When it comes to mining stocks, most every investor/speculator out there has had a dream where they strike it rich and hit a grand slam homerun. They say that fear is paralyzing, but the lust for greed can be just as overwhelming (if not even more so). Naturally, our dreams of scoring “multi-baggers” become enhanced when a particular sector is booming, and we start perceiving ourselves to be genius investors when in fact we are really doing nothing more than benefiting from a rising tide (that is indeed lifting all boats).
The Depths of Despair
Well, as someone who was aggressively buying up shares of gold and silver mining stocks when that particular sector was struggling through the Depths of Despair, let me tell you with 100% certainty that what is happening right now in the lithium space is the ABSOLUTE OPPOSITE to what it was like investing in the precious metals space in 2015. You see, when I was buying up mining stocks last year, even the best of the best companies were trading at ridiculously absurd valuations. Many companies were at 5 year lows, with their share prices down over 90%, despite the fact that these same companies had only continued growing and bettering their stories.
That’s what happens in a downmarket!
And as it pertains to dinky junior explorers? Many of them were trading for less than cash in the bank (I am not joking)… That’s what happens in a dreary environment… The market becomes absolutely ruthless, and almost zero (or in some cases NEGATIVE) credit is given to any company with speculative ground…
So, having experienced all that (before getting involved in the lithium space), let me assure you again, what we are seeing now is NOT that!
The Heights of Greed
Lithium is currently on fire, and I don’t expect this “fad” to fade away anytime soon… Why should it? The demand is very, very real, and the supply is extremely limited. That’s not a speculation on my part, just look at what the price of lithium carbonate and lithium hydroxide are selling for in China this year… For certain, it’s a lot higher than where it was even just 1 year ago…
Anyway, when a sector is booming, you’ve got to be extremely careful with your stock picks… It’s infinitely more difficult trying to separate the wheat from the chaff in an upmarket. Most recently, I was burned badly by my speculation on Pure Energy Minerals (PE.V), and I had to learn the hard way, again, to be a lot more selective with my holdings… Sometimes, I get too far ahead of myself, becoming big-headed with aspirations of landing another multi-bagger… Call it too much ego, pride, hubris, or what have you… I should have learned my lesson last year, when I got toasted by Rubicon Minerals (RBYCF) in the gold space…
In both instances, the stocks that hurt me the most were the most speculative ones; both Pure Energy Minerals and Rubicon Minerals had NOTHING more than inferred resources… Nothing even close to resembling a Feasibility Study (the most thorough report you can have performed by independent analysts to validate and confirm a company’s mineral deposit). In the case of Pure Energy Minerals, luckily, I sold out when I did because shares have only continued plummeting downward, and I don’t see any reason why shares of PE.V will climb back any higher (not at least until the next set of drill data justifies a re-rating). Because of the all the buzz and electricity surrounding lithium stocks these days, without a doubt, many of the new shareholders will be the ones who get shafted…
When it comes to lithium, trust me, we ain’t seen nothing yet!
This year, many, many, many, (too many) companies have bursted onto the scene, and are working overtime to try and promote their stories… I’m not a geologist, so I don’t have the skill or knowledge to actually be able to discern which projects are legitimately prospective and which ones don’t have a chance in hell of succeeding, but if I’ve learned anything in the mining space, it’s that there are a ton of unscrupulous people out there who want nothing more than to pump and dump a stock so that they (and the people in their inner circle) can profit, while we, the naive, unsuspecting novice shareholders, get to play the role of bagholder, to their benefit.
Such is life…
But the problem with a surging sector is everyone gets super crazy and the lust for greed prevents us from filtering out all the noise… We end up chasing after crappy companies with no REAL ASSETS, never suspecting that we’re actually buying into a lemon, dud, or worse, complete scam. That’s how deceiving a rising share price can be!!!
The Pain of Speculation Gone Wrong
This morning (in Australia), another one bites the dust…
May 13, 2016:
Dakota Minerals (DKO.AX) is currently down over 35%! First off, I should be crystal clear here — Dakota Minerals is NOT a scam! Dakota is an early-stage lithium story that has real spodumene and merit to its name… I am not trying to discredit anyone associated with that company.
But today’s sell-off, should be an important lesson to all of us speculators… These results are EXACTLY what can happen to any one of us if we chase after hype and get too carried away with an accelerating share price. DKO.AX simply got way, way, way ahead of itself on ONLY a few drill holes from their maiden drill program, and anyone piling in after the stock had already tripled since January was just asking for trouble… Now, latecomers to the party are paying a very steep price, indeed! The new drill results got released this morning and they were mediocre, to say the least, which prompted the market sell-off.
