Globe & Mail: Outlook: Junior mining stocks
Play waiting game on junior miners, analysts advise
Monday, April 7, 1997
By Shirley Won
Investment Reporter
That's the advice from some analysts about investing in junior mining stocks in the wake of revelations that have raised
doubts about Bre-X Minerals Ltd.'s controversial Indonesian gold find.
Freeport-McMoRan Copper & Gold Inc., a partner with Bre-X in the Busang deposit, recently said its preliminary
findings indicate an insignificant amount of gold on the site once touted as a 71-million-ounce reserve.
Analysts say it's a bit too early to project the outlook for the junior mining sector until there is more conclusive evidence
about how much gold, if any, Calgary-based Bre-X's Busang deposit really holds.
But if the deposit does prove to be worthless, then investors can expect another crash in junior stocks that could be
worse than the carnage that has already occurred, some analysts argue.
"If it [Busang] does turn out to be a bust, then the stocks are all going to go for one more major downward lurch," warns
John Kaiser of San Francisco, publisher of the Kaiser Bottom-Fishing Report, a newsletter on junior resource stocks.
"My advice right now is to stay clear of everything until the smoke clears."
Even if Busang does turn out to hold viable gold, Mr. Kaiser doesn't foresee a rush back into junior mining stocks soon
thereafter.
"Either way, we are screwed," he said. "If Busang is not a bust, then we will have had misery inflicted on the market
unnecessarily.
"Investors are going to wonder how vulnerable are we to these crazy shocks from left field that suddenly wreck all the
valuation levels of these companies in which we are speculating."
Junior mining stocks--even those not involved in Indonesian exploration plays--got clobbered after Bre-X confirmed that
there was "a strong possibility" that reserve estimates may be overstated.
And Bre-X--whose stock had been halted initially--got hammered when it resumed trading. On March 27, the shares
plunged $13 each on the Toronto Stock Exchange to close at $2.50, wiping out $3-billion in market capitalization. The
stock closed on Friday at $3.18.
Bre-X and some other junior mining stocks have rebounded slightly in what analysts call a "dead-cat bounce" that could
be easily be short-lived if Busang turns out to be a bust.
Against a backdrop of a major correction in North American stock markets, some investors have jumped back into the
junior market, either to make money on a quick bounce, or on hopes that the Busang project is still alive.
"We are in a slump [in junior mining stocks], and it's a question of whether it's going to be a long-term bear market
slump, or whether we are dealing with a slump of maybe two to four months for people to come to terms with this whole
situation," Mr. Kaiser said.
"If we are dealing with a fraud, or a massive error and Busang does not exist, we are in danger of a longer-term bear
market."
A short-term slump probably would not occur if there were a fresh success story to rekindle optimism in Canadian
exploration, he said. Right now, there are only "historical winners" such as Diamond Fields Resources Inc., Dia Met
Minerals Ltd. and Arequipa Resources Ltd. to keep investors going.
Wendell Zerb, mining analyst at Pacific International Securities Inc. of Vancouver, agrees that junior mining stocks stocks
are headed for a major fall if Busang turns out not to hold significant gold.
He sees such a revelation possibly triggering a 150-point drop on the Vancouver Stock Exchange, although not
necessarily in one day. "It will hit everything," Mr. Zerb predicted.
"It'll be like any negative news that hits a junior mining company and results in the selling of a stock. Only this would be a
large-scale poor news release that would affect all junior mining stocks."
But the extent of how poorly the stocks could fare would be based on the extent of the misrepresentation--if that is what
has taken place--he said.
"I don't think it's going to be a cut-and-dried situation," he added. "I think that if there is not potentially a large deposit at
Busang, I think the market will react poorly, but it won't react as poorly as if there was nothing there."
Given the "strong possibility that some misrepresentation has taken place," he advises extreme caution in investing in
junior mining companies. "I am not recommending anything right now."
Those who insist on investing in juniors in this uncertain environment should stick to less risky companies that have a
strong cash position to pursue exploration work, strong management and advanced projects--such as those at the drilling
stage--and are located in politically stable areas, Mr. Zerb said.
Unlike Mr. Kaiser, he foresees "quite a small boom in junior mining stocks" should there be good news that the Busang
gold find is still intact.
Doug Leishman, mining analyst at Yorkton Securities Inc. in Vancouver, said it's a bit too early to project the effects of
the Bre-X saga on the junior stocks. "We are waiting to see how the Bre-X issue is resolved before we make any
longer-term projections."
Mr. Leishman said he is not recommending that investors avoid junior mining stocks, but he advises investors to be more
cautious and selective in ferreting out quality companies. "I think that good stocks with solid assets will come back."
He was referring to Bema Gold Corp. and Arizona Star Resources Corp., both of Vancouver, whose stocks had a
nice bounce last week on news that tests at the Cerro Casale mine in Chile indicate sizeable deposits of gold and copper.
But some analysts concede that the market euphoria for the stocks was not as high as it would have been without the
Bre-X saga. Test results indicate that there are 24.8 million ounces of gold at the Cerro Casale site and 6.4 billion
pounds of copper. Bema owns 49 per cent of the deposit and Arizona Star owns 51 per cent.
"They [the two stocks] have come back and over time they should do very well," Mr. Leishman said. "They took an
unnecessary hit based on something that really had no effect on them." |
