Wednesday, 22 March 2023 — Melbourne

By James Cooper Editor, The Daily Reckoning Australia

[6 min read]

Dear Reader,

‘2022 was a euphoric journey of battery metals price discovery and hundreds of ASX explorers, mostly lithium, went along for the ride’, writes Stockhead.

‘So far, 2023 has been a more grounded experience.

‘Lithium is coming off those outrageous highs with hard rock spodumene prices hardest hit, down +16% year-to-date.

‘Benchmark Mineral Intelligence’s graphite and cobalt indexes are down 5.7% and ~21%, respectively, over the same period.

‘The outlook remains overwhelmingly positive. But as the hype balloon deflates, those stocks riding sentiment alone, which is most of them, tend to tumble back into mediocrity.’

It’s a weird dynamic in play at the moment.

The wider markets continue to grapple with a potential banking crisis…

And yet…at the same time…battery makers and car manufacturers continue to grapple with a looming shortage in critical metals.

In my opinion, a massive supply crunch in copper, nickel, lithium, and a bunch of other rare earths is now unavoidable.

Spending in mining exploration is going up as a result.

However, many mining stocks have been hit hard by the wider uncertainty.

The selling in February and the first weeks of March extended across juniors and majors.

You can either take this as a sign to steer clear of miners for the rest of the year…

…or…you can see it as a giant opportunity…

Especially at the smaller end of the scale…

Since I started with Fat Tail Investment Research last year, I’ve tended to avoid recommending what I call ‘Phase One’ miners.

The ultra-exploration stocks that can and HAVE turned into 10–50-baggers…

…but much more often, lose most of the money you put into them.

As resources legend Rick Rule puts it:

‘Your winners must be big enough that they amortise your losers.

‘Over 40 years that has worked out unbelievably well for me, but I have had 12-month periods where I have enjoyed no success whatsoever.

‘The truth is, if you have a 20-bagger that amortises a hell of a lot of sin elsewhere in your portfolio.’

Punting on Phase One miners is a super-tricky game to play.

Especially if you don’t know geology.

For every Phase Oner that ‘graduates’ up the development scale…bringing its early stock investors along for the ride…

…there are 50-or-so prospectors that never get that dream strike…and go nowhere from IPO day until eventual delisting. 

‘It’s the good, the bad and the ugly’, says Rule about Phase One investing. ‘Concentrating on the good, ignoring the bad, and avoiding the ugly like the plague.’

Now…

Conventional wisdom is that you get as far away as you can from risk plays like these when times are uncertain.

But that didn’t happen in 2022.

Even as inflation, interest rate hikes, and the war in Ukraine spooked the markets, we saw some pretty spectacular Phase One re-ratings over the last 12 months.

However, we’ve seen many of those stocks dragged right back down to Earth recently.  

Are there further falls to come? Maybe. We’ll have to see what goes down in the non-mining world over the next few weeks.

Fundamentally, though, the longer-term, sector-wide picture remains the same. Drilling projects are powering ahead. Exploration investment is going up. Mergers and acquisitions are happening all the time.

Sometimes you have to separate the business of mining from the stock
prices of miners.

And let me tell you…

There’s nothing like being in a Phase One
stock BEFORE it gets its maiden strike…

You can see it double in a trading session. I’ve seen it happen. And then keep going up from there.

If that strike never comes, though…

Well, that’s the downside of playing this field.

You might find yourself holding doomed shares…where you only get a fraction of your initial investment back. 

This happens more often than not with most Phase One miners.

Losses are an excepted part of the game.

But if you’ve picked the right one…at the right time…before a dream drill hit opens up a world of further exploration…

I believe there are very few greater gains to be had from the stock market.

And right now…the money that FUELS these companies is flowing again…

The quest for copper, lithium, rare earths, and other battery metals saw Australian explorers pour billions into the ground in 2022.

In British Columbia, exploration spending just hit a 10-year high.

Even the capitalists and entrepreneurs of Silicon Valley see which way the wind is blowing.

With their own high-tech patch in a lull…they’re now diverting a wave of fresh investment to the tune of $15 billion towards Phase One miners:

‘If we take 30 companies where we can put US$30 million in each early, we’re winners if two or three of those turn into billion dollar returns for us.’

…said David Danielson of Breakthrough Energy Ventures on 15 March 2023. Echoing what Rick Rule said earlier about speculating in this space.

I believe we’re entering a fertile time for this kind of mining. Very similar to the set-up in 2003/04.

For this reason, I’m starting a new project that focuses solely on Phase One explorers.

