The State of the Mining Industry

I've assembled a short compendium of articles on the state of the mining industry, most notably, the fate of under/non performing properties which were purchased at unjustifiably high prices.  They are placed at the end of this post. Additional citations will be made over time.

With the substantial reduction in commodity prices over the past three years, many assets have crashed in value - to the point where their owners are selling them at fire sale prices.

What factors were responsible for this state of affairs?

• Some testosterone-charged executives were motivated to expand their holdings in order to enlarge their enterprises.  Why?  A desire to be bigger than their competitors for that reason alone.  Anticipation that their compensation packages would expand with the growing size of their companies. 
• Executives misunderstood/miscalculated/mismanaged political risk.  In some instances, political turmoil and its impact on work forces, sources of electrical power etc. prevented "mining as usual".  In other instances, local opposition to proposed and early stage development caused delays, thereby burdening company balance sheets or preventing further development. 
• In some instances, especially with coal, significant changes in market demand caused operations to cease.  
• Unanticipated technical and logistical issues sometimes impededdevelopment.  The worst time for these to happen is when commodity prices are at their lows. 

The take-away lessons:

• Never discount political risk.  I avoid operations in countries where corruption is widespread, the rule of law is "flexible" and not at all respectful of property rights, and where social strife is rampant.
• Unless deposits are huge (a very rare event), I avoid situations which require a tremendous amount of new infrastructure to support mining operations, especially for mining products where there is not a national strategic interest in developing the supply. 
• Always watch companies which "overpay" for new acquisitions as demand rises.  Mining executives are prone to the "mania of the crowd."
• Always, always ... make the integrity and skill of management THE first priority when you start to evaluate the worthiness of a company as a potential investment. 

Going Forward - There are Opportunities for Patient Investors

I have started a "watch list" of potential companies.  

The mining cycle will repeat itself.  Tremendous amounts of money can be made from investments made during lows in the mining cycle.  Some would argue that the risks associated with investing during these times is quite low as prices reflect the most pessimistic assessments of market participants.  This has at least two dimensions:

• Once depressed commodity prices have been in place for a few years, the valuation of mining reserves tends likewise to be unduly depressed. Following market recoveries, the "bargain" prices of bad times can translate into tremendous profits. 
• Investor sentiment is notoriously fickle.  With the 24/7 news cycle (which mostly celebrates bad news) investors are bombarded with apocalyptic visions of collapse.  Added to this is the demographic profile of the investing community in the northern hemisphere: aging investors, fearful of losing their retirement savings, run for the exits when markets start declining. (I have not seen much mention of this in the academic literature: it would make for a nice dissertation.)  It is when investors are fearful, that the best opportunities arise.  

Here's what I will look for in prospective companies as I assemble my watch list:

• Experienced management with an excellent track record.  During the hard times of the present, investors have an excellent opportunity to assess the metal of mining executives.  Look especially, at companies which are still adding to the bottom line e.g. Silver Wheaton and others. 
• Companies which can ramp up operations quickly to meet increased demand have an advantage in generating cash flows.  I give preference to mines which are run at low levels as opposed to those which are mothballed or new ventures under development. 
• Good balance sheets and access to financing are extremely important.  Even today, there are some mining operations which are able to issue new shares or access financing through other measures. 
• Companies must have what I call a "smooth playing field": good relations with local/regional communities, no environmental issues of note, no significant operational issues such as access to water, power, technical problems with mining geology, extraction and processing
• I look for companies in with operations in countries with the rule of law and where corruption is not rampant.  

Interesting Articles on the State of the Mining Industry

Canadian Miners in Knife Fight After Year of Dumping Assets at Fire Sale Prices

A Look at Copper's Global Development Trends

This article, written in 2012, warrants attention: a potential shopping list.  There are other comparable articles on other elements which are easily found.  Now is the time to look while others are licking their wounds or hiding their stash. 

Republic of Mining

This blog is an aggregates information from a variety of sources with an emphasis on Canada.  I read it to "take the pulse" of the community.  

Mining iQ

A comprehensive view of many facets of the international mining scene.