Adages to live by for resource investors

The pursuit of locally prevalent ideologies and ideas are of no consequence to global, fungible markets.

This is a prominent issue whereby many Australian investors and companies became enamored by the ideal of a ‘bifurcated’ global metals market. This notion ignored one very important aspect: global metal markets are fungible and are, largely, of no consequence to the end consumer.

The idea that a broad, critical mass of customers would pay a premium for products manufactured using ‘green’ materials however, offering no difference in utility looks to be idealism and nothing more.

Indeed, history can guide us in this regard; for instance in the case of off-shoring manufacturing capabilities. If consumers were unwilling to pay extra for Australian-made products, Occam’s razor dictates that the same situation would ensue in the case of ‘green’ materials.

Marginal assets get hit the hardest when sentiment turns

Higher cost, ‘novel’ assets like an underground lithium mine under development, will get hit harder than a conventional, open-pit producing mine. Boards are trusted to make the right decision for the company to survive and ‘fight another day’; not to be beholden to the whims of minor shareholders. Companies should accurately articulate their market or potential market position, rather than marketing low certainty long-term projections that may misinform less sophisticated investors.

Sunk capital has little value until the cycle turns

Australia holds a lot of old mines and projects, with a lot of historical expenditure via development, exploration or studies spend. This is a sunk cost, that is effectively lost capital for projects of insufficient scale and/or grade. Contemporary projects are not immune to this dynamic by any means.

Sunk capital can be of immense value when the cycle turns. A great recent example of this is Champion Iron (CIA.AX) benefitting from billons of dollars of sunk costs in infrastructure by it’s project’s previous owners. CIA shareholders have benefitted many times over given this materially lowered the hurdle for commercialisation of their resource, when the iron price cycle turned positive.

A cycle in certain commodities can take years or even decades to turn and provide a favourable environment for investment.

Bias can affect even the most highly regarded and adroit personalities

A bull or bear market can affect even the most skilled operators and investors. Extrapolation of the present circumstances, perpetually forward both positive or negative, is a dangerous mentality to live by. Things rarely go as good or bad as expected or feared.

Taking an extreme position can often mean an expensive mistake eventuates in time. This generally is capital destruction via financial overcommitment to a particular opportunity, or via omission due to becoming a ‘charitable seller’ of what may be a perfectly good asset at a certain part of the market cycle.

Keeping an ‘even keel’ and developing composure in all aspects of life comes with upside - providing a higher probability of capturing whatever it is that one truly wants.

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Disclaimer: The information contained in the material on this website article is for wholesale investors only and for educational purposes only. It reflects only the opinion of its author in a strictly personal capacity