Savannah Resource, It’s the mining cycle stupid!

For full disclosure. I have a stake in Savannah Resources (SAV), Several actually and have been buying more, with the last buy at 5.35p today.

I haven’t written a blog for a very long time, but the blatant lack of understand about SAV’s market mechanics and in particular the latest RNS has inspired me to correct a few misconceptions. Skip to part 2 if you want, the below can be a little insulting to 90% of investors.

*image not mine.

Firstly we need to cover a few basics, the mining cycle for junior miners. This is very well explained elsewhere, if you don’t know about it, then READ UP! It’s essential knowledge for any wanabe AIM mining investor. Simply put, a mine has an SP cycle. The SP responds upwards during exploration when the asset is first “discovered”. Then as we hit the feasibility and licenses stages it declines, before starting to rise again when construction on the mine starts and into production. It’s a touch more complicated than this but….

Secondly my favourite saying never underestimate the stupidity of investors. They are greedy, want a quick return and have been lured into AIM on the promise of 1000% share rises. They have no patience, expect everything to happen as planned and have next to no knowledge of what life is really like for a junior explorer. They also make the cardinal sin of going “all in” on a share. Going “all in” makes no sense at all. Have an initial stake and then average down if the SP drops or even up if the SP rises. All of the reasons I’ve outlined above apply as to why investors don’t do this, particularly greed and stupid. They want to maximise returns and be in it to win it and any one of a dozen clichés that just imply stupidity. They then complain if the SP falls a bit and they have a paper loss. If only they could see this as the perfect opportunity to top up, their life would be much easier, but alas this isn’t so.

As disputably attributed to Macmillan, “Events, my dear boy, events”. Events can impact a share, you need the flexibility to respond and adjust your investment strategy to events. You also need to differentiate events that affect the long-term share price and events that just move the sp up and down a bit.

Some events can be anticipated. For example the “stupid” investor will always assume that a mining licence can be obtained and given out like confetti. They will assume that a PFS and DFS can be produced at a speed that will rival a bullet train. They assume that just because a country might be classified as developing they will jump at a chance for a western company to come in and take all their assets. 

Mining licenses take on average 2-5 years to obtain, countries tend to be very strict as to environmental impacts, outreach projects, employment opportunities for locals, cherry picking of assets etc. A PFS isn’t just a fag packet appraisal of a potential mine. It’s a legal document. It needs to detail a thousand different aspects. The writes of a PFS/DFS will need to contact 100 different companies and govt offices. Many interconnections and dependencies will exist. If a company claims a PFS/DFS can be produced in 6 months, most of the time I would sell the company immediately, FRAUD would spring to mind. The average length for these can be anywhere from 12 months to 2 even 3 years. 

Folks should remember that sometimes these are legal documents used to raise money for 100m+ capex projects, they take a bit longer to produce than your plans for an extension on your house!

With the knowledge now known and information obtained this can be used to direct your strategy.

Part 2 Savannah Resources.

David Archer has a simple strategy, 3 projects all at different stages in the cycle. Combined it should even out the junior mining cycle as described above leading to steadily rising SP, the 3 year SP chart shows this perfectly with a 200% increase. NO, I hear you shout, the SP has been pretty flat recently.

I agree to some extent, from July 2017 to the end of the year the SP rose 25%, largely off the back of the new lithium project in Portugal, as per the junior mining cycle. This has been offset to a degree though by Oman and Mozambique being in the downward cycle as they await licenses and PFS. From Christmas the dominance of these down cycle projects has overcome the excitement around Portugal.  Particularly as investor patience has been tested by Oman licensing delays and unknown timeframes around the Rio Tinto Moz tie up. Both of these Events have affected the SP without affecting the long-term SP potential. Combined with this we have a now waiting for scoping study for Portugal (more patience required). Leading to a micro downward cycle on Portugal as well. The consequence is a 20% sp fall.

We now come to today’s RNS outlining the developments so far on the Rio Tinto PFS. This was incredibly misunderstood. David has been clear that there are 2 stages to the PFS. A few folks misunderstood that the PFS started in Aug 2017 would be finished soon. [I laugh out loud]. 

However it was clear that it was only stage 1 that would be finished after 6 months or so. Today’s RNS confirms this is nearly finished, but that more/extra work is needed. Stage 2 of the PFS will be completed in 2019. So we are looking at around 2 years for a +100m PFS with and to satisfy the world’s largest mining company. The lack of patience of the “investor” shows its head here and the price declines on what is expected news.

So where next. The turn on the mining cycle always occurs when the PFS is produced or the license granted.  Mozambique will require a lot of patience yet, it probably won’t turn to an upward mining cycle until summer 2019 and so hence won’t add to the sp until that time. However todays RNS should limit its downward affect. Oman should still get license approval allowing mine construction and production to start and so becoming a positive effect on the sp rather than a negative. The scoping study should unleash an upward cycle positive on the sp for Portugal as well.  Possibly strongly upward.

Events have so far just created a deepened negative cycle effect for SAV. Which should reverse in the very near future, probably June, lasting until the end of the year. Due to this the next 4-5 weeks will be all about buying as many shares as possible at each opportunity. Today’s RNS was a perfect example of this. 

Remember the smart investor takes advantage of the stupid investor. Buy value on the cheap, hold value for the long term.

My final word is that events can knock an sp, but that knock can be sharply upwards as well as down, look out for value positive disposals, buys and strategic partners. These don’t travel up the curve but displace the curve upwards.