Every investor knows that the best time to buy is when prices are low. When it comes to the broader overall stock market, or local real estate market, there is currently no clear-cut consensus on whether or not prices are too high (and we are in a bubble), or if good value can still be efficiently extracted. However, as it pertains to precious metals mining stocks, there is ABSOLUTELY no shadow of a doubt that these assets are RIDICULOUSLY undervalued and selling off for pennies on the dollar.
But anytime we are in a brutal bear market, almost no one wants to buy… It’s simple human psychology — Anyone who was brave enough to dabble in mining stocks these last few years has been mercilessly punished for their early entry. As such, we human beings tend to shy away from investments that have burned us badly; in particular, we like to avoid anything that has hurt us most recently because those negative feelings and emotions are most fresh in our minds.
The fear and negativity engulf our mind and thoughts. When we see bargain basement discounts on these mining stocks, we don’t say, “Wow! What a wonderful gift!” Instead, our natural reaction becomes, “Don’t you dare touch that! Prices are only going to continue to drop further!”
Even after prices have declined by over 90%+…
In a bear market, the general consensus is that prices CAN and WILL only keep going lower, and lower, and lower…
Objectively, though, if prices keep dropping but the fundamentals behind these individual companies have not changed, in theory, the opportunity should only become that much more attractive. If we are able to strip away the emotion and fear, we should be able to clearly see that bear markets do indeed give us the best chance of creating wealth and reaching early financial independence.
I am not backing away from this brutal bear market!
Instead, I am embracing it with open arms. When it comes to investing/speculating, I’ve learned to LOVE what is HATED. Because I know very well that markets are cyclical, and what goes up must come back down. And vice versa. As it pertains to precious metals and mining stocks, throughout history, the only thing that they have done is boom and bust… over and over again… without fail.
In this article, I will be going over my own personal strategies on how I am playing this most wretched downturn in commodities.
If anyone wants to venture into the world of mining, the first thing that they must do is get properly educated. This means you have to do sufficient research before forming any definitive conclusions and opinions.
Making careless accusations and assumptions before you have even done your homework doesn’t benefit anyone…
I always get a kick when I hear other investors (who don’t know anything about mining) say:
“Mining is a crappy business. You’re gonna lose all your money bro!”
“These penny stocks are all HIGHLY RISKY! Stay far away!”
“Gold is gonna keep going down! It’ll be at $250/oz by the end of next year!”
And so on and so on…
The world of mining is really no different than any other asset class, such as: stocks, real estate, bonds, currencies, etc.
If you wanna play, you first have to get educated.
How do you get educated?
I would recommend anyone start by:
- Networking with others who know the sector well. The CEO.CA chat room is a wonderful, vibrant place for that. The Stockhouse forums are not as active, but there are still many interesting discussions to be found.
- Watch Youtube videos (interviews, more interviews, corporate presentations, stock picks, etc.). Listening to material will help you learn the terminology, major companies, and legitimate people in the industry.
- Read, read, read. Seeking Alpha is a great source for company-specific articles. The Gold Report gives you insider/newsletter writer thoughts and opinions on individual companies. Mining.com is a great website for general market news. SEDAR is a wonderful resource for public securities documents.
- Subscribe to newsletters. Unless you’re a seasoned geologist, you’re probably like me and don’t know a lick about geology. For the most speculative plays (junior exploration), you really do need an insider to tell you what is a legitimate deposit/story and which companies are offering speculators nothing more than a hope and a dream.
- And if you do come across any companies that intrigue you, read the company’s press releases, digest their corporate presentations, go over their financial statements, annual reports, etc.
And there are of course many other tools you can utilize to expand your knowledge base, but I think the above bullets should provide a newbie with a good starting point.
Best Ideas Gameplan
When I first started researching mining stocks, naturally, I stumbled upon some of the most popular names out there — the large-cap companies.
Barrick Gold (ABX), Newmont Mining (NEM), Goldcorp (GG), Randgold (GOLD), etc.
But instead of jumping right into those stocks, or loading up on an ETF, I took my time to study up so that I could put together a gameplan that made the most sense for me. Eventually, my research took me off into another direction.
Don’t get me wrong, I don’t mean to imply that there is anything wrong with the large-cap companies, but I learned that my own preference is to speculate more heavily into the mid-tier producers, and junior development/exploration stories.
Although my portfolio is still a work in progress, as I began to construct it, I did so with the gameplan of making sure that I established a solid base made up of my best ideas first.
The most important thing that I have learned in mining is that if you want to maximize your odds for success, you must follow the best management teams.
That means backing the successful people who have a strong track record of delivering results and shareholder value. In an already extremely volatile and tricky sector, you want to mitigate risks as much as possible!