Again, with Dakota Minerals, we had: No proven resource (Feasibility Study).
How could we? This story is way too damn early stage!
But when speculators lose their minds, they will bid up shares relentlessly, and the market cap can soon balloon to north of over A$80 million…
A$80 million market cap on pure speculation is risky, risky, risky!!
However, if lithium keeps on flying high, you can be very certain that we haven’t seen the last of the hysteria; I won’t be surprised the least bit to learn about the next junior lithium company with NOTHING more than land claims to their name trading north of $100 million… That much stupidity is bound to happen, I am positive of that (remember, human nature NEVER changes and is entirely predictable)… And when it does happen, I will want absolutely nothing to do with it either…
Chase REAL Assets
I got a lot of flak last year for my gold thesis because a lot of people thought that I was a total nutjob for buying up shares of a beaten up sector… But I argued vehemently (time after time again) that what I was doing made perfect sense — I was buying up very high quality gold assets for pennies on the dollar…
Naturally, when a sector is in liquidation, that’s a tough sell and good luck trying to convince most anyone else that you’re actually onto something… For the most part, people will think you are a complete loon because people don’t like to chase value, they like to chase hype (momentum).
Which is why lithium is SEXY right now… and gold wasn’t last year…
But now that the tide has turned for gold, all that “value” that I was trying to extract from last year can be seen more clearly… Well, I guess that’s kind of easy to observe when these gold miners are now up 200%, 300%, etc…
No, I didn’t make the most gains with my gold picks (I’m just a subpar retail investor with no substantial connections inside the industry), but I’ll tell you what, most of the companies I bought last year were (and still are) LEGIT! They hold REAL ASSETS to their name, and I always knew that, eventually, their true value would be revealed once the markets stopped acting so irrationally…
So, with lithium, I’m doing my best to learn… Once I dumped that dog Pure Energy Minerals, I went out and again bought up shares of companies with REAL ASSETS. Right now, I hold shares of: Pilbara Minerals (PLS.AX), Galaxy Resources (GXY.AX), Orocobre Limited (ORE.AX), Lithium Americas (LAC.TO), Altura Mining (AJM.AX), etc.
Sure, I could still fail with these lithium stock picks (nothing is ever really guaranteed), but at least if I go down in flames, the companies that I’ll be going down with will all have had at least a published Feasibility Study to their name.
Most recently, shares of PLS.AX have been soaring, reaching an all-time high of A$0.87/share, earlier this week. With so much hype surrounding Pilbara Minerals and the entire Pilgangoora region, it was bound to happen that companies such as Dakota Minerals (who are next door) would see their own share price pushed up much higher (as a benefactor of geological “Nearology”)… When I purchased shares of AJM.AX earlier this week, I noticed what was going on with DKO.AX, but I said, “Nah, man, I ain’t chasing the flavor of the week… Give me the company that will almost assuredly go into full-scale commercial production, even if their market cap is higher and the upside “more limited”. I want the safe pick, not the sexy one.”
Well, DKO.AX is now taking it on the chin, down 35%, and AJM.AX is having a rather uneventful day (yes, shares of AJM.AX are down 4%, but so are almost all Australian lithium stocks, so there’s nothing to be alarmed about). Ditto for PLS.AX.
Again, I’m not suggesting that DKO.AX won’t bounce back, likewise for PE.V… If somehow the next set of drill holes for each company turns out to be PHENOMENAL, a re-rating and redemption story would be perfectly justified… That’s a huge “if” question, though… So really, outside of say 1-2 spec plays in my portfolio, I really don’t see the need for that much excitement in my life!
I’ll take the “smaller baggers”, but please, please, please, just give me something LEGIT!
Give me the PLS.AX type of investments that actually have substance to support all the hype.
All these junior start-ups (wannabes) arriving at the Pilgangoora scene can go ahead and make their “quick hit”, early gains… 2x, 3x, 5x, 10x multiples, you can have it all! Same for all the Clayton Valley explorers who have “pie in the sky” dreams of supplying lithium to the Tesla Gigafactory in the future. Some stories will work out, but most won’t… As an investor, if you want to speculate while a sector is in strong favor, good luck, you’re going to need lots of it! With REAL ASSETS, however, you don’t need luck, you just need the markets to eventually agree with your underlying thesis (which in the case of lithium, is almost a certainty).
With that said, my Core Holdings MUST be comprised of companies that allow me the ability to sleep well at night.
If the gold, silver, and lithium sectors all crash and burn, at least I want to know that it’s because the entire sector is crumbling apart, and NOT because the markets discovered that my individual holdings were never sitting on anything more than moose pasture…
Live and learn… Always.
Photo Credit: Dakota Minerals