Despite the significant increases in base metals (copper, zinc, lead and tin) the juniors involved in these commodities have failed to capture the imagination of speculators in stark contrast to the mini-bubble in the nickel sector. Whilst the nickel price was showing it's most vertical increase on the charts the associated stocks were still undergoing sizeable corrections from their impressive highs (200%+ increase across the board). One may assume that many were indeed trapped by the sharp correction in some nickel stocks as the commodity and share prices diverged and the speculative blow off on this occasion failed to materialise.
In terms of bubbles the junior energy sector is undergoing a stealth bull market as the share prices of many juniors with very unattractive capital structures continue to defy gravity. Whilst the oil price has been at its cruising altitude for sometime the bulk of the upside has only eventuated since late 2003. Many would have been distracted by the steep rise in the oil price from the $11 days not having a material impact on the sector in general. In comparison to nickel there has been limited press coverage of the moves occurring in the energy stocks, however I have noted considerable overseas interest in our juniors based on the ability to purchase companies with producing assets for under 1c per share.
The other bubble is clearly "Reality Television" that is threatening its own version of the Tulip virus madness (flame designs that led to a frenzy in Holland). Once the general public have been fully milked, the marketers come rushing in with spin-offs (creating their own derivatives), and all of a sudden we have programs that acknowledge the fact the bulk of the population are unlikely to ever embark on a career as a supermodel. One aspect which I find humorous is that the sting out of these US programs is removed with the slotting of Entertainment Tonight at 5.00pm which tends to tell us who gets the girl/guy in upcoming yet to been seen programs in Australia. I have put forward my own suggestions for "The Great Gold Hunt" where four attractive couples are escorted into the outback and team up with a celebrity chef and rock kicker to find the next "Lassiters Reef". The fact our State Government has only just pledged major assistance to the creation of the next "Major Mining Boom in WA" suggests that the bull market is still essentially in nappies. I find it staggering that many simply cannot accept the fact that base metals are only returning to their long-term average trading ranges, and that has soon as anything that rises that is not associated with real estate or a garden makeover it is dismissed. Already there is mounting evidence that the Sydney housing market is in serious trouble, whilst Brisbane has taken over as the fastest growing city in terms of median housing prices. In terms of suburbs we are now witnessing average prices in some remote areas moving in excess of 100% simply because a few mates discussed it round a Barbie and a $12,000 house must be a bargain. As with reality television the mature stages are where we again are presented with the harsh reality that "Human Stupidity is infinite".
Another bubble that has been inflating for sometime has involved taking major brand food products and creating as many derivatives/alternatives of it as humanly possible. At this rate we may have an aisle in Woolies labeled "Tim Tams and Coke only". The comment in relation to the Tia Maria Tim Tams was pure gold, "You would have to eat your body weight in Tim Tams every hour to go over the legal limit".
Some readers may be starting to ask the question, "What the hell has all this got to do with the Australian speculative market?" It all boils down to what could be construed as a bubble, what is a classic example of human stupidity, and indeed how many have become filthy rich taking advantage of our character traits.
I can still find numerous base and precious metals stocks with considerable resources (some now moving into pre-feasibility and bankable studies) with market capitalisations barely above shell/cash and liquid security valuations. One copper stock in particular has just announced a major increase in resources and an accelerated push towards production yet is trading 2c below the prices it reached when anyone talking about exploring for and/or producing copper publicly would be a candidate for a loony bin.
Those that spend most of their lives on Internet stock forums scaring the pants off new investors when anything goes up should audition for Australian Idol 2 to 10 in a clown suit. Here we are faced with what could well turn into one of the great economic shifts in our lifetime, yet the vast majority (statistics suggest 97%) will end up financially worse off for being nothing more than a sheep being led to the slaughter. The creators of Big Brother, World Idol, and The Bachelor/Bachelorette have more than likely made an absolute poultice by being leaders, yet the reasons not to own precious/base metals stocks tend to gain greater publicity than the potential for some exponential financial gains. Sure we all have our own agendas in life and finance, however I have never really kicked any major goals by following anyone else. One of the first questions clients ask me when I am buying a stock is, "Why are you the only one buying it?" When it comes time to write that wonderful pink slip I get, "Why would I want to sell it when everyone wants in?" To put it bluntly markets will never become sophisticated, we will be continually fleeced as investors and consumers regardless of the hard hitting reports on current affairs programs, and as with any boom the majority will charge in at the top and blow themselves out of the water financially.
During the Nasdaq inspired boom that transformed our junior mining sector into a maze of fibre optic cables, we had lengthy periods to adjust to the ridiculous market capitalisations some of these companies were fetching. In plain English there was ample time to get out, however when certain levels are reached a correction seems impossible and if you sell out after a twenty-bagger you may miss out on an additional 30% upside.
Whilst perusing today's mining pages in "The West" I noted that our junior resource sector has undergone somewhat of a re-rating, however I see no adverts for computer systems that predict where the next major gold discovery will occur. Bubble, what friggin bubble?