I’m not a geologist… I have no insider information… I’m quite simply just a retail guy who wants to make a lot of money in this sector. 😉
So, I’m not going to try and overcomplicate things and get too fancy… Rather, I’m going to do the easy thing and stick with “the best of the best”.
Here is the original list I put together (October 2015):
$100,000 All-Star Portfolio:
$10,000 – Ross Beaty (Alterra Power)
$20,000 – Keith Neumeyer (First Mining Finance)
$20,000 – Robert Friedland (Ivanhoe Mines)
$20,000 – Bob Quartermain (Pretium Resources)
$25,000 – Mark O’Dea (Pilot Gold; True Gold Mining; Pure Gold)
$5,000 – Lukas Lundin (Newmarket Gold)
Here’s my most recent updated list (December 2015):
But as you can see, even a list of “best ideas” is subject to change. Originally, I had the idea of speculating on the junior explorer Pure Gold (PGM.V), but have since changed my mind and removed it from my list entirely.
Since putting the original list together in October, I’ve also decided to beef up my allocation in First Mining Finance (FFMGF/FF.V), and have increased my position from 70,000 shares (the original target) to 100,000 shares.
Further, I had an allocation for Pilot Gold (PLG.TO) and True Gold (TGM.V) originally set to $10,000 each. Most recently, I decided to up the stakes to $15,000 each, especially since shares of Pilot have come off substantially these last few months…
So, even my list of “best ideas” is constantly evolving still… and it may very well change again in the upcoming months….
And that’s ok…
I’m constantly refining the gameplan… But at least there is a gameplan in place!
When starting off, it’s extremely important to operate off of a defined gameplan so that we aren’t just running around in the dark chasing after stocks aimlessly.
Embrace the Sea of Red
If you have done your homework, you will know that mining is an extremely cyclical business. Unlike Buy and Hold Forever investments, these stocks routinely overshoot and undershoot from their historical means. Even the best ones! Volatility is inherent in this sector, so if you’re going to speculate you need to accept that upfront.
So, when my portfolio (a good chunk of which is comprised of my best ideas!) is down 10%, 20%, 30%, or more, I don’t panic and freak out.
Again, as long as the fundamental story for each company is not broken, I’m not going to let my emotions get the best of me and force me into irrational selling.
Mining Portfolio: November 12, 2015:
Instead, I’ve learned to embrace the Sea of Red.
When I observe this much destruction, my appetite for greed only increases… A Sea of Red only makes me want to go out hunting for more bargains!
Buy In Tranches
When it comes to mining stocks, I’ve learned that it is typically a good idea to buy in tranches… This means that you don’t buy your full allocation of any one company all at once.
Again, because these stocks are so inherently volatile, it’s not outside the realm of possibility that whatever you buy today (even if you think it’s SUPER CHEAP) won’t depreciate by another 50%.
And who knows what 2016 might bring? 2017? Maybe a lot more devastation!
So, it’s important to tread carefully…
For instance, I made the mistake of buying too much Pretium Resources (PVG) all at once, and am now paying the price… Likewise for Lake Shore Gold (LSG).
In the case of Pilot Gold (PLG.TO), I’m also glad that the lash tranche I bought for C$0.376/share was only for a decent size, because I now have the opportunity to buy a lot more PLG.TO for a much better price (C$0.29/share)!
Dollar Cost Average Down!
When you subscribe to the philosophy of embracing a Sea of Red (because you know it provides for even better opportunities), you’ll have no fear of dollar-cost-averaging (DCA) down on any weaknesses.
In fact, DCA out over time is perhaps my own personal favorite strategy… In my own particular portfolio, any time one of my positions is down in excess of 20%, the spreadsheet cell guess shaded yellow so that I am alerted of the new “buying opportunity”.
For instance, a few weeks ago, I owned 2,000 shares of Energy Fuels (UUUU) at a cost basis of $2.87/share.
Shares of UUUU then proceeded to decline as a massive selloff started to take flight.
I didn’t panic.
In fact, I contacted management just to make sure there was no negative news that I was not aware of… When I got the confirmation that everything was A-OK over at Energy Fuels, I knew that I had a good opportunity to not only significantly reduce my cost basis, but to add shares of one of my favorite ideas at at extremely favorable prices.
Thanks to DCA, I now own 6,900 shares at a cost basis of $2.22/share, a vast improvement from $2.87/share.
Be Aggressive At the Lows
To further tie together the previous ideas discussed above, one thing that I really like to do when prices are beat up is to average down aggressively in tranches.
Using the same UUUU example — On November 12, I “only owned” 2,000 shares. I now own 6,900 shares, a 245% increase in my previous stake.
My rationale for being more aggressive on the way down?
Well, if you LOVED the idea at a much higher price, shouldn’t you LOVE that very same idea at a much reduced cost?
