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Tracking Junior Miners - Why Are they Underperforming?


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#1 Cuthbert Calculus

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Posted 12 January 2008 - 05:41 PM

Why Are Junior Miners Underperforming?, Will This Change? : chart/added
=============================================

Many here and eslewhere have been deeply frustrated watching the gold price rise while their junior miners decline or stagnate. Even producers such as Capital Gold are trading at a discount to where they were when gold was $700. This company has done nothing but get into production quickly. Explorers and developers have been proper dogs, even though the underlying asset has flown. We have seen a 40% rise in gold and barely a move in juniors, in fact declines in some.

Why is this?

Were they overvalued before? I don't think so.

Is it because the market doesn't believe the move?

Is it because nobody wants to take any risk?

Even some senior producers have lagged.

Please post some suggestions as to why this has happened - and some arguments as to whether this will change or not.

My first suggestion is the ETF. Why take individual company risk? Why even bother doing any research when you can just buy GDX or GLD? If you want leverage, you can just trade options on said ETF. I think the ETFs have taken huge amounts of capital that would otherwise have gone into juniors - capital that pushed them higher in previous moves when the GDX didn't exist.

#2 deeper

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Posted 12 January 2008 - 05:52 PM

Jim Puplava talking about the juniors



#3 DrBubb

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Posted 13 January 2008 - 12:59 AM

A very good series of questions, Frizzers.
And I want to look deeper into this (and maybe change the name of the thread)

First of all, I have been searching for a chart which shows the underperformance, and I think I have found one:

CDNX vs. HUI ... update ... CDNX-5years : 1.year : 3.mos : 10.days // CNDX vs. HUI- 3mos
Posted Image

The CDNX index is an index of stocks traded on the Canadian Venture exchange, which is obviously heavily weighted towards junior mining and exploration companies, which are the main stocks that trade there. The chart above shows that a big gap has opening up between the sharply-rising HUI (Gold Bugs index), which includes the unhedged major gold producers, and the CDNX.

There have been some lags in the past. HUI tends to move up first, but this is - by far! - the biggest gap we have seen over the 3 year time horizon. Even looking back to the beginning of 2003, I cannot find a period like this. In this past, the HUI normally got rolling first, but the CDNX would eventually catch up. It will take a real spurt on the part of the CDNX to catch up this time.

How big is the gap?
Eyeballing the chart above, I get HUI (235%), and CDNX (155%), that's a ratio of 1.516.
The CDNX is back to the level of August 2007, when the HUI and the CDNX Index were at the same level.
- the HUI is up 52% since then- that's a big gap.

Let's dissect it. What can explain the gap:

+ Currency movements: (explains less than 1/10 of the gap)
CDNX is priced in C$, and since August (C$0.95), the canadian currency has gained about 3% to C$0.98 That's not much. But if you look in some detail at the C$ since August, you will see some big volatility. The C$ spiked up to as high as $1.13 along the way. In fact, you could say that C$ movements explained much of the initial gap which opened up from August into early November. But since then as the C$ has pulled back. Meanwhile, despite a weaker currency, CDNX has eased into mid-December. The gap widened again as the HUI began its rocket-like ascent since Christmas. And the gap would look even more dramatic, if we looked at CDNX priced in US dollars since November. So we need other explanations.

+ Lagging general stock indices :
People who invest in juniors also invest in the general market. If general stock indices lag, people will feel poorer, and be reluctant to invest in Juniors (especially exploration companies).

This argument seems to be backed up the price action:

CDNX versus SPY, HUI and GLD : ... update
Posted Image

Since the sharp market break in August 2007, the CDNX has tended to move with the general stock indices, rather than following the upwards path of Gold, GLD, and HUI. Investors in juniors are rational. They realise that junior exploration companies "are like burning matches", and will need to keep coming back to the market to replenish their capital. Consequently, they are hostages to the market, and if there is little demand for shares, they will have sell stock at low price levels to keep exploring, and stay alive.

+ HUI (which is concentrated) has caught up with Gold, while CDNX (which is broad) has not :

CDNX vs. HUI and GLD ... weekly update : daily comparison
Posted Image

+ Retail investors haven't started to buy juniors yet / the volume isnt there :
Look at the volume in the chart above! It was up in the latest week, while the CDNX eased, and truly weak and pathetic in the prior two weeks, when the CDNX rose. The Buyer are not flooding into these stocks. Volume will be needed to get the junior stocks moving. We saw it last year, but not yet in 2008. (Admittedly, those two low volume weeks were mainly a result of holidays.)

