Junior Miners Poised For Impressive Gains
Jeff NielsonLike all commentators, I am somewhat constrained it what I write about: it has to be a subject in which people have interest. Sure, I could write about Greek mythology or backpacking in Bolivia, but if no one reads it, it becomes a fruitless exercise - and raises that cliché question "if a tree falls in a forest...?"
November 17, 2009
Regular readers will have noticed that I have been writing about precious metals mining companies more often in the last few months - and this is no accident. In my interaction with readers/investors there has been a sharp rise in awareness of and interest in these companies.
In contrast, during the panic of last fall, miners in general - and junior miners in particular - had been devastated by the Wall Street-engineered sell-off, with many losing more than 90% of their value. With these companies sitting at once-in-a-lifetime valuations, no one (outside of the hardcore commodities investors) wanted to touch these companies.
In recent conversations with people, I have used an example of a brand-new, junior gold exploration company which I am holding - a spin-off of its parent company, which has already produced one, major gold discovery. It was spun-out shortly before the worst of the panic at a price of 9 cents, and was pushed down to as low as 2 ½ cents. It closed yesterday at 73 cents a share - an advance of nearly 3,000% from its 52-week low.
This is still an early-stage exploration company. If the property it is currently exploring lives up to its potential, this junior is still at no more than 1% of its long-term value. However, as I wrote in a recent commentary "Investment Check-list for Precious Metals Miners: part I"), such companies are like "lottery tickets". They are highly-speculative, and should never be considered "core holdings" in anyone's portfolio.
It is with the miners who have advanced into production where most of the truly exciting investment opportunities exist. These companies offer spectacular up-side growth potential, with limited down-side risks. Before I discuss their fundamentals in greater detail, let me review how this investment opportunity was created.
Precious metals miners (and commodities producers, in general) are expected to leverage the gains in the underlying commodities which they produce. I explain this concept in detail in a previous commentary. However, since 2007 (and for the juniors, back to 2006) these companies have grossly under-performed versus the price of bullion - irrespective of whether the price of gold (and/or silver) was rising or falling. Put another way, they have been getting steadily cheaper based on the underlying fundamentals.
This has naturally caused a great deal or consternation in this sector, even amongst the most committed "gold bugs". There are several potential explanations for this phenomenon. Some have suggested there are simply too many of these companies. There are more than a thousand mining companies in the precious metals sector alone, although a number of these companies had all of the "life" crushed out of them last fall, and exist in much the same manner as U.S. zombie-banks (though without their own taxpayer-funded lifeline).
This argument loses most of its persuasiveness when the size of the sector is looked at collectively, however. A recent commentary (with accompanying graph) illustrates this vividly - unfortunately I forgot to bookmark it. It showed how the collective market-cap of the entire precious metals sector was much less than that of Exxon Mobil. Clearly there are enough investor-dollars floating around to support a sector of this size.
My preferred explanation for the sector-wide under-valuation of these companies is the creation and growth of the infamous, "bullion-ETF's". As I have indicated in many previous commentaries, the legitimacy of the larger "bullion-ETF's" (which are supposedly backed by the same bullion banks which are the largest "shorts" of gold and silver in history) is seriously open to question - with the question being: do they really hold any bullion?
There are many bases for challenging these "fronts" for the bullion banks. I have previously raised the most important question to these bullion banks in a previous commentary ("Your ETF Silver is For Sale"): why do you have a "for sale" sticker on every bar of silver which you hold for SLV, and other (so-called) silver bullion-ETF's?
As that previous commentary points out, every ounce of silver contained in bullion-ETF's is listed as part of official "silver inventories" - meaning that anyone with enough money could buy every ounce of silver supposedly "held" by SLV. Of course, the other interpretation of that data is that the "bullion" of the silver bullion-ETF's is simply being added to inventory numbers to pad them - and hide the fact that silver inventories have plunged by 90% since 1990.
If the bullion-ETF's are indeed nothing more than the fraudulent shells which much of the data suggests, then these entities become the perfect weapons of the anti-gold cabal - which (of course) includes the same bullion banks which claim to back the bullion-ETF's.
Anyone suggesting that bullion-ETF's are completely legitimate faces the enormous hurdle of explaining how/why the largest "shorts" in the history of commodity markets would also be the sponsors/guarantors of what have become the largest investment vehicle (on the "long" side) for small investors in this sector.
