Is it time to start picking through the junior rubble?
In a round up of market watchers the bottom is here, or close, or maybe further away, but overall, there's something to be said for making some savvy picks over summer.
Posted: Saturday , 30 Jun 2012
HALIFAX, NS (MINEWEB) -
Alice Cooper may as well have written the classic rock tune "School's Out" as an anthem for juniors right now. "School's out for summer/School's out forever/School's been blown to pieces," Cooper sang. As the junior market drags yet further down around multi-year bottoms and a typically slow summer threatens, the question for investors becomes: is it time to pick through the junior rubble?
This question was put, perhaps not quite so metaphorically, to a handful of junior watchers on Friday afternoon as we head ever closer to July and August, the "summer doldrums" as they're called; typically bad months for juniors and gold alike.
Stefan Ioannou, a Haywood Securities mining analyst, may speak for many juniors themselves when he said, "I think the valuations are at a point where they don't make sense fundamentally."
You can plug numbers into financial analyses all you want these days, he said, but in the end junior valuations now seem to have "no rhyme or reason."
Still, he hit a theme that most would echo. Ioannou thought summer would be slow, even painful, though not without some opportunity. Much of the pain being experienced now, according to Ioannou, can be blamed on retail investors. He said that recently there has been a lot of retail selling. That contrasts with institutions which he believes have largely finished their selloff.
"They probably got the lion share of selling done - I hope," Ioannou said. Tax loss selling could confound this situation, he acknowledged. While most institutions were holding core positions, for some it might still be "worth taking the tax loss now and then reloading," he said.
Kids and vacations are to blame for slow summers and Ioannou noted summer fever had set in around offices. In the past week or so talk has noticeably turned to vacation plans among fund managers and institutional investors, he said.
"I think most people are happy to sit on the sidelines," Ioannou said. That would mean shareprices do little over the summer months.
But Ioannou was optimistic about fall. "At that point I think we should see more action - hopefully," he said. His caveat on a good fall was a total bombshell in Europe or China. Otherwise, equities in the junior market are, he concluded, "ridiculously cheap."
As ever an issue to beware is junior heroine: cash via financing. Those that don't have a good stash will be 'jonesing' and willing to pay whatever they must to make the score. The money is out there. It's just a matter of price. And the dealers know they have the upper hand on their customers. Even relatively small sums of money, say a few hundred thousand dollars to a couple million, can mean heavy dilution that eats away at stock value.
Investors hate it. Junior execs have few other options.
Bob Moriarty, owner of 321gold.com, got straight to the point in an email on the question of junior markets. Quick background, here, Moriarity makes strong bottom calls, and called a junior market bottom a month ago.
"We had a correction," he wrote in answer to a question about the state of junior markets. "The bottom was May 16. It's typical to have a retest some six weeks later. I think we just finished that. It's the buying opportunity of a lifetime."
Taking a somewhat different stance on summer than others, Moriarty said the doldrums may not hold true in 2012. Junior stocks could catch some rare wind. "Maybe," Moriarty said. "In any case they have already crashed and are historically cheap."
While Mickey Fulp, the Mercenary Geologist, agrees that junior valuations are generally low, he maintains there could still be lots of pain this summer. It's a position he took a few months ago when he stated he was going to sit more or less on the sidelines and watch the carnage unfold. So far it has.
Right off the bat Fulp threw a recent statistic about juniors. He noted that over a third of companies on the Venture board hit 52-week lows on the same day recently.
"The permabulls in the junior resource sector must have vested interest in pumping the markets for whatever reason," Fulp said. "These guys have been calling bottoms since April."
Fulp was bearish about the summer - to a point. "In some regards I'm on the sidelines waiting for post-labour day when people get back to work."
"By the same token," he said, "there has been a fire sale on some junior stock."
Fulp is watching closely those stocks with strong prospects and management. And he is willing - and making - stink bids in a few cases. Not a buying frenzy, but at least he is taking chances on stories that he can't resist.
Will a turn come soon for juniors?
"I don't know what that point will be," Fulp said.
Fulp strongly believes the bloodletting will continue through the summer. But he agreed it could be a good time to get into companies that for years an investor might have liked to have owned but thought was overvalued.
"Absolutely. I'm not adverse to that. In fact I have been doing it."
Yes, it's a bad time for juniors, Fulp said, but, "It's not all doom and gloom." He made a telling point, too, about junior shareprice movements. Drilling results on discoveries have been rewarded. In a number of cases over the past few weeks shareprices have jumped 50 to 100 percent on novel drillhits.
"That's encouraging to me," Fulp said, noting he's made some profits on such events.
For Fulp summer seasonality is, as in other years, an opportunity to buy gold. He said he was waiting for July or more likely August to buy gold bars, when he expects gold to take a traditional dip.
However, his overall thesis for the summer was this: "Bottom line. It's going to get worse before it gets better."
Over at Dahlman Rose, analyst Adam Graf, struck a similar tone. The negative sentiment hanging over the commodity sector, with gold lumped in, was pervasive. The average institutional and retail investor is waiting for gold to start moving before deploying cash, if they have it. Stock prices are being pounded, and continue to be pounded.
"And selling begets selling," Graf said.
His view is that if you're a gold bull you should consider buying quality projects. "If you believe that gold is going to $3,000, then you want to be bargain hunting," Graf said.
But, as some others noted with seasonality in mind, he said, "You might not be catching the bottom here."
If Graf were investing he would look to shovel ready projects that have been disproportionately beat up by markets. He would tend to stay away from larger projects, not because they are not good, but because of associated costs and concomitant lack of interest from miners and commodities giants.
"Capital costs have got so crazy that major producers are shying away from buying."
It is a theme he turns to frequently. That geologists are getting paid many multiples what they used too. And products like cyanide and rubber tires are dominated by a few large manufacturers that have barely increased capacity, he said. So prices go up and miners feel the pinch.
Still, if majors aren't buying to build right away, Graf didn't rule them out. He made an interesting point: He wondered if majors might just start buying up junior projects, not so much to consider developing them immediately, but merely to put on the shelf for another day.
And perhaps some bargain hunting investors are already doing much the same.