[miningmx.com] — ONE cold winter morning, in the early Nineties, I was keeping a lonely vigil in the cavernous newsroom of the Argus newspaper in Cape Town.
It was 4.30am, and I was about to make the worst investment decision of my life.
I had been asked to substitute for the person who usually sub-edited the first edition of the Argus business pages. Because I was fearful of stuffing-up the various programmes for the unit trusts and exchange rates, I came in to the office extra early.
With the various subbing programs running smoothly, I turned my attention to the overnight copy that had been dispatched from our sister newspaper The Star.
And there it was: a report on what could be the best kept secret on the JSE’s Gold Mining board – the overlooked, under-rated and under appreciated Gazankulu Gold Holdings.
I was enamoured, especially with the bit about a collapsed shaft or wall that had inadvertently revealed a possible rich seam of gold, hitherto unknown to the chaps at Gazgold.
I bought Gazgold – which I seem to remember mined in an area called the Sutherland Belt – that very morning.
I held Gazgold like a secret treasure, not confessing my stash to kin or kind and refusing to be spooked by the ominous share price dribbling.
I had so much faith that Gazgold was eventually going to strike a rich vein. I simply had to wait out the various operational setbacks and less than convincing operational performances. It was only when I received the annual report in the post that I really started fretting.
An annual report – which some people still refer to as the glossies – is a financial tome that should be taken very seriously.
Gazgold’s glossy was fashioned on rough A4 paper stapled together in a rather crude fashion.
It was the first time (and last time) I received a personalised copy of an annual report.
Somebody at Gazgold’s HQ had actually stapled together the pages of each report. How freaking desperate was that?
I don’t think I even bothered flipping through its pages, I got straight on to the blower and bailed Gazgold at less than half of what I’d paid to buy in.
And the lesson I took out of that little episode? My note to self ran something like this: “Never, never buy independent marginal mines. If you want to dabble, then HJ Joel is good enough.”
Putting the con into Cons Mining
My golden rule lasted a few years. I was convinced that Consolidated Mining Holdings was trading at a massive discount to its listed (Westwits, Egoli, SouthWits and Benoni Gold) and its unlisted mining interests.
When I lost patience waiting for the dastardly discount to narrow I went a step further and plunged directly into Westwits as well.
These entities ended up buried in the Kebble empire, which wasn’t very good for minorities.
Understandably I took a blood vow: “Nevermore shall I dabble in the yellow metal.”
Of course, I was a little surprised when Gazankulu Gold Holdings returned to the JSE, this time as part of the short-lived and much hyped, OTR Mining listing in the late Nineties.
Still, small gold mining projects do have a certain appeal.
My interest was inevitably piqued several years ago when the new gold guard – Afgold (now Gold One International), Great Basin Gold, Pamodzi Gold, Central Rand Gold and Witwatersrand Consolidated Gold – came striding onto the market.
But, to my eternal credit and personal banker’s enormous relief, I looked away from these precious punts.
Although I must confess my reluctance to even peak at these new contenders stemmed mostly from a conversation I had with former Gold Fields CEO Ian Cockerill at a Finweek breakfast.
Cockerill was kind enough to explain the vast difference between a company that extracted gold from the ground and a company that dealt mainly in geological information.
Recent reports of a listing later this year for Galaxy Gold, which, I read, intends resuscitating mining areas long abandoned, have about as much appeal to me as reports on the Slovakian soccer team’s practice drills.
I think it’s safe to say I’ve shaken off the long-lingering effects of yellow fever.
Although, let it be said I am partial to buying the odd bunch of New Gold Debentures when the markets do their relief rally trick. A nice insurance policy against market volatility.
Thankfully and no worries about wayward management, seismic events, strikes or debt issues.
Curb your enthusiasm
(Things to consider before going gaga for junior mining opportunities)
WHAT REALLY LIES BENEATH THE SURFACE?
I attended an investment briefing at the JSE recently, where two junior mining companies presented very compelling valuations for their proven reserves some six, seven times more than the share price.
