Low market valuations for junior mining companies have Michael Ballanger, director of wealth management at Richardson GMP, feeling like a kid in a candy store, and equities satisfy his sweet tooth more than the metal right now. Ballanger has had enough years in the business to recognize the advent of gold fever. In this Gold Report interview, Ballanger discusses his personal views and discusses how he looks for "well-incubated" companies that meet budget and timelines and raise funds without diluting shareholder value. He also shares why he sees junior miners as higher-reward and lower-risk than gold itself.
The Gold Report: Michael, can you tell us why you believe we are at the psychological and valuation bottom of the trough in the junior mining sector?
Michael Ballanger: Using the TSX Venture Exchange (TSX.V) as a proxy for the junior mining sector, the TSX.V between 2003 and 2007 traded in a range of approximately 1.5 to 3.3 times the price of gold. In the 2008 crash, it went down to 0.8 times the price of gold. Going back 15, 20, 30, 40 years, the TSX.V had traded on a 1:1 correlation with either the oil price or the gold price. Since the 2008 crash, there has been an immense aversion to risk in the junior mining space. At the end of 2012, trading was around 0.71 times the gold price. We have never seen valuations like this in the junior mining sector.
At the bottom of any bear market, sellers become exhausted so only survivors are left. If you accept that premise, it becomes important to see who has survived or who has the management capabilities, the financing and high-caliber projects to advance. Those are companies that will benefit from what I think will be a normalization of the Venture Exchange's ratio to the actual gold price. I think a realistic level would be 1.5–2.0 times the gold price.
Unlike most experts, I am far more bullish on the senior producers and on the junior and intermediate developer/producers and explorers than I am on the physical gold price. I think there is a lower-risk, higher-reward potential in the shares than in the metal right now.
TGR: Given the market performance in the junior precious metals sector and in the junior mining sector as a whole over the last couple of years, do you feel like the characters in the film "Groundhog Day," reliving the same events over and over?
MB: What is peculiar about this cycle is that we have not experienced the "mania phase" that typically happens at the end of a bull market. At the bottom in 2009, again in 2011 and all through 2012, despite near-record gold prices and very high energy prices, it felt as if we were in the post-Bre-X Minerals Ltd. period.
You need to remember that the symbol for crisis in the Chinese language is made up of two symbols: The first one is danger and the second is opportunity. I see tremendous opportunity, but not without challenges.
In my work, I have to be very good at identifying management teams and projects that will survive and will excel in most environments. With market valuations so low, I feel like a little child in a candy store with $10 in my pocket. There is so much to choose from.
Due diligence takes longer, yes, but when I find something, I can hand my clients an awfully big rate of return if they are prepared to take the risks associated with the sector.
TGR: We hear a lot about management teams at junior mining companies. You have said that you prefer management teams that incubate companies to preserve shareholder value. Can you expand on that concept?
MB: The perfect way to incubate a junior mining company requires, first, a private company with a very small group of shareholders who are looking three to five years down the line. The caliber of the shareholder base is paramount. The ideal shareholder is one who has been successful in his or her own business and knows how long it takes to start up, develop and eventually reap the rewards of owning a start-up. Having shareholders with a three-to-five-year timeframe eliminates frequent turnover in the shares, which makes it a lot easier for the management to raise capital for development at progressively higher prices.
The second most important thing relates to raising money. If a company needs $3 million (M) for a project, it should not try to raise $10M. If a company raises only what it needs, it avoids diluting shareholders' equity. Do you remember the old expression "Friend or foe, take the dough"? In the last few years, junior mining companies have taken the dough, which is always associated with larger percentage fees charged by the investment industry, and companies have been trashed by the market. They have diluted shareholder equity.
A well-incubated company keeps its financing strategic, on a needs basis and at progressively higher levels. This minimizes dilution and enhances shareholder value. These companies can go to their shareholders first for financing. If they wrote a check at $0.10/share, they will write another check at $0.35 and another at $0.75 because they understand the business model.