Animal Spirits to the Fore

In March this year, copper miner MMG announced that it had sold its Century zinc mine in Queensland for the grand total of $1. That $1 didn’t go far though. MMG agreed to pay the purchaser $34.5m to cover the costs of rehabilitating the depleted mine site over the subsequent few years (MMG declared the mine had reached its end of life and stopped mining in 2015).

End of life, you say? The group that bought the mine included ASX-listed Attila resources and a few associates. Attila changed its name to New Century Resources at the end of May. In July it raised $5m at $0.15 per share, converted $17m worth of convertible notes into equity at the same price and issued 80 million options to the management team.

In October Attila raised $52m to restart the mine that MMG thought was depleted. The $1.20 per share raising price was eight times the previous raising price and implies a fully diluted market capitalisation of half a billion dollars.

Either MMG did something really stupid, or investors have lost their minds. I’m siding with the latter.

Greed is back in 2017

And it’s not just mining stocks. Last week I received a prospectus for an upcoming IPO. It’s not public yet, so I won’t name names.

A summary of the investment proposition is a company that is asset heavy, hasn’t historically made any money and doesn’t seem to have a competitive advantage. On the plus side, it has buzzwords in the company name, albeit unrelated to what the business does, and profit margins are expected to double in the year after the float. Why and how remains a mystery.

Investors are being asked to contribute $30m of new money, which would allow the founders to get most of their original investment back and value the business at $100m or so. It is one of the more obvious unattractive investments I have seen.

This bull market might be coming on ten years old, but scepticism has abounded for most of it. When junior miners with little to their names but a name are surging tenfold, $100m sucker floats are making it to market and taxi drivers are investing in cryptocurrencies, we’re looking at some real animal spirits.

Back to basics and buckle down

It was a breath of fresh air, then, to interview Tim Carleton of Auscap outside the Sohn Hearts and Minds conference last Friday. With many of his fellow guests sprouting artificial intelligence, disruption and driverless cars, Tim told viewers he quite liked Westfield.“We like businesses that generate lots of cash and are trading at prices that we find attractive.”

He went on to talk about his enthusiasm for property trusts “yielding 7% and growing at 3-5% per annum”. Simple businesses, attractive yields and a perfectly sensible place to park your money.

What’s not simple is sticking to a sensible, conservative, long term strategy when those around you are seemingly making easy riches. In fact, not succumbing can be just as hard as forcing yourself to invest when it feels like the world is collapsing around you.

We haven’t had to suffer the angst of a rampant, irrational bull market for more than a decade. It is seemingly time to prepare yourself.

Forager Funds 

Steve Johnson
Founder & Chief Investment Officer

Steve began Forager Funds in 2009, and now manages approximately $350m across two funds. Offering a listed Australian Shares Fund (FOR) and an unlisted International Shares Fund, Steve focuses on long-term investing in undervalued companies.

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