A Monday Morning Musing from Mickey the Mercenary Geologist
“Gold stocks suck,” said fellow newsletter writer Eric Coffin in a presentation at the recent Cambridge House Investment Conference in Calgary. I could not agree more.
Let’s review the fundamentals to understand why his words ring true.
Most micro-cap resource stocks were immersed and have stayed underwater since a sector-wide high in early March 2011. The Toronto Venture Exchange Index, which serves as a good proxy, is down 43% from that period of time. Weakness in the resource sector has occurred despite record or near-record prices for most commodities in 2011 and continuing high prices into the second quarter of 2012.
Reasons for the decline in junior exploration and mining stocks are many:
- The Japan earthquake and tsunami in mid-March 2011 resulted in a significant downturn of the world’s third largest economy and substantial damage not only to the uranium industry but to the entire resource sector. Some mining operations have been substantially affected by delays in delivery of heavy equipment from Japanese manufacturers.
- Private placements in Q4 2010 and Q1 2011 became free-trading and began hitting the market four months before the summer doldrums started. Professional investors and speculators essentially front-ran the old adage, “Sell in May and go away.”
- The usual seasonal weakness in the summer of 2011 was followed by a 30% correction in commodities in the early fall that devastated resource equity markets.
- Many investors sitting on significant capital gains from early in 2011 balanced them with massive tax-loss selling near year’s-end.
- Continuing economic worries in Europe related to the bad debts ofGreece,Portugal,Spain, and nowItalyhave led to general risk aversion among investors and speculators.
- The continuing high price of oil has inflated exploration and development costs and resulted in less work being accomplished at higher expenditures than advertised.
- Environmental opposition and bureaucratic regulation have led to the delay of many projects with most juniors’ timelines not being met at their budgeted cost.
- A slowdown of growth inChinafrom higher interest rates and stricter bank leverage requirements in late 2010 and 2011 has reduced overall demand for industrial commodities.
- Reluctance of financial institutions to bankroll large mine projects because of sharply escalating capital expenditures and operating costs has trickled down to a tight market for equity funding of junior company projects.
- The US Federal Reserve’s postponement of a third round of quantitative easing, at least until after the November elections, has resulted in range-bound and stagnant prices for precious metals.
The ten factors listed above have contributed to an on-going bear market for junior resource stocks.
However, in my opinion the main reason that speculators have lost interest in the high risk / high reward micro-cap sector is the overall poor performance of these equities since January of 2011. Simply put, a legion of juniors has consistently over-promised and under-delivered for several years now and investors finally have grown weary of the charade.
Daily trading volumes and the value of the Toronto Venture Exchange show the disinterest and resulting downturns:
Chart Courtesy of MSN Money
This chart shows that:
- More than 200 million shares were traded daily for most of the first quarter of 2011.
- There were only three days with trading volumes greater than 200 million shares in April 2011.
- There have been two days with trading volumes greater than 150 million shares since May 2011.
- Average daily volumes have been less than 100 million shares since July 2011.
Seasoned investors know that trading volume and market capitalization are strongly correlated. The lack of liquidity in the junior resource sector is shown by the on-going downtick of the Venture index.