Mongolian miner blames bad Mongolian weather: Why we got out of Erdene ($ERD.TO)
And when we might get back into it.
The Pre-Production Sweet Spot (PPSS) is an investment strategy that was discovered and popularized by Lobo Tiggre (aka Louis James). In short, you buy a mining stock after the formal construction decision and sell at first pour. On average, this strategy yields a double, and it delivers at least some gain 74% of the time. Read Lobo’s article for more here. Considering that many mining companies don’t ever make money for shareholders, this is a pretty impressive strategy.
A recent example of an ongoing PPSS story is Erdene Resource Development ($ERD.TO). The company is building the Bayan Khundii Gold Project in southwestern Mongolia together with Mongolian Mining Corp. The formal commencement of construction at Bayan Khundii was announced on January 29, 2024, and we bought into the stock shortly after, at around 38 cents Canadian.
There were no major delays aside from some short-lived weather issues in Mongolia, and the project has been advancing nicely. Until recently, the management guided the first pour of gold (“FP”) to occur in Q2 2025. However, within the 2024 annual report released at the end of March, the timeline was suddenly shifted to H2 2025.
We don’t like delays (despite 80% of mine developments coming with some sort of delay). According to management, weather and logistical delays were the main reasons. Okay, but difficult weather conditions in Mongolia are one of the most certain things in the world. In our opinion, the management didn’t sufficiently justify the delay, and the provided reasons are vague. Hence, we sold the stock for the time being. Notably, we sold at 80 cents Canadian, which represents a double nonetheless. Kudos to Lobo.
In other cases, it might be worth it to hold the stock through a delay, if the company presents clear reasons for the delays and when the reasons might translate into further returns down the line. For example, a company may decide to build a high-quality road instead of just using gravel. This would potentially improve cash flows later and justify a delay. Or if extreme weather conditions are super rare in the region and have a 0.001% chance of occurring. That was unfortunately not the case.
While the stock may further advance until FP, no one went broke taking profits, and in this industry it often pays to be safe rather than sorry. Bayan Khundii is still a great deposit, and the exploration potential in the area is huge. Once Erdene operates the mine at nameplate capacity (and does so profitably), it might also be a good time to own the stock.