It Feels Like Not Even Lipstick Will Work Now

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April 17, 2012 03:33 AM

To say the junior resource market has been “acting like a pig” is an understatement. To say simply I’ve been wrong about them being undervalued only irritates those already wishing they hadn’t purchased… (just ask my wife—I would, but she stopped speaking to me after looking at our last brokerage statement).

It’s about 25 years since I first started speculating (gambling) in the junior resource market, and I can’t recall a stronger sense of dislike, disgust and hopelessness (maybe some Canucks fans feel close to this) in this sector than I am seeing and feeling now.

While I didn’t need a metal detector at the door, I just had many readers at a local seminar and from them sensed a high level of frustration and a wanting to throw in the towel. (It was my wife who was giving me the really dirty looks). The common theme among their questions and comments was, “Why are the mining and exploration stocks doing so poorly despite metal prices still much closer to their decade highs versus lows?:

Because I never felt they could be selling where they are at today (my own personal portfolio of juniors is down seven figures in the last couple of months), I no longer deserve to be the one to answer their questions. However, I will tell you what I told my wife and hope you hold off seeking a divorce attorney as she has (at least, I hope she has).

Despite metals prices up anywhere from 100% to 500% or more from where they were a decade ago, the vast majority of producers and exploration stocks have not remotely come close to reflecting those appreciations in their share prices. The thought used to be that mining shares were actually better to own than the physical metal as they were to offer better leverage to metal prices going up. Nothing has seemingly been further from the truth.

Here are my “crying towel” reasons for why I think we are where we are:
The audience for mining and especially exploration shares has shrunk despite the dramatic increases in metals prices themselves. A clear example of that is the dramatic drop in the primary “end users” that used to be a key part of the demand side – brokers.
Years back, hundreds if not thousands of brokers built part or much of their book of business around the buying and selling of mining and exploration stocks. They each had 100 or even 500 clients and many of them ended up buyers of these shares. Unfortunately, these folks are now asset gathers and commission-driven buying and selling is ancient history. They no longer are active in the mining and exploration sector. This is also unfolding in the Canadian financial industry.
While the 43-101 rule truly reformed what used to be like the wild, wild west in the junior sector, it also removed any sizzle from the promotional side of things. While not a bad thing when one recalls what used to go on in this area, the downside to it is companies who are mostly sizzle and not yet steak can’t even light a match when speaking of their potential, let alone stroke the fire. That may be a good thing, too, but it wasn’t the case when these shares did much better as a group a decade or more ago (and a reason one must consider now whether they like it or not).
Regulatory and/or compliance factors have made it much tougher for juniors to attract attention. Again, this may or may not be a good thing, but it’s a fact of life as far as I’m concerned. In the States, most brokerage firms no longer allow solicitation of companies not trading on the NYSE or major NASDAQ markets. Some even don’t allow unsolicited orders anymore. Many compliance departments have made it difficult or impossible for their advisers to buy juniors-period.
Canadian investors may be surprised to find most Americans don’t find natural resources as “second nature” to them. Americans’ biggest concerns about natural resources are availability of gas to drive their cars and oil to heat their homes. They’re not keen on natural resource stocks and still think for the most part a gold mine is a hole in the ground with a liar standing next to it.
The junior sector is a “pimple” of an industry, yet 1,000 to 1,500 juniors are trying to find a few dozen so-called experts who can appreciate and talk about them in a mostly what’s-in-it-for-me mindset. The ability to get their story known is perhaps the biggest challenge and drag for a junior these days.
Reducing the hold period on private placements to just four months has hampered the juniors. Companies just can’t advance themselves up the corporate ladder in such short periods to warrant enough new interest to gobble up all these new free trading shares that come to market.
Investment bankers now play the “warrant” game in order to keep deal flow going. They turn to their institutional buyer and suggest selling the shares that are coming free trading for either side of breakeven and hold the warrant as their leverage. Meanwhile, they take the freed up capital and buy their next deal.
Discount brokerage has also greatly added to what seems like an endless supply of shares. Years back, one held juniors at times simply because they couldn’t profit from selling them after just a few cents rise. Now, thanks to deep discount commissions, one can profit from the sale even if the share price is barely up.
I’m certain there are other reasons, but I believe the above is a good part of why we’re where we are today. The question now is does this mean the mining and exploration stocks are no longer worthy?

