“It’s the inherent inefficiencies of the capital market system that create these opportunities.”
This quote captures why certain exploration stocks are suddenly moving – and reminds me that more such moves will come.
With no money, exploration companies could do no work. Some assets got dropped because carrying costs could not be met; other assets got dusty sitting on a corporate shelf and getting zero attention. Investor relations people found work in new sectors.
Now that’s all changing. Today folks are busting to get all their ideas going before the rebound takes off. Assets are being dusted off. Investor relations people are getting rehired. Money is available again, which means explorers can explore, developers can advance, and miners can acquire.
When gold goes, major miners are the first to respond. Their share prices have done phenomenally well this year; Kinross is a good example, up 160%.[i]
Along with majors went the small group of companies that managed to maintain momentum through the bear market. Their share prices levered off gold’s gains in January and are now up 100% or more year to date. Examples include Kaminak Gold [ii] which recently announced that it is being taken over by Goldcorp for a healthy premium, Integra Gold [iii], and Newmarket Gold [iv].
It is easy to look at those companies and think, “Well, I missed it.” And yes, anyone who did not invest in late 2015 missed this part of gold’s rally.
But a gold rally has many parts.
A second wave has gotten underway more recently. Gold consolidating at its stronger level for two months has created confidence this is not a seasonal move but the beginning of a new gold bull market.
Mining’s movers and shakers have been awaiting this for years.
These are the guys who spent the bear market gaining ownership of prospective projects, eyeing juniors with good assets but bloated share structures or debt, connecting with successful management teams or technical groups that needed a new vehicle, and telling their contact lists to be patient.
None of that work generated any pay. On the contrary, it costs money to do all this research, navigate these channels, and prepare these assets, companies, and people for a fresh start.
But now those starts are starting.
All of these are companies where new interest, from another company or from an active investor or because of asset qualities, has brought its share price back to life.
The first move in gold and gold equities already happened. If you missed it, the important thing to remember now is that this is a stepwise process.
The current step involves bringing broken companies back from the brink. That means fixing broken share structures, rejigging entrenched management, and raising some cash.
Yes, such raises are dilutive – but without some cash a company remains stuck. To get a company unstuck requires providing a bit of capital and letting a determined team demonstrate that it can lever that cash into a real share price move via exploration or acquisition success. If it works, they can raise the next bit of cash at a higher price and continue the process.
The investors who back these initial financings take on a lot of risk. Success hinges on the company achieving something noticeable with that first bit of capital. If the sampling or trenching or drilling does not hit into something interesting, the game might be up. If the idea was to acquire a particular asset, better hope the deal closes. If management was dishonest and the cash goes to pay overdue bills, the investment is likely lost.
But if it works the rewards can be big, especially because the initial investment carried such a low cost base. There is zero guarantee of success, for any of these newly revived stories. But the return of confidence and capital to the mining sector means good assets and quality teams are getting another chance.
Investors should remember that placements in junior resource companies are highly speculative. The odds for success are against any one issue but the ones that work out can do so spectacularly. A more prudent speculator can improve their odds for success through very focused due diligence within the context of an exploration portfolio with the idea that most of their speculations will not work out but the ones that do will more than make up for it.
As long as you understand and accept the risks, however, the early stages of a new gold market can be pretty exciting. Mining’s movers and shakers are still working to get their new vehicles going, which means there are still lots of early stage entry points available if you have your ear to the ground.
And we have the bear market to thank: entry points are cheap because, as that broker said in our conversation:“It’s the inherent inefficiencies of the capital market system that create these opportunities.”
Advancing an asset from prospect to discovery to deposit to development to production takes decades. Mining’s cycles are shorter than that. That mismatch means every asset goes through bear markets. Lucky assets just advance slowly in the bad years; most assets lose steam completely or go backwards as continuity is lost, permits expire, limited capital forces shifts in focus, and a much-slowed pace hurts efforts to gain social license.
Many assets have gone backwards over the last five years. That is a lot of inefficiency that needs addressing. Not every project or team deserves another shot, but a good number do. If you can understand what went wrong last time, you can assess whether the project, company, or team is worth another look.
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