From Bust to Boom to…?
In recent PIO’s, we have examined the volatility across the broader markets in terms of inflation, price of oil, and potential tech bubbles, however we have not discussed the mining sector. Historically, the mining sector has had its own distinct boom and bust cycles. This commodity price cycle is characterized by underinvestment in exploration during down cycles leads to declining reserves and production, which in turn sets up a supply crunch. This crunch fuels capital inflows and higher commodity prices incentivizing additional supply to come online. This leads to marginal supply bridging the gap and essentially leading to oversupply and a correction in metal prices. This pattern has repeated with remarkable consistency for decades.
What’s different now is the role of governments. Unlike historical bull markets driven by economic growth and globalization, leading to capital investment cycles, the change now is commodities are being treated as strategic assets rather than purely commercial ones. Governments are now realizing the importance of certain commodities. Today’s current juxtaposition of globalization vs. domestic control of minerals has a potential to upend the historical cycle. However, as I have witnessed, when I first entered the mining industry as a student in 2004, the “old timers” told me how lucky I was to catch the market in an upswing. I didn’t realize at that time how right they were. When the industry is bullish, a lot of capital is available to fund projects and that funding is typically based on commodity prices. Figure 1 illustrates this relationship clearly showing that rising gold prices correlate directly with equity capital raised on the TSX and TSXv. The chart also captures new listing activity, which typically lags the cycle, but demonstrates a shift in sentiment. The question is: are historical trends still relevant or are we in a new paradigm.
“This means that” having spent years on the technical side of this business, I was trained to think in boom&bust terms for most of my career. However, the global push to secure critical minerals is introducing a structural shift that doesn’t fit neatly into the old framework. The question we ask ourselves is where we are in the current cycle and whether the old playbook still applies. Therefore, rather than focusing on historical trends, we underwrite every position on fundamental valuation and maintain a proactive investment strategy.
National Instrument 31-103 requires registered firms to disclose information that a reasonable investor would expect to know, including any material conflicts with the firm or its representatives. Doug Johnson and/or Pathfinder Asset Management Limited are an insider of companies periodically mentioned in this report. Please visit www.paml.ca for full disclosures.
Changes in Leverage. We are increasing the asset ceiling to 2.0 times the market value of equity for Pathfinder International Fund and Pathfinder Conviction Fund to be consistent with Pathfinder Partners’ Fund and Pathfinder Resource Fund.
For more information, please follow the links above to review the fund term sheets.
*All returns are time weighted and net of investment management fees. Returns from the Pathfinder Partners’ Fund and Pathfinder Conviction Fund are presented based on the master’s series of each fund. The Pathfinder North American Equity Portfolio and The Pathfinder North American Income Portfolio are live accounts. These are actual accounts owned by the Pathfinder Chairman (Equity) and client (High Income) which contain no legacy positions, cash flows or other Pathfinder investment mandates or products. Monthly inception dates for each fund and portfolio are as follows: Pathfinder North American Equity Portfolio (January 2011), Pathfinder North American High-Income Portfolio (October 2012) Pathfinder Partners’ Fund (April 2011), Pathfinder Conviction Fund (April 2013), and Pathfinder International Fund (November 2014).
Pathfinder Asset Management Limited (PAML) and its affiliates may collectively beneficially own in excess of 10% of one or more classes of the issued and outstanding equity securities mentioned in this newsletter. This publication is intended only to convey information. It is not to be construed as an investment guide or as an offer or solicitation of an offer to buy or sell any of the securities mentioned in it. The author has taken all usual and reasonable precautions to determine that the information contained in this publication has been obtained from sources believed to be reliable and that the procedures used to summarize and analyze such information are based on approved practices and principles in the investment industry. However, the market forces underlying investment value are subject to sudden and dramatic changes and data availability varies from one moment to the next. Consequently, neither the author nor PAML can make any warranty as to the accuracy or completeness of information, analysis or views contained in this publication or their usefulness or suitability in any particular circumstance. You should not undertake any investment or portfolio assessment or other transaction on the basis of this publication, but should first consult your portfolio manager, who can assess all relevant particulars of any proposed investment or transaction. PAML and the author accept no liability of any kind whatsoever or any damages or losses incurred by you as a result of reliance upon or use of this publication.