As it pertains to UUUU, I definitely did!
In general, I am a fan of diversification. Not so much as it pertains to overall asset diversification at a given time, but diversification within your best ideas.
Let me explain:
Right now, I have ZERO interest in real estate. I also have ZERO interest in buying index funds of the S&P 500. And I very close to ZERO interest in other equities outside the mining sector.
My only two good ideas at the moment are hoarding USD and buying up loads of mining shares.
But within the mining sector, I very strongly believe in the idea of diversification. We must remember, that in mining, when we buy shares of any company, we are also purchasing an interest stake in that company’s mines… which are in many cases, not located in our own backyard.
For instance, I own shares of True Gold (TGM.V), B2Gold (BTG), and IAMGOLD (IAG), which means that my portfolio is subjected to Burkina Faso risks. Just last year, the country had a coup and True Gold had to suspend mine construction because of vandalism and other problems attributed to social unrest…
And mines aren’t exactly like internet startups… If there are any geopolitical issues, a company cannot just simply out of the blue decide to pack their bags and relocate operations elsewhere… Mines are fixed assets that are forever anchored to the earth…
It’s also not so simple that we can just say — Stay away from hostile environments… Even perceived first world countries (USA, Canada, Mexico, etc.) have their own sets of problems… Permitting issues, increased taxations, robbery/crime issues, etc. Not to mention, companies operating in first world jurisdictions typically trade at a market premium… In other words, be prepared to pay more for a company like Klondex Mines (KLDX), which operates out of Nevada.
As such, I think the best approach is to take a balanced one and not put all of your eggs into just a SINGLE basket.
Not Too Many Stocks
On the topic of taking a balanced approach, my own preference is to hold about 20 stocks. This includes a blend of:
- Mid-tier producers
- Development stage stories
- Prospect Generators
- Sole Risk Exploration
I think ~20 stocks is a reasonable number to help a speculator cover all bases: blends, commodities (gold, silver, copper, uranium, etc.), jurisdictions, etc. My own preference is to focus primarily on mid-tier producers; your mileage may very, depending on your own risk appetite.
Mining Portfolio: December 04, 2015:
I am NOT interested in adding much more than 20 stocks because quite frankly, I don’t have enough time to keep track of that many companies… And I’m not trying to build out a complex ETF either…
I only have so many good ideas… After 20, they are essentially all used up, anyway…
Sell On Rallies
One frequent knock that mining stocks and other growth stocks get is that they do NOT produce an income. Therefore, many income investors refuse to participate in this sector.
Well, if the companies are too beat up to pay their shareholders an income, then that just means that you’ll have to produce an income on your own!
Which is what I have been attempting to do (to some degree), by selling some shares off in a rally.
Most recently, I’ve sold the following:
- First Majestic Silver (AG) ($721.50)
- Yamana Gold (AUY) ($1,088.76)
- Kinross Gold (KGC) ($677.96)
That’s over $2,000 this year in “income”. Sure, that’s not a lot, but it doesn’t have to be $0 either…
In a brutal bear market, frankly, I don’t mind having to do some of the hard work on my own; if almost EVERY company out there can’t pay a dividend, it’s because the sector is that decimated…
What would you prefer? Shares trading for 80% and 90% off? Or shares trading at 50% off + a weak dividend?
I’ll take the firesale discount any day of the week…
Be Well Positioned
For whatever the reason, trading stocks does not appeal to many investors… Personally, I am not against trading in and out of positions to capture some “hard to come by” gains in this brutal bear market.
I’ve seen my portfolio down $30,000+… so when I can get some wins in, I’m more than happy to!
Actually, booking profits, from time to time, makes it that much easier for a speculator to continue participating in this volatile sector…
For instance, most recently, shares of AUY and AG were up BIG on no relevant news, so I decided to take those gains…
What if AUY and AG run away from here and I never get another opportunity to add back in?
To me, that’s no big deal, because I am already well positioned for the next bull market upturn in precious metals… In my own case, I have over $200,000 invested into mining stocks… If the rally wants to begin tomorrow, by all means let it happen! I have no objections to that… 🙂
But what if AUY and AG plummet back to 52 week lows? Well, because I sold during the rally, now I have a lot more cash to play with! I could either buy back AUY and AG at even better prices, or load up BIG on other ideas.
Regardless, being well positioned now, lets me capitalize on any upturns without having to worry about the Fear of Missing Out (FOMO).
And since I don’t believe the next bull run is imminent, I will continue to sell off bits and pieces of my portfolio for some short-term gains on any rallies. In addition, like I said, I will load up BIG on any drastic declines.
Already, in my limited experience, I’ve seen far too many mini rallies do nothing more than reverse course for me to believe that it won’t happen again… Each time that I did not sell ANYTHING, I rode the wave all the way back down into a deep Sea of Red with NOTHING to show for it!
