Buy Now Before the Great Reversal: Consensus from Mining and Metals Conference


"Key when looking at the junior sector is, as Rick Rule commented in his San Francisco presentation, that investors need to seek junior companies that have three factors in common: have a management team that owns a lot of stock in the company; make sure the company has a good property; and last, but not least, does that company have working capital?"


Judging by the keynote presentations at the San Francisco Metals and Mining Investment Conference, there seems to be a bit of a consensus developing among the pro-gold mining analysts. They all do seem to feel that now may well be the time to take the plunge back into gold stocks, although one needs to be highly selective when it comes to the juniors—perhaps less so if going for the Tier 1 producers. Never mind that some have been preaching similar views throughout the way down, but seldom has there been such close correlation in their opinions.

See the following three Mineweb articles:

Best gold issues may start to melt up rather than down—Rick Rule

It takes courage, but now is the time to buy gold stocks—Adrian Day

Gold building a base for next leg up—Jay Taylor

What does also seem to have been of particular note about the recent event is the big fall in numbers of attendees and in participating junior mining companies. Even a year ago when the industry was depressed already, numbers of both at this event remained reasonable, although far from breaking any records. What will be really interesting now is how much lower the attendances will be at the Minerals Exploration roundup in Vancouver in January and at the PDAC in Toronto in March. While both these events see major participation from the manufacturers and the Canadian provinces, one suspects that overall numbers will likely be down—perhaps quite severely and there will be many juniors staying away altogether given they are in cash preservation mode and the cost of attending these events, particularly when one adds in time and accommodation as well as exhibit and booth design costs, starts becoming significant when the treasury may be down to a few thousand dollars. While not many quoted companies have yet fallen off the exchanges as unable to meet requirements, the attrition rate is likely to start to increase strongly in the next few months if the gold price, in particular, stays at around current levels—or, horror of horrors, dips further.

Gold is such a key element in the exploration sector, though, that one forgets that some other metals and minerals have suffered even bigger percentage losses. Gold is 'only' down about 35% from its peak. Some other industrial metals have fallen much more—think uranium or molybdenum or cobalt, all down around 70% from their peaks—you get the picture. The major base metals haven't fared quite so badly—copper down around 30%, nickel—the worst performer in the base metals sector which has halved from its peak—while lead and zinc have come back between 25 and 30% respectively. But all in all, the whole mining sector remains in the doldrums and the effect on juniors is far worse than on the bigger producers.

Some juniors can hang on quite well on very limited funding, but those which are trying to fund a new mine will be having problems. Stocks are generally too low to contemplate an equity funding option—at least not without hugely diluting existing shareholders—and banks are loath to lend to small companies with what they view as risky projects. That mostly leaves private equity, streaming or royalty sales as ways of raising finance and private equity finance at the moment can drive a very hard bargain indeed.

Be that as it may, key when looking at the junior sector is, as Rick Rule commented in his San Francisco presentation, that investors need to seek junior companies that have three factors in common: have a management team that owns a lot of stock in the company; make sure the company has a good property; and last, but not least, does that company have working capital?

Wherever the gold price is headed now, the downside risk would seem to be becoming increasingly limited and upside potential is great. There is a growing feeling that those who have been forcing the price down through offloading large amounts of gold at times of day when there is virtually no market activity, which seems to be happening with increasing frequency, are doing their very best to force the remaining weak gold holders out of the market. In this they are being extremely successful as witness the continuing exodus of gold from the big ETFs. But what is the end game? When the weak holders have gone—and most of their gold has found its way to China—many analysts now believe that the reverse process will be introduced with big buy orders at illiquid times in the markets thus driving the price up in exactly the same way as the sell orders have been driving prices down. If and when that day comes we will see some very large gold price climbs indeed.

Some cynics now think that China may be behind some of the machinations in the gold market as a means to the end of driving more and more western gold eastwards. And then, when the time is ripe, announce a very substantial increase in its gold reserves leading to a big upwards price revision at a time when ever increasing doubts are being raised over the state of western central bank gold holdings. Is it all really there, and even if it is who actually owns it? Such a move might see a flight back to gold in the West, but with little or no physical gold left to satisfy a sudden increase in demand, price rises would be dramatic, thus hugely boosting not only China's global financial position, but dramatically increasing the wealth of its people who have been persuaded to invest in gold by China's state-controlled institutions.

If this Machiavellian scenario is indeed Chinese policy, and plays out, it would also boost hugely China's internal marketplace and thus substantially reduce its industries' reliance on exports at one fell swoop. What a coup that would be!

But this is, of course, pure speculation but in these days where absolutely every financial market seems to be being manipulated by some group or other, who knows?—Except the Chinese perhaps!

If this does happen in some form or the other those who would benefit in the West would be holders of gold and silver bullion and of those gold stocks which have managed to survive the downturn—and a holding in a surviving 'good' junior could then see rises of hundreds of percent. Such are fortunes made in the markets—but you have to pick likely survivors first.

Lawrence Williams

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