Just Follow the Money when Investing in Junior Miners
Kitco Commentaries | Opinions, Ideas and Markets Talk
Featuring views and opinions written by market professionals, not staff journalists.
The precious metal miner sector began trading this week with yet another news release of a global miner taking over a junior developer. On May 15, Eldorado Gold Corp. (EGO) agreed to buy the remaining shares of small-cap developer/explorer Integra Gold Corp, to expand its mining opportunities in the Eastern Abitibi region of Quebec, Canada.
This latest announcement came on the heels of another major miner firm making an agreement to invest in a junior developer late last week. On May 11, Newmont Mining Corp (NEM) announced an agreement to invest approximately US$109 million for a 19.9 percent ownership of Continental Gold Inc, supporting near-term development of the high- grade BuriticĂˇ gold project in Colombia. The investment also covers three other exploration assets in this prospective gold district.
Meanwhile, the bifurcation from the sector of many other quality junior developers/explores and cashed up quality early stage exploration firms continues unabated going forward. I have been pounding the table on this theme in my column for the past year while the best junior issues continue to climb a wall of sector investor worry.
The global miners are simply running out of economic ore and see the writing on the wall going forward. The majors are in short supply of large, economic deposits due in part to falling budgets for grassroots exploration programs. This dilemma for the major miner firms has arisen due to the previous particularly nasty bear market which ended in Q1 2016. During that period, the majors had to cut these programs so they could keep down expenses during four years of a falling gold price.
Furthermore, the CEOs of these firms have learned from their mistakes of the last bull market. The majors issued massive amounts of their company stock to get ounces on the books at any price to appease share-holders. Most of these ounces, which are un-economic below $1500 per ounce, were written down and remain moth-balled. This failed strategy also contributed to the viciousness of the recently concluded bear market as too much company paper was issued to acquire un-economic gold ounces.
Since that time, the M&A in the sector is back, as well as an innovative, lower risk approach by the global miners in hopes of garnering future economic gold ounces. This new strategy has been to invest capital into developer/exploration and/or early stage exploration juniors by taking anywhere from a 9 to 19.9 percent position in the junior miners they feel have the most potential.
The aforementioned take-over announcement by Eldorado Gold Corp of junior developer Integra Gold Inc is an example of this money saving strategy. In February of 2016, Eldorado Gold Corp. purchased 15% of the outstanding common shares at C$0.50 per share, then paid C$1.21 per share for the remaining 85% earlier this week. However, this was announced as an all-share deal, so it was the existing EGO shareholders who were spared a lower dilution as opposed to really “saving money”.
Since the new miner bull market began, it has been my main strategy to simply “follow the money” no matter how the over-all sector is trading. This entails anticipating the companies which the global miners may be interested in either taking a position in, or taking over in the future, as well as watching for a good entry on a company which a major has already taken a sizable position. Â
This is a very appropriate time to begin this approach, while the sector is mired in what has now become a nearly 10-month consolidation period. However, a generous amount of research and due diligence is highly recommended before purchasing a junior miner. If you require assistance in doing so, please stop by my website and check out my subscription service at www.juniorminerjunky.com.