Due Diligence Tips in the Precious Metal Junior Space for 2018
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If I were to sum up the performance of the junior miner space in 2017 into one word, it would be “Frustrating.”
After the previous year began with a 6-month rampage of short-covering and value-based buying in the sector, triple digit outsized gains were commonplace. Since that time, the miners have been mired in what has now become a 17-month consolidation period. Adding to sector participants frustration, has been the under-performance of the miners in relation to the gold price since the beginning of the year.
This recent quote from Joe Foster, who manages the $670 million VanEck International Investors Gold Fund from New York, should be music to the contrarian ears of miner value investors: “Nobody cares about gold right now. With the stock market marking new highs, everybody’s talking about bitcoin, nobody needs a safe-haven asset in this environment. But I think it would be foolish not to have an allocation to gold because it has a very low correlation to stocks and it’s a hedge against systemic financial risk.”
Looking ahead into 2018, I believe the faithful will be rewarded for their patience, when the sector eventually breaks out of this consolidation in the first half of the year. Here are a few things investors should be cognizant of when researching the space for the best quality juniors to invest as we head into the new year:
Majors are still grappling with grade: I believe grade is still one of the biggest problems in the industry as on the whole it continues to decline. In order to maintain production, majors must expand milling capacity to process lower grade material. They will also need to step-up acquisitions of large, higher-grade development projects with blue sky potential. This means mergers and acquisitions will be heating up again in 2018. Investors should concentrate on juniors which control such projects, as they are more likely to be acquired by a major much sooner than lower-grade “optionality plays”. My favorite developer which meets these criteria has been and continues to be Sabina Gold & Silver Corp (SBB.TO), which is trading near a 5-year high this week after receiving a strategic financing deal by Chinese global miner Zhaojin International Mining.
Global miner strategic financings will continue: One of my most successful investment strategies this year has been to “Follow the Money”. While global miners have been in the process of pouring over $425 million dollars into junior developers/explorers via strategic finance in 2017, I simply scoured the space for juniors which had the same basic attractions of previous firms targeted by majors who acquired up to 19.9% of their stock via bought-deal placements. These deals not only legitimized projects to the market, they were also deemed “acceptable dilution” by current shareholders as most strategic deals did not have a warrant attached and the shares are now held by “strong hands”. My favorite explorer which meets these criteria and has yet to have a global miner purchase a large position in its stock is Marathon Gold (MOZ.TO).
Focus on lower risk growth oriented producers (GOP’s) for a strong base in your junior portfolio: The junior mining space is one of the riskiest on the planet, so it is extremely important to manage one’s risk when building his/her portfolio. A few quality GOP’s purchased at the end of tax-loss selling season (now!) should provide a solid base for a riskier junior basket of developer/explorers as we head into 2018. Focus on companies which have strong balance sheets with little or no debt, a solid cash position, and positive cash flow in a sub-$1300 gold environment. It is also best to concentrate on companies which own low-cost mines in safe jurisdictions with no hedges or streaming deals attached to future production. The “gold standard” of GOP miners in my opinion is McEwen Mines (MUX), which tics all of these boxes.
As we wrap up this challenging year in the junior miner space, I look forward to a prosperous 2018 in what I believe to be the last deep value sector left in the marketplace. I would also like to wish all of my readers a very safe and Happy New Year.
Full disclosure: I own shares of the companies mentioned in this article and purchased them in the open market with my own funds. I have also recommended each of them to my subscribers.