PENGUIN COLONIES…The quick and the dead
As witnessed in the childcare and retractable syringe mini bubbles the penguins would wait for positive news then upon others joining them would regurgitate stock like it was that packet of Tim Tams that never ran out. Some stocks would easily turn their issued capital over within days, and now all of a sudden they are hitting the junior gold sector with gusto. Haoma Mining (HAO) last week released a set of drill results I thought looked pretty good, and would probably add several cents to the share price (closed at 15c the previous day). Sure the stock traded within a tight range initially (18.5c-20c) then proceeded to run furiously to 40c with the penguins squeezing every one-price step move (on this occasion half a cent) out of it possible. As far as the traders were concerned it was the only game on in town and volume was sucked into it like one of those industrial strength vacuum cleaners with the ability to lift not one but two bowling balls.
The sheer strength of HAO's intra-day rise in my opinion indicates the following,
One of the key ingredients required for any market cycle to be labeled a "boom" is the ability to accumulate hefty short-term losses whilst chasing the fast buck. To an extent these have been available, however the Australian market has failed to embrace the sheer exhilaration more accustomed to the Canadian juniors.
IN SEARCH OF ASSET VALUE
During a lull in trading activity I printed off my client holdings and went through them with calculator in hand. I found it very interesting that approximately 40% of our funds are in an emerging zinc-lead producer (27%), with 14% directed towards a QLD based emerging copper producer (with gold credits). This may be a result of the easy money already been won in the major gold's, and a lack of viable opportunities in the Australian silver sector which I intend to address in my next article.
I am continuing to recommend situations where the value of in-ground resources is clearly not reflected in market capitalisations. It is far too early in the cycle to ditch the full-scale fundamental research in favour of backing jockeys that have a stable of horses to choose from. Whilst a number of companies are starting to become stretched in terms of valuation (through simply money flow), the discrepancies that now exist in the Australian mining sector are simply too good to ignore.
I have zero interest in charts and formulas, I simply look to buy undervalued situations and wait for the sentiment to change. Amazingly we are now faced with positive sentiment in some sectors yet the market has clearly failed to pick up on a handful of stocks. This aspect makes a bargain an absolute steal and this was no more evident during early 2000, when any stock sub 1c was targeted along with those that still had their structures intact.
THE NEXT BOOM
Apart from the obvious (Insolvency Management) I am now targeting "Rare Earths" as the next big thing to take the ball up from gold/silver and base metals. I believe demand will stem from the growth in hybrid vehicles, alternatives sought for traditional commodities and metals (where possible), along with a focus on the environment. (Sounds like I should be wearing a koala suit and holding a white bucket). We have not had a decent diamond boom in Australia since 1993-1994, and this sector cannot be discarded either based on some positive signs emerging in terms of fundamentals. I have decided not to go massively long into comics, old records, and some sectors of memorabilia. I gave myself a swift uppercut for not buying every case of Duff beer available in some bottle shops prior to it being removed from sale. (Maybe it was just too obvious). If any batsman looks like getting anywhere near Don Bradman in terms of stature and batting average I would be prepared to accumulate gently but with Sachin hot and cold I cannot see this in the medium-term. If anything the greatest cryptic tip (with the benefit of hindsight) of the decade thus far has been Nickelback's "Silver Side Up" CD. Maybe it was Chad who has been lightening into the nickel price strength?
I see Barbie and Ken have broken up after 43 years and she now has an Australian toy boy (Blaine) after her affections. Maybe when the next survey is dropped on the front step they can leave a "DIY divorce kit" and a CD where you can create your own perfect partner online. The associated press mumbo jumbo associated with this tragic event certainly re-iterates some of my points made earlier in the essay. We are all pawns in one big publicity machine, and I must confess when shopping yesterday I actually purchased a brand of washing powder because it came out trumps in a TV survey. Being a practicing contrarian I still have my moments of weakness.
" Hey Blaine put another shrimp on the Barbie"
Disclaimer
I have direct/indirect holdings in the stocks listed/mentioned above. Clients have considerable holdings in each of the stocks and may change these holdings without notice. The information on each stock has been derived from ASX reports, company discussions and a site visit to Long Victor in 2002 (Independence Gold). Each of the stocks listed is to be considered as speculative, and may not be appropriate for individual investors. No buy recommendations have been provided on the listed stocks, and the opinions on each are those of the author only. It should also be noted that some of the stocks may have very low levels of liquidity and may result in significant percentage rises and falls. Please conduct further research and consult your financial advisor before making an investment/trading decision.
About the Author
Tony Locantro is a Perth based Senior Private Client Advisor specialising in the junior resource market. He is the author of "The Green Room, A Guide To Speculating On The Australian Stock Market" (available on request) and presents on resource stock investment. He has been a contributor to a number of precious metals and market related forums.
16 February 2004
If you would like further information or are interested in becoming a client I can be contacted at locantro@iinet.net.au