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As The Mining Cycle Moves Towards Its Recovery Phase, Finance Is Available For Disparate Assets

Funds are available if you have the appropriate asset. As the financial press informed us this week, finance has been forthcoming for toilets in China, a famous author's chair and unicorns.

It is a golden age for lavatory construction in China. In a program supported by President Xi Jinping, China's National Tourism Administration announced this week that the government plans to spend over 12.5 billion Chinese yuan (about US$1.9 billion) this year to build or upgrade 25,000 public restrooms in and around popular tourist attractions.

The investment is part of an ongoing program — described by CaixinOnline as the "Potty Revolution" — that aims to build 57,000 "odorless, free and effectively managed" restrooms for travelers by the end of 2017 after a slew of complaints over the years.

This week, the 1930s oak chair used by J.K. Rowling when she wrote the first two Harry Potter novels sold for US$394,000 at auction in New York. The chair, one of four mismatching ones given free to Rowling for her council flat in Edinburgh, contains the inscription, "I wrote Harry Potter while sitting on this chair," and comes with a letter of provenance.

Finance has also been readily available for unicorns. In addition to describing a mythical creature, the term is used for private technology companies that have a valuation of at least US$1 billion. The term was coined in late 2013 by Aileen Lee, founder of the seed-stage fund Cowboy Ventures, to describe what were extremely rare startup ventures. At the time, she estimated there were just 39 unicorns, including Airbnb and Uber.

Gold companies collectively are now exhibiting rather impressive cash generation
 Unicorns are now less rare. Asset managers piled into private technology companies last year, and the number of unicorns soared as technology startups boomed. By the end of 2015 there were an estimated 150 young tech companies worth over a billion dollars.

In an outbreak of common sense, regulators expressed concern about the eye-popping valuation of some unlisted startups. Investors started writing down the value of these assets in the final few months of last year amid talk of a technology bubble. There are now fears of large-scale failures, and dead unicorns.

  In contrast, mining stocks are starting to look like a good bet, and several analysts at this week's Mines and Money Asia conference in Hong Kong talked of a positive shift in sentiment. For example, the executive director of fund manager Lion Manager Pty, Hedley Widdup, told delegates, "The tide has turned after five years of anything between awful and bloody awful."

Lion, which manages the ASX-listed investment company Lion Selection Group Ltd., has developed the concept of a "mining clock" to describe the mining cycle. Taking 6 o'clock as representing booming conditions, and 12 o'clock as a crash, Lion typifies company liquidations and declining exploration as occurring at 1 o'clock and 2 o'clock, mergers and cash takeovers at 4 o'clock and 5 o'clock, new floats and rising exploration at 7 o'clock and 8 o'clock, and paper takeovers and new floats at 10 o'clock and 11 o'clock.

Speaking earlier this week, Widdup commented that it has been "between midnight and 3 o'clock, signaling the bust, for the past few years." In September last year, Widdup had described the clock as having moved to 4:30, "where things start to pick up." This week he said the mining cycle had "hit 5 o'clock" as it was "becoming possible for companies to raise money for exploration."

Mining stocks are starting to look like a good bet, and several analysts at this week's Mines and Money Asia conference in Hong Kong talked of a positive shift in sentiment.
Widdup said that the rally in resources stocks in the first three months of 2016 is evidence of a substantial change in sentiment towards miners. A realization has set in that miners are "cheap and probably have very little downside on price."

Lion Selection believes that this rally stands out because this is the first time miners have outperformed the rest of the market since 2011, and there has been "a raft of small mining companies raising money."

"The end of a bust in any cyclical investment space is characterized by a capitulation event, which itself culminates in the collective realization by investors that the sector is too cheap to ignore any longer."

Gold companies collectively are now exhibiting rather impressive cash generation, driven by low costs and a robust price (especially as measured in the weak currencies of many producing nations). When rising equity prices align with increasing cash balances, company aspirations usually shift toward growth, notes Widdup, rather than increased dividends. The climate in the gold space, he said, "looks right for the beginning of balance sheet funded mergers and acquisitions."

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During the same panel session at Mines and Money, EIM Capital's John Robertson agreed there were "points of light," but stressed "no rays of sunshine." He complained, "If the resource sector was getting its fair share of investment, an extra A$30 billion would be available."

Perhaps a few more fund managers can be encouraged to leave unicorns to mythology and invest in something more tangible. The clock is ticking.

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