Investment legend Doug Casey once called mining a ‘crappy business’.
That’s because it’s fraught with risks and uncertainty.
But the potential rewards of exciting percentage gains from investing in mining stocks are too alluring for investors to pass up.
Want the rewards? Then bear that risk!
But every so often, setbacks are so big they scare off investors.
Providing opportunities for true
contrarian investors!
Today I cover two companies that hit more than a little speed bump last month.
One company’s share price plunged 40%, while the other bounced moderately despite the disappointing news.
Yes, these are common occurrences when you take a punt with mining stocks.
The first company was Silver Mines Limited [ASX:SVL]. It owns the Bowdens Silver Project, located near Mudgee. It lost a court case to a local community group that challenged its current plans.
The second was Regis Resources [ASX:RRL]. It the owns the McPhillamys Gold Project, located near Bathurst. It received an order from the Minister for the Environment, Tanya Plibersek, to suspend development over cultural heritage disputes.
The news cycle covered these two developments closely, sparking much debate and controversy.
Supporters of these mines point out they create local jobs and prosperity while producing critical minerals for Australia.
Those against development cite environmental concerns, land ownership and cultural heritage issues.
Moreover, there’s even talk that the latest decisions may seal the fate of the Australian mining industry. These setbacks struck a blow to many gold stock investors who have experienced a wild ride the past three years.
As a precious metals’ investor, you’d think I stand with the former group and disregard the views proposed by the latter.
But from my conversations at the Australian Gold Conference last week, I’ve learned there’s more to it…
Who’s at fault for the delay at the McPhillamys
and Bowdens mines?
The decision to start the McPhillamys and Bowdens mines is long overdue. These two projects sat on the state government’s waiting list for over a decade.
Both should already be pumping out tonnes of gold, silver, and lead, creating jobs, and boosting the state’s coffers.
However, these projects are still a plot of dirt right now.
Both projects only secured approvals to begin construction in the past year. To build these projects now would be costly. McPhillamys will now cost nearly $1 billion to bring into operation, almost five times its 2017 estimates.
For Bowden, the cost is likely around $400–500 million today, compared to $250 million in 2018.
Much to these companies’ frustrations, these projects are now on hold! One for cultural heritage reasons and another due to locals raising concerns about the development plans.
Now, it’s easy to blame Big Government. We’ve seen environmental groups pressure the government to go green, save the wildlife and block plans to develop near towns, schools, and parks.
And don’t forget last year’s The Voice referendum sought to make lasting changes on land ownership and development. Even though the vote didn’t pass, it hasn’t stopped the government from using it to hold up development. That’s what happened with McPhillamys.
But there’s more to it than that.
At The Australian Gold Conference, an experienced geologist took me aside to discuss both projects. He revealed that the Regis Resources committed a major error when it proposed to build the tailings storage facility on the Belabula River. This river bears cultural and heritage value to the local Wiradjuri people.
Interestingly, after the decision by Minister Plibersek, the elders of the local tribe came out to voice their support for the project. They criticised the group that petitioned the minister, saying they didn’t reflect their interests.
From the geologists perspective, however, that didn’t take Regis Resources off the hook. Management could’ve sought alternatives to avoid that controversy altogether.
Regarding the Bowdens project, he highlighted the issue of powering the project with transmission lines. This was the pressure point the Bingham Community Landcare Group used to win their appeal. He believed that the Bowden mine is vulnerable to locals seeking to block its development because it’s located near the town of Lue.
Moreover, the mine produces hazardous lead. Therefore, his view was again that management needed to exercise extra caution to keep the locals on side. This latest appeal, which delays the project, came down to poor planning.
So, you can see that these companies are partly to blame.
Regardless of who’s at fault, locals in these two regions may need to wait another year (or more) before these mines can go ahead and boost the local economy.
Meanwhile, shareholders of these companies will have to stomach some losses or lost opportunities.
How to improve your game
with mining stocks
I don’t delude myself into thinking I hold the keys to solving the issues discussed. They’re complicated. You’re dealing with a mix of political, social and environmental issues. Some of them can spark heated debates and division.
But what I can do is help you from an investor perspective.
I focus on exercising better discernment and managing your risks.
Mining companies regularly face roadblocks and troubles with their operations.
Sometimes, you can see the signs; others come out of nowhere.
Having a clear plan and not letting emotions cloud your judgement can help deliver better returns over the medium and long-term.
I wrote about this in one of my articles in the six-part series ‘Strategies for successful gold stock investing’.
Incidentally, Regis Resources is one of my recommendations in my precious metals’ investment newsletter, The Australian Gold Report. In the wake of the McPhillamys project suspension, I went against the market consensus, placing it as a Speculative Buy.
Why’s that?
I’m a contrarian investor!
Sure, the company copped a lot of hate as it lagged its peers in the gold bull market. But it is still generating significant free cashflows from its operations. That could continue for at least three or four quarters. What management could do with that is anyone’s guess.
If you aren’t scared off by the latest mining fiascos and want to invest in mining stocks, I suggest you don’t do this by yourself. Find someone who will analyse the markets and do the hard work for you.
Like gold and silver? Join me in The Australian Gold Report.
Or you can try Diggers and Drillers, a resources investment newsletter. My colleague, James Cooper, covers a broader range of resources, including critical minerals.
While these fiascos may cause many to lament the end of mining investing…or indeed name it a ‘crappy business’…by doing your research, and always being a contrarian…you can gain from others’ fears.
God bless,
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Brian Chu,
Editor, Gold Stock Pro and The Australian Gold Report
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