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Posted on 21 Nov 2017 by Steve Johnson

Animal Spirits to the Fore

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.

Animal Spirits to the Fore

One thought on “Animal Spirits to the Fore

  1. I completely agree. Indeed, a reasonable argument can be made that, given the unprecedented degree of money printing and low interest rates the world has seen this cycle, that it would be surprising if this cycle’s equity bubble did not exceed all historical precedent as well, including the 2000 mania. Unless central banks drain liquidity fast (an unlikely prospect at this point), this seems to me to be an entirely feasible possibility.

    Valuations globally reached relatively high (but far from bubbly) levels even when everyone was still pessimistic/cautious. We are only now seeing confidence and risk appetite start to return. It would be surprising if markets peaked so soon after we transitioned from pessimism to optimism.

    Templeton once said, if memory serves, that bull markets are born of pessimism, grow on skepticism, mature on optimism, and die of euphoria. We seem to have moved from the skepticism to optimism phase of late. Euphoria still some distance away.

    It is not impossible, for instance, that mega-cap tech increases another 4x over the next 3yrs. If earnings double and multiples go from 40x to 80x (they have risen from 20-30x to 40x this year), that could happen. The horseman of the dot-com bubble – Cisco, Microsoft etc all – peaked at over 100x. ETF money could keep pouring into tech, and institutional active managers everywhere will be increasingly forced into owning these stocks, lest they risk trailing the broader indices to an extent that could imperil their careers/businesses, in yet another eco of the 1990s tech bubble.

    This is of course only one possible scenario, not a prediction. But it is definitely a possibility and one many investors are ignoring.

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