• An Insider's Guide to the Mining Sector

• How to make money from gold and mining shares

• by Michael Coulson

Reviews

• Secrets of Success: Precious metals are getting set to go for gold By Jonathan Davis 01 May 2004 This has not been the best of weeks for those who put their faith in gold and other metals as the answer to their investment anxieties. After its strong run last year, gold has been in retreat for most of 2004. This week its price fell sharply through what traders regard as a key support level, $390 an ounce. Some other metals, notably nickel, have dropped even more sharply since last year, raising the question of whether the much-trumpeted bull market in metal prices and mining shares has run its course. The immediate pretext for gold's fall was reports that the Chinese authorities are serious about their efforts to start reining in the hell-for-leather growth of their economy. This might seem a rather tenuous explanation for such a sharp fall in the price of the world's oldest precious metal, revered throughout the centuries by financial conservatives as the only sure store of value in a precarious world. It is true that China's rapid dash for growth has been a major source of marginal demand for commodities of almost every kind in the past few years. It is said that half the cranes in the world are now at work on Chinese construction sites, and the furious pace of China's economic growth is pushing up the price for almost all the inputs a growing economy needs. If it is correct that the Chinese are now trying to rein in the frantic pace of economic activity, as at some point they must, it could have important implications for gold and metal prices, as well as for currencies and the equity and bond markets. But in fact, whatever happens in the short term inside or outside China does little to dent the case for believing that metal prices - along with mining shares, which are essentially a geared play on metal prices - are set to resume their bull run. After 20 years of steady decline the supply and demand pendulum for some metals has swung so far that further tightening of the market seems inevitable. Although two years of rising prices are now starting to stimulate the search for new sources of supply, the practical difficulties involved in bringing new sources of production on-stream means it is likely to be several years before a new equilibrium is established. In that case, despite the setbacks we have seen so far this year, there must be a serious risk that the investment case for mining shares will in due course flip over into the usual speculative bubble, with all the excitement and danger that such an event traditionally involves. You don't have to look far for evidence that the seeds for such a boom are already being sown. Take the steady stream of speculative new mining companies finding their way to the stock market. For anyone who can recall the heady days of the 1960s and 1970s, looking through the lists of mining shares on the junior markets in London is to take a nostalgic step into the past. Who would have thought that once again, alongside the well-established mining companies such as Anglo American and BHP Billiton, we would find the likes of Eureka Mining, Patagonia Diamonds and Gold Mines of Sardinia (whose head office turns out to be in a village outside Cirencester)? True to form, few of these companies have much in the way of solid assets to back up the boldness of their names and aspirations, but what they typically possess are rights to some prospect or other, and shedloads of hope. The unhappy recent experience of Bullion Resources, a small AIM-listed company which turned out not to have anything like as much in the way of reserves as it claimed, is a salutary reminder of what can go wrong. Nobody knows this better than Michael Coulson, a mining analyst whose experience in the sector spans more than 30 years. As a graduate his first job was as the most junior member of Julian Baring's legendary mining team at stockbrokers James Capel. Today he is one of the few mining analysts still at work for whom the great highs and lows of the past (Poseidon, Bre-X) are more than just a textbook memory. In his book An Insider's Guide to the Mining Sector, Coulson lists 10 golden rules for investing in mining shares. The first is surely the most important: "Stripped down to bare essentials," he says, "mining shares are like the proverbial tin of sardines - for trading rather than eating - so always take profits." What he means is that only a handful of mining companies ever make the transition from speculative counter to established company. For every Newmont Mining, the one company of note to have come out of the 1960s nickel boom in Australia, there are hundreds of others that will sparkle briefly, only to disappear. Beware in particular, says Coulson, buying "retreads", companies whose main asset is a prospect that has been worked unsuccessfully before. He also warns that bull markets in mining shares often "develop very slowly but spike very quickly". He means that, once a bull market has peaked, prices can fall very fast. So while it is legitimate to play booms in mining shares for all they are worth, never kid yourself you are buying something of enduring substance. The greatest sin is to be too greedy - be sure to leave plenty on the table for the next guy.
  R L Harvey