+ Junior are a relative bargain - wait for the spillover and takeovers:
Jim Puplava talks abiut this. He say the buying has been concentrated in the majors (HUI) because people realise there is enough liquidity. So they can get in and out. Buying illiquid juniors is a different proposition, they are so illiquid, that investors only buy for long term investments. Since they have lagged behind bit gold, and HUI, he believes the lower valuations are now so compelling, it is inevitable that the money will start to flow in.

THIS WEEK, starting with trading on Monday 14 Jan. may show us the beginning of a flood into juniors

CDNX chart ... update : intraday
Posted Image

Friday's comparison was good:
CDNX: C$ 2,797.76 +$19.10 , +0.69% / Volume: 85,738,400
SPX-- : $ 1,401.02 - $19.31 , -1.36%
Outperformance was 2.08% in only one day !

A breakout above CDNX-2900 with volume behind it would give us a good indication that the inward flood into Juniors has started.

= = =

MORE CHARTS, and Links:

Ratio (Gold majors-to-Stocks) : HUI-to-SPX :: Weekly : Daily
Jim Sinclair's website............ : http://www.JSmineset.com
The market is "bipolar", swinging back and forth from a focus on Inflation to Deflation. Bet on swings; and stay flexible. What are bipolar markets? See: http://tinyurl.com/GEI-Manix

#4 AceofKY

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Posted 13 January 2008 - 02:36 AM

Why is this?

Were they overvalued before? I don't think so.


1. I think most gold stocks were valued very highly until August 07. I assemble discounted cash flow models on every miner that I research, and prior to August it was impossible to find a gold miner in a safe country that traded at NAV or lower. Most, in fact, traded at prices at least 2 times NAV. The market was already pricing in a big jump in gold price.

2. I know I've been beating this like a dead horse, but the mining companies haven't been increasing their profits during this period of high prices. Construction costs and operating costs are rising as fast (or faster) than the gold price. Since corporations are valued based on expected future profits (rather than a simple proportional relationship to gold price), there has not yet been sufficient justification to bid up the already high valuations. Even things such as the acid used in heap leach operations are experiencing significant cost increases.

If/when the U.S. goes into a recession, this may relieve the pressure on the cost side of the equation and allow the miners' margins to increase.

#5 DrBubb

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Posted 13 January 2008 - 02:45 AM

2. I know I've been beating this like a dead horse, but the mining companies haven't been increasing their profits during this period of high prices. Construction costs and operating costs are rising as fast (or faster) than the gold price. Since corporations are valued based on expected future profits (rather than a simple proportional relationship to gold price), there has not yet been sufficient justification to bid up the already high valuations. Even things such as the acid used in heap leach operations are experiencing significant cost increases.


Maybe this is why Royal Gold (RGLD), a royalty company, has started to outperform in recent days. People are beginning to realise that a royalty company gets its contracted royalty slice of gold production, even if mining costs rising. The main challenge for RGLD has been to get its own overhead under control. It lagged for a long time, because it was adding new staff and costs as quickly as its royalty income went up. How many people are really needed to run a roylaty company? But if you look back to 2005-6, you can see that the stocks can really sprint when gold prices are shooting up.

If/when the U.S. goes into a recession, this may relieve the pressure on the cost side of the equation and allow the miners' margins to increase.


Hope you are right. But I think the cost pressure has more to do with high oil prices, and a weak dollar

= =

BETTING ON A CATCH-UP by Juniors - what to buy?

I am investingating this.

What may interest some here is what I have been doing with my own portfolio. If you have been a regular listener to the CWR podcasts, you may know that over 2007, i shifted away somewhat from juniors in my new investing. Alongside the tax bargains, much of my investing had been into larger companies, with direct income and cash flow from godl production, like RGLD (still my largest position), and call options on stocks like: GFI, HMY, and AU. These stocks have soared in the past few weeks, and have driven my portfolio valuations to new record highs. I am begnning to slowly shift out of the Call options, and graduallly sheding some shares in RGLD. I am sticking with the Junior miners and explorers, and think they have great potential.

Most of the cash from selling Gold share calls has gone into:
+ Calls on EWJ: the etf for Japan
+ Calls on some Energy royalty co's, like: HGT (moving too fast now), ERF, etc.
+ Some property-related shares in Hong Kong.

