Are you wearing your combat helmet? Junior Mining
Are you wearing your combat helmet?
The last 12 months have not been kind to junior mining equities, which is all-too
apparent to investors who have held shares in these companies. An impactful illustration of this point is the significant drop in
the in situ market value for ounces of gold in the ground. One year ago, bullion was making new highs week over week with the
price of gold rising up to US$1,508/oz. Based on Canaccord Genuity’s Junior Mining Team’s in-situ Au database, the market
was valuing Au held by non-producers at about US$129/oz. A year later, while the price of gold is trading higher at US$1,590
(5.4% higher than one year ago), the average in-situ value per ounce has dropped to US$62/oz (52% lower than one year ago.
Ouch!! The Team believes that the following factors have contributed to the decline in the in situ market valuations over the
past 12 months: 1) Decreasing grades; 2) Increasing Costs; 3) Increasing political and regulatory risk; 4) Lack of qualified
mining personnel; 5) Too much competition (too many juniors and only so much speculative capital); 6) Expansion of ETF
holdings at the expense of equities; and 7) Lack of M&A. The decline in the market value for an ounce of in situ gold has
significant implications for junior explorers. The potential reward for new discoveries has effectively been cut in half over the
past 12 months. While a change in the trend in gold to strength from weakness would likely improve sentiment toward the
junior mining sector and in situ values, the Team believes a fundamental shift in outlook for the sector likely needs to occur to
reverse the current down trend. Without a fundamental series of positive catalysts, however, they believe the sector could be in
for additional downward pressure on low overall volumes. While exploration will continue to be an integral part of the mining
sector, junior mining companies need to be wary of this new environment and manage their capital accordingly. This is an
extremely challenging environment for financing. Companies that burn through their balance sheet too quickly are likely to be
faced with increasingly onerous dilution and fees associated with new funding.