In some cases, yes, in many cases, no. This article will touch on nationalization, but in the context of a bigger evaluation of risk in the portfolio. Nationalization is just one of MANY risks.
On one of my articles posted, a reader made mention I didn’t go into all of the risks with the miners. I do, but it’s spread out probably over 10 articles. In short, Doug Casey called it a “crummy business”. For my non-miner investment buddies, they can’t understand an income statement where there’s no income. For those of you curious, the numbers are something like one out of every 3,000 projects becomes a mine. You are looking at 10-15 years of finding a spot, drilling, testing, doing paperwork, getting permits, financial projections, and raising tons of cash through share dilution. Why would someone invest? Because if you get the right projects, you might get a 100-bagger. Or, at least semi-early you are still looking at a 10-20x.
So you can see the upside to the crummy business, but one downside is that before you make tons of loot, the country seizes the mine? I’ll get to that in a bit.
With my mining portfolio, I have risk. Everyone does. Let’s discuss the major risks I look at with MY portfolio, overall.
- Mix of miners.
- Due diligence
Mix of miners – With the mix of miners, I have them in many different stages. I’m looking at my overall investment portfolio risk – FIRST and foremost. I’m not just chasing a miner on good drill results. I needed to construct TYPES of miners FIRST to understand my overall RISK I am comfortable with in MY portfolio.
So I have a basket of mostly senior and junior producers mixed with near term producers and explorers. If I had just all producers, I have reduced risk, but I also have reduced upside. If I had a massive bucket of explorers, I’d have potential massive upside, but also massive downside. Some of these are long term holds, some may be more swing trades. Some I may sell a portion into the rise, some I may cut if they are dogs. Some are short term options, some are long term options. At one point in January, I was up 3x year over year when silver hit $30. The next day, OUCH. I think even the pros have had a tough time the last 8 months with consolidations. No one is perfect. Your portfolio will not be perfect. You will make mistakes.
When I worked at the Vanguard Group of Mutual Funds, they were big on communicating risk to their investors. If you are 25, you are hearing about YOLO plays. At 45 and married with two kids, YOLO is the furthest thing from my mind, but I still want SOME action on explosive plays. Younger investors could have higher risk items. The older you get, the less risk you have in your portfolios. Why? If you are 26 and get wiped out, you have 40 more years to rebuild your portfolio. If you are 65 and get wiped out, you are in trouble. But me, at 45, my risk tolerance may be higher than someone else at 45 who may have millions in a 401k, where I do not. He may be much less risk to preserve, I may be higher risk to catch up. The moral here is YOU NEED TO FIND YOUR RISK TOLERANCE FIRST. Then, I picked miners AFTER I determined a ROUGH allocation to different types of miners.
So the idea here is perhaps the younger generation might find a large percentage of their portfolio could have the most exciting explorers and chase after Abras and Vizslas of the world, the elder generation may be wanting to look at safe and well known producers that pay dividends with Newmonts of the world.
Here is my approximate mix, as I’m 45 years old….changes a little weekly. If I was 25, I’d probably have a LOT more explorers. If I was 65, I’d probably be 90% producers. Below, the “physical metals” is what I consider PSLV. Most would advise owning physical BEFORE you ever look at miners.
So I reduce my risks in my mining portfolio FIRST by having them at different stages.
The risks of the stages I have are below – highest risk at top, lowest risk at bottom. Forgive the color differences here from the pie chart, these were separate files on my computer.
Who are the best producers? The best explorers? Etc. Furthermore – who are the best explorers, AT THIS TIME? Maybe you have a hot company that just had great drill results. But….maybe we are looking at a 3 year period of share dilution ahead? Are you going to be that guy who gets in at the peak of exploration mania and then hold the bag on the way down?
Point is, I FIRST diversify by type.
Due diligence – Almost all of my portfolio was put together by subscriptions to 4 pay services. Each has different strengths and limitations. I found that most of the pay services don’t discuss the major producers much. These aren’t exciting, really, and the truth is, whether you pick a Barrick or Newmont, you’re going to have slight variances in your returns, but not much.
This area here is where I try and reduce risk by outsourcing information. If I have a miner that all 4 of my pay services have, this de-risks this miner for me, a lot. They may be an explorer now with only a 3x upside, but this is different than only being picked by one pay service that may have a 10x upside with a 50% downside risk.
What do these pay services look at?
