The upside to the downturn: extraordinary value' for selective investors

By Mining Markets staff / June 04, 2014 / / Article Link

There's no doubt that the past few years have been tough on junior miners and those who invest in them.

So tough in fact that the World Resource Conference put together each June in Vancouver by Cambridge House has been rebranded as the Canadian Investor Conference, with small-cap tech and "diversified" companies - including those juniors that have recently migrated to the burgeoning medical marijuana sector - invited in to shore up the exhibitors' list and bring in more investors.

But while it's easy to dwell on the hardships exploration companies and those who invest in them have had to endure for the past three years, there is an upside to the junior mining industry's current malaise.

A panel at the conference, which took place June 1-2, laid out several positives for investors who are still interested in the exploration space.

Moderated by Chris Berry of Disruptive Discoveries Journal, who characterized the last 18-24 months as a "bloodbath" for the exploration sector, the panel agreed that, for investors that are extremely selective, it could be a profitable time to accumulate positions in juniors with top-notch management, exploration teams and projects.

First, tough times serve to "separate the wheat from the chaffe," said Eric Coffin of the newsletter HRA Advisory. And for exploration plays as opposed to development plays, lacklustre commodity prices aren't a killer.

"Even in a really bad market, you can get really good returns if somebody has an exploration win," he told the audience. "So at that level, I think exploration stories are always worth following."

In fact, Lawrence Roulston of Resource Opportunities suggested that investors forget about commodity prices - at least on a day-to-day basis - and instead focus on companies that are adding value.

Second, there are commodities that are so out of favour that there's nowhere left to go but up.

Coffin identified uranium, whose spot price recently sunk to US$28.25 per lb. as one of his picks "just because it's done so badly," while Lawrence Roulston of Resource Opportunities sees attractive upside in base metals.

"Nobody cares about base metals right now, which means you can get extraordinary value in companies that have base metals deposits," Roulston said. "Right now, you can get a silver deposit at great value and get lead and zinc thrown in effectively for free."

Even as the price of gold and many other metals remains stagnant, there are a few with near-term potential, including zinc and diamonds.

"I actually like diamonds, God help me, but I hate diamond exploration stocks," said Coffin, who is still searching for a diamond stock to buy.

He noted that diamonds have held up well as the price of other minerals and metals have fallen.

"It's one of those minerals that the majors have really stepped back from and there really is not much at all in the pipeline, so diamond prices should actually be good for the foreseeable future."

Exploration Insights' Brent Cook agreed that diamonds - and in particular, near-term diamond producers Mountain Province Diamonds (TSX: MPV) and Stornoway Diamond (TSX: SWY) - are a bright spot in the industry.

"Right now, you can buy both Mountain Province and Stornoway and these things are going into production and they're going to push out a ton of cash flow," Cook said. "In terms of safe bets right now, that's probably one of the safest bets I see in this sector."

Of course, there's still a market for gold exploration, even with the languishing price. That's because investors are more comfortable with gold and more likely to react to positive results with buying, said Coffin.

Whatever the commodity, grade is king in the current market, which will only react to the best-quality projects.

It will take either a rise in the price of gold or new discoveries to revive the junior market, noted Kaiser.

"I think to bring the capital flows into this sector either from retail or institutional does require a higher gold price than what we have now. So we are going to be stuck in a bear market if gold continues to drift or even goes lower," he said.

"That's why I'm sort of praying for discoveries because discoveries go by their own dynamic and nobody cared what the price of nickel or copper was when Voisey's Bay was discovered or Ekati or Peirina," he added. "So far as we're focused on advanced projects only and no discoveries, our destiny's tied to where gold's going."

While complaints among juniors about how hard it is to raise money abound, Roulston noted that 12 of the companies he follows with his newsletter raised a total of $184 million so far this year.

"There is money out there for companies that have got (good) projects and management teams," Roulston said, suggesting that perhaps the companies that can't raise money shouldn't be in the exploration business, but in the marijuana sector instead.

Most investors have left the mining industry, however, commodities will come back and new, high-quality deposits will be in demand when they do. Roulston noted that money is coming into the sector from people who understand the cyclical nature of the industry and the importance of finding new deposits over the next few years.

"Think back to 2000 when mining was branded a sunset industry by the popular media and most investors wouldn't touch it with a 10-foot pole" he said. "People that came into the market at that time made a fortune."