Going back to my days studying economics, one of the concepts that has most stuck with me and indeed has almost become a guiding principle is that of “opportunity cost”. In micro-economic theory, the opportunity cost of a choice is the value of the best alternative forgone, where a choice needs to be made between several mutually exclusive alternatives given limited resources. Assuming the best choice is made, it is the “cost” incurred by not enjoying the benefit that would be had by taking the second best choice available.
The New Oxford American Dictionary defines opportunity cost as “the loss of potential gain from other alternatives when one alternative is chosen.” Opportunity cost is a key concept in economics, and has been described as expressing the basic relationship between "scarcity and choice.” The notion of opportunity cost plays a crucial part in ensuring that scarce resources are used efficiently.
When we apply it to investing in mining we are thinking that one dollar given to a no-hope story is one dollar less for a “serious” story. While that misallocated dollar may seem immaterial in the easy money days like 2007 or 2010, in the lean times it can be the difference between a worthy project, run by determined people, surviving or not. There has been a massive misallocation of funds in the mining investment space and some of the most egregious examples have been in the specialty metals that have been subject to boomlets and fads over the last decade. In the final wash the unworthy have ended up ultimately disappearing no matter how much money was thrown at them and the collateral damage has been the starvation to death (or near-death) of those with projects that might have made a realistic contribution to global supply in their respective metals.
Here we shall review the scope of this opportunity cost and the price that was “paid” by choosing the path less travelled of seriousness and gravitas.
This was the first boomlet off the taxi-rank after the shock and awe of the global financial slump of 2008. However, it was built upon an already established though admittedly small group of very large producers (i.e. the lithium cartel). That universe burgeoned to around 20-30 wannabes pretty fast but some never found roots and went away rather quickly. In any case the Vancouver lead promotion machine had scarcely started to crank its gears before the Rare Earths boom came along and stole Lithium’s thunder. There was also a perception that two or three of the projects coming on stream would satisfy mid-decade demand so this calmed some of the more fevered claims that could be made.
By late 2010 the focus was elsewhere and the sector was left to get on with business. Galaxy was added to the ranks of producers, while others like Orocobre and Neometals (back then Reed) worked away on their projects which are in fruition. Quebec Lithium managed to go all the way to production then stumbled. Talison made it to production and was snapped up. Nemaska proved to be the most durable Canadian player and is on the way to being a producer. In Australia, General Mining has been added to the producer mix via their earn-in to Galaxy’s Mt Cattlin.
This group of lithium companies now have a powerful lead. The latest price uplift in the metal has drawn a number of new players into the fray. Some will be years away from production even with the best will in the world. But we expect to see more success stories coming like from the likes of Sayona Mining, Power Metals Corp and Advantage Lithium. It will be interesting to see if the market disciplines itself and keeps the number of entrants down.
The opportunity cost of this space has been much less than in others. The takeover of Nutrien's SQM shares for USD 4.07bil made investors way more money (net/net) than was lost from the few juniors that expired or other players that lost market value.
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