But as I continue to take profits on the gold leaders, I may look to invest in some gold laggards. I will plan to talk about on this thread 9(or elsewhere) as my research and investing continues.

Why not join me in this research, and maybe invest some too.

Links:
Charts of some Jr's interviewed by puplava : http://www.advfn.com...hp3?id=15918251
The market is "bipolar", swinging back and forth from a focus on Inflation to Deflation. Bet on swings; and stay flexible. What are bipolar markets? See: http://tinyurl.com/GEI-Manix

#6 Civil Servant

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Posted 13 January 2008 - 03:07 PM

Can you buy an ETF or similar that tracks CDNX or junior miners?

#7 DrBubb

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Posted 13 January 2008 - 04:10 PM

Can you buy an ETF or similar that tracks CDNX or junior miners?


Hmmm... Interesting idea.
Not yet, as far as I know. If anyone knows differently, please post that
The market is "bipolar", swinging back and forth from a focus on Inflation to Deflation. Bet on swings; and stay flexible. What are bipolar markets? See: http://tinyurl.com/GEI-Manix

#8 Cuthbert Calculus

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Posted 13 January 2008 - 08:21 PM

I think a great deal of the money that would previously have gone into juniors has instead gone into ETFs, so there is less capital available for juniors.

Perhaps people have been hurt so badly in previous corrections that they would rather find other ways of playing the sector.

I am fully invested, but there are so many companies I would like to buy at these levels.

I own a lot of physical and have some SB-ing success, but the underperformance is most frustrating.

Another factor is that small caps generally have been doing worse than large over recent months - compare the Russell declines to the SPX.

#9 skinny

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Posted 14 January 2008 - 11:59 PM

I think a great deal of the money that would previously have gone into juniors has instead gone into ETFs, so there is less capital available for juniors.

Perhaps people have been hurt so badly in previous corrections that they would rather find other ways of playing the sector.


Not exactly what you are saying Frizzers, but along the same lines....
I bought the Silver ETF as a way [hopefully] of getting similar action to the gold miners, but in a simpler [single sterling transaction], cheaper way [just one dealing charge].
I just have a small stake, so is ideal for me.

Bad news is I didn't buy till at $15, as I had to open a new account [Selftrade] just to get access to the Sterling versionof the etf

#10 NabCom

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Posted 15 January 2008 - 06:59 AM

Bad news is I didn't buy till at $15, as I had to open a new account [Selftrade] just to get access to the Sterling versionof the etf
[/quote]

Did you want to access the sterling version purely for ease of use ore there other gains?

#11 Newbear

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Posted 15 January 2008 - 07:53 AM

Has anyone mentioned the effect of naked shorting on juniors? That must also be part of the picture when considering their underperformance last year, especially those on TSX.

But relax guys. This is a bull market with a long way to go. The best is yet to come and the juniors will come good with patience. My approach: buy companies with rising resources, hold them, enjoy the roller coaster, wait - and sleep at night.
"No man has been shattered by the blows of Fortune unless he was first deceived by her favours."

#12 bobbyald

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Posted 15 January 2008 - 11:45 AM

I suppose the logic next question is what would happen to these juniors if we got a pull back to say, $700 gold?
And if the lag is down to higher costs then why are majors up so much - they have rising costs too.

Also some juniors have oil production as well so costs are contained to some degree.

It's not easy to explain but my two main reasons would be as follows:

1) Unloved.
2) I own some.

#13 bobbyald

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Posted 15 January 2008 - 11:49 AM

Anyone care to disclose their juniors (and majors)?

I mainly follow Doody's top ten (as it was - too tight to subscribe) plus a few of Puplavas, Eedens etc.

I now live in Aus but don't own any gold stocks down here as I'm just finding out about them.

#14 bobbyald

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Posted 15 January 2008 - 12:56 PM

Money Morning asked the same question - here's their take on it all:


Why are the junior mining companies lagging so far behind?

One fund that did not have a stellar year was RAB Capital. Youíll probably have heard about the groupís investments in Northern Rock Ė but this in fact constitutes a tiny portion of their portfolio.

They invest largely in junior mining and exploration companies and, despite the phenomenal performance of gold, the underlying asset of the majority of these stocks, the fund was down. Why are these juniors in a bear market, when gold and silver are flying? A 30% move in gold should see more than a doubling of these juniors, not a decline.

