Junior stocks ignored, investors buy blue chips

Prodded by softening interest rates and expectations of a mid-year end to the recession, the bulls went on a 2-week walkabout that sent trading volumes soaring to levels not seen since the summer of 1988.

But as investors rushed to get out of cash and into equities, mining stocks, with the exception of the base metal blue chips and a handful of gold companies, have been largely ignored.

Inco (TSE), Noranda (TSE) and Cominco (TSE) are among the select few mining stocks that have benefitted from a market rally that has sent the composite TSE 300 index over the 3,500 boundary, representing an increase of more than 8% since July.

Between Jan. 30, the day the latest rally began, and Feb. 11, shares of Inco have shot up to US$36.38, while Noranda has climbed to $19.13 from $16.25 and Cominco to $23.75 from $21. Rio Algom (TSE) has also performed strongly, moving to $19.50 from $17.13 in the same period.

Investors are rushing to buy up the base metal blue chips in the hope that they will benefit when the recession ends and metals stage a recovery, says John Hainey, mining analyst with Loewen, Ondaatje, McCutcheon & Co. in Toronto.

With the exception of Freewest Resources (TSE) and Franco-Nevada (TSE), the big gold issues have lagged behind metals stocks.

Hainey says the lack of interest in precious metals is connected to the price of gold, which some analysts believe has gone temporarily out of fashion. Since the war in the Persian Gulf began, the price of gold has plummeted to US$367 per oz. from US$403.70.

As a result, many price-sensitive stocks like Hemlo Gold (TSE) have actually sunk below pre-rally levels. From Jan. 30 to Feb. 11, Hemlo dropped to $9.13 from $9.25. While others like Placer Dome (TSE) have hardly moved at all. On Jan. 29, Placer Dome closed at $16.13 compared with $16.75 on Feb. 11.

“Investors are staging themselves back into the market,” says Fred Mott, a retail broker with Midland Walwyn Capital in Toronto. “Still shellshocked by the October, 1987, market crash, they aren’t playing the juniors like they used to.”

Because of the economic recession, people are becoming more cautious with their money and they are tending not to trust the so-called “hot tips,” says Mott who has received a lot of inquiries about Inco.

“In the long term, Inco is very attractive because of its sensitivity to the price of nickel,” added Hainey. “Any increase in demand for nickel could lead to a rapid rise in Inco’s earnings,” he said. Inco is the western world’s largest nickel producer.

Investors who have bought into Cominco, according to Hainey, are betting on the growth potential represented by the Red Dog zinc mine in British Columbia and the future price of zinc.

While Mott says it is anyone’s guess as to how long the current rally will last, Hainey claims that all the signs point to a continuing bull market. “Investor enthusiasm will keep it going,” he said.

Here is a brief overview of how some other mining stocks fared from Jan. 30 to Feb. 11.

Cambior (TSE) $10.50 to $9.63

LAC Minerals (TSE) $8.75 to $8.75

Euro-Nevada Mining (TSE) $9.25 to $10.50

Freewest Resources (TSE) $2.75 to $3.25

St. Genevieve Resources (TSE) 71 to 85 cents

Dickenson Mines (TSE) A shares $3.55 to $3.25

Thunderwood Resources (TSE) 75 to 65 cents

Metall Mining (TSE) $12 to $12.63