In a market where majors are struggling to perform, there seems little hope that all juniors will weather the storm, making strategies to survive a popular theme at this year’s Prospectors and Developers Association of Canada (PDAC) convention.
At the international panel luncheon held on March 5, speakers discussed how commodity prices, regulations, financing options and macroeconomics are affecting the junior sector, and provided some insight on how juniors could make use of the current situation.
Moderated by Raymond Goldie, a senior mining analyst at Salman Partners, the panel featured Sprott Asset Management CEO Eric Sprott, Dundee Corp. president and CEO Ned Goodman and mining analyst and Kaiser Research Online editor John Kaiser.
Goldie began the discussion by saying that gold stocks and gold prices have marched to the beat of different drummers, posing the question of how closely do stock prices follow metal prices.
“The important thing we have to realize is that they will follow the metal, but the metal must have some momentum in a particular direction,” Sprott said. “It’s not satisfactory for us to say ‘gold is $1,600, so the stock should be this,’ because people are more concerned about where the price of gold is going.”
Sprott expressed his contempt for the Comex market, where commodities trade at high volumes and affect the metal price. “It is an absolute joke that we can trade 1 billion oz. silver each day, when we produce 800 million oz. a year,” he said, contending that central bankers are partly to blame, because they supply more gold and silver than what is physically available to suppress metal prices, as a way to distract people from their “totally ridiculous and irresponsible” monetary policy.
Kaiser added that the sector is being held prisoner by a gold-bug narrative of “an imminent apocalyptic collapse,” which has created a poor environment for juniors. This is because whenever metal prices go slightly up or down, “they are used by the trading culture to hammer down or crank up the juniors.”
He predicted there would be a massive buyout — likely coming from China — to clean up the junior space. “Hopefully we don’t lose all these projects at ridiculously cheap prices, when they are taken out at 100% premiums from low bottoms that are being sort of engineered now, not so much by the gold price trends, but by the entire market bias towards the downside, which is linked to the negative interpretation or implementations of the gold-bug narrative,” he said.
Agreeing that governments are partly responsible for the current global situation, Goodman said that mining stocks are driven by the anticipated future metal prices and not by the commodity prices of today.
“I’m a long-term investor,” he remarked, explaining that he pays little attention to what commodity traders and central bankers are doing on a daily basis. “To me, the market is driven by ‘Mr. Market.’”
Given there is a discrepancy between metal and stock prices, Goldie asked how juniors could use that to their advantage, and eventually be taken over.
Kaiser, who covers 1,800 Canadian-listed junior companies, said the bulk of them might not last another year. Out of the 1,800 juniors on his list, he said that 675 have less than $200,000 in their treasuries.
Looking at the more than 520 companies participating in the PDAC, he commented that 22% of them have less than $200,000 on hand, and that 47% were trading below 20¢. After painting this bleak picture, he stated that the juniors capable of surviving should disconnect from the current situation and focus on what they’re worth.
“All these companies intrinsically have zero value, but they have a real project, a target they are working on, and there is an optionality value. And the way to disconnect from the metal prices is to focus on what it is that you are doing on the ground — what is the fundamental outcome — and plug in US$3.50 copper, and plug in US$1,600 to US$2,000 gold, because the trend in real price terms is upwards going forward.”
Sprott agreed that junior producers could manage their fate like a senior producer, saying that “the fate is that nobody likes you anymore.” He explained that juniors able to convert their cash flows to dividends instead of putting it in their next mine could improve their market capitalization and buy other exploration properties, which could consolidate the space.
Goodman, who’s also a geologist, securities analyst and professor, pointed out that he uses the metal and stock price disconnect to his advantage, “because when [juniors] show up and need some money and the markets hate them, it is usually when I want to buy them.”
The consensus was that the market doesn’t need more regulations, but that regulators generally needed to do a better job, and give juniors a chance to attract funds.
Moving on to whether juniors should access debt, Sprott argued that debt should be off limits if a junior isn’t producing. But if a company has substantial cash flow, he believes a small amount of debt could be taken on, with interest rates being as low as they are.
While agreeing with Sprott, Goodman cautioned that “debt is an interesting thing, because you can lose your whole company if you can’t repay it . . . we are still in a secular bear market that still probably has five, six or seven years to run.And if that’s the case you have to be careful on taking on debt,” he said, suggesting equity financings are a safer alternative.
Kaiser said that while debt should be avoided by juniors, offtake agreements are good for obscure metals like rare earth elements, and sometimes base metals. But he conceded that the trend of juniors selling royalties could be harmful in cases where jurisdictions have super royalties.
“For example, Guyana has a 7–8% gross royalty, and when you start stacking up a 2–3% royalty on top of this . . . all those projects that are encumbered with the private royalty, they are all dead in the water, and the royalty stream will absolutely never happen.”
Sprott had a more optimistic view on offtake and royalty agreements, stating that “anyone who can fund the industry is good for the industry.” He admitted that he would never advise junior producers to sell their precious metals in an offtake agreement, but had “no objections” if they let go of their base metals.
Goodman explained that offtake agreements could make money or keep a company in business, but suggested that juniors get offtake buyers to become a strategic partner, if possible. In regards to royalties, he opined that in some cases they don’t make sense, especially if the metal price is too low, saying that “it’s an arithmetic lesson you have to go through to see if you really want to do a royalty.”
Sharing their views on where gold is heading in the near term, Goodman said he sees gold as “real money,” and as a hedge against “the stupidity of the idiotic governments.” He predicts the price will increase, but didn’t elaborate.
“I look at gold as a store of wealth and a hedge against uncertainty,” Kaiser stressed. In the next two to three years, he projects the gold price will stabilize between US$1,400 and US$1,700 per oz.
China and central banks have a lot of reasons to buy gold, and once they start mopping up the ounces, the price will trend towards US$2,000 per oz., Kaiser said.
Sprott — who believes the gold price will rise, with the uncertainty in the global recovery — added that “it’s chaos out there, and I don&
rsquo;t know where the tipping point will be . . . so you’ve got to have precious metals.”
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