-- Posted Tuesday, 17 April 2012 | | Disqus

To say the junior resource market has been “acting like a pig” is an understatement. To say simply I’ve been wrong about them being undervalued only irritates those already wishing they hadn’t purchased… (just ask my wife—I would, but she stopped speaking to me after looking at our last brokerage statement).

It’s about 25 years since I first started speculating (gambling) in the junior resource market, and I can’t recall a stronger sense of dislike, disgust and hopelessness (maybe some Canucks fans feel close to this) in this sector than I am seeing and feeling now.

While I didn’t need a metal detector at the door, I just had many readers at a local seminar and from them sensed a high level of frustration and a wanting to throw in the towel. (It was my wife who was giving me the really dirty looks). The common theme among their questions and comments was, “Why are the mining and exploration stocks doing so poorly despite metal prices still much closer to their decade highs versus lows?:

Because I never felt they could be selling where they are at today (my own personal portfolio of juniors is down seven figures in the last couple of months), I no longer deserve to be the one to answer their questions. However, I will tell you what I told my wife and hope you hold off seeking a divorce attorney as she has (at least, I hope she has).

Despite metals prices up anywhere from 100% to 500% or more from where they were a decade ago, the vast majority of producers and exploration stocks have not remotely come close to reflecting those appreciations in their share prices. The thought used to be that mining shares were actually better to own than the physical metal as they were to offer better leverage to metal prices going up. Nothing has seemingly been further from the truth.

Here are my “crying towel” reasons for why I think we are where we are:

• While the 43-101 rule truly reformed what used to be like the wild, wild west in the junior sector, it also removed any sizzle from the promotional side of things. While not a bad thing when one recalls what used to go on in this area, the downside to it is companies who are mostly sizzle and not yet steak can’t even light a match when speaking of their potential, let alone stroke the fire. That may be a good thing, too, but it wasn’t the case when these shares did much better as a group a decade or more ago (and a reason one must consider now whether they like it or not).
• Regulatory and/or compliance factors have made it much tougher for juniors to attract attention. Again, this may or may not be a good thing, but it’s a fact of life as far as I’m concerned. In the States, most brokerage firms no longer allow solicitation of companies not trading on the NYSE or major NASDAQ markets. Some even don’t allow unsolicited orders anymore. Many compliance departments have made it difficult or impossible for their advisers to buy juniors-period.
• Canadian investors may be surprised to find most Americans don’t find natural resources as “second nature” to them. Americans’ biggest concerns about natural resources are availability of gas to drive their cars and oil to heat their homes. They’re not keen on natural resource stocks and still think for the most part a gold mine is a hole in the ground with a liar standing next to it.
• The junior sector is a “pimple” of an industry, yet 1,000 to 1,500 juniors are trying to find a few dozen so-called experts who can appreciate and talk about them in a mostly what’s-in-it-for-me mindset. The ability to get their story known is perhaps the biggest challenge and drag for a junior these days.
• Reducing the hold period on private placements to just four months has hampered the juniors. Companies just can’t advance themselves up the corporate ladder in such short periods to warrant enough new interest to gobble up all these new free trading shares that come to market.
• Investment bankers now play the “warrant” game in order to keep deal flow going. They turn to their institutional buyer and suggest selling the shares that are coming free trading for either side of breakeven and hold the warrant as their leverage. Meanwhile, they take the freed up capital and buy their next deal.
• Discount brokerage has also greatly added to what seems like an endless supply of shares. Years back, one held juniors at times simply because they couldn’t profit from selling them after just a few cents rise. Now, thanks to deep discount commissions, one can profit from the sale even if the share price is barely up.

I’m certain there are other reasons, but I believe the above is a good part of why we’re where we are today. The question now is does this mean the mining and exploration stocks are no longer worthy?

I’ve had discussions with many different players in the junior sector of late and they’re all either sitting on their hands, in a state of disbelief, and/or feeling life as they knew it has ended. Like I said at the beginning, in 25 years I have not seen such a dire state relative to when gold was well below $300 and it seemed like “last one out of juniors turn out the lights.”

So, the end result of all this appears to be only three possibilities:

It is indeed the end of juniors as we know it and we die off as former buggy whip players did at the turn of last century;

Like it did a decade ago, the juniors become mostly non-existent price-wise and they rally simply because they really can’t go any lower;

Something not imaginable (good or bad) occurs and we go from there.

On the basis it’s like a decade ago and we’re at or close to a major bottom, there are a host of juniors at which one could almost toss a dart at this juncture. Whether it’s those with a pile of cash, a sector like uranium that fundamentals seemingly demand attention to, or special situations that appear to be crying out for attention ASAP.

“Often the difference between a successful person and a failure is not one has better abilities or ideas, but the courage that one has to bet on one’s ideas, to take a calculated risk – and to act.” Andre Malraux

-- Posted Tuesday, 17 April 2012 | Digg This Article | Source: GoldSeek.com

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Peter Grandich is the Managing Member of Grandich Publications, LLC (www.grandich.com).
The company publishes The Grandich Letter (first published in 1984) which covers the metals and mining industry, follows world markets and economies, and covers the Canadian markets from an American prospective.

Grandich also provides a variety of corporate finance and development services to publicly-held companies.

Peter Grandich is also the Managing Member of Trinity Financial, Sports & Entertainment Management Company, LLC (www.trinityfsem.com), a Registered Investment Advisor in the State of New Jersey. Trinity provides investment advisory services to individuals, small to mid-size businesses, professional athletes and entertainers.

Peter is a long-standing member of The New York Society of Security Analysts and The Society of Quantitative Analysts.

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