WHILE THE WORLD'S MAJOR GOLD producers have reaped a windfall from high gold prices, their much-smaller counterparts -- known as junior miners -- not so much.
Hit by the credit crunch and risk aversion, the venture capital-fueled juniors have had difficulty using debt to finance their operations. So they turned to equity financing, diluting holdings even as investors were dumping their shares in a flight to quality that, ironically, was behind the record gold prices.
But change may be afoot. Gold has slid by more than 16%, from a March peak above $1,000 to Thursday's $848.90 low, the weakest front-month level since January; May futures closed at $856.10 an ounce Friday, down 3.5% on the week. Such a decline could indicate risk appetite is growing and may signal investor readiness to return to the juniors, in hopes that gold exploration will bring a big payoff.
![[BA_DJAIG_COMMOD.gif]](https://s.wsj.net/public/resources/images/OA-AS935_BA_DJA_20080502213500.gif)
"Gold moves up [when] we're in a riskier market," says Victor Goncalves, economist and president with the Equities and Economics Report, who tracks mining companies and sees Canadian juniors at "fire-sale" prices. So gold's easing "would bode well for juniors," he says.
Pure-junior listed indexes are rare, but investors can get a sense of their performance with the Standard & Poor's/TSX Venture Composite Index (ticker: ISPVX), which tracks gold juniors among other small-cap stocks. It fell more than 23% from its August high to March's low as the credit crunch intensified, and has since recovered only about 0.6%. Meanwhile, the August-March period graced large-cap gold miners in the Philadelphia Stock Exchange Gold Silver Sector Index (XAU) with a 73%-plus rise; but they've given back more than 18% as gold's price fell back.
DOW JONES REPRINTS
This copy is for your personal, non-commercial use only. To order presentation-ready copies for distribution to your colleagues, clients or customers, use the Order Reprints tool at the bottom of any article or visit:
www.djreprints.com. •
See a sample reprint in PDF format •
Order a reprint of this article now.
The second quarter has historically been harder for the juniors due to waning seasonal jewelry-making demand. But Thomas B. Winmill, whose Midas Fund1 (MIDSX) invests in commodities, sees juniors' share prices "ratcheting up fast," in two to three months, as cash-flush majors in need of bolstering production numbers are likely to buy up under priced juniors.
In addition to buyouts, juniors' shares can appreciate as the miners discover deposits or secure beneficial financing.
But not everyone sees the wider market as risk-tolerant enough to return to junior-mining investment: "If there is capital coming back into the market, it's not necessarily looking at junior gold," says David W. Adamson, president and CEO of Rubicon Minerals (RMX.Canada).
Indeed, junior miners are risky, because they are often years from commercial production, and their properties may come with higher production costs. Political risk can also be a factor.
A case in point is Aurelian Resources (ARU.Canada), an oft-mentioned analyst favorite because it's sitting on an attractive gold-silver deposit in southern Ecuador. But that nation's acting legislature recently froze mining activity, and reduced the number of concessions allowed private mining companies.
The skittish may want to look at more politically stable countries -- Canada, for instance, says Carlos Sanchez, precious-metals analyst with consultancy CPM Group. But that nation also comes with higher labor costs and a slew of junior-mining competition. With juniors "you have increased potential to gain, but you also have increased risk," Sanchez says.
MATT WHITTAKER is a reporter for Dow Jones Newswires in Jersey City, N.J.