It is the best of times and the worst of times depending on the market sector. For mining and commodities it is the worst of times. Sentiment has become a visceral rejection of all things concrete. Industrial commodities abandoned in favour of all things nebulous such as IT stocks.
It is high summer, July in fact and the afternoon of the last day of the working week. The masters of the universe have sold up just in case the world blows up. They are on a beach or a yacht somewhere on the limpid tepid waters of the Aegean. Maybe they were right, China has erupted and Greece has imploded. The media villifies gold bugs as the price of the metal sinks to a five-year low.
Charts will not tell us when we are reaching the bottom only investor behaviour. Propitious signs are that fear is palpable and that sentiment is bad and getting worse.
China consumes almost half of all copper, zinc, nickel zinc and lead. Metal commodities are falling again as if China were about to sublimate. There are five important things to know about the Chinese economy but nobody knows what they are. At some point the investor will get weary of being wary. Rumours of financial collapse have been greatly exaggerated.
Investors do not want to invest because they fear they maybe marooned. This has resulted in a flat value-curve from exploration through to feasibility. In this market if you cannot show that you can find the funds to build a mine the market will give you no value. If you cannot go the whole way all the hard diligent work to advancing and de risking your project is for nothing. Maybe this flat or even inclined value-curve is not ominous but rather auspicious. A sign that we are at the bottom and ready to turn? It will just take one wildebeest to break from the herd and all will follow.
It is not that project risks have changed but that we perceive the world as a much more precarious place. The slack of fear has smothered the flames of greed. It was Warren Buffet who said: “be greedy when others are fearful, and fearful when others are greedy.”
The sapling is bending lower and lower in the wind. When the turbulence passes the snap-back will be like a whip-lash. Exploration for metal deposits is in crisis. Despite a sharp rise on exploration spending since 2005 the discoveries have just not been made.
It takes seven to ten years from discovery to production and valuations are punishing now in this market where the value-curve is flat all along the way. Sclerotic equity markets have choked off Juniors from their main source of financing .
It is also getting more expensive to make discoveries. The average weighted cost of a base metal discovery has almost tripled. Climbing from $23 million in the period from 1980 to 1989 to $64 million during the first decade of this century. Capital costs and operating costs have ballooned during the last ten years. In zinc we see regurgitated zinc projects which for the most part are undeveloped for a reason. There is little price incentive now for some considerable time now to make discoveries
Let’s get one thing clear. Discovery is not about big organisations. Success does not hinge on efficient management, process, technology or science. You cannot explore from an office and there is no silver bullet. What it is about is passion, observation and making connections. Simple really. We need entrepreneurs with insight and talent. We need persistence, discrimination and of course lots of luck . These ingredients for success must combine with the business of managing opportunity. We should not treat the enterprise as a cost centre. We need to stop allocating scarce resources to “dog projects” run by the deluded and inept.
What a great time for someone to start a new zinc company with assets so cheap and investors so getting tired of being afraid?