Legitimate or not, bullion-ETF's have pulled tens of billions of investor dollars intended for precious metals into these paper-trading vehicles. Naturally a large chunk of that money would have gone into real bullion, if not for the creation of the ETF's. However, for whatever reason, many small investors are simply unwilling to hold "physical" gold and silver. Previously, all of these dollars would have gone into the shares of mining companies - as the next-best proxy for holding physical bullion.
Absent these billions, mining companies have not been able to leverage the gains in bullion over the last few years. This has also removed what is historically seen as one of the most important, bullish technical indicators from this sector: the out-performance of the miners - very convenient, indeed, for the bullion-bank "shorts".
With this reference to bankers, I can't forget to include the rumor about last year's sell-off of Canadian mining juniors (which do the bulk of global exploration for minerals). After all of Canada's banks collectively cut-off 100% of all financing/credit from Canadian mining companies (despite being the strongest, best-capitalized banks in the world), it is rumored that these banks then also collectively shorted all these same companies.
In the case of exploration companies (which, by definition are not yet producing revenues), cutting them off of all capital and then ruthlessly shorting them has about as much "sport" in it as shooting fish in a barrel. I'll leave it up to readers, individually, to judge for themselves if this sounds like a strategy which a banker would be likely to pursue.
Irrespective of the cause, the fact is that by last fall, precious metals miners had fallen to their lowest valuations (versus the price of bullion) this decade - a decade in which the price of gold and silver has quadrupled. As my previous example illustrated, valuations have improved in the sector, although given the impressive moves higher for gold and silver, these companies are still cheap versus bullion, itself.
Given the tendencies of bankers to back "winners", suddenly the same mining companies which couldn't get a penny one year ago are now being welcomed with open arms by Canadian bankers. It is with this set of parameters that we can now look to the future for these companies.
With rising share prices (and equally impressive gains in trading volumes), many of these companies have very attractive charts - adding yet another source of demand: the speculative traders. While these are clearly the most fickle segment of the investment community; high trading-volumes, great volatility, and strong underlying fundamentals are a combination likely to maintain the interest of these buyers.
Just one year ago, these companies were totally starved for capital, ignored by analysts, shunned by investors, and at their worst valuations of this decade-long bull market. It is typical of market psychology that such scenarios often form the basis for the strongest, bull-market runs.
Now these same miners are all fattened with new capital, sought-after by investors, and fawned-over by analysts. However, unlike the fantasy-rally in U.S. markets, where valuations are grossly excessive by any rational metrics, precious metals miners are objectively inexpensive - still under-valued versus the commodity they produce.
Some of the gold perma-bears have cited the fact the miners have not outperformed bullion as a reason to believe to that this sector is poised for a crash. Some have even resorted to the hysterics of calling the precious metals sector a "bubble" (see "Beware Fortune's Gold Warning"). Ignore these fear-mongers.
The price of gold remains at less than half of its all-time high when adjusted for inflation, while silver is at only a tiny fraction of its inflation-adjusted high. Meanwhile, the miners are valued cheaply versus current bullion prices. No honest and informed commentator could describe such parameters as a "bubble".
The fact is that if precious metals miners had been greatly outperforming bullion over the last two years, the same perma-bears would be "warning" investors that the sector was ready to crash because of the outperformance of the miners. The only difference between those two contradictory stances is that the second is actually rational. At some point (many years down the road), when the miners have fully-leveraged the price of bullion (plus an extra premium for "irrational exuberance") then this sector will reach a long-term "top".
However, with the same banksters who undermine precious metals at every opportunity serving the precious metals sector through refusing to curtail the excessive creation of new debt and the paper they call "money", the end of the precious metals bull-market remains out of sight - on even the most distant horizon.
The time to buy into precious metals miners is not when everyone living on your street holds shares in at least a couple of these companies. The time to buy is now: when valuations are cheap, few yet understand these companies, and the bull-market remains "young".
As more and more questions are asked about the legitimacy of bullion-ETF's, this is yet another new source of demand for precious metals miners. Should these funds become completely discredited, or should one or more funds formally default on their obligations to unit-holders (both being possible scenarios) the flow of dollars away from the ETF's and into the miners will go from a trickle to a flood.
Those who remained loyal to this sector have already regained their losses from last year and begun making real gains again. The good news is that our "party" has just begun.
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