- Interviews with companies – check in with CEOs directly, where I can’t
- Understanding geological analysis – while I now understand grades that are good, this is a whole rabbit hole that goes down types of geology, districts, historical mining.
- Management teams – they know who the good jockeys are and who the wash outs are
- jurisdiction – one could make an argument that California is a far worse jurisdiction than most places in Mexico. Nevada is one of the top in the world. These guys research a lot of the risks of jurisdictions and political issues in these countries
- Upside/downside – while I may see an exciting drill result, one of the pay services may warn that this is a continuation of a known vein and not a new discovery. They might project “upside of 10x, but downside is 50%”.
- Financial stability – these guys can tell you if a company is cashed up, if they screwed up on financing, what their burn rates are, and what their cash flows might look like. You might see a higher grade, but they may also know that the infrastructure is not there and project IRR might be 15%.
- M&A – you and I may have no idea if a miner is a possible takeover target, they might. Now if I had 2 near term producers I’m looking at, and one is a near term takeover with maybe a 35% premium, I might opt for the one who is not a near term takeover to perhaps see a 100% move up in a year. Now, if you bought them 5 years ago at pennies, a takeover might be a good way to end a 400% move for you.
So to de-risk, I consult the experts. Yes, they cost money. But it’s the same thing I’d pay a financial advisor for. These guys all have made me 10x their subscription costs. A small percent of my portfolio I have tried it on my own for a few. Nothing crazy. It’s fun to then learn everything you can about them.
This is one of the columns in my spreadsheet. I pay VERY careful attention to this. While I’m not fond of what the Mexican government is going to First Majestic, I finally applaud AG for diversifying outside of Mexico. THIS is why you would diversify. I’m not big on Chile, Peru, or Argentina. Or Ecuador. Or Guatemala. I stay out of Africa. I love Australia, Canada, and am very concerned about my Mexican investments – but if you want silver, you need to be in Mexico.
In fact, I’d have to say 95% of my portfolio is Mexico, Canada, US, and Australia. I have SILJ which then has a massive basket of junior silver miners, so this basket will then contain all of those jurisdictions I don’t like. It’s one reason I’m not a fan of Fortuna. Or PAAS. Or many others.
One of my miners is in Serbia, and I checked with one of my newsletter guys, and he said Serbia is surprisingly a good jurisdiction. I never would have thought that.
What you find is some of these riskier jurisdictions may have a higher discount to NAV on their PEAs and the like.
Recently, we had seen the threat of Papua New Guinea (PNG) threaten to essentially nationalize a mine from Barrick. One of my miners is in the Dominican, right next to a Barrick massive mine. It seems a lot of miners have to operate in the not so great places in the world. It’s part of business for them.
But let’s now really dig in to jurisdictional risks with nationalization.
Let me be clear – this has happened before. It will again.
More recently, I’d like to point you to Venezuela. Over the years, Hugo Chavez’ socialist regime felt that it was a good idea to seize oil companies and resources owned by other countries. I’m sure in his mind it was some sort of Robinhood thing. Demonize rich people and then take from them to give to the people. In the short term, it is beneficial to the people. And those in these systems START to love them for it. Look at all of the resources you now have owned by the state! Problem is, the government is not efficient at doing things. No offense meant to any government person, anywhere – but that’s not their specialty. So what happens is twofold:
- The efficiencies reached by private production are lost. Where a company needed to make a profit to stay in business, government is not running a profit center. Deadlines are missed, productivity is lower, the best and brightest minds go to where the private sector pays more, and ultimately – you have incompetent government bureaucrats running something they have no expertise in and these end up losing lots of money.
- Foreign investment dollars stop, immediately, and foreign dollars invested start fleeing your country. When foreign investment leaves, you may also have a situation where the highest paid and most competent people in your society leave to make that money elsewhere. This creates a “brain drain” on your society.
Time and time again, you see seizures by government, and time and time again, all of these resources get run into the ground and the populations then suffer. In the short term, it’s loss of revenue from these resources – you cannot sell the goods anymore due to production delays, lack of a labor force, market conditions, costs run up. Eventually, you lose all of the jobs associated with that field. The best and brightest have fled your country, and you are left with a hole in the ground, no means of getting the resources out, and no inflow of foreign investment capital. In fact, you have no private investment capital because of fear of seizure.
What starts off a some sort of noble socialist cause always ends in ruin.
So let’s look at why this isn’t likely to happen as much as you might think.
- Foreign investment – If a country nationalizes a resource, they will lose not only foreign investment, but domestic investment as well. Then, it could be decades until any foreign entity wants to re-invest there due to the risks.
