Blood in The Streets

So here we are…

Blood is running in the streets and no asset class is spared. Investors are panicking and selling anything and everything, regardless of valuations…

“I must get out now at any cost!” seems to be the modus operandi.

Some junior mining stocks that have seen no detrimental change in terms of company specific fundamentals are down 20%-50% in just about a weeks time…

Almost everyone thinks and hopes they are a contrarian investor but few actually are. It’s easy to believe so when you are comfortable and have a good overall felling, but when the selling starts, majority of people will be negatively affected. Fear and doubt starts creeping in and what would be “slam dunk” prices only a week ago suddenly looks expensive since everything is “going to go to zero, right?”. If someone had asked me if how many shares I would have wanted to buy of Irving Resources at $1.80, a little over a week since Newmont Goldcorp bought more shares at $3.76, I would have said “an endless amount”. I am pretty sure 99% of Irving investors would be ecstatic if they were able to undercut Newmont and the current market by almost 50%. Yet, when these prices materialize meanwhile nothing has changed for the company itself, few actually have the courage to pull the trigger. Otherwise we would never have seen the stock go this low.

Don’t get me wrong, the Corona virus can probably cause a lot of mayhem and there are bubbles everywhere. BUT, that is the necessary environment for fire sale prices. Never have there been extreme bargains without extremely negative emotions prevailing in the market place. You don’t get one without the other. You won’t get a 50% discount without a corresponding sense of “the world is ending”. The same dynamic was seen in Lion One Metals and a bunch of other juniors stocks.

Will the world end? No.

What happens if Corona is contained within a few months?

What happens if CBs go all in on different money printing schemes?

… Anything bad that happens at this point in time draws us closer to the final revaluation of gold.

When stocks starts to price in the end of the world, one should keep in mind that so far it has yet to come and no government or central bank will go quietly into the night either. When more and more of the possible negative scenarios starts to get priced in it also means that the amount of “risks” to the upside increases as well. I’m not saying junior mining stocks have bottomed but what I am saying is that the risk/reward is getting really good in some names. Honestly, I think some have 100%-300% of upside just to reach fair value from here and the question is what would have to happen to see another 50% loss from here (given the fact that the world will not end this time around either)?

If we are indeed headed towards a depression then gold and gold mining stocks would probably be some of the best performers (although there might be some more short term pain at first). For example many people probably know the story of Homestake Mining and how it became a multi bagger throughout the great depression.

The overall stock market might have started this correction from an overvalued level but miners actually started it from an undervalued level. Thus, I wouldn’t touch most common stocks even after a 13% correction or whatever. BUT, when mining stocks who started out undervalued are down 30%-50% then it ought to mean that what was a bargain has become an extreme bargain.

With that said, there are no guarantees when a bottom is in or when the stocks will revalue but I consider these current paper losses to be TIME related and not PERMANENT.

… At any given time it doesn’t feel that there is any difference…

If you are down 30% you are down 30%, but if you are down 30% due to a negative change in company fundamentals then that is infinitely worse than being down 30% due to extremely negative sentiment. A company who lost 30% of it’s intrinsic value and revalued accordingly has no real reason to provide you with future gains but a company where nothing has changed and just got 30% cheaper will revalue at some point in the future. Thus, the former cost is time and opportunity cost while the latter involves permanent costs and opportunity costs.

What am I doing?

During broad sell offs I always tend to concentrate my portfolio because quality gets cut down along with lesser quality. When my core position made up of what I perceive as quality names are somewhat fairly valued then I tend to sprinkle in some cheap but low conviction plays where I see say a 50% upside in the short term but with a cloudier long term picture. When both types of stocks go down simultaneously, then I think that the buying opportunity in the higher quality names is higher than in the lower conviction and quality plays. Thus, I often end up re-shuffling my portfolio even though every type of stock might be down the same amount. A 30% bargain on high quality is better in my eyes than a 30% bargain on a lower quality stuck. With every passing day of broad selling, my portfolio will get concentrated more and more into fewer and fewer companies. Yes, that means I have caught a lot of falling knives lately!

Lion One and Irving Resources are good examples because these are two companies that I consider to be tier 1 among junior exploration companies and they are both very well cashed up. Thus, negative short term sentiment and a lower share price does not affect the long term value proposition as much due to the fact that there is no pressing need to raise money at the prevailing very low price environment. In other words they have the tools to wait out the storm and hopefully won’t need to dilute at fire sale prices. In contrast, a lesser quality junior which is also very cheap but low on funds might have to stop work completely or might need to raise additional funds at very low levels, thus exponentially increasing dilution.

All said in this article does not strictly relate to Lion One and Irving Resources but those are the two best examples I can think of since both have substantially gone down in price while the respective company fundamentals have never looked better. These and others would need to go up more than 60% just to get back to the levels they were trading at less than two weeks ago… And all this while nothing has changed in terms of company fundamentals.

Lastly: Never risk money you can’t afford to lose. The miners can still go down a lot more before the sling shot move higher!

(Note: This is not a buy or sell recommendation. This is not investment advice and I am not a geologist. This article is highly speculative, forward looking and I can’t guarantee accuracy. Always do your own due diligence. I own a lot of shares of Lion One Metals and Irving Resources which I have bought in the open market and am thus biased.  Lion One Metals is a passive banner sponsor on my site. )

Best regards,

The Hedgeless Horseman

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