Transcription
[Music] Well, hi. My name is Henry Jennings, and I'm a senior market analyst and portfolio manager at Marcus Today, which is a financial newsletter based in Australia. And I'm very honored to be able to present to IMAT in uh October. And uh just a little snippet before then, a little uh guide to really how to invest in mining shares.
I'm someone that's been around the mining industry for some time and has been, I guess, to some extent, a professional investor in mining stocks and also an analyst and a commentator on mining stocks. So, I just thought I'd give a few pointers as to what I look for in terms of the the mining sector.
I guess the first question that people ask is, is, is why invest in the mining sector? And I think it's important to bear in mind that the mining sector resources generally are probably more speculative than investing in say, Commonwealth Bank or uh an industrial company or even a technology company, because really and truly, resource stocks do go through cycles and they are prone to big, big cycle swings, and sometimes some metals are very much in focus, and other times they go very much out of focus. um, thinking back to the days of the lithium boom, which went very, very cold after the boom with all the supply that came on stream. So, it's important to remember that there are probably more speculative and more cyclical than your average uh industrial or bank or technology stock. So, I think that's important to know.
And also, I think it's also worth pointing out the mining stocks, especially smaller mining stocks, explorers and wannabe producers, etc., are also quite capital hungry, and there's nothing wrong with that. There's nothing wrong with mining companies raising money because that is really what the purpose of the stock exchange is. When you float a company, the reason is that you have access to more capital, and that is really important because capital goes in the ground, and that's where you want it to go into, in terms of drilling and bringing on that production. You can't complain, I guess, uh, when uh companies are serial uh capital raisers. What you can complain about is when the money doesn't go in the ground, and that is important to make sure that it goes into the drilling and the resource rather than into uh management and director's fees.
So, the great thing also about resources in Australia, of course, for me, you buy Australia for resources. I'm originally from the UK, but Australia is always to me a resource haven. We are the lucky country. So, for me, you buy Australia for resources, and if you want to buy technology, you go to the US. But this is what we do best in Australia. And to be honest, the two do go hand in hand. And what has become apparent is that AI cannot exist without resources. Whether those resources are to power energy for power plants, whether that's uranium, coal, etc., or other commodities, oil and gas and natural uh resources, there they are inextricably linked. You cannot have the next generation of technology without resources, critical metals, rare earths, etc. So, they are very much linked, and copper, of course, is the big one.
So, some of the things that I look for when I'm investing in mining stocks, that there's two things, I guess, that are are key for me. Uh, one is the management, and one is the grades that are coming out of the drilling. Firstly, management is very important, and I guess there is somewhat of a sweet spot. You don't want management that is so inexperienced uh that they have no hope of making a discovery, and if they do make a discovery, then have no idea what to do with it. Equally, for me, it's very easy uh for management to get sloppy and to get lazy, especially as potentially they get older, and it becomes more of a lifestyle business, and that lifestyle business is not your lifestyle, that is feeding their lifestyle, and it is easy for some companies to do capital raisings, drill six months later, do the same thing again, and keep doing that. So, I kind of look for a sweet spot in terms of management, in terms of uh people that are experienced enough to uh to bring the project into production, but also, you know, they're young enough to have that ambition. And when you look around the mining sector, there are many mining executives that have been started young, Jake Klene one of those, with Evolution Mining, Rolfe Harenson as well is another one that have done extraordinarily well, and as a result, uh both of those, you know, have built substantial companies. So, that that is very important to find those young up-and-coming managers, and one that springs to mind is uh Alex Scandan from Barton. So, again, you know, you're looking for those sorts of uh companies.
You're also looking for the the sweet spot, I guess, in what commodity they're exposed to, and we do tend to cycle through commodities at the moment, especially uh in the current uh environment that we've seen. And you know, one minute it's a very hot commodity, and the next minute it's not so hot, and that has a lot to do with the macro, that has a lot to do with demand coming out of China. Uh, but certainly, you know, there has been a focus recently on critical metals, rare earths, because of the leverage China does have in that space, and as a result, those sectors are running pretty hot. The gold sector is another sector, of course, that is running very hot, and has run very hot on the back of the bullion price getting up to, well, at one stage it spiked to $35,000. So, again, you've got to pick your commodity, because lithium had a boom, and then it had a serious bust, and uranium's had its moments. So, not all resource stocks are are kind of born equal, to some extent.