Stay tuned for more information coming soon…

Regards,

James Cooper,
Editor, The Daily Reckoning Australia

PS: Tomorrow morning at 10:30am sharp, Money Morning Analyst Kiryll Prakapenka is hosting another livestream discussion with Greg Canavan and Ryan Dinse, covering what comes next after Credit Suisse was bailed out by UBS, and whether we should expect a Fed Pivot. Click on this link to add a calendar reminder so you don’t miss it.

By Bill Bonner Editor, The Daily Reckoning Australia

Dear Reader,

What a week! Another exciting mix of the absurd, the ominous, and the sublimely ridiculous.

The most important thing that happened was that the Fed revealed more of its ‘stealth pivot’. It came out with a program to bail out the big depositors of failing banks. Already, the FDIC insures the deposits of small account holders (less than US$250,000). Now the new alphabet group — BFTB, or something like that — is going to look after large account holders. In other words, the whole banking system is being nationalised.

Well, not exactly. The losses are being nationalised. The profits will remain with the bankers.

What’s behind it? We recall our old friend Richard Russell:  

‘The feds can control the banks to a large extent. They can control the bond market, to some extent. They can control the stock market, also to some extent. They can cause booms and trigger busts. But they can’t do those things and also control the value of the currency. The dollar is the pressure value. It suddenly pops open when the system needs a reset.’

The gates of Hell

Ultimately, when you spend more than you can afford, something’s gotta give. Either you go broke or, if you’re a sovereign country with debts denominated in your own currency, you ‘print’ more money to pay the bills. It’s either deflation (when prices fall) or inflation (when the dollar falls). Either you protect the currency (and the people who depend on it) and let the chips fall where they may or you print and spend…and let the dollar go to Hell.

Last week, we saw the gates of Hell open a little wider.  

Big depositors, faced with big losses, turned to the big Fed for relief.  

The Fed could have said: ‘you called the tune; you dance to it’.

Or it could have used a less-festive metaphor: ‘you made your bed; you sleep in it’.

The real world is full of simple truths like that — a penny saved is a penny earned! — observations…recommendations…illuminations that help us avoid mistakes.  

But the feds live in a fake world…a planet of wishful thinking and self-serving illusions. For more than 12 years, they encouraged people not to save, but to spend.

The fix is in

Naturally, some of them go broke. But rather than acknowledge their mistake, they said, ‘OK…we’ll get a new band…and change the bed. You’ve got too much debt. We’ll give you more of it…so we can keep the scam going’.

That is how the Fed has handled every crisis since 1987. It backed the markets with more and more credit…leading to more and more debt…to the point where the debts cannot be serviced at normal interest rates.

But now, for the first time in 40 years, the Fed’s not merely adding debt, goosing up the economy and making the rich richer, it’s fighting inflation.  

Yes, the wheel has turned. Jerome Powell is no Paul Volcker. 2023 is not 1979. And the Fed will not follow through on its inflation fight. It’s gone too far down the road to perdition. It can’t turn back. So, when the going gets rough, then it will take a dive.

But the fix has been in for a long time.     

First, the federal government is not even pretending to protect the dollar. It’s spending money willy-nilly on every cockamamie scheme that comes its way. The deficit this year is anticipated to be US$1.7 trillion — that’s more than the entire federal budget in 2002. And the interest on the debt is already reaching almost US$800 billion. Soon will hit US$1 trillion.

All of this spending, far in excess of receipts, is inflationary.  

Under pressure

And the Fed, too, is already well advanced with its ‘stealth pivot’. A month ago, it quietly changed the way it handles its QE bond portfolio. Instead of letting the bonds run off — as had been the program (to reduce the money supply) — the Fed began quietly rolling them over…effectively increasing the supply of debt in the Fed’s balance sheet.

Dan reported last week:

‘This has been burning up the Twitter wires all night. Quantitative Tightening reduced the Fed’s balance sheet by $625 billion when it started on April 13th of last year. Since March 1st, it’s up $299 billion. So 47% of QT was wiped out when the first hint of crisis came.’

And even now, a year after the campaign of rate hikes began, the Fed’s key rate is still well below the level of consumer price increases. The two-year ‘stacked’ CPI is around 7%. The Fed Funds rate is below 5%. You can do the maths. Speculators and borrowers still earn a net 2%.  

That is why the debt level is still going up. Household, government, corporate — all major categories of debt are increasing…adding to the pressure in the system.

Most likely, the Fed will publicly announce another rate increase this week…and continue with its inflation agenda, without mentioning it.

Regards,

Bill Bonner,
For The Daily Reckoning Australia