Want to make yourself a fortune quick smart?
Say you’ve got a rare earths deposit!
Investors will throw their money at you…and beg you to let them give you more.
Yes, the mad dance of resource investor expectations and exuberance has shifted from lithium to the next battery metal sector superstar.
For example, take a look at Arafura Rare Earths [ASX:ARU] lately.
It’s doubled since late last year, interest rates be damned!
Check it out:
But a ‘double’ like that is chicken feed to the mega gains that only the junior resource sector can bring.
You can measure the returns in the thousands when they really go right.
However, the ghost of Mark Twain haunts us all who dare to tread here.
‘A miner’, the great wordsmith said, ‘is a liar standing next to a hole in the ground’.
How to make sense of it all?
One way I do that is to stay in contact with those in the industry.
My favourite is Hedley Widdup.
He’s the chief investment officer of Lion Selection Group. Lion specialises in the junior resource sector.
Hedley was a geologist before he turned to managing money.
I caught up with him last Friday for a burger.
I asked Hedley which commodity he was most excited about.
The answer? Copper.
The rationale here is familiar if you follow the sector. Copper is due for a big demand lift from the switch to electric vehicles and renewable energy.
Plus, there’s plenty of existing demand from the traditional source of urbanisation and modernisation across Asia and Africa.
Where is the copper going to come from to meet all this? No one is quite sure. Copper grades are in decline.
And we know the big boys like BHP and Rio are interested in this sector.
BHP just made its big $9.6 billion play for South Australian-based Oz Minerals.
Hedley took a sip of his water and explained why he chose copper over all the other metals out there. It’s pretty simple.
The metal is not called ‘Dr Copper’ for nothing — copper is intrinsically linked to economic growth. And isn’t easily substituted.
That’s not all…
It’s a big market, so less susceptible to wild price swings (ala, some of the new-age critical metals…).
If you can find a junior with a decent copper project, the medium-term outlook to support economic growth is great.
I put down my burger for a moment as I pondered this.
I couldn’t let Hedley leave before asking him about the famous Lion Clock.
To explain, Hedley is not the first Widdup to run the Lion investment fund. His father started the company about 25 years ago.
He also created the Lion Clock that shows the typical movement of the resource sector.
You can see it here:
Where are we now?
Hedley finished his chips, thinking carefully. Then he explained…
The Lion Clock is driven by liquidity — that’s the amount of money that is moving into, or out of, the mining sector.
This drives characteristic behaviours cycle after cycle — hence the clock.
Lion has tracked this current mining boom since it started in 2016, and so far, it’s moved through all the characteristic steps.
We’ve seen more and more money move down to smaller companies take the risks that come with backing explorers, with a record year in 2021.
2022 was a tough year for markets generally.
Volatility like that bruises the large-cap miners, but it is fatal for the money needed every single year to fund the junior resources sector.
The hand on the Lion Clock, according to Hedley, went to 12 in late 2022, with capital raisings become hard to execute.
Historically, once liquidity drops like this it doesn’t come back.
We could call Hedley out on this. So I did.
We have seen some pretty big deals announced (e.g. Newmont having a tilt at Newcrest Mining), which are more characteristic of just before 12 than after.
Hedley might be a touch early with that call, but while investors are worried about inflation, they’re being pretty hesitant to back exploration.
And as long as that goes on it will drag down share prices.
For Hedley, that means it’s time to start hunting for bargains.
Periods of extreme volatility have historically provided some of the most lucrative investment opportunities in companies that depend on market funding.
When the market turns for the resources sector, good projects can become available at amazing discounts.
Interesting, don’t you think?
Today, Lion is cashed up after selling out of some long-term gold investments in Indonesia and is ready to go hunting for the next junior potential resources stars searching for the next big elephant strike.
So is my colleague James Cooper. He’s the editor of Diggers and Drillers — an investment advistory for the resource sector.
I mentioned the stock Arafura Rare Earths above. James recommended that one to his readers when he launched Diggers and Drillers last year.
He’s also as bullish on copper as Hedley is.
It’s an exiciting time to be investigating the junior resource space. The Lion Clock suggests now’s the time to be actively picking up what you can and kicking over a lot of rocks.
Or let James do the work for you.
If that sounds of interest, check out James’s service by clicking here.
Editor, The Daily Reckoning Australia