Please God just give us one more bull market, I promise not to blow it this time
Crypto surge signals mining’s new bull run.
Recently I was in Dubai for a series of meetings and a resources conference. One evening I found myself on the Ritz’s roof top bar sipping an ice cold Diet Coke and eating a wood fired peperoni pizza, two of life’s great pleasures. I looked around the city, it is amazing how far Dubai has come in such a short period of time. The city has gravitas, it buzzes with oligarchs, crypto bros, arms dealers, financiers, and British stag parties. It’s like what Vegas wanted to be, but never could.
As it happens, there was a crypto conference that same week and the two gentleman sitting at the bar next to me were talking about all sorts of coins and ideas I knew nothing about. After an hour of banter about why BTC was the new gold and so on, they convinced me to buy XRP and FTM. I humored them, and bought tiny positions.
“What the hell, I thought”, let’s have a taste.
Since that evening I have been captivated by crypto. I find myself regularly checking my phone and watching the price of both go up daily. I confess, every day I wonder if I should liquidate all of my junior mining positions and just buy crypto. The amount of money I have involved in crypto is so small it is irrelevant to my portfolio, but the “feels” I have been feeling… it’s as if I have learned to love again.
There is nothing like a bull market.
Everything is positive. Everything goes up. You are happy, you are making money. You are smarter. You are better looking. Yes all bull markets end, and surely this one will too, but exhilaration from afar is amazing.
All this excitement got me thinking, what is the next catalyst in the resource market to bring back the good times?
We are now exiting the halo of World War II. Those who gave so much have now mostly passed on. The stability and prosperity they helped create is now coming undone. The United States helped to rebuild Europe and Japan and in the process created a currency both fiscal and diplomatically that has controlled most everything that has gone on, both good and bad, since WW II.
We are no longer living in a unipolar world. Russia has been fighting a war in Europe for several years that the US has not been able to stop and it is as if, at any moment, China may make its move on Taiwan.
And then there’s the record-breaking US national debt, which now stands at a staggering $35 trillion. The government spends nearly $1 trillion annually just to service this debt. And that’s just the US. Japan’s national debt is estimated at $9.2 trillion. This is eroding confidence in traditional financial systems and fuelling the appeal of cryptocurrencies.
I believe this instability is the backdrop.
And this geopolitical instability matters to mining.
Deglobalization, AI and the energy transition are the catalysts for major investment in mining and a series of bull markets
In August, China announced a ban on the export of certain minor metals and, on December 3, they followed up on that announcement with a ban on the export of metals like antimony, gallium, and germanium to the US.
All of these minerals are critical to chip making and the military. For these metals and others, almost the entirety — ranging from 80 to 98% — of global refining capacity sits inside of China.
The US and Canada are a permitting nightmare. It can take a decade or more for a mine to be built, and that assumes that the capital markets are there to provide money. Permitting a refinery is hardly any easier.
But, this will change, and herein lies the opportunity.
It is time to invest in projects in North America and Europe. Many of these projects are trading at a fraction of their peers. Under promoted, lesser known to their counterparts in different parts of the world. We have already started to see the US government create programs to help support companies and projects. I think this is only going to continue, if not accelerate.
The US and Canada are full of projects that have been overlooked because cheap Chinese money funded a competing project in Africa (not to mention environmental attacks and various permitting issues):
There are copper mines in northern California that have been closed for decades that could be reopened
There are massive nickel deposits in Canada waiting to be funded
There is uranium in Wyoming and antimony in Alaska. North America is rich with natural resources
To remain a global superpower these projects in the US need to be funded.
I am not sure if we are going to have a single bull market like we did in the super cycle where every deck ended in – “and the Chinese will buy us.” Instead, I think we will have a series of rolling bull markets that will be driven by sanctions, tariffs, wars, politics, etc.
As we look across the TSX, CSE, and the private markets there are a large number of:
Historically operating mines with historic drilling and data
Stockpiling, above ground mining
Recycling projects
Brown field expansion opportunity
In the coming months we are going to launch an investment club “The Green Room”, to bring you opportunities to invest alongside us, at our same price. Some will be home runs, others will be zeros… all will be fun.
So, I’ve not liquidated all my junior mining positions and bought crypto yet.
Just, please God give us one more bull market, I promise not to blow it this time.
Psst, your mining CEO isn’t a “scumbag”, even if Twitter tells you so
Being a junior mining CEO is hard. Trust me I have the battle scars.
This month I am going to share my thoughts on the modern junior mining CEO and how the position is changing dramatically. Hopefully this will help reframe how we think about these individuals and reevaluate who/how certain aspects of the companies we invest in, are being run.
