Typical portfolio and asset management firms approach their growth plans as strategic capital allocation. According to this approach, asset management firms evaluate where to put their money based on market analyses and projections. Following this approach, resource companies should worry about which commodity will perform better. Why is this approach the wrong approach for mining or oil & gas companies?
Resource companies, especially mining, have to look at a 35 to 50-year horizon. Permitting of a new mine alone takes 3 to 5 years including environmental impact evaluations. Short to medium run performance projections are hence not the best indicator. Instead, mining companies should focus on resource life and low cost operations. Clearly we can “guestimate” based on historical data which metal may have higher demand, but what really matters is the difference between supply and demand.
Hence the question to ask when evaluating a potential investment is:
In the long term, is this mine capable of being:
- a sustainable low-cost operation
- an expandable project
We cannot disregard other information such as geography and potential “country risk”, emerging markets and potential impacts in supply/demand, potential regulatory change in those locations, regional skill shortages, potential nationalization, infrastructure access, social license, cost inflation and price/currency volatility among others.
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