The mining industry is really bad at seeing around corners or even remembering recent history.
Take a look at Freeport-McMoRan (NYSE:FCX). They could never have predicted what wealth they would destroy by playing it “safe” and buying out two oil and gas companies — Plains Exploration and McMoRan Exploration Co. — with serious leverage.
That ill-timed move might cost them the company, and certainly cost the chairman his job. The fact that Freeport faced a crisis in 2008, and watched other companies pay through the nose because of ill-timed acquisitions, did not mean that they learned from the 2008 crisis, or any of the 20 years of history before that.
I dual majored in medieval history and economics in college. What I got out of the combo was a set of rules:
- Stability builds wealth. England built wealth because it had the English Channel separating it from Europe, which let it remain stable at home. If you have time, and focus, you will build wealth.
- Leverage reduces stability unless it is backed by secure assets. Borrow against cash flow you know and trust, not cash flow you can’t trust. Ideally build leverage like Warren Buffet via insurance float, or something else you understand. Ill-timed and structured leverage brought us the Magna Carta, and cost the chairman of Freeport his job.
- Good projects take time. If you think you are going to get rich tomorrow, you should go do something else. The average person in this business can work on four or five projects in their life well. England spent hundreds of years building the empire.
- Never underestimate agents of change. The mouldboard plow brought us the Renaissance by changing the food supply and letting people farm denser areas. In feeding so many people that Europe exceeded its peak population capacity, it also brought us Black Death.
- Everything goes in cycles: 100’s years of history taught me that. Resource extraction attracts capital on a wave cycle. When we are at the top, we do not think about what can go wrong, and when we are at the bottom, we can’t imagine a recovery. In all cases, almost no one has a two-year view — let alone a 10- or 100-year view.
There were 17 recessions and depressions in the United States between the Civil War and 1929. During periods of wildly fluctuating but extreme growth, it is imperative to stay on an even keel. If you panic on every downdraft, you will never have the stability to build wealth, or be able to take the time to work on a good project.
We are in a period of agents of change. The mouldboard plow provided the food to end the dark ages, but in the mining sector the Volkswagen emissions crisis has completely destroyed my platinum models, and I have still not worked out my long-term view since that crisis has come to light. The major iron ore companies have sanitized iron ore on a small-scale (sub-20-million-tonne-per-year) basis for over 20 years. Coking coal has been disrupted by changes in nickel pig iron production.
The best thing I learned was that panic never works. So calm down and have a cup of proper British Tetley tea (imported from India and now owned by Tata, which also owns British Steel, a great story in its own right).