Bottom line:
In addition to having a real asset/project, I won’t invest in a company that doesn’t have a big marketing budget spent mostly on digital advertising and content AND either a CEO that is well paid and/or owns a large position in the company.
In the age of social media it’s easy to get swept up in the tide of public sentiment, especially when it comes to an industry like mining. It’s all too easy to portray mining CEOs as villains, driven by greed at the expense of shareholders.
But this clichéd portrayal rarely reflects the complexity of the role or the modern realities of marketing and capital raising. Instead it’s often a narrative that seems to be pushed by individuals who have lost money, are jealous, or simply don’t understand the nature of the asset they are investing in.
Sure, there are bad actors but, in my opinion, the overwhelming majority of CEOs are doing their best in a job that requires you to be a capital raiser, market maker, public relations expert, and business operator. This is at least two and maybe three very different skill sets in one person — which is a rare find.
Mining executives are responsible for balancing the need to power the world’s industries, from technology to infrastructure, rearmament to the energy transition, while navigating an increasingly challenging capital raising environment with a (let’s be honest) general lack of interest from investors in small cap stocks — as well as, now, the social media’s armchair CEOs.
The internet in particular has catalyzed this trend with mostly anonymous keyboard warriors vicariously running junior mining companies from their mom’s basement in their underwear… heck, even the pros take their turn (probably also from their mom’s basement in some cases!).
Did you know there is an invite-only group on Discord where so called professional portfolio managers go to exchange ideas and berate management teams.
Under the cover of what some of them believe to be anonymous and semi-anonymous handles they take their turn. Look at X/Twitter, where many of the popular accounts are hyper negative. But why? Should they be? Is it fair and/or helpful to junior mining stocks?
Dismissing mining CEOs as “scumbags” because of oversimplified social media narratives misses the modern reality of running small public companies.
All the while these CEOS are required to be optimists and cheerleaders.
For a junior mining story to work you HAVE to market, and the CEO HAS to stand to make money.
As discussed last month in our newsletter, I attribute much of the negativity by a given investor to not framing their junior investment correctly. As Charlie Munger once said “If you don’t understand it, don’t do it”.
Investing in a junior mining stock is akin to investing in an option! Make the mistake of thinking about it differently, and risk not understanding why you lost money.
(Catch up on last week’s newsletter The Art of Betting on Maybe, Junior Miners as an Options Trade)
Now, for all that, let’s be honest, you can’t (and shouldn’t) ignore the chatter online. BUT don’t take it in isolation. In particular, what’s the source of the noise and potential agenda behind the rumors.
The junior sector is so unloved that chirpy little hedge funds with small AUMs can have an outsized voice.
What should you look for in a CEO?
My rules of thumb when judging management (it goes without saying that we are assuming, of course, that they have a real project or opportunity):
You can’t fight the tape!!!
Market sentiment and commodity price above all else are going to drive the CEO’s ability to move his or her stock. If lithium is down big, your stock will be down big. If silver is up big, your stock is likely up big.
The CEO’s job, through their marketing efforts, is to amplify an upward commodity move into share price appreciation and minimize downward pressures in a tape moving against them.
Never fall in love
A quick reminder: Your CEO is not building the mine. Statistically the mine ain’t getting built anyway! But if you take it even further and say the junior is building the mine you are now entering the world of delusional. If, by chance, the mine is built – it won’t be by a junior mining company.
I refer you back again (to reemphasize this most crucial point) to our newsletter from last month, these junior mining stocks need to be thought about as options!!!
AND ALWAYS REMEMBER TO SELL!!!
If you don’t spend on marketing you are irrelevant
I will NEVER invest in a company where the management tells me they aren’t spending on marketing. This is INSANE. Your CEO needs to be spending on marketing through the ups and downs of the market. Sure, you need to ramp up and down budgets based on the cycle, but not spending is never an option. All not spending really does is make it harder for people to find your name when the market comes your way.
There was a time when raising money was easy and stock promotion required little effort. The days of paying for dinners in Zurich hoping that one of the twenty people in attendance buy your stock are long gone. Instead the modern CEO is faced with a simple fact, in addition to running a business they have to embrace modern marketing methods to have a chance at moving their story forward.
I like to think about marketing spend like big wave surfing. You need to be spending while you are out bobbing around the sets…but when you finally see the right wave, you need to go all in to catch the wave! Marketing spending can massively amplify positive underlying market sentiment or a positive commodity price move. In a downturn it can also make the difference from being a 50m market capitalization company or a 5m market capitalization company.
Just a quick anecdote: last month at Beaver Creek, I was in a meeting with one of the industry greats. He noted to some of the people in the meeting that he was not interested in the group joining his group unless they would commit to spending two million per year on marketing. That’s right. Two million.
