Pre Production Sweet Spot
This page compiles from previous blog articles on this well supported investment strategy.
The methodology is pretty simple. Buy at Construction Decision after financing and permits are in place. Sell at either First Pour (more reliable) or declaration of Commercial Production (some additional gain but higher risk). The average returns are over 100% in an average of 1.5 years, but you need to spread your bets out because over 20% of them deliver negative returns.
Why Does It Work
- You are paid for the risk of failure
- Certain Investors Only Invest in cashflowing assets
- The market is often backwards looking
- There is value in transitioning from putting money into a hole in the ground to taking money out of a hole in the ground
Lobo Tigre on PPSS
Louis James aka Lobo Tigre of the Independent Speculator Newsletter lays this out most clearly in his Pre-Production Sweet Spot study. He's not the first to notice this upward trend in this part of the Lassonde Curve, but we'll adopt his terminology because I think he lays this out with the most convincing amount of data.
Besides the study linked above, he also gave a good in depth interview on it here:
Kevin MacLean on PPSS
Kevin MacLean, former gold stock fund manager and current chief investment officer for Star Royalties, calls this the risk transition yield.
The second one is risk transition yield that's the phrase that i give to that gain in a stocks price as it de-risks from developing an asset into operating an asset and that could be substantial. I'll give you a i'll talk about that in the developer sector section
uh so the market discounts uh that asset typically to about 17%, not the not the five percent that's going to be there when it's in production but 17% that's an empirical observation i just made over many years back calculating what stocks are trading for because i've had these debates with analysts as a portfolio manager well Kevin used to be buying the stock it's cheap as chips and I'd say we'll back calculate the IRR and this thing says well it's 17%, 18% I said well that's about right so it's going nowhere.
now but here's the math if you have a 10-year mine life that's trading at a 17% discount rate instead of 5% it's trading at 0.6 times NAV. If you're going to go from point six times NAV to 1.0 times NAV that's a two-thirds return 66%, and you can get that in the last six to nine months, sometimes sometimes longer but you know in the last six nine months most of that you can pick up if the mine operates properly starts up properly so you can get a massive return and i did have a number of those names in my portfolio.