Tips to avoid blowing your dough in mining stocks

Spectacular fortunes have been made from mining. Australia’s two wealthiest individuals, Gina Rinehart and Andrew “Twiggy” Forrest have a combined wealth of more than $50 billion, amassed from their ownership of vast expanses of commodity-rich dirt.

It’s also worth noting that, in the global context, the ASX is home to very few industry-leading companies, with the exception of BHP Group and Rio Tinto.

So, it should come as no surprise that there are a disproportionately large number of aspiring miners listed on the ASX. With these companies also comes an avid pool of investors keen to take a punt on what they reckon will be the next big thing.

You know the drill—last year, it was lithium; this year, it’s uranium. Get in early, and you could be rubbing shoulders with Gina and Twiggy.

But where the money flows the sharks also circle. This is true of all industries and the mining sector has had its fair share of spectacular flameouts. You’d think the days of Bre-X Minerals were behind us but earlier this month, a Canadian miner came clean to investors after discovering a rogue CEO had been manipulating assays of drill results. Needless to say, the market did not respond well with shares falling over 50% on the news.

Mining is a sector many Livewire readers have on their radar; however, it tends to receive less coverage from professional money managers who regularly contribute their insights to Livewire. So when the crew at Money of Mine got in touch ahead of their recent Sydney visit, it was an excellent opportunity to dig deeper into the sector.

For those not familiar, Money of Mine is a daily mining podcast run out of Perth and hosted by three mining tragics. Don’t be deceived by their larrikin image, Matt, Travis, and Jonas are passionate, switched on and knowledgeable about the mining industry.

While in Sydney, I hosted a chat with the Money Miners to help Livewire readers identify red flags in resource stocks and learn about the ingredients the crew looks for when scouring the market for investment ideas.

You can watch the interview on the player below and find more content from Money of Mine on their YouTube channel.

Put on your hard hats: This video contains some mildly colourful language. A summary of the key insights is available below.

Key lessons from the Money Miners - 4:03

Be mindful of incentives whether it be from companies, brokers, or media:

“Assume everything is a scam,” Travis Ricciardo

Watch out for highly promotional companies attending lots of conferences and always appearing in videos and podcasts:

“The best mining companies you see from performance, you never see them in the media,” Matt Michael

Have your eyes wide open:

“The default position is I won’t invest and I need to be won over," - Jonas Dorling

• Look at the track record of management
• Be mindful that these businesses are capital-hungry
• Management often has limited skin in the game so they tend to be short-term focused

Where to look for red flags

1. Go to the back of the annual report and look at related party transactions.
2. Look at the remuneration report to see how the executives are being incentivised
3. Look at trade payables to see how much the business owes and how much cash they have.
4. Watch out for directors suddenly leaving the board

“When you see a director step down from the board after the stock has had really strong performance. The see-through on that is that the director now recognises that now they are off the board they can rinse their shares on market without disclosure,” Travis Ricciardo

Where is the value? - 12:39

I asked the Money Miners if they prefer to invest in explorers, developers or producers. As a general rule, the trio is drawn to the mid-cap producers and believes there are plenty of inefficiencies that remain in these markets.

“Not many people are looking at these stocks and there are a lot of inefficiencies in the market,” Jonas Dorling

Money of Mine developed its logo based on the Lassonde Curve depicted below and aims to identify the optimum time to invest. 

Ingredients for success - 20:07

Mining companies will often present their credentials to investors including management, commodity, the underlying asset, location and proximity to infrastructure. The reality is that few companies possess all attributes so I asked the Money Miners what they value most.

Travis: Management

“Really good management can solve the rest. They’ll find a way to create value.”

Matt: Commodity and Location

“You can have a share price go up with poor management if you’re in the right commodity at the right time.”

Jonas: Commodity and Management

“You can’t get the commodity wrong. We love looking at commodities that are deep into the cost curve. Mines are turning off, CAPEX hasn’t been spent and isn’t going to be spent going forward, companies are retreating from it. They’re the ones with such asymmetric opportunities.”

Two commodities that fit this description are manganese and tin - neither of which you would have read much about in the headline.

The best emerging mining operators - 29:17

Proven management teams command a premium, and these are some of the emerging operators that could attract a premium in the future.

• Luke Creigh - Ora Banda Mining
• Mark Zeptner - Ramelius
• Aaron Colleran - AIC Mines