Now, I don’t know the details of that deal, but another way to think about it is like this: If your CEO effectively spends a million dollars on promotion and the stock is 120 million market capitalization versus the same CEO on the same deal spending nothing and you have a 40 million market capitalization — which do you prefer?
As I noted in our September Newsletter, dilution is the enemy to your junior mining investment and so the highest market capitalization possible helps to protect against dilution. Spending money to defend your investment with a higher market capitalization makes sense.
Can the modern junior mining CEO be just one person?
Or is the new paradigm a technical CEO and a marketing oriented Chairman or president (or some version of it – just that it is two separate people).
I have been struggling with this question(s) for a number of years. Certain projects demand a CEO with deep technical knowledge to lead technical development. In my experience that technical CEO is often either unable or unwilling to turn their attention to marketing.
A modern marketing program has to be run by a senior executive
Marketing has turned in to witchcraft, we are going to have to address this in depth at a later point.
I have come to believe that every company needs two people at the top, one who is managing modern marketing techniques and dealing with shareholders and a second that is running the business.
Gone are the days when you can outsource your marketing to a 20 or 30 something and show up to a conference. Instead, marketing today requires content review, ad words, strategy around timing, TikTok, SEO and placement of content before certain audiences, keywords for search and blogs need to be given serious consideration. MILLIONS AND MILLIONS AND MILLIONS of dollars have been wasted over the past few years by CEOs in the mining space who have outsourced their digital marketing budgets because they didn’t understand how it works or didn’t want to spend the time and energy to understand how truly important the new era of digital marketing is to the success of their story gaining a wider audience of investors.
The Chief Marketing Officer has to be a senior executive! Ok Ok. I keep talking about the CEO but, as noted above, you really need someone to market the company. This means the CEO or Chairman etc need to effectively be the Chief Marketing Officer. My firm view is the CMO needs to be one of the top two guys in the deal. It can be the CEO who markets and a technical president or a technical CEO and a marketing chairman etc. They also need to be committed to learning how to properly use modern marketing techniques so that they are not wasting their marketing budgets. A half-ass approach is actually worse than not trying because a half-ass approach results in wasted money!
The CEO either needs to own a large position in the company or get paid
The days when the promoter of a Vancouver penny stock deal could take no cash money out of a deal because they were blowing out their stock in a secret Swiss account are long gone. Grow up!
Your CEO either needs to be paid or have a huge position in the company. Do you honestly want a CEO who is so desperate for a job that they are willing to not have a position in the company and make $150,000 per year. Yes, I get that that is still a lot of money, but a starting salary for a junior investment banker or someone right out of school at a tech company well exceeds that number. So ask yourself a basic question, do you want a talented CEO?
I don’t know what the right salary number is for a given company, but making sure you have the best management team in place is critical. This is really achieved through one of these means. I would also note that this, in my opinion, is one of the main reasons why many so-called private equity firms and stories where there isn’t a promoter, have failed.
To sum it up
It is really hard out there in the small cap space these days. The people running the companies you are invested in are doing their best. When I look at company executives I want to see a division of labor along the lines of running the business and marketing. I also want to see highly incentivized management teams spending large budgets on marketing in the context of a given market scenario.
That’s where I’d put my money.
Anthony
Stay tuned for next month!
The Art of Betting on Maybe, Junior Miners as an Options Trade
After kicking around the commodity sector for almost twenty years it still makes me laugh when I meet some guy running a small hedge fund (usually a fresh face kid out of New York or Connecticut) telling me he is a “value investor” looking at the mining space. The only thing I can tell you for sure is that these guys are an odds-on favorite to get smoked out!
No one really ever owns a mining stock, THEY RENT THEM
The same goes for many of the folks on forums like MINTWIT, CEO.CA and Hotcopper.com.au. These sites are littered with angry investors who lost money in part because they didn’t understand what they were buying and how they should assess risk.
Recall Warren Buffett who said “risk comes from not knowing what you are doing.”
Not appreciating what you are buying or using the wrong framework when thinking about your investment is setting yourself up for disappointment.
Earlier in my career I was the head of origination at one of the largest mining funds in the world. It afforded me the opportunity to look at countless deals. The number one input in every mining company I have ever looked at, and there have been tens of thousands over the years, is the commodity of their project. No other factor can ever eclipse the commodity price for a given project. At some commodity price every project is viable. The inverse is also true, at a certain commodity price no project is viable.
How can we use this knowledge to make money?!?