• An Insider's Guide to the Mining Sector by Michael Coulson Mining is currently regarded as a sexy sector. Every week sees a new miner listed on AIM promising the possibility of great wealth. Since I have been writing about oil and mining stocks for almost a decade and a half I am perhaps rather more cynical about some of these market debutantes than most. Michael Coulson, the author of this book, started his career as a mining analyst just after the last great crash (the Aussie Nickel boom of the last 60s) and so his perspective on what happens next is inevitably even deeper than mine. Incidentally the section in this book which I found most interesting was on that Aussie mining boom. I am not for a minute suggesting that today's boom compares with that bout of madness. At this stage, it is very different in its causes and scale though there are one or two similarities just starting to creep in. But as a snapshot history of an era before I was born it is fascinating. Is this book aimed at you? This book is not aimed at me. I already know what aluminium is used for. More critically I have a decent understanding of what grades from drill holes mean; the difference between a low cost and a high cost mine; how a mining company develops (or doesn't); how one values a mine or a company; and where commodities tend to be found. As such I found some of this rather hard going and I didn't learn anything new until around page 35. Coulson clearly knows his stuff but he is obviously more of an analyst than a writer. There are jokes and funny anecdotes in this book the overall prose style is that of an investment report rather than a book. In a sense that is a shame because the resources sector is - I find - the most fascinating area of the market. Accountants don't rule the roost but instead - certainly among the juniors - dynamic entrepreneurs and explorers abound. Gossip, rumour, slander, malice, envy, scandal, great successes, great failures make for a heady and exciting cocktail. That aspect of mining rarely breaks though in this book. But, I stress this book is not aimed at me. If you wander into mining stocks without any knowledge you will emerge a poorer investor. My friend Evil Knievil may occasionally reveal that he has bought a certain mining stock just because his mate tells him that it is going up. But Evil's "mate" is probably either a geologist who knows what he is talking about or someone with an inside track. Not all of us have such well informed friends. Indeed, as Coulson stresses in this book, most brokers or journalists don't know much about this sector either. And so before you invest it makes sense to use this as a sensible primer for gaining a - more than basic - grounding in this subject. In that respect this is an excellent book. Is Mining about to go pop? In short - no. Some of the rubbish written about how base metals prices (and indeed the gold price) are about to collapse (the FT is a veritable font of such drivel) is based on the very flimsy premise that the Chinese economy has to either boom or bust or alternatively that what goes up must come down. While the latter is usually true it can be wrong for decades. And as for the idea that China, India and the rest of Asia are going to stop the process of industrialisation? Does the FT really expect the PRC to reverse direction and return to a purely agrarian economy? Moreover, in a section which I did find useful on the majors (Antofagasta, Anglo American, Rio Tinto, BHP Billiton and Xstrata) Coulson points out how integral they are to FTSE tracker funds and the like. As such they have ceased to be the wholly cyclical plays of old. Looking at market movers on a day by day basis one might have thought that all five of the majors were pretty similar company's. A detailed breakdown of the product mix of each shows how wrong this is. On a day when the City indiscriminately marks all five up or down because one metal price or another has moved sharply, there must be arbitrage opportunities. It is not my game but it is something I might find myself thinking about on the beach this summer. And whilst Coulson thinks that there is a time for selling mining stocks it is pretty clear that while he would not be lapping up some of the fanciful new issues joining Aim right now - read this book and you will see why they will mostly go pop - he would not be rushing for a wholesale exit either. Indeed he makes a strong case for always retaining some mining (at least some gold) exposure in your portfolio. Since I have always thought that a portfolio without gold and oil is a portfolio run by a fool (i.e. 90% of City fund managers) I think that this is a point well made. Is this book worth buying? If you are happy to have no mining/gold exposure in your portfolio you have no need for this book. There is, in my mind, a chance (perhaps 1 in 10, perhaps 1 in 20) that gold will hit $600oz at some stage over the next three years which would be very bearish for non-resource equities. So if you have no gold exposure in your portfolio it is probably wise not to buy this book as you might just need all the spare cash you can get in a few years time. You may well already be a well informed mining investor. In which case you also have no need for this book. It won't entertain you greatly and you won't learn an awful lot. However if you accept either the premise that mining has to be part of your portfolio or the alternative thesis that it offers significant returns if you get it right but you feel unsure about how to play the sector or how to interpret the information that you can access, this book is well worth working your way through. It won't have you biting your fingernails but you will be better prepared for investing in mining stocks at the end of it.
  A Murray