The Old Gold Rush
Last week I was in Nevada — a quick trip to see a gold mining operation in the northern part of the state.
The firm I visited is far from being a big, famous, name-brand miner. The outfit is still in the proverbial “company building” phase.
Then again, the map of the region is loaded with big, name-brand miners like Newmont (NEM: NYSE) and Barrick (ABX: NYSE). Nevada isn’t called the “Silver State” for nothing. There’s a lot of mineral wealth out there.
In a broad sense, the area is smack in the middle of the old “California Gold Rush” part of Nevada’s Basin and Range province.
That is, back when the West was won (to use a phrase), many people stopped in Nevada and dug holes. People have been stopping, digging holes, kicking rocks and building mines out here for 150 years and more. This site that I saw fits nicely with the idea that the best place to build a new mine is next to an old one.
In the case of the company I visited, the geological team has done heroic work in deciphering complex rock and structural systems. The engineers have blazed new trails in terms of extracting valuable elements from what they can pull out of the ground.
Out of tiny acorns do mighty oaks grow, eh (to use another phrase)? We’ll see, eventually. This outfit is promising, as early-stage companies go. But right now it’s preoperational and pre-revenue. So it’s risky in ways that large, established mining plays are… well… less risky.
Get out in the Field and Meet People
Why mention this short trip to a small mine? Because I want to emphasize how, whether a company is small or large, it’s important to go out in the field and see real operations.
Yes, investment presentations on the Web and meetings in offices and hotel ballrooms are fine. Conferences and slideshows have their place. But when possible, I want to examine the goods. I want to review maps, see rock cores and lay hands on equipment. All that, and I want to go out and meet people who actually do the work.
At the end of the day, when you invest in a company, you’re investing in its people. When you buy into just about anything — whether it’s a mining play or a bank or a software company or you name it — you’re an outsider looking in. How much can you really know? You’re taking a chance on all manner of risky things, including the ethics and competency of management teams and technical staff.
Thus, I want to speak with the geology and engineering talent, plus everyone else I can buttonhole, from the core drillers on the rig to the cook in the camp galley. What do they see every day? What do they know?
I admit that in my resource writing, I tend to dwell on issues of geology. I discuss science, engineering, resource numbers, size of ore bodies, barrels of oil, extraction technology, industrial capabilities and such. But all of this won’t get you very far if the people on the payroll can’t make it work.
Just so you know, I check out the people, too. On occasion, I’ll mention the name of a CEO or senior staff. But in this crazy day and age, I shy away from mentioning most people’s names, out of respect for privacy — if not safety.
The Mixed Messages of Markets
I’ll add that strong stock markets tend to mask problems with both assets and personnel. That is, when share prices are up, there’s a tendency to think that everything must be OK, or why else would the share price be up? All the other buyers out there must know something… right?
Then again, when share prices decline, that must be for a reason too. The sellers know something… right? But what do they know?
Sure, there are reasons why share prices sell down. But it’s not always that there’s “something wrong” with the company. In fact, I’ve seen many a company whose share price declined while the quality of management, staff and assets steadily improved.
Think about it. A company develops its mineral leases. The staff does their work. The overall level of knowledge accumulates. Capabilities develop. Technical and execution risks become more and more favorable. There’s money in the bank. Yet what if it happens during a market decline?
Oft-times, when share prices fall, there’s nothing wrong with one company or another. It’s just that a sector falls from favor for some reason. Something stops being the flavor of the season, for instance.
It’s strange, but sometimes a company becomes more and more valuable in an absolute sense while the share price metric is less valuable to the market makers. If you’re holding shares when this happens, it’s frustrating, and painful to watch.
Take copper, for instance. There’s gloom on the horizon. What’s happening with red metal?
Generally, things were going reasonably well with copper until about mid-February. Then, if you read the news accounts, it’s as if the wheels fell off the copper bus — along with gold, silver, platinum and a list of other metals. All told over the past six months, copper is down nearly 18%.
Clearly, market sentiment turned, while both metal and share prices sold down. Was it too much supply coming out of left field? Or perceptions of declining demand? Downward copper prices took down many a share price as well.
I was in London a couple of weeks ago and sat with a group of commodity analysts who are pessimistic about copper prices for the next 18 months — but optimistic toward the end of 2014 and into 2015 and beyond. Their view is that the “China growth” story is petering out and copper demand from China is slumping. How many more “see through” cities can the Chinese build, right?
So will a China slowdown really wreck global copper demand? Should we start turning out the lights? Or continuing the metaphor, should we dwell on the fact that over 2 billion people in this world lack access to even one light bulb.
Fewer wires in China going forward? Perhaps. More wires in other parts of the world? We should all hope so. So I respect what the market is telling us. Yet I suspect that there’s still quite a bit of copper yet to be mined, pulled into wire and strung from poles.
Through it all, the markets have sold down copper and copper miners. Now what? Sell on the low side? Or buy at a bargain level?
Follow Freeport’s Money
Let’s name names. Recently, I’ve said many good things about one key copper play, Freeport-McMoRan Copper & Gold (FCX). Yet the market has traded the company shares down. It’s painful to watch the chart turn red for Freeport.
In my view, the Freeport share price slump is not so much about Freeport itself — that is, as an explorer and miner — as much as it reflects how the market views declining copper prices. It’s that the market expects a continuing downward price trend for red metal.
So what about Freeport, the company? Is anything… umm… “wrong?” Well, it’s mining copper at a profit and paying a solid dividend yield.
Also, looking ahead, Freeport is investing for the future. Indeed, I’m scheduled to visit Serbia in a few weeks to see some of the company’s exploration efforts. I’ll visit a site in the eastern part of the country, not too far from the Danube River. It’s near the ancient mining district of Bor — it’s “ancient” in that it dates back to the days of the Roman Empire, to be exact.
Right now, Freeport has eight (!) drilling rigs poking holes in just this one part of Serbia. It’s one of the largest new copper plays anybody has discovered anywhere in the world in a decade. I mean anybody. Anywhere. This is an important play. It’ll move the needle, even for a big guy like Freeport.
It’s intriguing that Freeport management has been so quiet about the Serbian play. The company has not blown its horn too loud. All I can surmise is that if Freeport management says too much, they might draw more attention than they want at this stage of proceedings. Acquiring land might get more expensive. And permits might be harder to obtain. Or tax issues could arise. Things like that.
Still, I’m not under any kind of gag order with respect to Freeport. I don’t work for Freeport. I can write about what I know. Plus, it’s hard to hide some things — like eight drill rigs. At least you can’t hide it from people like me, who know where to look.
Besides, the finances for this scale of exploration are evident when you dig into Freeport’s public documents. This year, Freeport is spending about $240 million on exploration, and about one third of that is in new (to Freeport) locales.
To make a long story short, when you do some math, it appears that Freeport is spending around $25 million in Serbia this year, or just over $2 million per month. That’s my read of the public filings. That’s a lot of money to explore in one place.
There must be something there in Serbia keeping Freeport interested. This is especially the case when you look around and see other big companies cutting way back — say BHP Billiton chopping billions from the capital expense budget.
In other words, all across the mining space, management teams are culling the herd of project lists. The name of the game is “de-risking.” Mining companies are putting money only where they can see the very best potential returns.
Yet while the copper sentiment is bearish and companies are scaling back, Freeport is still putting good money into one significant new play. That tells you something about where the future is heading. For Freeport, the future will be where the company puts its money now.
That’s all for this note. Thanks for reading.
Byron W. King
Original article posted on Daily Resource Hunter