It's time to be bold, says Paul Renken, senior geologist and analyst with London-based VSA Capital. He seeks the “sizzle,” or the narrative, in mining equities because the sizzle moves the story. But Renken remains selective and likes to see a significant discovery or acquisition that provides a clear path to investor returns. In this interview with The Mining Report, he recommends a veritable laundry list of companies in numerous commodities operating around the world.
The Mining Report: You're a survivor. Mining investors want to know what they will need to survive 2015. What's your message?
Paul Renken: Always know how much you can afford to risk in any particular situation, but it's probably the time to be bold simply because the sector has done worse than anyone has expected over the last year or so. That is essentially forcing out the weak players.
TMR: Weak players?
PR: Weak players are those looking for a short-term turn in a particular stock in order to make a short-term gain. There just hasn't been a significant move upward in virtually any of the commodities. In fact, just the opposite has happened. We've had a significant selloff.
TMR: How should investors play this market? Are you seeking specific situations across all commodities?
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PR: We're being quite selective. For instance, the difficulties in the iron ore market are widely known—iron ore just dipped below US$70/ton—but there are some specific circumstances that warrant a closer look, simply because they were hit early and had the opportunity to fall farther than their peers. The firm is not particularly bullish on iron ore going forward but we expect that the price will be somewhat higher next year, so there is going to be a modest recovery.
TMR: Are other commodities showing favorable support levels in this market?
PR: We think that there is going to be continued strength in diamonds and colored stones. That has been a good market this year for equity investors as auction prices have strengthened. The growth market is in Asia for polished stones, both colored and white stones, diamonds and colored gemstones like rubies and sapphires. And that seems to be continuing.
Another commodity that we like here is lithium. The confirmation that Tesla Motors Inc. (TSLA:NASDAQ) will build the “Gigafactory” in Nevada definitely strengthened the outlook for lithium. And other automobile manufacturers are attempting to make electric and hybrid vehicles both popular and commercially profitable, too.
TMR: Gemstones and lithium. Any others?
PR: We also see some good support on a longer-term basis for tungsten, simply because the market hasn't been flooded with too much material, unlike what has happened in iron ore and oil.
TMR: Please outline your investment thesis for junior mining companies in this market.
PR: We want to see sizzle in the story. It could be a deeply discounted cash flow position that the company is either acquiring or that has been inappropriately discounted. Some investors are also looking for a dividend yield that's relatively secure even though the commodity that the company produces has witnessed some weakness. Another angle is a significant discovery or an acquisition that was made via exploration drilling through a deal. These kinds of sizzle will help move these stories because there are too many junior companies where the project is going to stay where it's at without something to sell it. You also have to have confidence that the story will come to fruition rather than just a blind punt on the gambling table.
TMR: What are some telltale signs that something is a legitimate story?
PR: One thing is a clear timeline that is achievable for what the company intends to accomplish. That could be how long it will take to get a permit or how much money it will take to finance a portion of the exploration or development. Those two things let us know that management has a good understanding of the project as it develops. Another one is three-dimensional evidence that there is continuity of high-grade mineralization. An additional good sign is a simple and clear path to how a potential investor would make money because complications essentially make stories much more difficult to believe.
TMR: How many mistakes are you willing to forgive before you sell?
PR: If I were an investor in a project, I would have a clear vision as to how much I was prepared to tolerate. I could probably tolerate only one or two errors. But if I owned shares and it becomes clear that the reason I initially invested is not going to happen right away, I would be prepared to exit a position after the first mistake.
TMR: Are you more willing to discount delays in a market where money is difficult to find?
PR: The short answer is no. The reason is that most investors are not solely invested in natural resources. They have more than enough other opportunities to risk their capital. That's part of the problem with the sector. Equity performance has been so poor across natural resources for so long that the money has exited to less risky places.