Take a moment and think about some of the biggest wins in our sector. Do you recall the legendary story of Uramin? A handful of investors raised a few million dollars and purchased historic drilling data on a uranium project in Africa. Eighteen months later the company sold for nearly USD 2.5 billion dollars without drilling a hole. Or more recently take lithium. Left for dead, lithium stocks couldn’t raise a penny and then almost overnight billions of market capitalization was created. Ditto for uranium.
It’s cliche but TIMING IS EVERYTHING!!
Today’s low grade will become tomorrow’s high grade
To make money by trading junior mining stocks you must first understand what it is that you are trading. You cannot think about these stocks like a NYSE or NASDAQ listed company. Trading junior mining companies is like trading options. Having the discipline to make AND lose money this way has always been helpful once you start to think like an options trader.
One way to make money in junior mining companies is to start to think about them as options. Yes, you heard me right – options.
Think about it, there are two basic types of options: calls, which allow the purchase of the underlying stock, and puts, which allow its sale. The price of an option (the premium) is influenced by factors like the stock’s current price, the strike price, time until expiration, and market volatility. A key aspect of an option is “theta” otherwise known as time decay. Theta is the idea that over time as you near the expiration of the option it becomes worth less money. I think about junior mining stocks as “call options” on large out of the money deposits. Just like options, you need to manage your holding period… or you may likely get diluted into oblivion.
How does this strategy translate to the junior mining space?
Roughly one-in-three-thousand exploration projects will ever become a mine. Spoiler Alert! For all the CEO-of-your-favorite-investment’s talk of building a mine… he isn’t going to do it! No, he isn’t a liar… or even delusional… he is just doing his job. Selling a dream!!! This is where discipline comes in. DON’T FALL IN LOVE. See the stock for what it is, an option that it is likely heading towards zero or 20x and nowhere in between.
Buy the dream, stay for the commodity move, sell on volume!
How is a junior stock an option? There are almost zero junior mining stocks that have cash flow, only slightly more than zero ever will… Remember that scene from Silicon Valley: “If you show revenue, people will ask “how much” and it will never be enough…if you have no revenue you can say you are “pre-revenue” and be a pureplay.” That basically sums up junior mining. I am sure everyone can point to the outlier but, in reality, the stock you are buying is going to need to raise money again – and sooner than management is prepared to tell us. Hence the theta. The very nature of every junior mining stock is their time decay due to the future need to raise money. This isn’t a bad thing, it is just worth acknowledging and accepting it.
If you buy a stock and hold it through a period where the underlying commodity of the stock’s project doesn’t appreciate you can just about be guaranteed to suffer massive dilution. BUT…if you buy a stock at the right point in the cycle and have the commodity price come your way, you can see unfathomable returns.
How are options priced?
Certainly, theta as described above is part of the equation but, in my opinion, leverage to a commodity price move is key! There are a bunch of different ways you could think about this framework — personally, I prefer large “low grade” unloved deposits. Robert Friedland, one of mining’s most recognizable figures, has famously said that grade doesn’t matter. He is right! It is just as hard to permit and build a small project as it is a big project, and so, if you are going to be long a project, it may as well be a large one.
Across nearly every commodity that I can think of there are large low grade “world class” deposits that are trading at a fraction of the NPV or any other metric just waiting to transition to high grade. These are the HIDDEN GEMS that can generate vast sums of wealth in a small amount of time. Nearly all the big scores I have ever had personally have been in part related to a commodity move and leverage to the commodity move through a large project.
So how do we think about pricing the options?
Actually pricing the option has much to do with timing the commodity price cycle. If you buy in too early, you will be crushed by theta – or future capital raises – but as the underlying commodity moves, the share price can move in a matter of trading periods. In short, once you have identified a company with an asset you like, you have to make up your own mind about where we are in the commodity cycle for the relevant company and their underlying projects.
Our team is constantly evaluating these types of opportunities and at some point in the future we will let you know when we identify interesting opportunities. We will always focus on the commodity first and foremost, and then look for good companies with good leverage to that commodity.
Originally posted at https://theoregongroup.com/greed-guts-glory/the-art-of-betting-on-maybe-junior-miners-as-an-options-trade/
Greed, Guts and Glory
For years I have wanted to share my thoughts with a broader audience regarding investing and making money in the commodities space. For a variety of reasons I have not turned my attention to this endeavor but feel that the market is changing, and creating a community of speculators to share ideas, celebrate wins, and commiserate the losses is growing more and more important.
As the old adage goes, “if you want to do something new, you have to stop doing something old.”
To that end I am launching a personal monthly letter on : Greed, Guts, and Glory: Mastering the Art of Speculation, to focus on creating a community of like-minded individuals. I intend to share my views on the space, strategies, people and, above all else, share opportunities. Subscribe now at https://www.theoregongroup.com.
Anthony Milewski
