Issues with mining stocks

I think that institutional investors generally don’t know what they’re doing when it comes to mining stocks.  If they were smarter, many problems with mining stocks wouldn’t be so widespread.

#1 – Believing in management

Management giving out overly optimistic projections is widespread and common.  Almost all technical reports are inflated.  There are no penalties for these types of deceptive behaviour.  And institutional investors are dumb enough to believe management.

#2- Institutional investors don’t know how to do due diligence

You need access to technical data, some time, and a team of specialized engineers.  Perhaps there are cheaper alternatives.  Maybe investors can insist upon credible technical reports and honest management teams.  But they don’t.

#3- Perverse incentives

The investment industry tends to have a problem with pyramid scheme-like companies.  It happened with telecoms and it’s happening with mining.  If a company is able to continually sell stock at ever increasing prices, a lot of people will have paper gains and everybody is happy.  The investment banks are making a killing and can afford to wine and dine their money management clients.  The money managers are making a killing.  The money managers’ clients think that they are making a killing.  Nobody wants the music to stop.

So maybe these institutional investors do know what they’re doing after all.

#4- Lack of value creation

Some of the part-time junior mining CEOs have no idea what they’re doing when it comes to mining.  They often don’t have mining experience and were never responsible for an economic mine.  But industry “legends” like Robert Friedland know how to mine investors.  Mr. Friedland was the CEO of a mining company that was responsible for an environmental disaster.  He also used to promote an underwater mining venture with no hope of being economic.  (Tip: avoid anything related to underwater mining or placer deposits.)

In general, mining companies waste huge amounts of money promoting their stock.  Too much money is wasted by companies trying to mine investors (e.g. paying for shills, fancy investor trips, conferences, corporate videos, “investor relations” expenses, etc.) and trying to constantly sell stock at higher prices.  G&A as a percentage of expenses is way too high at most companies.  Insiders and the company boards tend to be overpaid.

With juniors, these problems are even worse.  Many of them are small and therefore their fixed overhead costs (audit fees, compliance costs, listing fees, etc.) are a huge drain on their resources.  It doesn’t make sense for these undercapitalized companies to exist in the first place.

Shortcuts to tell if an investment manager knows mining

  1. Do they own hundreds of stocks?  If so, they probably don’t know what they’re doing.  Mining assets are incredibly difficult to analyze.  And there just aren’t that many good management teams out there.  With hundreds of stocks, you are bound to own junk that you don’t understand.
  2. Do they value a mining asset by taking the amount of resources and dividing it by the market cap?  This is a ridiculous valuation method.  But go on and you can find it.
  3. Do they own juniors while using leverage?

The current TSX Venture bloodbath

Yes, I hate most of mining.  BUT, I think that there is opportunity here.  Altius Minerals (ALS.TO) is my largest position- it’s a great business that is selling below liquidation value.

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