Also, it's important as you get closer to production, and when you get through the sort of the the feasibility studies, to look at the production costs and the margins, uh, because it's important, because at the end of the day, once the company gets into production, once it's gone through uh what they call the "land curve" and it's gone through the various stages, the various cycles in getting from being a discovery to production, uh, it's very easy to get kind of a bit blindsided to things. And at the end of the day, they are producing widgets, whether that's gold, whether that's critical metals, and the important thing is how much it costs to get that stuff out of the ground, and then how much they can sell it for on the market. So, that is very important to bear in mind. Don't get blindsided by the the romanticism, I guess, of it being a gold stock or a silver stock or whatever. Uh, bear in mind that there is a more pragmatic, down-to-earth, if you pardon the pun, way of looking at things in terms of how much it costs to produce and how much they get to sell it.
Also, it's very important when you're looking at mining companies to assess the kind of the risk profile, and bear in mind that it takes many years, in some cases decades, to bring on a project. So, some patience is required. And as I've said earlier, uh, there is a thing called the "land curve" in mining industries, in uh mining investment, and that is the the kind of the the cycle, the life cycle of a miner from uh inception, from people just pegging the ground, to actually bringing in production and becoming a producer, and that is very important to uh to understand. So, you need to know at what point the company is in terms of the cycle.
You also have to look at the political and country risk. Of course, uh, sovereign wealth or sovereign risk is a is a real thing. Uh, as we've seen with Barrick in Mali and various other places, Kingsgate in Thailand as well. Sovereign risk is a real thing. And unlike, you know, unlike Apple, that can move their production from China up to India, to India, to America, it's very hard to move a gold deposit from Mali to somewhere that's got a jurisdiction that's more kindly to miners. So, bear that in mind as well. Country risk is substantial. So, that is why Australia offers, you know, some some serious uh positives in terms of that country risk.
Also, you've got to look at the capital structure, how they're going to fund the mine, how they're going to fund the project. Uh, you know, it's all very well looking at a $26 million explorer that suddenly strikes it big, which is great, but if the capital cost is going to be a billion dollars, how are they going to fund it? Are they going to continue just to be an explorer and form joint ventures or sell the project on, or what are they going to do? What's the endgame for that particular company? Uh, also obviously landholder agreements, and many a project has been uh stuck in environmental courts and environmental issues for some time. And when we're talking that, of course, you have to look at the ESG considerations. And then it's also important to look at how it compares to other projects in the same sort of field. So, that is very important.
So, the time is now, I guess, uh, in terms of being successful investing in mining. I I personally believe that we are in a bit of a resource boom. That doesn't mean that we're in a resource boom for every single commodity. Some commodities will be booming. Some commodities will be stuck in the slow lane. So, you have to do your research on the underlying commodity and stick to the ones that you see as having demand going forward. For instance, it may be that lithium technology moves so fast that that is that is overdone. Well, it's massively overdone at times, but that is superseded the lithium battery by say, a sodium battery. So, there are technology changes that you need to bear in mind. So, that is important there to look at the underlying commodities that they're investing in and the supply-demand equation and how quickly that supply can be brought on stream. If uh, some of you remember the lithium boom, the prices got so extraordinarily high that uh, the supply came on stream far quicker than anyone thought and crushed the market, and it has been uh in the doldrums for some years. So, just bear that in mind.
But I personally do think that we are in the middle of a resource boom, and we've got a long way to go because AI does require uh critical metals, rare earths, resources. The whole defense sector, which is gearing up not only in Australia but in Europe and across the world, needs those resources.
So, some of the tips and tricks to manage uh your mining investments. Well, I guess the best tip is be nice to your driller, because if you're close to the guy that's doing the drilling, then you're going to get the first look at those results. Of course, that is insider trading, but it it does mean that you really have to uh concentrate and know the companies and try and get a feel for when the results are going to be out, when those assays are going to come through, and you do, in some respects, have to kiss a lot of frogs. Now, the good thing is there are a lot of frogs to kiss, and there are also an awful lot of conferences, and especially resource conferences, where many, many companies present, and certainly one of the tips I would say is go along to as many of these as you can, especially if you're starting out. Many of them are free and uh just require registration, which is fantastic, and they also have lots of booths. It is not just about the presentation. It's about chatting to the miners afterwards, going to the booths, chatting to them about what's going on. Because mining executives, miners, drillers, explorers are nothing if not passionate about their projects, and nothing if not passionate about the companies they work for. So, that's a really good tip. Go to the booths, talk to these guys, and uh, you know, try and get the most out of them. They'll tell you as much as they can, but uh, sometimes, you know, little nuggets, if you pardon that pun, uh, tend to drop out from, uh, from talking to these people, and you can't beat looking someone in, you know, seeing the whites of someone's eyes to see whether the project actually stacks up, whether they actually believe in it. So, I think that's very important.
