‘2022 was a euphoric journey of battery metals price discovery and hundreds of ASX explorers, mostly lithium, went along for the ride’, writes Stockhead.
‘So far, 2023 has been a more grounded experience.
‘Lithium is coming off those outrageous highs with hard rock spodumene prices hardest hit, down +16% year-to-date.
‘Benchmark Mineral Intelligence’s graphite and cobalt indexes are down 5.7% and ~21%, respectively, over the same period.
‘The outlook remains overwhelmingly positive. But as the hype balloon deflates, those stocks riding sentiment alone, which is most of them, tend to tumble back into mediocrity.’
It’s a weird dynamic in play at the moment.
The wider markets continue to grapple with a potential banking crisis…
And yet…at the same time…battery makers and car manufacturers continue to grapple with a looming shortage in critical metals.
In my opinion, a massive supply crunch in copper, nickel, lithium, and a bunch of other rare earths is now unavoidable.
Spending in mining exploration is going up as a result.
However, many mining stocks have been hit hard by the wider uncertainty.
The selling in February and the first weeks of March extended across juniors and majors.
You can either take this as a sign to steer clear of miners for the rest of the year…
…or…you can see it as a giant opportunity…
Especially at the smaller end of the scale…
Since I started with Fat Tail Investment Research last year, I’ve tended to avoid recommending what I call ‘Phase One’ miners.
The ultra-exploration stocks that can and HAVE turned into 10–50-baggers…
…but much more often, lose most of the money you put into them.
As resources legend Rick Rule puts it:
‘Your winners must be big enough that they amortise your losers.
‘Over 40 years that has worked out unbelievably well for me, but I have had 12-month periods where I have enjoyed no success whatsoever.
‘The truth is, if you have a 20-bagger that amortises a hell of a lot of sin elsewhere in your portfolio.’
Punting on Phase One miners is a super-tricky game to play.
Especially if you don’t know geology.
For every Phase Oner that ‘graduates’ up the development scale…bringing its early stock investors along for the ride…
…there are 50-or-so prospectors that never get that dream strike…and go nowhere from IPO day until eventual delisting.
‘It’s the good, the bad and the ugly’, says Rule about Phase One investing. ‘Concentrating on the good, ignoring the bad, and avoiding the ugly like the plague.’
Conventional wisdom is that you get as far away as you can from risk plays like these when times are uncertain.
But that didn’t happen in 2022.
Even as inflation, interest rate hikes, and the war in Ukraine spooked the markets, we saw some pretty spectacular Phase One re-ratings over the last 12 months.
However, we’ve seen many of those stocks dragged right back down to Earth recently.
Are there further falls to come? Maybe. We’ll have to see what goes down in the non-mining world over the next few weeks.
Fundamentally, though, the longer-term, sector-wide picture remains the same. Drilling projects are powering ahead. Exploration investment is going up. Mergers and acquisitions are happening all the time.
Sometimes you have to separate the business of mining from the stock
prices of miners.
And let me tell you…
There’s nothing like being in a Phase One
stock BEFORE it gets its maiden strike…
You can see it double in a trading session. I’ve seen it happen. And then keep going up from there.
If that strike never comes, though…
Well, that’s the downside of playing this field.
You might find yourself holding doomed shares…where you only get a fraction of your initial investment back.
This happens more often than not with most Phase One miners.
Losses are an excepted part of the game.
But if you’ve picked the right one…at the right time…before a dream drill hit opens up a world of further exploration…
I believe there are very few greater gains to be had from the stock market.
And right now…the money that FUELS these companies is flowing again…
The quest for copper, lithium, rare earths, and other battery metals saw Australian explorers pour billions into the ground in 2022.
In British Columbia, exploration spending just hit a 10-year high.
Even the capitalists and entrepreneurs of Silicon Valley see which way the wind is blowing.
With their own high-tech patch in a lull…they’re now diverting a wave of fresh investment to the tune of $15 billion towards Phase One miners:
‘If we take 30 companies where we can put US$30 million in each early, we’re winners if two or three of those turn into billion dollar returns for us.’
…said David Danielson of Breakthrough Energy Ventures on 15 March 2023. Echoing what Rick Rule said earlier about speculating in this space.
I believe we’re entering a fertile time for this kind of mining. Very similar to the set-up in 2003/04.
For this reason, I’m starting a new project that focuses solely on Phase One explorers.
Stay tuned for more information coming soon…
Editor, The Daily Reckoning Australia
PS: Tomorrow morning at 10:30am sharp, Money Morning Analyst Kiryll Prakapenka is hosting another livestream discussion with Greg Canavan and Ryan Dinse, covering what comes next after Credit Suisse was bailed out by UBS, and whether we should expect a Fed Pivot. Click on this link to add a calendar reminder so you don’t miss it.