Here are some possible answers:

Firstly, many junior mining companies haven't been increasing their profits during this period of high prices. Construction costs and operating costs are rising as fast (or faster) than the gold price. Since corporations are valued based on expected future profits (rather than a simple proportional relationship to gold price), there has not yet been sufficient justification to bid up valuations. Even things such as the acid used in heap leach operations is experiencing significant cost increases.

Secondly, exchange-traded funds (ETFs) might be a factor. Why take individual company risk; why even bother doing any research on a company, when you can just buy GDX, the ETF which tracks the HUI index of gold miners? And if you want leverage, you can just trade options on it. So I think the ETFs have taken huge amounts of capital that would otherwise have gone into juniors - capital that pushed them higher in previous moves when the GDX didn't exist.

Thirdly, people might have been so hurt in previous corrections that they are reluctant to put more money into this high-risk sector, while, more generally, with the deflationary impact of this credit crisis, appetite for speculation has disappeared. Exploration is highly speculative and capital-intensive Ė it badly needs funding.

Fourthly, small caps market-wide have been hit much harder than large (just look at the Aim index for example) and this has spread into mining companies too.

However, money canít keep going into large cap miners and ETFs indefinitely. At a certain point, it has to go into the juniors. Valuations are extremely compelling, and soon we are going to see a flood of mergers and takeovers Ė itís inevitable that money will start to flow in.

#15 needmorespace

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Posted 15 January 2008 - 04:28 PM

Money Morning asked the same question - here's their take on it all:
snip


Um, if you look carefully you might see that the Money Morning email and the original poster in this thread are the very same person...

#16 No6

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Posted 15 January 2008 - 07:13 PM

To answer the question slightly differently, why would you buy any stocks in current market conditions? In the minds of many investors, stock markets falling = stocks, any stocks falling = stay away.

#17 DrBubb

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Posted 15 January 2008 - 11:53 PM

To answer the question slightly differently, why would you buy any stocks in current market conditions? In the minds of many investors, stock markets falling = stocks, any stocks falling = stay away.


I see your point.
But MAJOR gold stocks (HUI) had been rising, while the stock indices (SPX) were falling.
Until yesterday.

Here's a chart, showing the ratio : HUI-to-SPX

Posted Image

The gap near 0.33 needs filling, and a pullback to 0.31 would not be surprising.
The strong rally off that clear mid-Dec. low would remain intact, if 0.30-0.31 holds
The market is "bipolar", swinging back and forth from a focus on Inflation to Deflation. Bet on swings; and stay flexible. What are bipolar markets? See: http://tinyurl.com/GEI-Manix

#18 skinny

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Posted 16 January 2008 - 09:07 AM

Bad news is I didn't buy till at $15, as I had to open a new account [Selftrade] just to get access to the Sterling versionof the etf


Did you want to access the sterling version purely for ease of use ore there other gains?


Sorry for delay NabCom - work shifts

Wanted to keep things as simple as posible, with no currency risk to worry about

Of course I would have done much better just getting the GTX etf as frizzers says

I'm green

#19 No6

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Posted 16 January 2008 - 07:24 PM

I see your point.
But MAJOR gold stocks (HUI) had been rising, while the stock indices (SPX) were falling.
Until yesterday.

Here's a chart, showing the ratio : HUI-to-SPX

Posted Image

The gap near 0.33 needs filling, and a pullback to 0.31 would not be surprising.
The strong rally off that clear mid-Dec. low would remain intact, if 0.30-0.31 holds

I think the retail investor is spooked right now. There are many probably sitting on heavy falls, even of good stocks, and many will have day jobs where it is not possible to react to current market conditions. You wouldn't want a stock market dependant pension maturing right now would you? Perhaps there will be a flight to safety, can't go wrong in bricks and mortar. B)

In an ironic way, if the Fed cuts by 0.50 at the end of the month and the market bounces, junior minors may then out-perform on the back of this.

#20 deeper

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Posted 17 January 2008 - 03:07 AM

One thing that really sparked a junior rally the last time we had one was a MASSIVE discovery. No not Bre-x , I mean Voisey's Bay. Ironic it was a base metal. But I see a BIG gold discovery somewhere in 2008 that might inject some life into the whole sector. Which stock? I wish I knew!



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