Values and Price Action Dislocated in these Markets: Todoruk
Steve Todoruk oversaw mining operations as a field geologist before joining Sprott Global Resource Investments Ltd. in 2003. He laid out one of the most important lessons he has learned about investing in natural resources.
“In mining exploration, it can take one week to drill one hole; a junior needs to drill approximately 150-200 holes to establish an ore body. This means you could be in a discovery stock for three or four years,” Todoruk begins. “A ‘normal’ market would typically rework the valuation of the deposit continuously. The company’s share price would more or less continue to rise as long as the deposit kept getting bigger.” Investors would see their position increase gradually.
”But we haven’t been in a normal market environment for over three years,” Todoruk laments. “The market capitalizations of these companies are no longer correlated to the estimated deposit values.”
“Big mining companies still need to replenish their reserves, and are still going to be acquiring junior explorers that have found those elusive high quality deposits,” he said.
Case in Point
“I recommended Hathor Exploration, a uranium exploration company in Saskatchewan, Canada, in February 2008 at under $1.00.”
Todoruk and his clients would follow the company’s drilling program for the next several years with the hope that the deposit would become large enough to be acquired by a major mining company, resulting in the hoped-for investment success. The road was not a smooth one.
The stock performed well for the first six months after February 2008 and exceeded $4 per share as the company increased the deposit size. “Then the wheels got wobbly. The financial crisis in late 2008 struck, and Hathor fell with the rest of the market, giving up almost all of the previous six months’ gains.” Clients were shocked and anxious. He counseled to hold on, or even buy more, at the reduced prices. The company still had enough money to keep drilling, and drill results at the site had not gotten any less attractive, he said.
Within a few months, the worst of the market crash was over but the market remained turbulent. “The stock bounced around the $2.00 level for the next year and a half or so and finally returned above $3.50 in late 2010.” Meanwhile, the deposit was nearing 50,000,000 pounds of uranium – a milestone for when a uranium deposit is considered truly world-class, by Todoruk’s estimate.
In March 2011, a tsunami and earthquake shut down the Fukushima nuclear power plant in Japan. Anti-nuclear policies and selling of Japanese reserves in response clobbered uranium prices. Hathor was down below $2.00 and Todoruk’s clients were not pleased. “Why aren’t we selling this pig Hathor?” he quotes one as saying.
Still the fundamentals of the company’s assets had not changed, he says.
Within several months, Hathor made the breakthrough announcement that the deposit contained at least 57 million pounds of high grade uranium. Investors finally received their reward when Rio Tinto acquired the company for $4.70 per share in December 2011.
“As long as the story is intact,” says Todoruk, “investors need to be patient. There are several recent discoveries that I am convinced will be very good mines in the future, but you’d never guess it by looking at the share prices today.”
“Today’s share price is not ultimately the share price that you should care about – it’s the price you get paid at the end of the day when you sell it.”
Past performance does not guarantee returns, however. Success stories remain the exception in this high-risk market. Speculators in natural resources must meet the financial profile before investing in junior exploration companies, and be willing to accept high risk, including the risk of losing the entire amount of any specific investment.
Steve joined Sprott Global Resource Investments Ltd. in 2003 as a Senior Investment Executive. To contact Steve, e-mail him at firstname.lastname@example.org or call him at 1.800.477.7853.
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