Now answer THIS. Why if Faber has turned anti-Gold would he include in his 4/1/2009 newsletter this article. An article promoting that Canadian Juniors are worth the risk.
This is COPYRIGHTED MASTERIAL, BTW.(Graphs NOT included)
******************************************************8
Junior Mining Stocks In a Long-Term Perspective
PREPARED BY MICHAEL BALLANGER
Since the Barron’s Investor Sentiment
numbers dipped below 20% (bulls) for
the week ended March 6th, the major
averages have gone
on an absolute TEAR
in what must be
classified as a
“vintage” bear
market rally with all
sectors starting to
kick in as the Shorts
and the “Left-Behind
Louie’s” are now
scrambling to get a
“piece” of the action.
It might be noted
that if this were a
“true bottom”, the
Barron’s numbers
last weekend would
have still been mired
in the low 20’s but
they were above 30%
in what I would
define as “classic
behaviour within a
bear market”. I am
not a market timer
by any stretch but I
have used Barron’s
Market Lab for over
thirty years to get a
sense of what the
TRUE PSYCHOLOGY
of the market
actually is. It spoke
to me a few weekends
ago and it
made us some
money but that is
shares, we have been largely left out of
every rally imaginable and every
bullish precious metals move and every
discovery or 43-101 or “Resource
continued page 2
not the purpose of this report.
Most of us are long some physical
bullion in some way, shape, or form but
our BIG POSITIONS are in the companies
that were SUPPOSED TO BENEFIT
from the (correct) overweight in the
precious metals SHARES. Moreover,
since we needed the advantage of leverage,
we opted for JUNIOR precious
metals shares and if we opted for
JUNIOR EXPLORATION precious metals
Where is the MONEY?
March 23, 2009
TSX Venture Exchange (Weekly)
Estimate Increase” since mid-2007.
That was over two years ago.
P2 Junior Mining In a Long-Term Perspective
Why?
The answer to the question, in my
humble opinion, is really quite simple.
It is all about the MONEY. Between
2002 and 2006, over a billion dollars
was raised in the junior mining arena
for EXPLORATION and for that amount
of money, one might have thought that
there would have been a wrath of new
BIG discoveries to fuel the fire of
speculative interest. Well, there were
discoveries but they were either in
proven mining camps (Red Lake)
(Goldcorp’s takeover of Gold Eagle for
$1.5B) or in some remote third world
country where the ultimate takeout
was about 50% of the stock’s 52-week
high. In 2007, the darling of the market
was Noront Resources, manned by the
superb promoter Richard Nemis, who
took a “high-grade pod of
copper-nickel-PGM’s” and commanded
a $800M market cap by this time last
year only to see the promotion
evaporate and take mutual and hedge
fund BAGHOLDERS to a revised market
cap of around $100M. All in all, year
over year, that MONEY produced very
few new real discoveries.
Then in Q2 2008, with the hedge fund
community owning hundreds of
individual names in order to “cover the
field”, the sudden and catastrophic
redemption-led meltdown forced the
hedgies to redeem vast amounts of
capital and any junior that had a “bid”
got hammered. As represented by the
TSX Venture Exchange, the carnage
was the worst I have ever seen, despite
historically high multi-decade pricing
for the underlying metals like gold,
silver, and copper.
Well, the devastation ended near the
end of 2008 and the juniors almost
caught a “forced desperation bid” last
month when the global markets took
out the lows and rallied from 678.62 to
937.90 representing a 38% advance
from the lows but considering the 80%
drop from the Q2 2007 peak, the rally
in the TSXV has been anemic.
Why?
The junior mining/exploration sector
devoted a great amount of exploration
and development capital into
refurbishing old projects particularly in
the base metals sector. Record high
nickel, copper and zinc prices lured the
hedge and mutual funds into a
“deer-in-the-headlights” mindset that
the metals could never correct and
bought into the sector with little
consideration of the enormous capital
expenditures associated with starting
or re-starting a mine. When the base
metals got taken down with the global
contraction and against a difficult
credit environment, these
developmental juniors were left with
advanced projects, zero funding, and in
many cases, a skewed feasibility model
due to the lower revenue forecasts.
These companies unfortunately
deserve to be on “Care and
Maintenance” until the global
downturn shows signs of reversal and
since many of these companies were
the drivers behind the TSXV move to
3372, it is their inability to recover
which has capped the rebound in the
TSXV.
However, there are a number of
companies in the exploration sector of
the TSXV that are being tarred with the
same brush as the developmental
juniors and herein lies the best
opportunity that I have encountered in
thirty years in this business.
Let’s take ECU Silver Mining Inc.
(ECU.T)(C$0.495) as an example of
an advanced junior exploration
company with what I believe to be
potentially one of the largest silver
deposits under development in the
world with its Velardena project in
Mexico. The rule of thumb for pricing
junior exploration companies is that if
they are not yet in production, you can
usually buy them safely up to ten
percent of “in situ metal value”. If you
have ten million tonnes of ore worth
one-hundred dollars per tonne, you
have a one-billion dollar in-the-ground
value. Using discounted net present
value modeling and accounting for
both mining costs and capital costs,
you can arrive at various valuations
depending on term and rate of interest
and capital cost payback period but the
rule to which I adhere is that I can pay
up to ten percent of a billion dollars or
one hundred million because the major
mining companies, when they take an
interest, will pay between twenty and
thirty percent of in situ metal value. My
“lift” is therefore two to three times my
cost base.
