We are seeing a mining sector with “artificial” pricing right now. Price is not reflecting value at all, across the board. It might even diverge further even though even the producers look cheaper than the 2015 bottom. Nothing makes sense right now. Theoretically this price environment shouldn’t even exist according to the “efficient market hypothesis”. Almost no miner is expensive so the risk of doing mistakes (buying high) is very low across the board. If the average miner is 50% undervalued right now, then buying the average miner will return 100% at some point (when the market is a weighing machine and not a voting machine). If we drop 50% or more from here on average, they will return 200% after the bottom is in. Point is, I expect few of especially the above average miners to show a loss within 12-24 months, but any can go down 50% before that for no “good reason”.

Example:

  1. Feb 20: Newmont increases it’s stake in Irving Resources, at $3.76/share, shortly after the first assays from the deep drilling campaign at Omui.
  2. March 13: Irving Resources closes at $1.62/share even though there has been no change to company fundamentals.

VALUE didn’t change but at this moment in time the PRICE is 57% lower. In other words you can buy Irving and all its projects for 57% lower than Newmont paid for it just a few weeks ago. Value is not priced accordingly at all at the moment.

I have seen miners with heavy insider buying just 5-7 days ago with share price down 30% just in the last 2-3 trading days. In other words; It have gotten up to 30% cheaper since insiders voted with their wallet saying that their company is undervalued less than a week ago.

… Did the value of the companies go down 30% in the last 2-3 trading days? Give me a break.

As a value investor I don’t think I have seen a more attractive investment environment than what we are seeing in the miners currently. I think I can pretty much buy any decent to high quality miner today and expect good returns within 12-24 months. They could of course go down even up to 50% before they turn and go up a few hundred percent. One should be prepared for this. One should be aware that a good buy can go down before it goes up. If you buy something that is 50% undervalued it will give you a 100% return some day. It does not guarantee that you won’t see a 1%-50% paper loss before it returns 100% though (unless you miraculously bought at the exact bottom tick). Be prepared and assume that every good buy will go down before it goes up and just accept this fact. An investment isn’t a bad investment just because it doesn’t pay off the next day, or the next week, or the next month or even the next year. Keep in mind that the average long term return from the stock market is 8% per year. If it takes 2 years to get a 50% return, you would be crushing the market.

If you buy something that sooner or later “must” go up 100% then it could take years and it would still be an excellent investment… Even if it dropped 50% before it returned 100%!

 

Be prepared and assume that every good buy will go down before it goes up and just accept this fact

Don’t invest money that you might need within a reasonable time frame that might be needed until the market goes from a voting machine to a weighing machine

Being forced to sell at the wrong time (low) will cost you a lot in the long run

One thought on “Valuations Do Not Makes Sense Right Now

  1. Scott says:

    Thanks Erik,
    You’ve been a consistent level head in dire times. I’ve contemplated selling some miner shares over the last couple of weeks, but as you’ve stated, not only have the fundamentals of the good juniors not deteriorated, they’ve grown better with lower oil prices and an increased demand for the physicals metals.

    The paper market, is not the physical market.

    Keep well man!

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