Too many investors fall in love with a project and forget that mining is a business, says Matt Badiali, editor of the S&A Resource Report. And business is tough these days. Still, a lot of companies' share prices have been unfairly cut down as investors who need to liquidate are selling good stocks on good news in an attempt to get a little higher price. These top 25% firms represent great bargains right now if you pick using the rules that Badiali sets out in this Gold Report interview.
The Gold Report: Your presentation "How to Navigate Junior Mining Right Now" uses the image of a giant intake hole in a lake to illustrate the condition of high-risk explorers. However, your price chart of the TSX Venture Exchange's performance shows the exchange to be in better shape than it was in 2000 or 2009. Why is everyone scrambling now?
Matt Badiali: The price chart does not tell the whole story.
Using 2004 as a base, there were 995 mining companies listed on the TSX Venture Exchange (TSX.V) then. Today, there are 1,309. In 2004, the total market value was about $12.3 billion ($12.3B). Today, it is about $19.25B. Additionally, the distribution in 2004 was more even. In 2004, the small caps made up about 7%, and the top 10% of those issuers represented 50% of the market value. Today, the average market cap is about $14 million ($14M) and the top 25% of the issuers are 84% of the exchange. That means 327 companies account for $16B of the $19B in market cap, leaving 75% of the companies comprising a tiny fraction of the total market cap. There is a big divide between the haves and the have nots.
Another ugly trend is the growth in the number of shares outstanding. In 2004 the average company had about 27M shares outstanding. A typical company today has an average of 72.8M shares out—almost three times as many. It may look as if things have gotten better, but the pie has been cut in much smaller slices.The average share price in 2004 was $0.46; today it is $0.20—a more than 50% loss.
TGR: Is there much mobility between the haves and have nots? Are small companies growing up into bigger companies?
MB: Most of the companies are in decline. There has been erosion in the market since 2011, especially in the ability of mining companies to get financing. These companies have no earnings. They cannot generate cash. What they can do is sell new shares in the hope of putting the money generated into the ground and making a discovery that will increase the company's value so they can raise money again at a higher share price. That is a miserable business model for most investors.
The number of financings fell from 3,000 in 2007 to 1,450 in 2012. Debt financing, on the other hand, has grown. Going to the bank to raise money is dangerous for small mining companies because they lack the ability to repay the debt. Debt financing is a great way to lose your asset.
Fund redemption is another mechanism pushing down share prices of companies with real discoveries. When the shareholders of funds that have bought new mining stocks want their money back, the fund has to sell whatever it can. With the bulk of the value in the top 10% of the TSX.V, that is what the funds sell off first.
As a result, some good companies have been sold off unfairly. For example, Bob Quartermain's company, Pretium Resources Inc. (PVG:TSX; PVG:NYSE), has a great discovery in British Columbia. It has gold intersections in its drill holes on the order of 1 kilogram per ton. It is a fantastic deposit run by one of the most successful explorers out there. And the share price fell 57%.
ATAC Resources Ltd. (ATC:TSX.V) has one of two potentially viable gold discoveries in the Yukon. It has fallen by the wayside. ATAC's share price fell 87%. Kaminak Gold Corp. (KAM:TSX.V), which owns the other, saw its share price fall 73%. Because these companies have viable discoveries, a lot of people got in quick and then got out just as quick.
It is mind-boggling that a company like Mirasol Resources Ltd. (MRZ:TSX.V) is so far down. It made a couple of great discoveries in Argentina and sold one to Coeur d'Alene Mines Corp. (CDM:TSX; CDE:NYSE), which was its partner on it, for $30M in cash and $30M in Coeur d'Alene shares. Mirasol's share price is down 77%.
Almaden Minerals Ltd. (AMM:TSX; AAU:NYSE) is down 56% from its recent high. It has an ongoing discovery in Mexico and a ton of cash. It is run by a father and son, proven ore finders, a team I respect.
Overall, I do not think the TSX.V is done falling, but there are opportunities out there.