In the case of ECU, I take the January
26th report authored by Bill Lewis of
Micon (an independent) who states that
there exists between 569 and 930
million “silver equivalent ounces” of
mineral potential present at Velardena.
[Please note there are no assurances
that all or any part of the resource
estimate or that all or any part of the
mineral potential will be economically
viable and that until a prefeasibility
study is completed, there are no
assurances the updated mineral
resource will be economically viable.]
This would imply a potential in situ
metal value or “in ground” value
(assuming U.S.$10/oz. silver) of
between $5.6B and $9.3B. Using my
rule, I am therefore “safe” in buying
ECU for a valuation of between
$569-930M (10% of in situ metal value)
or after dividing by the undiluted
shares issued of 242M, between
U.S.$2.35 and $3.64 per ECU share.
With the shares quoted on 3/23/09 at
U.S.$0.40, I submit that it is this type
of severe discounting that is hampering
the TSXV’s rebound but at the same
time creating some terrific
opportunities.
Here is another example. New gold
discoveries in proven favourable
mining jurisdictions like the Canadian
provinces of Ontario and Quebec,
specifically the Abitibi-Greenstone Belt
which has produced 180M ounces of
gold and 145M tonnes of Zn-Cu ore
continued page 3
P3 Junior Mining In a Long-Term Perspective
over the past one-hundred years, have
historically been priced in the $50M-
100 range of market capitalization. Last
year, Goldcorp took over Gold Eagle for
$1.5B in stock and cash for a gold
discovery below one-thousand feet in
depth. Other comparables included
Rubicon Minerals (RMX.T) capped at
over $250M for a gold discovery in the
Red Lake Camp where the most
noteworthy drill result was 2.5 m of
173 gms/t (8’ of 5.0 ounces/t).
I draw to your attention Explor
Resources Inc. (EXS.V) (U.S.$0.20)
whose discovery in the heart of the
Abitibi-Greenstone Belt was reported
last July at 12.2 m of 16.6 gms (40’ of
.496 opt) and who recently reported 3.0
m of 142 gms./t (10’ of 4.15 opt) at their
Eastford Lake Gold property. EXS.V is
capped at C$20M compared to RMX.V
at $250M.
The valuation gap that we are now
experiencing in the junior exploration
arena is reminiscent of the late 70’s, a
period of stagflation not unlike today’s
environment (only it was a lot better
back then because the banks weren’t
technically insolvent) during which the
TSXV (then the old Vancouver Stock
Exchange) was muddling along with
investor interest suffering after the
horrendous 1973-74 bear market and
that remained in place until gold prices
finally broke out above the $300
market. Within months into late ’79,
the gold price rocketed north of $500
ultimately peaking in January 1980 at
an intra-day $857 per ounce. In the
move AFTER the gold breakout in 1978,
the old VSE took off on an ascent that
saw many juniors advance in the order
of several multiples as the public finally
came down with a severe case of gold
fever and since gold was relatively
expensive and offered little in the way
of leverage, the GO-TO investment
became the juniors. The U.S.$1,000
level for bullion in 2009 is to the
juniors today what the $300 level was
to the juniors back in 1978.
As for the TSXV, the chart below shows
the severity of the discount in the junior
sector by way of the correlation to gold
bullion. The “$CDNX:$GOLD” chart
proves in spades that a picture is worth
a thousand words.
I believe that these juniors represent
excellent risk-reward opportunities.
Those looking to take advantage of in
situ metal valuation adjustment should
look to ECU Silver Mining Inc.
(ECU.T) and those looking for an
exploration discovery valuation adjust-
TSXV vs. Gold Bullion (Weekly)
ment should consider Explor
Resources Inc. (EXS.V) where such
adjustments could be substantial over
the intermediate term as these junior
markets experience normalization and
a return to sanity. It “feels” like the
‘70’s and very few remember how
many fortunes were made in a very
short window – but I do.
It was wondrous.
Junior mining companies are speculative investments whereby significant loss of capital is possible and should be suitable for risk tolerant investors only. This
article is solely the work of the author who is a registered investment advisor at Union Securities Ltd. ("USL"), this is not an official publication of USL and the
author is not a USL analyst. The views (including any recommendations) expressed in this article are those of the author alone, and are not necessarily those
of USL. The information contained in this article is drawn from sources considered to be reliable, but the accuracy and completeness of the information is not
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guaranteed, nor in providing it do the author or USL assume any liability. The information is given as of the date appearing on this article and
neither the author or USL assume any obligation to update the information or advise on further developments relating to the information
provided herein. This article is provided for information purposes only and does not constitute an offer or solicitation to buy or sell the securities
mentioned herein. This material is not intended for distribution in the United States or in other jurisdictions where this material is prohibited.
The holdings of the author, USL, its affiliated companies and holdings of respective directors, officers and employees and companies with which
they are associated may, from time to time, include the securities mentioned herein.
Prepared by Michael J. Ballanger
B.Sc., B.A.
Investment Advisor
Union Securities Ltd.
Office: (416) 775 5119
Fax: (416) 777 1276
mjballanger@union-securities.com |
