Mining as I understand it 2: How people will lose a lot of money

Fraud, deception

  1. Fraud, e.g. Bre-X.  Junior mining companies are almost always extremely promotional.  Many of them will try to deceive investors into paying more for shares of the company than they otherwise would.  Some of these forms of deception ARE NOT STRICTLY ILLEGAL.  Or if it is, the perpetrators aren’t ever going to get punished for it.  Some companies will pretend like they have an operating mine when they don’t.  They buy ore concentrates and then resell them (UUU, GORO, etc.).  This allows them to issue press releases that state concentrate sales.  One might wrongly assume that the concentrate is the output of an operating mine.
  2. Employee fraud.  In the case of Bear Lake Gold, it seems that the project geologist decided to commit fraud knowing that he would get caught.  He also doesn’t seem to have profited from the fraud (other than short-term professional acclaim) and he probably will never be working as a geologist again.  Crazy stuff can happen.
  3. Accidental mistakes.  Or “accidental” mistakes, depending on how cynical you are.  Canada Lithium for example had to significantly reduce its mineral reserves due to errors on the geologist’s part.  To be fair, it could have been an honest mistake.  And Canada Lithium’s management was rather vindictive and childish in their press release in how it mentioned the geologist by name.  (They want to push the blame on her.)
  4. Overstated NI 43-101 reports.  NI 43-101 regulations came about due to the Bre-X fraud.  Its proponents set standards on technical disclosures in order to try to prevent future frauds.  However, sometimes people will try to game these regulations.  Canada Lithium for example (they went by a different name back then) issued a technical report on one of its properties stating that it had several thousand ounces of gold.  The next quarter, the property was written down to almost 0 (i.e. it is worthless).

DISCLOSURE:  I own shares in Canada Lithium.  Yes, I am long.  At around 46 cents, it trades at close to cash and this is ignoring the value of the lithium deposit (whatever it is).

Commodities bear market

(I could definitely be wrong here.)  We are currently in a bull market for commodities.  Several years from now, it will turn into a bear market for commodities.  Retail investors will own commodity stocks because “they hedge against inflation”.  They will own gold “to protect against fear and uncertainty”.  These beliefs will have an element of truth to them.  However, they will become part of conventional wisdom and people will not question their validity (at least, their portfolios won’t).

Degenerate gamblers will discover commodity futures.  Loose regulations around them allow gamblers to be ridiculously leveraged.  They will be much more popular than they are now.  You are going to see the return of CTAs (commodity trading advisors), which are sort of like the mutual funds of commodity futures.  (They are regulated by the CFTC and not the SEC.)  Physical bars of gold will be considered a legitimate asset class.  People will make board games about trading commodities (I played one when I was very little; it sucked).  Grandmothers and shoeshine boys will own commodities.  That will be the time to sell.

Valuation-wise, you will see new companies that are over-leveraged (i.e. unsafe levels of leverage) and chasing extremely marginal opportunities.  Then a crash in the commodities market will wipe out all the overleveraged players and the bubble will slowly deflate.

Of course, things probably won’t work out this way.  Or maybe it will, but I will be totally wrong in my timing about when the bear market begins.

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