“This is the toughest market I have ever seen”, or some variant thereof is a sentiment longtime brokers, analysts, and bankers have been expressing over the summer. It has gotten so bad that bank sell-side analysts are actually issuing “sell” recommendations, and nearly every Canadian brokerage firm is cutting back staff. The mining sector, specifically the junior end of it, is the flotsam and jetsam of the financial world; and, until real world problems are addressed and investors become less risk averse, we suffer.
Here’s the Problem
The junior market is, on the whole, a capital destructive business in which participants clutch their precious certificates like bettors at the racetrack, hoping their horse comes in. The difference is that at the track, the minute the nag loses, the pieces of paper are thrown to the ground and you move on to the next race. With junior stocks, gamblers are reluctant to acknowledge the loss and move on. There is always the hope, encouraged by some silver tongued promoter, that maybe next time you will get lucky – maybe the horse will rise from the dead and win – and sometimes, very, very rarely, the horse does actually get back up – thereby perpetuating the myth. It is that failure to recognize defeat and move on, plus those one in a thousand resurrections from the dead, that result in a junior market that is way over-populated with hopeless companies run by hapless management.
Over the last 10 years there were too many low quality exploration plays and deposits being pushed by too many bankers, in order to support the champagne lifestyle of far too many lawyers, brokers, and miners in Vancouver. We tend to forget that a junior mining company is a perpetual share issuance machine, usually with no visible means of support, which sells dreams to the dreamers in the good times and slowly dilutes the dreamers out of existence during the bad. To the people running the machine it makes no difference how much paper is created; their job is to push it out as fast as possible to an overanxious public.
John Kaiser tracks the horses better than anyone in the business. Here, in more gruesome detail, is what’s been going on: at the end of July, of the 1,453 venture exchange juniors in his database, 48.8% were trading at under $0.10 (with a median working capital of $100,000), another 22.7% were under $0.20 (median working capital of $700,000) and, the next 10.8% were under $0.30 (median working capital of $1.3 million). That is an incredible 80% of the junior miners gasping in the quicksand, most without a rope or a hope – they are going away regardless of your efforts to save them.
This dying off of juniors is in reality a necessary and beneficial cleansing process that is so important to our market. At the end of the pain there will be a much healthier and smaller herd of juniors headed by competent people, and what money is left will be focused on these successful survivors. Only when (most of) the riff-raff is cleaned out of the system will new money wake up again to the astounding fact that, “Hey, by golly, the world needs metals and cannot economically meet demand without new deposits. There are billions of people that still want a house and a refrigerator.” At that point we will see the survivors take off again.
The junior mining sector has morphed into a more sophisticated market than I have previously seen. The majority of the surviving investors are paying attention to details. Flashy and spectacular drill holes and resource reports are being scrutinized. 46 meters grading 1.5 grams per tonne gold and 10 million ounces in a big open pit don't necessarily guarantee a free ride and high priced financing anymore. We here at Exploration Insights have to be as thorough as possible, which means independently analyzing data and making on-site evaluations. To that end, Quinton Hennigh is headed to the Dominican Republic and I am off to Serbia later this month to review four high profile discoveries. We remain confident that legitimate high quality mineral discoveries will sell for a premium.
Nothing has changed regarding our macro view of man’s unrelenting quest for a better life. In 1969, when Neil Armstrong looked down at Earth from the moon, there were 3 billion inhabitants. By 2020 the world’s population will have grown to 8 billion. They will all be seeking a better life and metals are a key component of that life. The idea that metal demand will increase over the coming decades is not in doubt but our ability to supply that demand with new discoveries is. We have covered this many times in past issues but briefly, mineral deposits are getting harder and more expensive to find. Political, social and environmental realities are closing off some of the more prospective exploration terrains in the world while the mine development and permitting process is being pushed out to five, 10 or 20 years for large projects. Additionally, costs are rising while the equity markets have become more risk averse. Therefore, that one in 1,000 junior exploration company making a legitimate discovery offers a 10 to 100-fold profit for diligent speculators.
That’s the way I see it.
Brent Cook will talk about "Evaluating Junior Exploration Companies, Tricks and Tips" in an Investor Master Class on Friday, Sept. 21, and on "Turning Rocks Into Money" in an Expert View on Saturday, Sept. 22, during the Chicago Hard Assets Investment Conference.