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The risk of being “right” but ending up “wrong”

I recently watched a SNN interview with Brent Cook. One topic which was discussed was jurisdictions, and how jurisdiction quality seems to go in cycles. Meaning, it is typical for jurisdictions to get worse, mostly due to government greed, when gold prices are high and any projects are the most valuable. That discussion made me want to expand further on the topic of “What to do in a Gold Bull?”. A topic which I did a recent article on, in regards to company types, that can be read HERE.

Lets say you buy any type of mining company (Explorer, developer or producer) near a mining cycle bottom when a bunch of risks are more than priced in and a lot of companies are cheap. The best outcome from such a buy would to be for said company to go up a lot in value along with a rising share price. Lets say you buy company X for $1 and it goes to $5 in a hurry, both on the back of improving fundamentals as well as a rocketing gold price. Now you own something that is obviously much more valuable and the investment is looking stellar…

At this point in time risks are probably not over discounted but perhaps under discounted. Furthermore sentiment is ecstatic and the value of the company’s project(s) and/or cash flow from the project(s) is at an all time high. Now, going by how human psychology and governments usually work as per Brent Cook, the likelihood of a negative surprise in terms of jurisdictions has gone up. This means that there is an increasing risk that the investment and company you own, which has gone up a lot in value, might decrease in value due to political reasons…

Maybe the governments slaps on a huge windfall tax on the mining sector. Maybe the government starts nationalizing companies. Maybe the government increases the royalty. Maybe the government demands some ownership percentage.

The point is that one can expect jurisdictional risk to increase the better the overall miners and gold are performing. I would hate to be “right” on an investment and then see it collapse due to it being “too successful”. It’s basically an unfortunate negative correlation. If you are fortunate to own shares of a company that has increased a lot in value, through for example exploration success, then the jurisdictional risk increases. Especially if the whole sector is doing well. If a company has instead destroyed value, then there is nothing to “steal”.

That is why I prefer to stick to the better jurisdictions if we are indeed in the early stage of a full blown gold bull. When I say better jurisdictions I am mostly referring to a history of somewhat stable policies through an entire cycle as well as upholding rule of law. An example of the former could be Nevada (which has been a top jurisdiction for ages) and an example of the latter could be Japan (where concepts like “honor” is ingrained on top of being one of the most “civilized” countries on earth). With that said there are of course a bunch of different factors that makes up jurisdictional risk and every country has its strengths and weaknesses (like native title negotiations etc).

To Sum up

Basically what I am saying is that as the gold and mining bull ramps up for real I will get more and more inclined to stick with companies who are operating in some of the better jurisdictions around. This reasoning should be easy to understand since the likelihood of negative surprises increases alongside a rise in the value of ones position. At least if you are more of a “buy and hold” type investor.

In contract, if we would be in a bear market with little perceived value in the mining sector I would be more inclined to go out on the risk curse in terms jurisdictions. Why? Because even if say a junior exploration company makes a solid discovery, in high risk jurisdiction, the odds of the value of the company to be negatively impacted through policy changes are lower (relatively speaking).

With all the above said, there are no certainties, only probabilities.

Closing Thoughts

My portfolio and especially my family’s portfolios are weighted towards “Buy & Hold” investments in good jurisdictions and/or companies with internal jurisdictional diversification. I simply prefer to lower the risk of one day waking up and finding out that a project or mine has potentially been shut down because it was too attractive to some bureaucrats… And the thought of suffering through a bear to have the spoils of a long awaited bull being snatched from ones grasp is a chilling scenario.

You can check out the Fraser Institute’s Annual Survey of Mining Companies yourself HERE.

(Jurisdiction rankings)

 

(Note: This is not investment advice and I am not a geologist. Always do your own due diligence.)

Best regards,

The Hedgeless Horseman

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