Is now the time to buy into companies that are engaged in the early stage of the mining business?
Does the Investec Mining Clock mean it’s a good time to buy into Greatland Gold?
Gold! What next? If there is anything in the idea of the Investec Mining Clock, now might be a time to buy into companies that are engaged in the early stage of the mining business - namely companies that focus on exploration, this is why some investors are getting excited about Greatland Gold.
It’s 5.30, or so I hear. The Investec Mining Clock is meant to describe the commodity cycle, drawing a parallel with a twelve-hour clock. It starts at 12, with a crash. By one o’clock we see cost cutting, by around 2, a wave of company liquidations - I think you get the picture, it’s not a good time. But, by around 3.30, things begin to settle down, prices stabilise, debt levels in the mining business fall and there are hints of an improvement.
The boom begins at 6 o’clock, we start seeing a few smaller flotations, exploration budgets rise, then we get a spat of takeovers, bigger flotations and then things get very exuberant until we get to the beginning again - 12 o’clock.
In the current cycle, it was twelve o’clock earlier this decade, following the boom from around the year 2010, and now I read that the ticking clock has moved on to 5.30.
I am not totally convinced by this theory, it smacks a little of voodoo economics to me, but then let’s keep an open mind.
If there is any truth in the Investec Mining Clock theory, and we really are at around 5.30, then now might be a good time for the explorers.
Greatland Gold is an example of an explorer - early stage exploration, a 5.30 company.
In this respect and in terms of quantifying the company as an investment, things get a little unsatisfactory. The deal with Newmont is subject to so many confidentiality agreements that all we have to go on is guesswork. Newmont may or may not decide that Ernest Giles is a gold mine worth getting excited over. The original deal with Newmont, which was more akin to the larger company doing due diligence than anything else, was for six months and that time frame is nearly up.
Meanwhile, Greatland makes bullish noises. It has been raising money via warrant conversions and a share placement, significantly boosting its balance sheet. Gervaise Heddle, the CEO, has said: “The encouraging results from our recent exploration work give us great confidence in our strategy of targeting under-explored areas with significant potential to host sizeable, high quality mineral deposits. Our strengthened cash position means we can aggressively pursue comprehensive and sustained exploration campaigns across all of our key projects over the next two years.”
Quantifying Greatland, quantifying gold
Whether the company is a good investment depends on how much gold and indeed cobalt it can find. Unless you are something of an expert in this field, I would say an investment in this company is marginally safer than a straight gamble. Don’t get me wrong, I think that if you had lots of companies in your portfolio with a similar risk quotient as Greatland, you might do pretty well - the key lies in spreading your bets.
But I am more cynical about gold. A certain well-known investment magazine has been tipping gold for as long as I remember. Well, forget about the Investec Mining Clock cycle, a closer analogy might be with a stopped clock - it’s right twice a day. If you keep tipping gold, sooner or later you will be right.
But I think many of the gold bulls base their ideas on a flawed understanding of the global economy and the rationale behind ultra-low interest rates. They see loose monetary policy as evidence that we need a more stable currency base - namely gold, hence their bullishness.
Instead, ultra-low rates are a symptom of a chronic lack of demand across the global economy.
There may be something in the Investec Mining Clock, but the justification for buying into gold because of fears that monetary policy has debased the currency, amount to little more than paranoid delusion.
These views are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees.