The View from England: March is a good time to consider risk and reward

It seems odd not being in Toronto during the first full week of March. For as long as I can remember, the Prospectors & Developers Association of Canada (PDAC) convention has started on the first Sunday in March. This year, however, not only is the first Sunday on the 7th (which is the latest it has been for 11 years) but the coronavirus leaves us with a Monday start. At least the mining industry’s largest convention is going ahead, albeit in a virtual world.

For seven of the past nine years the four-day event has concluded on, or before, the Nones of March, but (as if we’re not already messed up enough this year) the one-week delay compared with 2020 takes us dangerously close to the Ides of March (Idus martiae).

Like most Western countries, Canada traces much of its cultural heritage back to the Roman Republic, whose original calendar divided the days of each month into three groups. Kalends was day 1, Nones was day 7 and Ides was day 15 (in a 31-day month). Hence, days 2–6 in every month were described as “before the Nones”, days 8–14 were “before the Ides”, and the remainder were “before the Kalends” of the next month.

In this ancient calendar, the new year was celebrated on the first day of March (named after the God of War). The word Ides derives from the Latin for divide, and the day originally marked a full moon (so the Ides of March would have been the first full moon of the new year).

The middle of March is now better known for the words of warning, “Beware the Ides of March”, that William Shakespeare had a soothsayer give to Julius Caesar, who was subsequently assassinated on that day in 44 BC. Only two years earlier, Caesar had ordered the New Year celebrations be moved from mid-March to January (in honour of the God Janus, who is always shown with two faces, one looking to the past and one looking ahead).

Despite Shakespeare’s best effort, mid-March is not historically a particularly risky time of the year (although we English suffered an especially nasty coastal raid from the French on March 15, 1360). Nevertheless, the thought of all those junior companies presenting at the PDAC convention in the days before the Ides of March warrants some investment risk-reward guidelines to the unwary.

First, of course; size does matter. Larger companies are better insulated from market shocks, and can ride out any drought in the availability of finance. With regard to reward, however, the share price of junior companies is more volatile, and there is a much greater upside potential following positive resource announcements.

Investors in junior companies with a late-stage development, or mine, should be aware that high-cost operations can become suddenly uneconomic if the metal price falls. The reverse is true (if you’re feeling lucky) for a rising metal price.

Investors in developers also need to be aware that they will be diluted if the company issues equity to finance the project. In that regard, investors should ask about the company’s cash holdings and on plans to secure additional funds.

Mining is inherently a politically vulnerable business (you cannot move the deposit), so investors should generally focus on stable political regions. Stay away from countries with little respect for property rights and the rule of law. Investors also need to take a view on whether the assets are in greenfield or brownfield locations. The former has greater upside but higher risk and likely costs.

Related to the location of the asset is whether the company has a license to operate and has the support of the local community. This will be linked to the company’s track record, particularly in that region, and how it has handled public relations. More generally, a company’s license to operate will be linked to its environmental, social and governance (ESG) performance.

Investors need to decide on what level of diversity they require in terms of the commodities and countries in which the target company operates. Corporate concentration on a single metal and/or jurisdiction allows greater focus and expertise, but is of course riskier (the ‘eggs in one basket’ adage springs to mind).

For many professional investors, the calibre of the management team is the most important element in an investment decision. Investors should look for management with:
Skin in the game — They own equity (not just options)
Clear vision — Can articulate plans to create shareholder value
Business mindset — Ability to generate investment returns
Transparency — Announcements are honest (and regular)
History — Executives have a positive track record
Expertise — Experience in the operating country/commodity.

In mining there is a danger that the marketing hype, particularly for gold explorers/developers, runs well ahead of the underlying asset value. Investors should watch out for:
Near-ologists — Deposits are not necessarily continuous
Trendies — Jumping between metals/countries rarely makes sense
Promoters — The more gold on them, the less is likely in their deposit
Optimists — Executives need to know when to bail out
Figureheads — Overpaid CEOs, who should only be rewarded for results.

Perhaps investors should consider mines as ships. The American author John Augustus Shedd wrote in 1928 (the year he died) that: “A ship in harbour is safe, but that is not what ships are built for.” This phrase was quoted recently in Australia by the founder of Croesus Mining, Ron Manners, and sums up the risks and rewards of mining investment rather nicely.