery, and he believed that very well and sold it for $4.6 billion. So management can be changed when there’s a strong, quality discovery,” said Middelkoop, adding, “You can’t change the rocks, you can change management. So that’s why we follow the best discoveries out there.”
Day finished by noting, “Give me a good person with some money and if a project doesn’t work they’ll go on and do something else, but a bad person with no money can screw up a good project really easily.’
Investor takeaway
Rule, Middelkoop and Day have different strategies when it comes to investing, and it’s important for investors to establish their own set of rules. One key principle is to have a reason for making an investment.
“Too many speculators are narrative-oriented. Their idea of due diligence is, ‘You got a hunch, you got a bunch,’ and that doesn’t work,” Rule said. His statement is worth paying attention to — going into an investment on a hunch is going into an investment blind. Instead focus on data and certainly don’t be afraid to ask questions.
Investing in the resource sector has risks, and the juniors are the highest-risk segment of all.
Securities Disclosure: I, Dean Belder, hold no direct investment interest in any company mentioned in this article.
