“Junior Mining Bull Market Psychology is VERY Predictable” says Dr. Nicole Adshead-Bell

Key Concepts

• Bull Market Psychology: Predictable behavioral patterns in bull markets, including investor enthusiasm and resistance to selling winners.
• Profit Taking: The importance of taking profits strategically, even in a bull market, to manage risk and redeploy capital.
• Investment Strategy: Focusing on understanding specific sectors (precious metals, copper) and companies, rather than chasing trends.
• Generalist Investor Inflows: The significance of institutional and generalist investor interest as a signal in market cycles.
• M&A Drivers: Factors influencing mergers and acquisitions in the mining sector, including market sentiment, growth focus, and premium inflation.
• Copper Market Outlook: Analysis of supply-demand dynamics, production challenges, and the potential for a copper bull market.
• Geologist Compensation: The undervaluation of geologists and its impact on exploration and discovery in the mining industry.
• Warrant Structuring: The implications of warrants in financing deals, particularly for junior mining companies.
• Investment Thesis Time Horizon: The importance of defining and adhering to an investment thesis's expected timeline.

Precious Metals and Market State

Nicole Edgebell views the current gold market as experiencing a "very healthy pullback." She emphasizes that bull markets are never linear and that prolonged, steep upward movements can be sell signals. From an investment perspective, she finds these pullbacks to be opportune times to deploy capital, contrasting them with periods of excessive enthusiasm. She believes the market is not at the end of a bull run but has moved beyond its initial stages, which she attributes to last year. While commodity prices have been rising for a couple of years, investor and corporate behavior has lagged. If fundamentals remain unchanged, these periods offer opportunities to invest with less competition.

Distinguishing Current Market from Past Bull Markets

Edgebell differentiates the current market from the "flash in the pan" bull markets of 2016 and 2020. The 2016 market was primarily a relief rally following a severe downturn in late 2015, characterized by pervasive negative sentiment. She recalls leaving a precious metals fund with significant knowledge and the freedom to invest, not predicting the 2016 rally but sensing a shift in sentiment. The 2016 rally was "unbelievably rapid," with many positions up 200% in 3-4 months, leading to quick exits. In contrast, the current bull market is perceived as a "much slower percolation," suggesting a healthier foundation.

Profit Taking and Investment Rationality

Edgebell criticizes the notion that it's not time to sell in a bull market as "naive." She advocates for taking profits daily, regardless of market conditions. The idea of holding positions "in perpetuity" is driven by greed rather than rational decision-making. While acknowledging a long-term upward trend, she stresses the importance of "taking some money off the table." She highlights psychological studies showing that investors are more upset about selling a winning position too early than holding a losing one, deeming this irrational.

Example: Edgebell shares an experience of buying a position for a short-term trade based on expected drill results. After a 30% price increase on the day the results were released, she exited 50% of the position within two months, recognizing it as a "quick win" to be moved on from.

She also advises against holding too many individual positions (more than 15-20) without the capacity to track them diligently. She emphasizes the importance of writing down the reasons for a purchase and identifying exit triggers. The most successful portfolio and hedge fund managers, she notes, are those who "sell their losers the earliest." The core principle is to be aware that "nothing ever goes up in perpetuity." While some long-term core positions with "great optionality to gold" and low downside risk are held, she advocates for taking profits on shorter-term trades that yield even modest gains (5-30%).

Capital Redeployment and Sector Focus

When redeploying profits, Edgebell adheres to Warren Buffett's principle of investing in what she understands best. Her portfolio is primarily focused on precious metals and copper stocks, including junior miners. She has extensive knowledge of these sectors due to her background working at a precious metals fund. While she was knowledgeable about uranium in the past (2005-2007), she is not currently up-to-speed on those companies. She believes her time is better spent on copper and gold, as understanding these commodities requires significant effort beyond just analyzing individual equities.

Generalist Investor Interest and Market Signals

Edgebell observes that generalist investors are "definitely doing their homework" in the precious metals sector. She participates in expert networks where institutions seek insights. She contrasts this with the last lithium boom and bust, where a surge in calls from expert networks about lithium companies signaled the market top. Currently, she sees articles about gold in major publications that previously wrote about its demise. While generalists are "dipping their toes" and doing research, she believes the market is "nowhere near the top yet." Signs of generalist involvement include ETF inflows and strong performance in royalty and larger mining companies. These indicate that generalists, who need to deploy sizable positions, are identifying specific companies.