Personal experience tells me what also lurks beneath the surface is costs – even bigger costs.
It’s only when production gets underway that the real hassles with bringing ore to the surface emerge. This brings me to my next point.
WHO OWNED THE MINE/MINING RIGHTS BEFORE?
It’s a useful exercise to see who owned a mining operation previously, and more importantly, why the company stopped mining or exploration activities.
It would be quite reasonable to presume that if a respected mining house could not make “a go” of a certain mining interest, then why should a smaller contender be able to make a profitable turn?
There are all kinds of reasons promulgated: flexibility, lower corporate costs, different mining methods.
But in most instances the going is tough, and more often than not the mining area is once again “tagged and bagged”. But rest assured it will be re-packaged come the next upswing in the commodity cycle.
DON’T FOLLOW LEADERS (or walking parking metres)
When well-known business leaders back or take a strategic stake in a junior mining venture, there’s obviously cause for “following the smart money”.
Money is the operative word.
These chaps have more money than you or I, and can quite easily afford to drop a few bars on a speculative play.
I followed retail tycoon Christo Wiese into hapless fluorspar miner Sallies – where, seemingly, solid fundamentals were smothered by a variety of operational difficulties.
As fate would have it, when Sallies finally did “come right” the global crisis was in full swing. My portfolio still shows some nasty scars from Sallies, and my only hope of recovering some capital (and pride) is via the Sallies Debentures.
Wiese sold out his sizeable holding in Sallies ordinary shares at a massive loss, but I got the sense he was not beating himself up over the matter.
Of course, those who followed Mr Wiese into Ocean Diamond Mining Holdings – one of the few really lucrative junior mining ventures – would have no room to complain.
THINGS CAN AND WILL GO WRONG
Well, the prolonged prevarication at Sallies certainly underlines this statement.
Uranium One springs to mind, as well. But yes, things very rarely pan out as smoothly as the prospectus pre-listing statements suggest.
Shafts collapse, tunnels get flooded, funding falls away at the last minute, workers strike, supply contracts get disputed, management make crap acquisitions (usually with expensive paper) and grades dip well below expectations. Most of these set-backs are manageable if you are a mining house with a muscular balance sheet.
But when you are a geared to the gills junior miner – with an expectant shareholder body in tow – these little hitches can be devastating, even fatal.
Returning again to the example of Sallies: even the most generous funding commitments from major shareholders could not pull the fluospar miner (now with both mines mothballed) through a series of unfortunate setbacks.
IT’S NOT EASY TO EMULATE SUCCESSES
There have been quite a few notable junior mining successes. I can recall Ocean Diamond Mining or ODM (run by the brilliant and uncompromising Andre Louw), Ted Grobicki’s Kalahari Gold, Metorex (notwithstanding its debt hassles of late) and East Daggafontein (which, I seem to recall, became the base for Mvelaphanda Resources).
But success is not easy to emulate. Back in the Nineties there were a slew of West Coast marine diamond miners hoping to cash in on ODM’s popularity with the punters.
Companies like Benguella Concessions (later acquired by Trans Hex for next to nothing), Zenith Concessions and regional resources never managed to produce meaningful returns. Fizzled junior ventures are a dime a dozen.
These would include colourful characters like Amalia Gold, OTR Mining, Dalsig Mining, Union Mines (wow, what a crazy saga that was), Noble Minerals, Century Carbon Mining (surely the shortest tenure on the JSE), RareCo, TriDelta Magnet Technology, Rhombus Vanadium, Northfields Gold Mining, Yomhlaba Resources/SA Coal Mining Holdings, Good Hope Diamonds, Knight Gold Mining and Maranda Mines.
IT ALL COMES AROUND AGAIN
Most junior mining ventures often end up back in the ground. But you can be almost certain – if you’ve been around long enough – that parts of old junior mining entities will be exhumed, spruced up (to look less like a corpse) and led back to the market as part of newly packaged listings.
The trick, of course, is to hopefully recognise these “assets” and, more importantly, be able to recall why these assets did a duck in the first place.
