I would advise people to focus on the larger companies and commodities trading, whether through futures, options or CFDs for exposure to this sector. I actually saw this problem emerging back in 2005, but I must say I did not appreciate the severity of it. The reason of course is because I'm not on the ground doing field visits any more, and only reading Australian newspapers online. My father was telling me Australia needs 20,000 mining engineers, but only has 6,000. I guess that is a forecast for the next 5 years, but its implications remain clear. Small scale mining will be starved of funds and staff. A project that would normally take 2 years to commission will take 7 years and 3 times the cost at the small end of the market.
These small companies will not say why they are being undervalued but that is the reason. I thought the credit squeeze was raising risk premiums, but its for the most part the tight labour market. For example RED 5 raised $35 million for its project funding, yet you don't see any evidence that they are performing any construction work. On the country, I get the impression that they are more likely holding back information, so they can put a nice drill intersection announcement in their quarterlies. Its all delay tactics. In the meantime share prices keep tumbling and they have to go back to the market for more funds. Also you can't trust the quality of the work performed by these companies. They are using people that would not otherwise get a job in a weaker market. I don't see things improving for years. That is why fund managers are so keen on commodities despite a subdued outlook, even the industrial commodities are looking good. Its just just a speculative bubble, supply is very tight. The tightness runs right up the supply chain. It does not help that you have geoscientists opting to take lifestyle choices at a time of tight supply, by choosing to set up their own company rather than be a salary man. I think a lot of these small companies will merge. This is paradoxical because prices are high. Serious inflation ahead is not going to help.
I was just about to buy a lot of AAM because they are finally talking about building a treatment plant. They have $5mil in cash, $1 billion of gold in the ground, thats $10mil value for a $1bil of gold, but lets not forget the costs, delays, plant constraints to get it out, and heaps more capital raisings. When you consider these issues, I think this mine is not going to be commissioned for another 4-5 years, and they will be good buying around 3c. We live in faith because the dynamics of this market are like nothing we have seen in the past. Living overseas I was blind to it. Really it will be some time before money is made in this market. There is a huge backlog of critical plant as well, even if you could get your plant designed. This of course doesn't stop you from trading these stocks.
Commodities trading is the way to go. Unfortunately that limits you to palladium, platinum, copper, nickel, lead, zinc, tin, alumina, aluminium, gold and silver. Agricultural commodities too. Countries around the world are going to pay a price for their lax land utilisation in future. The Philippines and IndoChina would have to be the worst offenders. These countries seriously need to open up their land sectors. Anyone interested in farming in the Philippines Property Report. A day away from completion!
Andrew Sheldon www.sheldonthinks.com