The Kerry Slug and Broken Clocks

The Kerry Slug is rare – an endangered species. I know because I came across a paper of 101 pages about the slimy invertebrate[1]. The slug is also protected under the Wildlife Act 1976 under Statutory Instrument No. 112 of 1990. Rhododendron ponticus is a major threat to this slimy speckled creature. That is apart from road builders, renewable energy entrepreneurs and miners. The Kerry slug comes out to feed on damp, dreary and overcast days -a bit like a Vulture Fund. It eats lichen mosses on tree trunks. Alas sometimes it nibbles alas on the odd Rhododendron. It halted the construction of a major bypass road around Macroom in County Cork. One of its slimy crew hitched a ride on a Coillte logging truck to Galway. There it delayed the permitting of a wind-farm by 18 months.

Increasingly there is a slimy knot between the professional, unconscientious objector for hire and this rare slug and its ilk. European Legislation protects this noble slug. Maybe that is why the Mayor of London, Boris Johnson (BoJo) feels so strongly that England should leave the European Union. It could also be that he has a vision of Churchillian of greatness for himself. Maybe he was emboldened after writing of his latest book on the British statesman and author The Churchill Factor – How One Man Made History.

Globally the bureaucratic process of permitting projects is going to get longer. As justice delayed is justice denied so projects delayed is value destroyed.

There is another man in America seeking to make history. I woke up this morning and read that Donald Trump has won Nevada – a billionaire, xenophobic Tycoon with ideas just a bit to the right of Atilla the Hun. Will he be president of the most powerful economic and military machine in the world? How could such a self-centred capitalist become the champion of the Republicans? He peddles a populist and simplistic diatribe of inconsistency and invective. But he has struck a chord with the resentful underbelly of America. An organ bloated from broken promises and dashed American dreams. A dangerous cocktail indeed.

We have a general election here in Ireland on Friday. A man who owns the local flower shop in Maynooth is running as a candidate for the new Renua Party. As a party Renua is a minnow which may get only one or two percent of the vote. But it is a democracy which is a far cry from the multi-millionaire class of Presidential candidates in the race for the White House.

Have we stopped making things? There are now huge chunks of the economies devoted to financial trading, real estate transactions, processing forms protecting slugs and other “busy but useless” activity. Is the age of advancing productivity over? If the iPhone did not lift productivity what will? A world of slower growth and negative interest rates. Algebris is a new investment fund just launched and designed for a world of negative interest rates. We have Coco debt which is a form of risky bank-bond frequently referred to as Alternative Tier 1 securities. So why not coin the term Kerry Slug for our sluggish economies? But what if this is not the future? What if common sense prevails?

There are some things I have learned as an exploration geologist.

In mining only exploration creates value through the discovery of new mineral deposits. The deployment of resources, technical or financial adds value but does not create it. Without discovery there is no deployment.  Investors struggle to see the reward of discovery as a big enough to counter the risk of exploration. The pipeline of quality mineral deposits is directly related to the amount of exploration. A quality mineral deposit will attract support in any market. If you are a minnow explore in elephant country. That is where you might find something big. The exploration risk is the same whether it is big or small so go for it.

But I can buy zinc resources for less the cost of discovery.

But why are these resources not mines already?

The grades are too low for these depressed metal prices

So what you are saying is that you can buy these mine projects at bombed out zinc prices.

Yes but they are unlikely to produce enough zinc to make a brass hex nipple?

What the hell is that?

Ask a plumber.

Oh I get it so you are waiting for the metal price to go up.

What about private equity?

They want their cake and eat it.

I guess exploration is a dirty word now.

It is too risky, Heaven forbid you might not find what you are looking for.

Yes better not to speculate and then there is no worry about making a loss.

So where will all this leave us?

Metal prices will have to rise so high that even the dogs will stand out as stars.

But it will be too late then?

Not if you have a dog of a project which all of a sudden makes a lot of money at these higher prices.

Sounds like Optionality to me.

Also if you have a compelling and creative way to optimise a dog of a metal deposit then you might be in business.

Do you mean high-grading or slave labour?

Something like that. I once had an assignment to reassess the economics of reopening the old Igumenskoye gold mine in the Kolar goldfields of the Russian Far East. In the past it was a very profitable Gulag gold mine producing on the backs German prisoners of war.

Very low labour costs I take it?

Bottom of the cost curve no doubt?

Indeed.

So what is high-grading?

It is extracting the fillet mignon with a hunting knife and leaving behind the inedible rump.

Oh I see, you get blood on your hands.

Yes it shortens the life of a mine considerably old boy?

Unless you explore?

Now you are getting it.

Did I call the bottom of the zinc market just before Christmas? The Zinc price is in a bull sprint, up 20% over the last six weeks regardless of market turbulence. Are fundamentals of supply and demand finally getting the upper hand over fear and predictions of doom? Who cares? You do not need to fret about forecasting the future if you play the optionality strategy. You are reacting instead to known events. – collapsed metal prices – the closure and mothballing of major zinc mines – Chinese smelters lowering their treatment charges.

Optionality is the property of asymmetric upside. Hopefully unlimited with correspondingly limited downside -preferably tiny.” Venture capital, when practiced properly by a top tier firm, is a classic example of a business that benefits from optionality.

Another example of optionality is a venture capitalist who invests in a team which is very good technically, has a strong track record and sees a huge market opportunity. This is optionality because the company can often find success with a project which the founders did not conceive from the beginning, but rather found as they went along. There is only so much recycling of mediocre projects which is possible. The demand for metals is cyclical and a broken clock tells the correct time at least twice a day. Therein lays the optionality.

I am delighted that Group Eleven (G11) reached its initial seed financing target. Not surprisingly we focus on zinc. There is a world of opportunity out there. We are exploring for big zinc deposits? Where? In County Kerry of all places. We may also find something we did not conceive from the beginning. I like to think that this is what G11 is all about. After all we did it before. Maybe I write this blog to stay sane in this extraordinary and wonderful world.

[1] written by Mc Donnell, R.J. and Gormally, M.J. (2011).  Distribution and population dynamics of the Kerry Slug, Geomalacus (Arionidae). Irish Wildlife Manuals, No. 54. National Parks and Wildlife Service, Department of Arts, Heritage and the Gaeltacht, Dublin, Ireland..  http://www.npws.ie/sites/default/files/publications/pdf/IWM%2054.pdf


2 responses to “The Kerry Slug and Broken Clocks”

  1. Michael Colligan says:

    John,

    Amusing op-ed.

    Just one small thing: I have no truck with The Donald, as Herr Trump is known, but I have to point out that if you parse his “positions” such as they are, on issues, he is not “to the right of Attila the Hun” but in a wholly undefinable ideological place which includes disparate elements of nativism, neo-colonialism, liberalism (19th century UK), populism, authoritarianism, liberalism (20th century American) and bombast. Did I mention paranoia, racism, chauvinism as well as well? Contradictions are no problem for him. Far from it. Nor for his cult members.

    Good luck finding a single category for The Trumpet.

    yrs
    Michael

    • john says:

      Thanks Michael,
      Maybe Churchill would describe Trump as a mystery wrapped up in an enigma or maybe more ominously firecrackers in a tinder box.
      Cheers
      John

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