Risk in Bull Markets

Citing James Grant, Edgebell states that "risk is most threatening when it's least obvious and least threatening when it's most obvious." In a bull market, with overwhelmingly positive sentiment, the biggest risk is "thinking this time it's different." She reiterates the impossibility of predicting market tops and bottoms and the tendency for investors to only discuss their winners. She admits to having made significant mistakes, including holding a position until bankruptcy.

Key Learning: After 27 years in capital markets, she emphasizes being aware of the "sell trade." She points to fund managers who were up significantly in 2011-2012 but down 80% by 2015, underperforming ETFs. This highlights that reputation doesn't guarantee rational investing behavior.

She suggests an objective approach to one's investment style and weaknesses. An anecdote is shared about a mining professional whose wife, with no sector experience, makes all the sell decisions, removing embedded bias. This leads to the idea that a fund manager might benefit from having one person buy and another sell to instill rigor. She warns against confusing a bull market with personal skill, as "beta will outperform kind of everything." She advises investing only what one is prepared to lose, acknowledging the high-risk nature of the endeavor, akin to gambling. She observes that in bull markets, caution is often abandoned, and people prefer to buy stocks that have already appreciated significantly, avoiding "orphan" stocks.

Example: She discusses a Virginia company with a strong land position and exploration efforts but lacking "fantastic drill results" as a trigger for buying. CEOs are now marketing to funds that are looking at the company because it hasn't moved, indicating a search "down the food chain" in a market where everything is rising. This presents opportunities in companies doing good work but awaiting a "wow number" or name attachment. She also notes the irrationality of buying stocks solely because well-known investors like Eric Sprott or Rick Rule are involved, leading to inflated valuations on exploration companies without resources. She uses New Found Gold as an example, where a significant peak valuation was driven by famous names, but reality eventually emerged. She advises taking 100% profit on such situations if exposed early.

Mergers & Acquisitions (M&A) in Mining

Edgebell notes that M&A is often associated with geology or proximity, but the timing ("why now?") can be unclear. She observes that larger companies tend to pursue M&A in bull markets, not bear markets, which is when the "really really smart ones" do it. M&A often occurs in rising price environments because the investor conversation shifts from discipline and free cash flow to growth, for which companies are rewarded. When acquiring companies, their share prices have often risen, making the risk appear lower.

Thematic Driver: This overall theme drives M&A. She recalls the opportunity a couple of years ago to invest in developers and advanced exploration companies, which were then "orphans." Now, they are shining, and significant M&A is expected. The "Keeping Up with the Joneses" mentality influences companies, making it easier to act when others are doing so. She cites the Australian companies acquiring assets in Canada and the US within a year as an example of this herd mentality.

Premium Inflation: In bull markets, premiums for takeovers expand. While the historical average premium is 30%, management teams feel their paper is worth more and are less inclined to sell. This leads to "outsized premiums" to get deals done, especially when a buyer is "hungry to grow." She mentions premiums of 80-100% in the last cycle. Boards and management teams are cautious about rejecting offers above precedent transaction premiums, as they must be presented to shareholders.

Compensation and M&A: Compensation structures influence M&A. In Canada, executives are well-compensated upon job loss (two times base and bonus, shares vest). In Australia, compensation is more regulated, typically one times base and bonus, with shares vesting but often issued at a premium.

Timing and Fatigue: 18 months ago, M&A would have been easier due to management fatigue from running junior mining companies in a bear market. The current environment, where it's easier to say "no," makes transactions less likely unless a compelling offer is made.

Orion Resources and Rupert Resources: Edgebell expresses surprise that a deal between Orion Resources and Rupert Resources hasn't occurred, given David Lotan's intelligence and Orion's strong position. She believes Rupert's Preliminary Economic Assessment (PEA) makes a deal even clearer. She notes that the PEA's economic studies stop at 26 meters from the boundary, suggesting potential geological continuity onto Orion's project. She believes Orion will only become more expensive. She suggests that a year ago, a premium offer that couldn't be refused should have been made. She speculates that they might be aiming for a cheaper price. She praises Rupert's CEO, James Whittle, for the discovery and value creation, but suggests that acquiring Orion would derisk the project.

Copper Market Analysis

The copper market is described as "super interesting," with recent events like issues at Grasberg and the shutdown of Collahuasi Panama impacting prices. Treatment charges for smelting are near zero, indicating a tight market. Edgebell believes a copper bull market is imminent, having predicted it for some time.

