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Jayant Bhandari |
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Australia
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I have not sent you an email for a long time. Given the state of the junior mining sector, I have been devoting a lot of time writing on culture and politics. Also, I have given a lot of time recently to researching and writing a rather long article on what made the West so successful. In this yet-to-be-published article I critique Niall Ferguson’s and Jared Diamond’s works and then I build my own views on the magic portion that made it possible for the West to get so far ahead of “the Rest.” It will be here any day.
For me philosophy is the core of everything. It underpins my investment decisions. I am very often wrong, but philosophy provides me moorings.
Now on investing…
I have recently spent a month in Australia, attending and speaking at the IMARC conference in Melbourne, visiting companies and visiting the project of Novo Resources (CSE:NVO; $0.85).
In a just published article in the Northern Miner, which is linked here, I give my thoughts on Australia, its economy and what I expect from it going forward.
Leverage... Unlike many other investors, I value gold companies based on spot price and >20% discount rate. There is a reason: leverage in gold mining is mostly a myth. A common belief is that if gold price goes up, values of mining companies would go up exponentially. This belief seems to work on my spreadsheet, but not in reality. The problem is that when gold price goes up, the cost of making gold almost always goes up, often faster than the increase in gold price. Also, when gold price falls, the costs do not fall, for they are sticky. Indeed those who invested in gold companies thinking that gold would soon be $15,000 per ounce, never had to do any valuation. They are now in a sorry shape. However, that does not mean that I did not make similar mistakes. But I must change my views based on reflecting on my past mistakes.
One of the biggest mistakes I have ever made is related with investing with wrong kinds of people. When I saw a company with cash value thrice as much as its Market Capitalization, I decided to overlook the quality of the management. Such companies still trade at a significant discount to their inherent value and will likely always will. This is for a simple reason that those managements are either not honest or just financially illiterate. They will keep doing one stupid thing after another.
I must keep repeating a mantra to myself: invest only with good people.
One person I have known for a long time and respect a lot is Dr Quinton Hennigh. He is the CEO of Novo Resources. Dr Hennigh is not only a superb geologist, he is also one of those geologists who understand economics and finance.
I went on a site visit with Novo in the Pilbara district of Western Australia. With $10 million in cash, it is one of the better financed companies. Newmont own 28% of the company; and for a reason...
The project has free-milling rock at surface or very close to it. I learned some panning while there. Dr Hennigh believes that the structure of the deposit is similar to that of Witwatersrand basin in South Africa. Based on my back-of-the-envelope calculations, there is already a small deposit that can be put into production in a short timeframe, for a minimal cost of a gravity circuit, perhaps only about $15 million. This gives a lot of downside support in owning Novo. But the reason Newmont has given Novo so much money is to look for a major deposit, which is what they are looking for now, while moving what they already know towards the PEA stage.
I like the possibility of a good downside support with a possibility of a major upside in owning Novo. They are currently drilling and also hope to start working on a PEA very soon.
Just be careful if you decide to buy Novo: It is an illiquid stock. The market is very temperamental anyway. So, if I do buy Novo, I would give a stink order. But for now, Novo is one of my most favorite gold stocks.
I met Bob Moriarty during my trip with Novo. He is a special person and is worth knowing. Linked is where he writes, and this link will tell you in 30 seconds why he is special and worth knowing—the pilot is Mr Moriarty.
Finally, I will be speaking at the next Mines and Money 2014 show in London (UK) and Passport to Freedom 2015 conference to be held in Cancun (Mexico). I will indeed be complaining about the junior mining sector in several other conferences.
Jayant Bhandari www.jayantbhandari.com
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Latest Musings—28th November 2014 |
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