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Carl.

"Mining The Textbook Correction"

By: Tony Locantro

As a writer I tend to set aside Saturday nights for either updating reports or providing new material for the WWW. What has prompted me to break with tradition and conjure an article mid-week, as been my appreciation of the “correction” that is currently taking place in the mining sector.

As a younger surfer I would often venture to the beach knowing full well I would not dare paddle out into one of those rare storm swells that would batter Sydney beaches in submission. I was in “awe” of the ferocious nature of such an event and captivated by the courage shown by a handful to brave the elements.

What I have witnessed in the mining sector in particular as been so “calculated” and neat, and the type of activity that would have the mainstream authors and pencil and ruler brigade in fits of appreciation for their students and followers. It has been a correction that has had no regard for fundamentals rather an exercise in carrying out regulation “stop losses”. Unfortunately for those that will ultimately set the rolling 12-mth lows before the recovery takes hold, their training is so robotic and regimented and “averaging down” is scorned upon as an action likely to exacerbate failure.

My 2yr old daughter has recently taken up the hobby of “head slamming” my 10mth old son into the floorboards whenever he ventures towards “her” toys which basically accounts for 100% of our household goods and anything that lies within the picket fence. At first I would cringe at such an event, as Joshua would create a vicious thud that started the thought process on creating protective clothing for babies against their most feared predator “the older sibling”. As they became more frequent I noticed Joshua was starting to place his arm out in front and was becoming more adapt at breaking his fall. Two nights ago after struggling to his feet he looked at Maddison and smiled before breaking into a low-pitched chuckle.

As a speculator, investor and advisor with a reasonable client base I know exactly how Joshua has felt in the past, and can empathise with his attitude at present. The learning process has intensified to the point where he is no longer threatened and now is obviously deriving considerable humour from his sister’s cruelty. Some of the selling in a number of companies I support has reminded me of those old movies where the ladies dive into the pool in perfect formation then break into a heavily choreographed routine.

In my situation the majority of my time is spent accumulating assets I regard as trading “well” below fair value, and during the year the window of opportunity to sell rarely stays open long enough to make sure no one trips as they make a hasty exit. If it was a popularity contest I would be lucky to make it through the first cut, however during the wealth building process the moments of “exhilaration” can be few and far between.

The newsletter community and investment writers have suffered at the hands of their own success (myself included). Instead of recruiting masses of longer-term savvy investors we have allowed the fast buck artists a free ride and until they have all bailed out this correction will run its own merry course. New investors these days are immersed in the slick advertising of systems promoting significant short-term returns and work on the principle that if your right 51% of the time you are going to end up in front. They do not give a rats proverbial about hammering a company you floated or selling it down up to ten price steps to finish off an order. I cannot wait until the market sentiment returns to “NEUTRAL” and re-ratings are applied to companies that deserve them. The best course of action in the current environment is to take a mental note of who is coming out with news that is progressively improving and provides insights into what resources are likely to be developed. Do not let a penguin, space cadet or chartist convince you otherwise.

What I see now in the mining market is one of those rare opportunities where some fantastic war stories will be created. I am now able to buy my favourite stocks with world-class resources in the ground that are now trading up to one-sixth of the project’s NPV. Forecast earnings in some cases are now in excess of ten times the market capitalisation over the life of the project, and from these bases the odds are dramatically shortening in terms of “bagging the elephant”. From 90c or $1.00 the dream of capturing a “ten-bagger” seems distant and far-fetched however what these 30-40% corrections across the board have done is bring the dream within the realms of reality. Frustrated first home buyers are likely to be the next ones granted such an opportunity, however once sentiment heads towards rock bottom the recovery tends to return to historical averages.

I liken this situation to being transported back in time to 1999 where upon being greeted by the hostess in first class you are issued with a show bag containing maps of beachfront suburbs and vouchers redeemable for property worth $1m. The in flight entertainment systems should be turned up sufficiently to block out any noise from other passenger as more than likely the majority would and still have NFI.

As many are now resigned to analysing the West Coast Eagles chances of toppling St Kilda this weekend instead of discussing the next leg-up in the resource sector I am swimming in company announcements and quarterly reports and developing my own strategy of “Mining this textbook correction”