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Tracking Junior Miners - Why Are they Underperforming?

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Most of them are much better values now than they were at the end of July 07 or Oct. 07! But, generally speaking, the gold juniors didn't sell off nearly as hard as the base metal juniors.

 

I think GORO is a slam dunk for a double here once they reach full production in a year and a half or so. Possibly a triple if drill results keep coming in good.

 

My base metal favorites (SRZ.to, GMC.to) got beat into the ground over the last few months, but I still think they're both good buys. Also, I like Victory Nickel (Ni.to) at current prices even though it didn't fall much.

 

I guess my feeling is that the Fed is going to try to inflate its way out of this financial crisis. Thus, I'm not too concerned about holding base metal stocks. At some point, they will need to be sold when the fed no longer has the tools or the political mandate to continue devaluing the dollar, but I don't think we're there yet.

 

What we really need are some acquisitions by the majors to reignite the market in base metals. Ni.to and GMC.to are excellent takeover prospects, in my opinion.

 

Thanks AceofKY - very helpful to have your take on things - will take a look at these shares

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I have been tempted to stick my nose in to this subject. It's not something I know much about, but I have heard the odd thing.

 

It seems from what I've heard that the junior mining area is much more risky, and requires money to fund them until they start making money.

The thing I heard is that when markets crash, and people need cash, they will sell things like junior mining shares. That will reduce the money available, making it impossible for some of them to continue. Only when there is money available again, will they be able to continue.

 

My impression from what I've heard is that owning junior mining shares is not anything like owning gold because of the above. You're not investing in the gold they haven't got out yet.

 

Oh, and because of the risk you need to buy lots of companies, as many will fail. Like penny shares.

 

Just what I've heard.

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Had lunch in HK today with a Denver-based mining expert, who is a director of over 10 mining co's.

 

Some reasons he gave for the cheapness of Juniors:

 

+ Fear: too many people have lost money in stocks, and they have reduced risk appetite,

and they do not want to invest their precious money in risky companies that need to keep

returning to the market to replenish their capital

 

+ Base metals: mnay juniors are also in base metals, and those prices are far off their early 2007 highs

 

Hope is on the way;

 

+ There are at least 3 large Private equity funds being set up yo invest in mining related ventures.

This is likely to bring more M&A activity to the sector. And many co's in the sector already have

strong cash flow

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Green shoots of recovery in the Junior sector-- Are we seeing them?

 

Here's a list of Juniors I own that are starting to look up:

 

(At Friday, 1 feb. I noticed):

 

JNY.v : Journey Resources at $0.36

 

GCE.t : Grand Cache Coal at $1.74

 

CSM.t : Central Sun Mining at $1.85 (was Glencairn before reverse split)

 

 

= = = As more perk up, I will add them to the list = = =

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I have been tempted to stick my nose in to this subject. It's not something I know much about, but I have heard the odd thing.

 

It seems from what I've heard that the junior mining area is much more risky, and requires money to fund them until they start making money.

The thing I heard is that when markets crash, and people need cash, they will sell things like junior mining shares. That will reduce the money available, making it impossible for some of them to continue. Only when there is money available again, will they be able to continue.

 

Many juniors, and certainly most exploration stocks, ARE dependent on large amounts of financing. However, there are also many that are near-term producers that already have enough financing in the bag to carry them through to positive cash flows. These juniors may be helped by a tightened financing environment, since it will reduce the amount of mines coming online in the future.

 

My impression from what I've heard is that owning junior mining shares is not anything like owning gold because of the above. You're not investing in the gold they haven't got out yet.

 

Just because they haven't extracted the gold yet doesn't mean that it's not worth anything. The majors will pay over $200/oz for a good-sized proven deposit in a safe area. One rule of thumb is not to buy a junior for more than 10% of in-situ deposit value.

 

Oh, and because of the risk you need to buy lots of companies, as many will fail. Like penny shares.

 

Any company can fail. The most important factor in determining whether a gold mining junior will fail or not is the price of gold which can and has (in the past) gone down to very low levels. So to say that it's better to buy gold because a gold miner may go bankrupt is not really good logic. In general and over the long term, buying a gold miner gives you leverage to the price of gold - similar to options but without the timed expiration. The reason for this is that companies are valued based on anticipated future profits rather than the price of the underlying commodity. A 10% rise in the price of gold may yield a 20% rise in the miner's profits (and vice versa.) Also, a good well-managed mining company can still generate shareholder value over the long term even if metal prices stagnate or fall (as long as they don't fall too far.) GORO, I think, will be able to make nice profits even if gold goes back to $600-700/oz.

 

That being said, lately the miners have lagged gold's price rise, the explanation of which is the purpose of this thread. One thing is for sure: the junior mining market is NOT an efficient market. The market caps of these companies fluctuate much, much more than typical large-cap stocks. I'm not sure if anyone has ever attempted to calculate the average beta of, say the CDNX versus the S&P500 but I suspect it has a beta of at least 2 or more. It gives you an opportunity to find values that just isn't possible if you're dealing with companies like Proctor & Gamble or GE.

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Ace,

Many thanks for your reply. As I said, it's not my field, and your reply is very informative.