Uh, so, some of the tips and tricks uh from a professional investor. Uh, I guess it goes back to finding a resource with strong fundamentals. Don't fall in love necessarily with uh that one particular commodity, because I said at the beginning of this, they tend to move in cycles, and they are, that's the very nature of the beast, and uh, you know, high prices beget more supply as more people come on to produce more of the material, and that pushes prices down low, and that pushes people out of the the production, and then we start the whole process again. So, that is very important to to bear in mind that they are cyclical, and uh, don't fall in love with one particular resource.
And also, I think it's it's certainly a more active investment style as well. You need to be on top of your game, and you need to be uh very much on top of what's happening in your particular portfolio of mining stocks, because now they do raise capital. Sometimes that capital raise is is good because it is going in the ground, and other times that is not so good capital raising uh because of various issues, maybe with production, too much debt, etc., and we've seen some of that recently. So, it is important to uh to keep in mind that the purpose of the the stock exchange and being a a listed company is to raise capital, and for companies, it's really good if that capital is going in the ground. So, that that is important.
Uh, one thing to bear in mind as well, when you are investing in resource stocks, it can be very, very lucrative. It can be life-changing, and I know we have uh members of the newsletter here that have extraordinarily changed their lives with an investment in in in one stock, and they got to know one stock, and they rode uh the lithium boom, for instance, to the max, literally to the max, and turned, you know, hundreds of thousands of dollars into millions and millions of dollars. So, that was a process that was very much concentrated, focused, and they knew the company inside out. They talked to the management. They spotted an opportunity in a commodity and rode that very well. And that is, you know, certainly when you look around some of the wealth that has been generated in this country. Uh, there are two things, I guess, that stand out as as huge wealth generators. One, of course, is is property development, which uh continues to be um one of the great money makers, but the other one is investing in resource companies, and they really can transform your life. They are not without risk. They are speculative. But if you do your homework, and you get yourself a bit of a grounding in uh resources, and you follow the company, and you get to know the management, and you go to these conferences, and you talk to people at a booth, or you go to something like IMAR, and you see people, and you and you get that chance uh to hear from the um the horse's mouth, as it were, it can be extraordinarily uh lucrative.
So, it's it's certainly uh for me, it has always been an amazing journey, and uh one that sometimes I've got very right, and sometimes I've got very wrong, but uh it has been an amazing intellectual journey. It's been very enjoyable, and it it continues to stimulate, and after all, we do live in the lucky country, and Australia is blessed with resources. So, if you're going to invest in resources, if you're going to invest in AI, even, then you're going to have to invest in resources at some stage.
I have got a little bit of a checklist as well, finally, uh, in terms of uh, just some of the things to tick off when you're looking at a resource company, and uh, some of the factors I look for, just a bit of a summary, is the commodity outlook? Is the demand growing? Price is set to to be strong? Uh, there's no point buying into a resource company where the commodity itself is down on its knees, because you might have a long wait. There's also the resource quality and reserves, and look to educate yourself in how to read a drilling report, because you know, not all uh drill results and not all assay results are the same. Uh, and there can be a lot of um, well, there can be a lot of deception, should we say, at times, that goes into some of these drill reports. So, just be careful out there as well.
Also, look at the costs and the margins, and the uh important thing, the all-in sustaining cost, that is always very important to see what sort of margins the uh the company has in terms of their production profile. Uh, the what stage they're at, whether they're an exploration company, development, production, obviously the further they get down that land curve, the less risk there is, however, that also means there's less reward as well. And sometimes a company will struggle to go from being an explorer to a developer to a producer. They are different skill sets.
Also, finally, I look at the jurisdiction you're in. Also, the management. Are they capable of delivering the project on time and on budget? Have they done it before? Has the company got the financial strength, cash reserves, uh, the debt profile to uh to get the project into uh production? And whether they've got all the agreements in place as well. And then finally, I guess this is a comparison thing. Look at the relative comparative value between the companies that you're looking at and other companies are established in investing. It is all about comparison. You're trying to compare an orange with an orange. There's no point in valuing Evolution on the same basis as you would Commonwealth Bank, or valuing a small gold explorer on the same basis that you would have on WiseTech in the tech space, for instance. So, compare oranges with oranges. Look for the the value. Look for the comparative value.
Enjoy your journey with resource investing. It is a fruitful one. That is for sure. And also intellectually stimulating and very challenging and very enjoyable. So, thanks very much for sparing me the time today.
If you enjoyed this presentation, don't miss the chance to hear from Henry Jennings live at Mines and Money at IMARK this October at ICC Sydney, where he'll be hosting an exclusive Q&A session. It's the perfect opportunity to put your mining investment questions directly to an industry expert. At Mines and Money, you'll also hear directly from junior mining CEOs as they present their projects and investment opportunities. Plus, you'll have the chance to connect one-on-one with them. Qualified investors can attend for free. Visit our website today to register.