Investing in the junior resource sector is not for the faint of heart or thin of wallet. Great thinkers have pointed out the risks for years. Mark Twain, once a miner himself, wrote “A gold mine is a hole in the ground with a liar on top.”
Investing legend Rick Rule, as clever a wordsmith as Twain, often points out that if you pooled all of the juniors together into one giant “Jr. Explorer Co., Inc.”, the company would lose $2-8 billion a year.
As an investor in this sector for years, I’ve come to the conclusion that miners and explorers are best at finding money in investors’ pockets and mining it to pay salaries.
“Most of the walking dead juniors, the zombies, are a bunch of liabilities disguised as public companies,” Rule told an audience of investors recently. “Their assets are liabilities; their financials are liabilities; mostly their managements are liabilities.”
Investing in the sector without knowledge or a guide is riskier than betting on the spin of a Las Vegas roulette wheel. Rule learned the math at university. “About 1 in 3,000 mineralized anomalies became a mine. So the typical Howe Street or Bay Street investment proposition is that you take a 1 in 3,000 chance for a 10 to 1 return.” Ouch.
Those are daunting odds, but the rewards can be spectacular when shares are purchased in a sour market. Shares of selective juniors have jumped in price this spring, but investor sentiment is far from bullish.
For instance, the owner of a gold mine in Canada’s historic Yukon gold belt wants to sell the property for $2 million worth of bitcoin. The Junior Gold Miners ETF (GDXJ) is trading at just 3% of the gold price. That ratio was four times higher (12) in December of 2010, when gold was trading $100 higher than what it is now.
Summer is normally a great time to go shopping for junior shares. Adam Hamilton writes, “In general, gold stocks just drift sideways through the summer doldrums of June, July, and August.”
For today’s article, Steve Todoruk, an investment executive with Rick Rule’s Sprott Global Resource Investments, tells us about the liftoff of a few juniors this year while the yellow metal hasn’t moved much, illustrating the leverage juniors provide to the metal price.
Todoruk is not just any old broker (full disclosure: I’m one of Mr. Todoruk’s clients). He’s a geologist and was the president of two Canadian-based junior mining companies. Believe me, he separates the liars from those who, as he likes to say, “have the goods.”
Read on and remember Todoruk is on the front lines of junior resource investing. He might just convince you that the debilitating bear market of the last three years is nearing an end and it’s time to take the plunge—selectively.
Doug French, Contributing Editor
Top Juniors Take Off with Slight Move in Metals Prices
By Steve Todoruk, Investment Executive, Sprott Global Resource Investments Ltd.
In the past few weeks, several of the “top” junior exploration stocks have seen a pronounced move upwards, many beating gold and silver bullion by a wide margin.
After hitting a low of $1,180 per ounce this past December, gold moved up to a high of $1,392 by mid-March, 2014.
Outperforming gold by a wide margin…
Many of the junior mining stocks were swept along, and even outperformed gold substantially. For instance, Detour Gold Corp., a junior that I would consider “top tier,” was at around $4.10 on January 1. By mid-March, the stock stood at $12.15, a 196% move. That is nearly 20 times the returns from gold, which rose less than 10% over that timeframe.
Silver had a similar story. In late December, an ounce of silver cost around $19.40. It then rose to around $21.40 by March 14—a 10% increase. Meanwhile, Mag Silver Corp. rose from around $5.15 per share to over $9.50 in the same timeframe—an 80% move.
But gold and silver subsided from Mid-march to late May. Gold fell back down to $1,250, and silver retreated back under $19 again. Many juniors gave up some of their gains as well.
Stocks boom in June…
In June, we saw yet another rally in the gold price, aided in part by the crisis in Iraq and recent hawkish remarks from Fed Chairman Janet Yellen.
Detour Gold moved from $9.80 to its current $14.51 level (up 48%), trouncing gold’s move of only 6%. Mag Silver’s share price has surged upward over 54%, from $6.55 to $10.11. Silver is up only 12% in the same timeframe.
Gold is still $70 cheaper per ounce and silver is $1.00 cheaper than their respective March highs, yet companies like Detour Gold and Mag Silver’s share prices are already making new highs for the year.
Quite a few other mining companies—big and small—are seeing the same thing: a sharp and rapid upswing in share price. A partial list of the well-known companies that are seeing share price appreciation includes Franco Nevada, Royal Gold, New Gold, Semafo, Asanko Gold, Premier Gold Mines, Tahoe Resources, Roxgold, and Agnico Eagle Gold Mines.
