Burst bubbles offer salutary lessons for mining industry

TORONTO (miningweekly.com) – Speculative bubbles offered useful templates for those seeking to identify new ones through which value can be realised before their inevitable burst, newsletter writer Mickey Fulp told an audience at the recent Prospectors and Developers Association of Canada conference.

But bubbles also acted as warnings for inexperienced or over-confident investors who believed the hype and failed to recognise the latent risks.

Fulp identified six bubbles since 2009: lithium 2009 to 2011; rare earths 2009 to 2011; the Colombia 2010 to 2011; the Yukon 2010 to 2012; graphite in 2012; and medical marijuana in 2014.

The lithium bubble witnessed more than 60 juniors enter the space, although Fulp argued only a couple of success stories had resulted. For example, Lithium One was advancing the Sal de Vida lithium carbonate project in Argentina when it was acquired by Galaxy Resources in the first half of 2012.

Of those that faltered and failed, Fulp highlighted the bankruptcy of RB Energy that followed its merger with Canada Lithium and the subsequent shuttering of its Quebec-located spodumene operation.

The rare earth element bubble was larger than its lithium counterpart, with more than 200 juniors entering the space and trying to advance projects worldwide. Much of it was driven on supply concerns as China accounted for around 97% of global output.

These worries appeared validated in 2010 when rare earths exports to Japan, the main consumer, were unofficially and temporarily crimped by China over a sovereignty clash related to the Senkaku Islands.

Fulp also traced much of the enthusiasm to Molycorp and its Mountain Pass mine. But Molycorp went bankrupt last year.

“It went from around $77 per share [at its height] to trading for pennies at the time of its bankruptcy,” he said.

However, it was an excellent stock for the investor who had arrived early and left either near or at the market top. “And the thing about bubbles is that you’ve got to time your trades,” he said.

Area plays often faltered on the jurisdiction failing to match expectations. This occurred for a variety of reasons, including government policies or the isolation of projects and the lack of supporting infrastructure.

However, some companies and their projects had continued to make some headway and were still worth mulling, Fulp noted.

Prices and market structure had been the main problem for graphite. “The problem with the graphite business is that it’s so small you can’t generate enough cash flow to pay off your capital expenditure,” he said.

By contrast, the medical marijuana bubble was only favoured by promoters often running failed projects and in need of money. It was fuelled by a loosening of drug legislation in the US and Canada.

“If you speculated on medical marijuana then I’d suggest your certified financial adviser might be one of these guys,” Fulp quipped, pointing to a picture of the famous 1970s hippies Cheech and Chong.

Fulp argued the next bubble might be lithium once again, spurred on by the narrative surrounding electric vehicles (EVs). “Do you really think [Tesla CEO] Elon Musk is going to sell 500 000 EVs by 2020?” he asked. “Well maybe you want to get into the next lithium bubble.”