Categories:
General Market Commentary
/
Precious Metals
Topics:
General Market Commentary
/
General Precious Metals
An impending junior mining mania – it is going to be exactly the same this time!
When the contrarians join in the herd, a turning point is fast approaching. Sentiment across the junior resource sector is dismal. It is shaking the steadfast dedication of even the gold bugs – some of the most resilient and loyal followers that exist. When their confidence shakes, something is afoot.
This week I received a call from a mining entrepreneur. He is independently quite wealthy and in fact, not too long ago sold a junior resource company for nine-figures. This is not a destitute retail investor who has burned through his last dollar betting on a dying penny stock. Yet, he relayed to me the same fears I have been hearing more and more of late – the junior resource market is broken, traditional avenues of financing are gone for good, this bear market could last for another five or ten years, and the key statement – things are different this time.
I provided him with a pep talk I have given countless times over the past couple months, my thesis to which is that contrary to public sentiment, things are going to be exactly the same this time.
First there will be a move off the lows (what causes this is unknown, but also irrelevant). Then investors with an eye on resource stocks will start to move in, wondering if this is the beginning of a real move. Pretty quickly, brokers and bankers will begin to pick up the phone and call their clients, talking about the next big mining deal. And before long, retail investors will be buying stocks like hot cakes.
News that previously was yawned over and created selling, will not just catch a bid, but in many cases cause frenzy. Recycled mining projects will be re-housed and renamed, and once again sold as the next big discovery. Five and ten cent stocks will head towards a dollar. Non-brokered unit financings with full warrants will shed their warrants and eventually turn into bought deals. Unsightly and unkempt promoters, without a hope in the bear market will emerge from the shadows. And the revival of the Vancouver machine will be complete.
Investors have trouble seeing this picture because the junior resource market at the moment is so depressed.
Just recently, the Toronto Venture Exchange ($CDNX) breached its December 2018 low and is just 8% away from reaching its 2015 low. Relative to the price of gold, the $CDNX is cheaper now than it was in 2015 or anytime since its inception in 2006. The $CDNX acts as a strong proxy for junior resource equities, comprising of 56% mining related companies. For those blaming the recent sell off on cannabis, cannabis related stocks make up around 5% of the exchange.
It is common for junior resources to experience a trickle down effect. Money that flows first into gold, moves to the majors and mid-tiers, eventually making its way down to the juniors. The trickle down has not occurred this time – not yet that is.
What has created this disparity in prices? After all, gold is up around $250 (18%) in the past 12 months.
The advent of passive funds certainly has been a major contributor – ETFs such as the GDX and GDXJ are an easy way for investors to get exposure to gold stocks. The GDXJ or the Junior Gold Miners ETF is a misnomer; the ETF has swelled to such a size that it no longer owns a single junior company due to liquidity restraints. This is starving the sector of capital.