I’ve had discussions with many different players in the junior sector of late and they’re all either sitting on their hands, in a state of disbelief, and/or feeling life as they knew it has ended. Like I said at the beginning, in 25 years I have not seen such a dire state relative to when gold was well below $300 and it seemed like “last one out of juniors turn out the lights.”

So, the end result of all this appears to be only three possibilities:
It is indeed the end of juniors as we know it and we die off as former buggy whip players did at the turn of last century;
Like it did a decade ago, the juniors become mostly non-existent price-wise and they rally simply because they really can’t go any lower;
Something not imaginable (good or bad) occurs and we go from there.
On the basis it’s like a decade ago and we’re at or close to a major bottom, there are a host of juniors at which one could almost toss a dart at this juncture. Whether it’s those with a pile of cash, a sector like uranium that fundamentals seemingly demand attention to (my Tracking List has several juniors in that sector), or special situations that appear to be crying out for attention ASAP.

Here are my six largest personal holdings dollar-wise as of today. It would come as no surprise to me that any and all of these might either merge, get taken over and/or get strategic partners before the year is out:

Cap-Ex Explorations (CEV-TSX-V $.74 )– Forbes and Manhattan have shown themselves to be on the forefront of the iron-ore plays in Canada by being key players in Consolidated Thompson and Alderon Iron Ore (a client of mine and a company I still own a substantial amount of shares in). They’re now leading CEV, which should be considered special when compared to its peers. A major drill program begins soon and the shares seem to be on fire sale at the moment.

Excelsior Mining (MIN-TSX-V $.48 ) is led by Mark Morabito, who took Alderon Iron Ore from birth to doing what should end up to be a billion-plus deal when all is said and done. I think we shall see a good part of his focus now on MIN and a major strategic partner like ADV received is not a pie in the sky possibility.

Geologix Explorations (GIX-TSX $.26 )only problem in my biased opinion outside of a collapse of metal prices or something unforeseen, is going to be being bought out for maybe just a dollar or so versus the potential for at least twice that if the junior market doesn’t get better. I will just have to learn to accept that and suffer on the way to the bank if and when that happens.

Oromin Explorations (OLE-TSX $.78 ) of all my companies and personal holdings, this is the no-brainer in terms of takeover/merger. The company has already told us they continue to have discussions and I suspect if not for some recent political factors in the country where OLE does business, such actions may have already occurred. The fact that the company is expected to update its resources and feasibility is only a plus in my prejudiced mind and like this report seems to suggest, risk appears to be pennies to the downside while upside potential is many times more than that.

Sunridge Gold (SGC-TSX-V $.39) and another company in Eritrea,Nevsun Resources, are prime targets of the Chinese in my biased view. I suspect when SGC feasibility comes out soon, we shall find the company’s Net Asset Value (NAV) more than its entire market cap. Like GIX, I think the worst case barring metals collapse or something unforeseen is I eventually sell my shares for $.90 or a buck versus $1.90 or two bucks. Here, too, I expect to adjust.

Spanish Mountain Gold (SPA-TSX-V $.45) after announcing it was skipping pre-feasibility and going straight to bankable status, the share price lost about half of its value. Go-figure. Fifty-cents or below feels like fishing in a fish farm.

I like to suggest given where shares stand today versus the actual metals, the time has come to add to my Tracking List. The fact that one of the handful of experts I take the time to listen to, Mr. Frank Holmes seems to agree, encourages me to add to my Tracking List today the following companies:
Agnico Eagle Mines AEM-NYSE $32.57
Hecla Mining HL-NYSE $4.16
Keegan Resources KGN-NYSE $3.16
McEwen Mining MUX-NYSE $3.82
“Often the difference between a successful person and a failure is not one has better abilities or ideas, but the courage that one has to bet on one’s ideas, to take a calculated risk and to act.” * *Andre Malraux