Believe me, it’s no fun seeing a position you own up by over $5,000 one minute and then down over $6,000 the next!
Sell Half On A Double
But what if you don’t want to sell out of any positions, yet you still want to book some small wins along the way? Well, the most popular strategy that speculators use is to sell 50% of a holding on the first double. That way, your initial investment capital is returned to you, and you are now only playing with the house’s money.
Let’s use UUUU again to illustrate this point:
I currently own 6,900 shares of UUUU at a cost basis of $2.22/share. Let’s say that for whatever the reason, the stock doubles sometime next year and is sitting at $4.44/share. At that time, If I don’t believe that a bull run in uranium is imminent, by selling only 1/2 of my position, I’ll be able to hold onto 3,450 shares at a cost basis of $0 (excluding all commission fees/expenses for simplicity).
And psychologically, it’s a whole lot easier to watch a volatile stock swing up and down when you know that you have none of your principal at risk…
It’s just human nature…
Also, for those speculators who are worried about parking aside “dead money” for 5+ years, waiting for the sector to turn, this is how you can continue to participate in the game while circumventing that concern.
Doesn’t sound realistic?
UUUU was trading at $4.26/share just this past August, not very long ago…
From Energy Fuels:
Again, and it can’t be overstated enough, mining stocks are extremely volatile and sharp spikes do occur often and regularly!
Don’t Buy On Rallies
And when it comes to head fakes, I’ve learned not to be duped anymore! The last two times around, a lot of people started speculating that the bottom was indeed established and we were on the cusp of turning the corner… Back to happy days!
What a tease…
For myself, I made the mistake of DCA on the way up! As I mentioned earlier, that’s when I started to load up on shares of PVG and LSG. Sure, it doesn’t feel too bad at first, but when the market finally decides to punish gold again, it can be very tough to stomach the pain!
Right now, for instance, BTG is another gold producer that I like that is currently trading at $1.25/share. For anyone who thinks that they might have missed the boat, they might start piling in and buying up shares now… But should BTG fall back down to $1.00/share again (like it has so many times before!), that 20% drop will have you grimacing in pain.
I guess what I am trying to say is this — I would much rather buy shares of mining stocks when the spot price of gold is down 10 out of the last 15 trading sessions, as opposed to buying shares after gold has rallied in say 8 out of the last 10 trading sessions.
Because if I do buy, I want to be buying at a time of severe weakness, not strength. In the case of the BTG example, I like the idea of buying at $1.00/share because a 20% decline would take us down to $0.80/share which would be a lot more unlikely, since that is uncharted territory…
But should that happen, that’s when I would be tempted to implement the aggressive tranche buying strategy outlined earlier! 🙂
Cut Your Losses
Unfortunately, even if you put in a lot of time and research, the odds are that not every single one of your investment ideas will be a roaring success. Mining, in particular, is a tough business, and many companies do fail.
As it pertains to junior explorers and development stories, this holds ever more true. Most recently, I was burned by purchasing a small position in Rubicon Minerals (RBY). Shortly after buying, the company announced a slew of problems with their operations and gold deposit.
I was duped into believing that the company was just on the cusp of production (they had their first gold pour back in June), so I mistakenly rationalized that the risks were minimal… Further, their Phoenix project is located in Red Lake, Ontario, a world class mining jurisdiction that offers immense appeal.
Regardless, all those “merits” weren’t enough to make this story work out — Management and geology suck… and when it comes to mining, if you don’t have that, you have NOTHING!
Once the bad news hit, I was very quick to cut the cord (the Rubicon story is fundamentally broken)…
There’s no need to get emotional… We can’t win them all… But we also shouldn’t hang around and hold onto losers either…
In the end, the show must go on… And there are way too many other promising stories out there to get discouraged.
Just try and learn from your mistakes… In my case, the Rubicon fiasco taught me to put an even far stronger emphasis on ONLY buying into the best management teams.
Enjoy the Ride!
Lastly, if you can manage to stay the course and not lose sight of the big picture, you should try and enjoy the ride!
To prosper with mining stocks, you don’t need the “end of the world zombie apocalypse” that many skeptics like to throw out there… If your views of the future are that dark and terrifying, then you’d probably be better off buying canned foods and lots of ammo, as opposed to speculating on mining stocks…
Bt if you’re like me and also a “glass is half full” type of person, then you probably believe in a brighter future in which commodities will continue to be rapidly consumed by growing (emerging) nations. And at some point, demand will outstrip supply again, making these low prices unsustainable long-term.
At some point, the tide must turn!
Hopefully when it finally does, you, me, and anyone else speculating in this space will be ready to rock’n roll!
Now where did I put my surf board?