I think I might be tempted to consider this area, but I'd have to do a lot of research first. I can see already how little I know compared to what I'd need to.

I suspect I'm going to miss the boat on it anyway.

Steve

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EXCERPT:

 

OK you'll say but what about the junior exploration companies? They have been trading like if gold was trading at $400 instead of $900, what is going on over here? Should we sell our juniors and swap them for rock solid producing entities or is there some light at the end of this long dark tunnel?

 

Sure enough I got a lot of questions coming my way asking what to do with our juniors since the general attitude seems to be that most juniors will have a hard time to survive the on-going liquidity crisis. The argument is that due to the liquidity crisis it will be harder and harder for juniors to raise money and juniors not able to raise money for their exploration adventures are doomed to file for chapter 11 rather sooner than later.

 

Although I understand such logic I simply disagree with it. My point is that it only requires such a tiny percentage of the total amount of invested money to flow into the gold share sector in order to skyrocket all gold shares into spectacular new highs.

 

/ Remember that in 1980 about 5% of all invested money was in gold and gold shares,

we 're nowhere close to even 1/10 of that today!! You get it?

Even a small amount of money flowing into the gold share arena will blow it up big time./

 

Juniors sitting on a significant amount of proven resources will do well since there's a huge demand for new resources by the senior producers. Right now the huge sell-off among the juniors is driven by fear which has driven the entire junior sector into extreme over-sold territories. the good news however is that such extremities never persist for a long period of time and in order to work off that extremity the gold price has to come down sharply or the junior sector has to catch up sharply.

 

Let me visualize the extreme undervaluation by means of a few charts.

 

Normally when the gold price goes up you would expect the juniors to go up as well. Now a good tool in order to determine extreme over/undervaluation of the junior gold shares is to divide the junior index by the price of gold. Now let's say when gold appreciates by 10% and the junior index appreciates by 10% as well then the chart will show you a flat line since the ratio didn't change. Now as long as the line stays flat the juniors appreciate exactly by the same percentage as the gold price. When the line turns down the juniors under-perform the gold price and when the line goes up the juniors do outperform the gold price.

 

Since there isn't really a junior index I used the CDNX index which isn't really a perfect match but nevertheless good enough to draw our conclusions. Now let's take a peek first at the daily CDNX/GOLD ratio chart:

 

...continues...

 

Conclusion:

The most interesting part of this chart is without doubt the almost identical setup as in early 2003. Now the year of 2003 turned out to be the best year for the juniors so far and in fact still many juniors are trading at levels below their 2003 peak! Another beauty of this chart is that it leaves plenty of room for a giant up-move for the juniors which could last for more than a year!

 

Now during these turbulent times what can you expect from us coming days?

 

+ Break-out alerts from TGDR TOP-20 companies breaking out of their recent down-trend to the upside

 

+ Discussion of which TGDR TOP-20 stocks will be getting more focus/attention and which ones will be faded out over time.

 

etc.

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I suspect I'm going to miss the boat on it anyway.

 

The boat hasn't even fueled up yet. I have several juniors down 20-30%, and one down 50%, and that's from where I bought them which was well off of their highs. Volume is still low to non-existent.

 

Look at SRZ.to, for example. They are fully financed and will be producing concentrate by the end of this month. They should FREE CASH FLOW somewhere around 25 to 30million THIS YEAR. Their market cap is only $100 million, and a big chunk of that is cash in the bank.

 

Granted, SRZ is a high cost miner, is very highly leveraged to zinc price, and they have some debt. But by approximately mid '09 they should have a process in place to recover gallium and germanium which will drive their cash costs of zinc production very low. Management owns a significant chunk of the shares, and the CEO just bought another 10k on the open market. SRZ's costs are all denominated in $US.

 

And who really thinks zinc price is going down with the world's central banks flooding the economy with freshly manufactured $$?

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Frank Barbera is BEARISH on Gold stocks (including Juniors)

 

He doesnt like:

 

+ The downside reversal in the Major Gold stocks,

+ The failure of juniors to participate

 

Next 4-5 months, "we could see gold moving down to $675-700 area"

 

After the drop, he sees a "mega-rally in the gold stocks"

 

IF "we go thru $950, I will throw in the towel on the Bear case"

 

(Personally, I think he will be throwing in the towel. But let's see,

and let's keep open minds on what might happen.)

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If gold goes back to 850 (I can't believe I'm sayingback to 850!) and even beyond, the juniors will get even more horrible.

 

Where do you see gold going from here, Dr?

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Frank Barbera is BEARISH on Gold stocks (including Juniors)

 

Next 4-5 months, "we could see gold moving down to $675-700 area"

 

(Personally, I think he will be throwing in the towel. But let's see,

and let's keep open minds on what might happen.)

 

That should certainly "fix" one problem that was concerning you.......

The bullish concenus [less Faber, TOB]

 

675 is very low [think TOB gave a similar number] - did he detail why that level was on his mind ?

 

Do YOU see anything troubling in the HUI / GDX chart ?

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If gold goes back to 850 (I can't believe I'm sayingback to 850!) and even beyond, the juniors will get even more horrible.

