How far can mining stocks fall?
Kitco Commentaries | Opinions, Ideas and Markets Talk
Featuring views and opinions written by market professionals, not staff journalists.
Stocks can shoot up and make you wealthy beyond your dreams.
And drop hard even while the underlying metal price hasn't moved.
Mining stocks are highly cyclical in nature, which is what attracts investors to the space.
A steep 50% dive can be followed by a 500% rise.
Some stocks mint millionaires.
But in reality, most are losers for investors.
However, because of cyclicality… massive amounts of share trading and capital are required to put in tops and bottoms.
You may have heard of the terms stock "consolidation" or "digestion"…
In a previous edition of Katusa's Investment Insights, we profiled a Dark Market Secret – called Shareholder Turnover.
It's a tool to help you understand when and how a stock can be put in a bottom or top.
You can run any number of analytical tools, add trendlines or your favorite indicators and try to confirm data.
But in the end…
This applies to tech, crypto, mining, energy, and every market sector.
Once you're prepared, you'll see the markets as they truly are: powerfully cyclical.
So today we're going to apply Shareholder Turnover to select stocks.
The Dark Market Secret you'll learn today is one you won't find on stock screeners. Or nearly any newsletter you pay for.
The "Share Turnover Ratio" of Major Miners…
Below is the share turnover ratio for Newmont, Barrick, Freeport-McMoRan, and Pan American Silver.
These 4 companies have been around for over 20 years and have been excellent bellwethers for the sector over that time.
Volume was exceptionally light back in the late 90s across the board and highly illiquid. Yet today's volume ratio is even lower than that correction.
The Dollar Volume Ratio
An even better apples-to-apples comparison uses the dollar volume ratio.
This is important because it shows the actual amount of capital required to turn over the stock and the "time required".
Again, this ratio points out that if we are in a structural shift, we are nowhere near out of the woods yet.
Like we did for technology and bank stocks here, the share price performance of these mining stocks is shown throughout the past downturns.
- Relative to the past downturns, there is a lot more pain on the way IF we are in for a long bear market.
Here is an example of Newmont from 1995 through to today…
This puts the cyclicality and turnover requirements in perspective.
Relative to the past 2 cycles, the dollar volume turnover ratio is nowhere near a level that would suggest a bottom.
What I find interesting about this is that since 1995, the bull market turnover ratios (19x & 16x) are considerably larger than the bear market turnover ratios (9.5x and 12.4x).
The Key Take Home…
This intuitively makes sense.
The point of the above analysis is to show what can happen in a global recession to share prices.
If the global economy experiences continued bouts of elevated inflation, it's reasonable to expect a further slowing down of the global economy.
It's possible we move beyond the stagflationary environment into a serious deflation and even potentially a deep deflation.
None of these outcomes are good for investors. If the global economy experiences a sharp but quick recession, the rate of turnover could be less.
That leads to the critical question:
Where is the New Capital Going to Come From to Buy Mining Stocks?
Millennials are not buying mining stocks at the same rate as they are buying crypto, NFTs, and tech stocks. (Or dumping them as of late…)
Over the last 30 years, the Baby Boomers' capital was the largest flow of capital towards mining stocks and that generation is now transitioning and preparing for retirement. Most boomers have had negative experiences with mining stock performance and are no longer willing to take the high-risk nature mining stocks.
With that comes de-risking their portfolios.
Here is the part where I will anger most investors in the junior mining sector…
Level Up: The Game Has Changed for the Flow of Capital
That means to attract the capital, a mining company must be large enough in size and meet the liquidity metrics required by trading algorithms designed by the big quant and passive funds.
And the metrics of the company are changing in real-time.
That means not just financial metrics like MCAP, EV, earnings, etc… but ESG metrics which I have covered in many past editions. Where the primary asset is located, and where the head office is located matter.
Here's a quick checklist…
I will never be a popular mainstream analyst, especially among the "rounder" mining companies whose lifelines are the brokerage firms in Canada.
But one of the gold companies in our portfolio is up nearly 500% in the past 2 years because it met the above criteria.
And that's in a market where most gold mining stocks are down 50-70% from their highs.
I believe this stock will go much higher and I've already placed a big bet on another company in a similar jurisdiction, with a tier-one asset. And I believe – in due time – the passive funds will come and scoop up shares in this gold rush story too.
If you want to get my in-depth research and know which company's I own (and at what price) – consider becoming a member of Katusa's Resource Opportunities.
You'll find in-depth examples of shareholder turnover charts and data on many of our KRO portfolio companies.
And in simple terms that any investor can understand. (Leave the hard part to our talented team).
It's going to be a bumpy road ahead in the markets. Arm yourself with the best information.
Keep it simple. Less is more and focus on the big score.