There is no doubt about it. Precious metal mining companies are going through a time of testing. The financing markets are challenging. Investors have lost faith in the major gold and silver producers who have over-promised and under-delivered in high cost projects in questionable jurisdictions. Acquisition strategies have been poorly executed near interim tops at high valuations. Some could say it is the worst of times for this sector. However, long term contrarian investors say that the worst of times may be the best time to find the top junior mining situations for the next upturn.
Gold and silver prices are basing at multi-year lows around their 5 year trailing moving average. The junior miners are priced at valuation levels not seen since the late 1990's post Bre-X scandal.
After Bre-X no one wanted to invest in precious metals and junior miners and went into the technology or the real estate sector sort of similar to what we are seeing again right now. In the late 1990's, we witnessed a major divergence between the U.S. equities and mining shares like today.
The pessimistic late 1990's junior mining investment climate turned out to be one of the great times to invest in juniors when it was totally ignored. From 2000-2007 the Canadian Venture Exchange went up over 450% while the Nasdaq corrected close to 50%.
I started focusing on precious metals in the post Bre-X error. For those who are unaware in the late 1990's there was a company called Bre-X, which went from a penny to close to $300 a share (split-adjusted) before the collapse. They claimed to have found over 200 million ounces of gold in Indonesia. The biggest funds were invested. It was a lie and became one of the biggest scams in history at that time. The biggest Canadian pension funds were the largest losers.
The reaction to the Bre-X scam was a major increase of costly and burdensome regulations on the mining industry. The entire geology business came under supervision. The regulators claimed this would protect the investors from other potential Bre-Xs. However, there is no doubt that the increasing amount of regulations raised legal costs and hurt the junior miners. The junior miners are finding it more difficult and more capital intensive than ever to focus on discovery and exploration.
Many industry experts are concerned about the current trends, which show that many juniors will be exiting the markets as the increased regulation sends away the potential investor. This continued downturn in the mining sector could have dramatic affect on the entire North American economy. Government officials claimed the banks were too big to fail, will they similarly state that for the large international miners?
Gold is no longer under $300 an ounce, oil is not under $20 a barrel, yet junior miners are priced that way. There has never been such a disconnect between the prices of the junior miners and the underlying commodity. This raises questions on the efficiency of the capital markets, especially the mining sector. This brings up many concerns. Is the entire sector being manipulated lower? Is there any investigation of this disconnect between miners and commodity prices?
There could be a rise of private investors to acquire assets out of the public arena for pennies on the dollar. Note the recent Uranium One deal going private from the acquisition with Russia's Rosatom. This trend of going private may continue as the public does not value these assets.
As ugly as it appears right now, when there is literally blood in the streets and when investors are signaling the death of the mining equities that is usually the propitious time to go contrarian. I became a junior mining investor in the late 1990's during this period of extreme negativity. Studying historical cycles, I realized precious metals were basing for close to 15 to 20 years. Gold could be bought under $300. Central banks were selling their gold. I believed the cyclical trend would change. It did. Gold ran to $1900.
Mining equities had a great run until the credit crisis in 2007. Mining is extremely capital sensitive and requires stable credit markets. Now the mining industry has been in base building mode for close to six years. As Joseph told the Pharoah of Egypt thousands of years ago so wisely -- the market will produce seven fat years followed by seven lean years. Junior mining investors should realize we had seven abundant years from 2000-2007 and now have been going through six scarce years from 2007-2013. Eventually the cycle turns.
Financing markets are tough for junior precious metal miners as in the late 90s. Many of these companies will not succeed in these difficult times without a strong treasury and shareholder support to weather the storm.
It is all about finding the right management teams. These corrections separate the quality junior miners from the weak ones as the smart management teams pick up quality assets for pennies on the dollar and actually build value during these cyclical corrections. This is the evolutionary way of the markets to weed out the weak entities.
Junior mining investors, especially during these trying times, must constantly reevaluate and make sure their junior mining investment has the ability not only to survive this market, but to possibly thrive in this environment by picking up quality assets on the cheap. Instead of exploration capital being put into the ground through grass roots exploration, there may be opportunities in other undervalued assets that are more developed. Look for a team that has been involved with major discoveries in the past. These companies will usually have a strong treasury and will be able to raise capital more easily than others. Look for junior companies whose capital raises are oversubscribed. This shows major interest from smart money. Investors should look to see who are the strong shareholders and if they are well known in the business. Right now, I am looking for situations where I can buy shares at a discount to some of the major fund managers. Stick to quality jurisdictions where there are highly profitable mines like the Cortez and Carlin Trend in Nevada. Keep a close eye on Colombia as it is one of the least explored South American countries, but has some massive gold discoveries. Some juniors in the region have just made some incredible discoveries. Over 96 million ounces of gold have been found in Colombia over the past 10 years and I believe there is much more to be found there over the next decade.