 

Where do you see gold going from here, Dr?

 

I think those growing fears will help to insure taht will not happen

Although Major Gold shares sold off with gold's drop, the juniors held up well.

That could be taken (and IS TAKEN by me) as a positive non-confirmation.

But we need more of that !

 

My own gut tells me that Gold may soon lacerate the recents highs, and will

drag the Junior invetsors back into the market. Junior slingshot anyone?

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The Frank Barbera forecast is an interesting one. Don't fight the Fed. His argument seems to be based on the fundamentals that the market will price in recession for the metals and commodities. He suggests that if gold goes through $950 then his bearish view would change.

 

A drop to $650 would be great for anyone wanting to buy on the dips. Same for any falls in other metals and commodities.

 

http://www.financialsense.com/fsn/main.html

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A drop to $650 would be great for anyone wanting to buy on the dips. Same for any falls in other metals and commodities.

 

We've already had huge falls in base metal stocks and some base metal prices as everyone is pricing in a recession.Check out this link (click on "metal producers") for charts that show that the money flow into the base metal stocks has turned around and is now going up. Will prices follow?

 

http://www.willain.com/EV/index.html

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We've already had huge falls in base metal stocks and some base metal prices as everyone is pricing in a recession.Check out this link (click on "metal producers") for charts that show that the money flow into the base metal stocks has turned around and is now going up. Will prices follow?

 

http://www.willain.com/EV/index.html

Good link.

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I've found the answer to the question.

 

It's the cost of tyres :lol:

 

Canada's Barrick Gold Corp. is so concerned about the worldwide shortage of the giant tires it needs for its massive mining trucks and loaders that it is lending a Japanese tire maker $35-million (U.S.) to help it finance a plant expansion.

 

Barrick, the world's largest gold miner, said Wednesday that it is lending the money to Yokohama Rubber Co. Ltd. as part of a 10-year agreement to secure the supply of "potentially more than $200-million" worth of off-the-road tires, at the rate of some 1,300 tires a year starting in 2009.

 

The tires retail for as much as $60,000 apiece, but the global shortage has seen them sell for as much as $300,000 each in Internet auctions, according to Barrick. (That's the equivalent of more than 325 ounces of gold at today's price of $920 an ounce.)

 

Yokohama will use the loan to help finance a $50-million expansion of its Onomichi plant, near Hiroshima, including a new building, production line and related equipment, the mining company said in a news release. The tire maker also will deliver the tires directly to Barrick's mines and provide technical assistance to each site to make sure the tires being used there will have the proper rubber compound, tread pattern and so on.

 

"This is an innovative response to a worldwide tire shortage now facing the mining industry," Barrick chief executive officer Greg Wilkins said in a news release.

 

Barrick to Fund Yokohama OTR Tyre Expansion

http://www.tirereview.com/default.aspx?typ...&item=10413

 

Well maybe not, but I thought you guys might find it interesting.

Steve

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News from yesterdays West Australian is junior miner View Resources has gone into administration.

Production down, but also need loan refinancing.

 

Obtaining credit was raised as a general concern for small miners and explorers in last Saturdays West.

Also rising costs are affecting the whole industry here. These companies will be competing with the big boys for labour and machinery. Would imagine the same situation would apply in Canada.

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maybe this is where the bob hoye analysis is encouraging. if other commodities fall faster or rise slower the gold then mining costs for gold go down in real terms. imagine the opposite, 150 dollar oil means every truck in canada will head for the tar sands

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One anecdotal datapoint I can add I picked up late last year from a fellow I met who lives in Vancouver and is in the business of investing in and promoting juniors. His comment on this topic was that in Vancouver all the old timers are expecting the bottom to fall out of the commodities any time now, because they are trained to expect that to happen after five years, and they don't want to be waiting tables in their retirements.

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One anecdotal datapoint I can add I picked up late last year from a fellow I met who lives in Vancouver and is in the business of investing in and promoting juniors. His comment on this topic was that in Vancouver all the old timers are expecting the bottom to fall out of the commodities any time now, because they are trained to expect that to happen after five years, and they don't want to be waiting tables in their retirements.

 

interesting comment.

many have cashed up- just in case.

And EVENTUALLY, we will see the bull move of a generation, which they may disbelieve

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QUOTE (DrBubb @ Feb 12 2008, 05:33 PM)

And EVENTUALLY, we will see the bull move of a generation, which they may disbelieve

 

 

You really think so?

 

 

19th century - Western world Industrial Revolution - maybe 2-300million people

 

21st century - Eastern/Asian emerging markets Industrial Revolution - Over 3 billion people

 

 

Would think so !!

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interesting comment.

many have cashed up- just in case.

And EVENTUALLY, we will see the bull move of a generation, which they may disbelieve

 

It does imply there is lots of cash on the sidelines. And of course, there's only so much they can sell...

 

This is only tangential, but it may be worth noting that some of the real old-timers I have seen speak, and whom I have personally spoken too, really don't have too much of an opinion about the future for commodities prices. This is what they do, and the sun is shining at the moment, so they are making hay. That viewpoint may not leave them with much stomach to stay fully invested.

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