What is happening? Why now? Remember that there is a common belief that buyers should “go away in May and come back after Labor Day Weekend,” when investors return from vacation. Doesn’t this rally fly in the face of conventional wisdom about market timing?
That quality miners continue to advance despite “sell in May” headwinds suggests that investors are becoming more confident that the lows are behind us. Gold investors are no longer fearfully awaiting the next drop in share prices. Instead, they are slowly but surely moving back into some precious metal companies, positioning themselves for higher stock prices.
In my opinion, these early-in investors do not necessarily believe that gold prices will rise dramatically. Rather, they have a degree of confidence that a gradual recovery in metals prices will generate better returns in quality mining or exploration stocks. I believe that if gold continues to rise slowly, high-quality names among small exploration and mining stocks stand to outperform considerably going forward.
Majors looking healthier…
One of the first signs of improvement in the miners came in mid-January, when Goldcorp Inc. announced a $2.6 billion hostile takeover offer for Osisko Mining Corp. Goldcorp management would not have made that takeover bid if they weren’t feeling confident. But others were confident, too.
A bidding war for Osisko soon erupted between Goldcorp, Yamana Gold Inc., and Agnico Eagle Mines Ltd. Yamana and Agnico Eagle emerged victorious, outbidding Goldcorp with a takeover offer of $3.6 billion to gain control of Osisko and its large, highly prized gold mine in eastern Canada.
This move demonstrated that Yamana and Agnico Eagle felt that their corporate houses were in order, and were ready to go out shopping. It also suggested that they thought Osisko was relatively cheap and ripe for acquisition. Acquiring Osisko allows both companies to grow their companies’ annual gold production.
Merger activity has picked up elsewhere, too. It looks like many companies feel that the bottom is behind us and that deposit valuations are still low enough to be attractive target acquisitions.
Four weeks ago, mid-tier miner B2 Gold Corp. announced a friendly takeover offer to acquire one of the largest and highest-grade gold deposits near surface (which means it could be mineable as an open pit) available, in a deal with Papillon Resources Ltd.
Just the next day after that, Mandalay Resources Corp. announced it was acquiring smaller gold miner Elgin Mining Inc.
Three weeks ago, large copper miner First Quantum Minerals Ltd. announced a friendly takeover offer for Lumina Copper Corp and its large copper deposit.
And most recently, Augusta Resource Corp. has agreed to a friendly takeover offer from larger copper miner Hudbay Minerals Inc.
After dramatic belt-tightening during the last few years, we are seeing companies pick up the pace on spending, too. Gold heavyweight Barrick Gold Corp. has already announced that it is prepared to start spending again on its giant Pascua-Lama gold-silver deposit that straddles the Chile-Argentina border. This mine construction project has seen costs spiral out of control since construction began. Initially pegged at $3.0 billion to build, it has so far cost $8.5 billion and is still ongoing. Barrick recently put the brakes on the project to stop the bleeding, but it’s back to building this significant mine.
These recent developments tell us that the precious metals and copper mining space is starting to turn for the better. Consolidation like this is a good sign. It tells us that the miners are getting healthier again.
Another good sign for the juniors…
The trend is very clear. In my view, you should own shares of the “best in class” junior mining companies available, which larger companies may look to acquire for their portfolios. My definition of a “top” junior is a company that has recently made a high-quality (by which I mostly mean high-grade) mineral discovery.
Today, that is a very short list. Most well-informed speculators would probably include Mag Silver Corp., Pretium Resources Corp., Fission Uranium Corp., Reservoir Minerals Corp., Roxgold Corp., Continental Gold Corp., and Rubicon Minerals Corp. on the list for “top juniors.” Papillion Resources Inc. would be one of these as well, had it not been taken over by B2 Gold Corp. three weeks ago.
In a depressed market environment like we’re in today—and have been for some time—it’s actually much easier to identify the top-quality companies. The list of quality names is short, and knowledgeable speculators in the sector can quickly point to them.
The sector is starting to offer a little more promise than we have seen in a while, so start getting positioned wisely. If you’re willing and able to travel this summer, consider joining me at our upcoming Sprott Vancouver Natural Resource Symposium, from July 22-25, 2014. Click here to find out more, or click here to register now.
Steve Todoruk worked as a field geologist for major and junior mining exploration companies after he graduated with a B.Sc. in geology from the University of British Columbia in 1985. Steve joined Sprott Global Resource Investments Ltd. in 2003 as a senior investment executive. To contact Steve, email him at [email protected] or call him at 1-800-477-7853.