Key Drivers:

• Declining Primary Production: Primary copper production is projected to decline from 2025, exacerbated by operational issues at major producers like Grasberg.
• Tight Supply: The Grasberg incident is seen as a stark reminder of exposure to disruptions in primary copper supply.
• Treatment and Refining Charges (TCRCs): TCRCs being at or near zero, and even negative at times, signifies that smelters and refiners are struggling to secure copper concentrate, willing to pay for supply. This indicates a fundamental tightness in raw copper supply.
• Incentive Price: The incentive price for building new supply is estimated to be around $8 per pound, with $6 not being sufficient.
• Inelastic Demand: Copper demand is inelastic, with limited substitution. The build-out of AI and increasing energy demands globally require significant copper.

Edgebell believes that companies should not bring on new supply until "everybody is screaming for it," a rational strategy for company leaders. She feels the market is in a "great environment for copper" and that large copper companies should be acquiring junior developers.

M&A in Copper: Despite the bullish outlook, M&A in copper has not heated up as much as in gold, with the exception of BHP's stance. Edgebell believes large companies are like the "Titanic," slow to react. Bureaucracy and layers of management in large companies hinder quick decision-making. She criticizes the lack of mining sector experience on the boards of major mining companies, suggesting that a majority of directors should have this expertise. This lack of experience can lead to poor strategic decisions and an inability to ask the right questions.

Opportunity in Juniors: The opportunity lies with small, growing, and nimble junior copper developers. However, these juniors may lack capital markets expertise for fundraising, marketing, and strategizing. The ideal company would possess size, liquidity, a strong balance sheet, and crucially, strategic and people capabilities.

The Role and Compensation of Geologists

Edgebell expresses astonishment at how "unbelievably poorly compensated geologists are," considering they are the "absolute foundation of our business." Without geologists, there would be no "rocks," and thus nothing else. She notes that few management teams include geologists in their top compensated positions. Companies with weak technical foundations often forget that mines are depleting assets and require constant replenishment of supply through investment in geologists and exploration.

Market Indicators: A sign of a bull market top is when mining companies are hiring geologists straight out of second-year university due to scarcity. Conversely, a sign of a bottom is mass firings of geologists and exploration teams. She calls for geologists to "stand up and unite" and demand "lawyer-like salaries."

Robert Friedland and Ivanhoe Mines: She highlights Robert Friedland and his team at Ivanhoe Mines as an example of a group responsible for numerous world-class discoveries, contrasting this with the limited material discoveries by companies like BHP in the last 20 years. She attributes Ivanhoe's success to valuing geologists, paying them well, providing share exposure, and funding their ideas. This long-term approach, avoiding mass firings during downturns, has resulted in more tier-one discoveries. She criticizes large companies for hiring management consultants with no experience instead of leveraging their balance sheets to invest in their core technical expertise.

Financing and Warrant Structuring

Edgebell views multi-year warrants in financing deals as "really bad." She acknowledges Ben's work at ATEX but criticizes the issuance of a four-year warrant with their current raise. She states that warrants make it easier for bankers to sell deals, but companies can and should say no.

Personal Experience: She recounts her involvement with Bravo, where she insisted on a stated policy of "no warrants" for private, founder, and IPO financings, despite bankers' pressure during a tough market in mid-2022. She also rejected "broker warrants," which are priced at the issue price and allow brokers to profit quickly.

Warrants and Desperation: She explains that warrants are typically attached when a deal is difficult to sell. She contrasts this with Rick Rule's strategy in bear markets, where he can demand warrants due to companies' desperation for capital. While this is beneficial for him, it is not for existing shareholders.

Investment Thesis Time Horizon

The duration for an investment thesis to play out depends on an individual's personal time horizon, capital, and financial needs. Edgebell stresses the discipline of writing down the reasons for an investment decision to help define the expected timeline. This could be a six-month thesis or a longer-term bet on leverage beta companies in a bull market.

Key Principle: Understanding why an investment is made is crucial for determining the appropriate time horizon. She acknowledges that even experienced fund managers can be guilty of making investments based on recommendations without sufficient research, which often leads to poor outcomes.

Follow-up and Awareness: Once an investment is made, it needs to be followed and tracked. She mentions holding positions for two years, content with the downside volatility due to a long-term view. She concludes that there is no universal answer; it depends on individual investment style, time horizon, capital deployment, and crucially, "awareness of what you own and why you own it."