- Efficiency – governments aren’t in the business of mining. While a private company might make billions, once you nationalize it, you are pretty certain to run it into the ground over years.
What I feel is FAR more likely in jurisdictions like Canada, Australia, and the US is taxation. It is far easier to tax massive profits than it is to discourage private investment.
What is still up in the air are things like Mexico. I feel it is very likely they just raise taxes if silver hits $100. However, governments like those in Mexico may be leaning heavily socialist at the moment and you just don’t know. However, you have silvercorp with heavy Chinese exposure, and I just stay out of that business completely.
Here would be my least risky jurisdictions of where I might get silver. Note some of these don’t have a ton of silver, but if they DID have silver, it’s where I’d be happiest.
- US (Nevada, Utah, Idaho, Alaska – please tell me other good jurisdictions in the US).
I didn’t list every jurisdiction, just a few. Are there any silver jurisdictions you like I should put in here?
Checking out the statista.com, it has Australia as second largest silver reserves? Can anyone tell me their favorite Australian silver companies? Most of my investments are in Mexico, and I don’t get a warm and fuzzy on them.
But Nate, what about $10,000 gold and $300 silver. Wouldn’t they just take it then? Not really. Again, what governments seem to want to do now is to track everything. They want an understanding of every transaction you do, so they can tax more efficiently. If you offer cash for a TV at your neighbor’s yard sale, the government wants their hands out to wet their beak on this. Most of my kind want extremely limited government and them not in my business.
If you had $10,000 gold and $300 silver, just think of the tax revenues that would skyrocket. For argument’s sake, assume a miner is paying 10% taxes today on their operating profits. I haven’t looked at this lately. No idea. If gold is $1700 today and silver at $25 today, you then perhaps have a 6x in gold and 12x in silver to get to those numbers. However, the cost to produce is not rising nearly as high. What you could have, in times of extremely high metals costs, is similar to the “windfall profit tax” they did (or introduced) to oil companies. If you are making all of this money, perhaps there’s a graduated tax rate up to 30%.
So at $10m profit before, a country would make $1m in taxes from that miner.
At $100m profit now, the country would make $30m in taxes from that miner, and the miner still is making crazy money.
Let me be clear. I’m very much against taxes, in almost all forms. However, what I’m presenting to you is what I would consider to be a far more likely scenario than mine nationalization, in most countries. While a lot of these Canadian companies own these Mexican mines, they get FIAT DOLLARS in profits from these mines, they are not literally taking the silver out of the hands of the Mexican people. The Canadian companies get investment money from all over the world, then spend hundreds of millions developing these mines and hiring millions of locals to work – creating massive jobs. The Canadian companies took the risks, and they are rewarded for taking those risks with profits. The governments, if they feel they are being taken advantage of, may simply ask for an escalating portion of the profits, IF prices rise to extreme levels. With metals, these things are cyclical, so it’s possible prices come tumbling back down 5-10 years from now. When that happens, the tax percentages drop.
One last thing here – is that people may make the argument that silver is a strategic resource and mine nationalization would help them achieve their strategic goals? Well, rather than nationalization, could it be possible that the governments may have a form of “streaming” introduced? Meaning, perhaps they have a 2% royalty in metals? For every 1m ounces of silver produced, that’s 20,000 oz given to the country’s government, on top of taxes (not using the windfall method). Or, perhaps they take the 10% normal taxes, and the other 20% of taxes on the windfall tax can be paid in silver? This then ensures a government stockpile, tax money, but does not have the risk of nationalization?
I think it’s important that investors understand risk appetite prior to looking at any single miner, and understanding the different stages of a mine. With this, it’s important to outsource research to professionals to you get access to the best information out there. Lastly, while mine nationalization isn’t like in most jurisdictions, it cannot be ruled out completely as a risk. To minimize this risk, I personally invest in “less risky” jurisdictions. I believe it is far more likely that the result of higher metals prices is higher taxes, not mine nationalization.
What are your thoughts? What countries do YOU think have the highest risk for nationalization? Have there been instances where nationalization worked out? Why would you think a country might risk investment to nationalize?
April 6, 2021 at 1:58 am
Most silver is produced as a byproduct of other metals mining. I prefer to invest in the large multi-metals miners. They also usually have the depth of experience with teams of geologists, geophysicists, geochemists, and mining/processing engineers. They are definitely a case of “more is more”.