Critical Minerals (Part 4 – 27/Sep) – How to think about Risk? 

Authored by Tshepo Magagane

Critical Minerals – How to think about Risk? Howard Marks

In Mining; you have these “Perceived Risks” regarding the sector or regions in which you find mining Projects!

Risk in Mining is not about Politics – you show that your knowledge of this sector is gossamer!

Risk in Mining is Geology. Friedland has proved this in the DRC and Mongolia. See that he has a Tier 1 project in the DRC that came in at a replacement cost of around USD6k/tpa (less than the replacement cost of non-Tier 1 projects, which comes in at USD7.5k-10k/tpa and only a fraction of Tier 1 of USD44k/tpa, let alone SAmerican low grade of USD80k/tpa).

…it is how you think about RISK!

As I have said, ” You can get cover for disturbance/confiscation and go to arbitration—worst case; in five years, you will get a settlement. When it comes to Geology, the project dies and capital is wiped out. Why is Quality of Deposit the most paramount consideration?”

NB: Never forget that decisions about RISK are just “someone’s personal biases”—nothing more!

[How much risk did the manage bear

Skill / value-added

Aggressiveness is not discernment / value-added

Asymmetry – superior gains in the good times

Risk is not volatility

Volatility is an indicator of the presence of Risk

Risk is the probability of loss

Risk cannot be anything but a matter of opinion – not quantifiable in advance (even after the FACT)

You cant tell from the outcome

Risk of missing opportunities / risk of not taking risk / chance of being forced out of the bottom

Risk says we dont know what its going to happen

A range of outcome – often dont know the range

Nearly reasonable but not quite

Future is a range of possibilities

Fallacy of Expected Value

How people participate in that Event / Market

The infrequency of loss can make it appear safer than it is 

High quality assets can be priced so high that it is Risky

Low quality assets can be cheap enough to be safe

It is not what you buy. It is what you pay

Because of the existence of Risk, things are going to be different from time to time

Are we prepared for when things don’t turn out as expected

Not risk avoidance

Risk avoidance = Returns avoidance

Should expect to make money without bearing risk

Super sense of probability distribution

How to Think About Risk with Howard MarksHoward Marks explores the true meaning of risk in a new ten-part video series. He discusses the character of risk, the relationship between risk and return, misconceptions about risk, and much more.www.oaktreecapital.com