The Junior Gold Sector
An article today titled ‘Junior Gold Stocks: Bent, Not Broken' by Scott Wright of Zeal Speculation summarizes his views on Junior Golds – where they have been and why, and where they are going. In summary, Wright says:
• in the past several months even though gold has been strong, the risk capital that usually finds its way into junior gold explorers has ‘all but left the scene';
• junior gold stocks typically lag gold and even the larger gold stocks over the course of an upleg since institutional investors usually can't buy them. Accordingly, rallies in these juniors are ignited when the enthusiasm of individual traders takes hold in the latter halves of uplegs;
• measured by the S&P/TSX Venture Composite Index (CDNX), the gold juniors have fallen by 80% from its 2007 high before finally appearing to have hit bottom this past December – and this in a period when the gold price has been strong;
• decimated stock prices and fleeting investor interest is a bad combination that does not bode well for the futures of many of these juniors. Ultimately they rely on bullish sentiment to survive, and (in Wright's view) many will now be strained to stay their course. Stated another way, selling begetting more selling has driven the stock prices of many gold juniors to alarmingly low levels over such a short period of time it has radically changed the landscape for junior gold stocks. For some of these companies the damage may be irreparable – with capital (new equity infusions) leaving the junior sector being "deadly for the survival of this species";
• Wright's believes his latest round of research on over 300 gold juniors has revealed ‘just how rotten the environment' is for this sector. He says "what I found was frightening". Only 3% of junior golds had market capitalizations over $300 million (the floor market capitalization of ‘small cap' per Investopedia.com) and only 15% had market capitalizations between $50 - $300 million (the definition of a micro-cap per Investopedia), leaving 82% being defined as ‘nano-caps'. Taking this further, Wright found just over 50% of all junior gold stocks have market caps under $10m;
• 85% of all junior gold stocks are currently trading under $1 per share, 75% are trading under $0.50, 59% are trading at less than $0.25, and nearly 40% are trading under $0.10;
• using 3-month average volume and the average share price for all the nano-cap juniors, the average daily trading value per stock only amounts to $44,000, and $18,000 for the ‘under $10 million market capitalization' juniors;
• when it comes to investor awareness, without a major discovery Wright believes ‘the smaller a company is the harder it is to attract interest', that a company's share price impacts their ability to raise capital going forward, that a company can release only so many shares to the market without disrupting share capital provisions and ‘diluting the heck out of existing shareholders', and if a junior tries to raise capital with an over-ambitious offering size relative to its market cap and existing shares outstanding it simply won't find the subscribers. To Wright this means that "many juniors with super-low share prices will have a difficult time raising capital in today's environment. And if they are able to find subscribers to new shares, they aren't likely to raise significant-enough capital to fund costly exploration programs";
• Wright concludes "the fact of the matter is it will be extremely difficult for many juniors to flex enough muscle to obtain the capital necessary to fund multi-million dollar exploration campaigns when they are so small";
• according to the Metals Economic Group, junior equity financings were down by $6 billion in 2008, with the juniors' overall share of worldwide exploration, falling under 50%. Further, with the magnitude of equity financings likely to decrease even further in 2009, there is likely to be a contraction in gold exploration which Metals Economic Group thinks will be in large part from lack of spending by the junior miners; and,
• those juniors that don't have cash will not be able to tap the equity markets in the fashion in which they had in the past, and those that do have cash will "reel in spending to conserve capital".
Having commented on what he sees has happened in the junior gold sector (which is consistent with how I see it as well) Wright then draws the following conclusions:
• many juniors will not be able to survive these current economic conditions. Those whose stock prices have ‘cratered' and have little cash ‘are in big trouble';
• a slowdown in exploration is ‘smashingly bullish' for gold's long-term fundamentals. The gold mining industry is already struggling to keep up with growing demand. Less exploration means less discovery, which in turn reduces the ability for gold producers to renew their reserves and build new mines;
• the extremely low market caps of the junior golds will open the door for acquisitions, and a noticeable consolidation in the junior gold stock sector is likely;
• those ‘elite juniors' with superior management, high-potential projects, and sound financials (among many important fundamentals) will be the ones to survive and thrive. Those ‘select' juniors will be able to overcome the current ‘malaise' and eventually provide investors with the spectacular gains they "should expect in this high-gold-price environment";
• the role of the junior golds in the gold lifecycle has not and will not diminish, as most of the big gold mining companies can't generate enough organic discoveries to sustain longevity;
• some of the best geologists in the world work for or run junior gold explorers, and these ‘rock jocks' need to explore for gold where geopolitics and geology may not always be favorable;
• as a result, while the junior gold sector may seem dead, Wright believes that now may be "the best time to consider speculation in this sector";
• as for picking the junior gold stocks in which to speculate, Wright believes quality is more important now than ever before. Irrespective of their current market capitalizations, the ‘elite juniors' able to maintain fundamental integrity will recover from their highly-sold-off levels;
• with strong gold prices it is only a matter of time before investors return to the junior gold sector. Wright believes that those investors who buy the ‘elite stocks' at the current "insanely-low levels" will likely score legendary gains.
Setting aside whether ‘Wright is right' with respect to now perhaps being "the best time to consider speculation in this sector" and the possibility of ‘legendary gains', I believe Wright is correct with respect to what is likely to transpire in the junior gold sector by way of consolidation, and what the future likely holds for that sector. For those readers interested in junior gold explorers the StockResearchPortal website is well suited to help ferret out what Wright calls the ‘elite junior golds'. As I have said in prior posts, I consider those to be ones that meet the criteria of having cash on hand to fund at least one year's operations, and having what appears to be – or pursuant to a pre-feasibility study has been likely determined to be - a commercially viable NI 43-101 Resource or Reserve located in a stable, mining-friendly, political environment physically close to both external infrastructure and third-party internal ore processing and refining infrastructure.
I recommend readers take the time to read Wright's article in its entirety and in context. I consider the time will be ‘time well spent' for those interested in the junior gold sector.
For Economic, Mining and Oil & Gas Stock Research click here.
• in the past several months even though gold has been strong, the risk capital that usually finds its way into junior gold explorers has ‘all but left the scene';
• junior gold stocks typically lag gold and even the larger gold stocks over the course of an upleg since institutional investors usually can't buy them. Accordingly, rallies in these juniors are ignited when the enthusiasm of individual traders takes hold in the latter halves of uplegs;
• measured by the S&P/TSX Venture Composite Index (CDNX), the gold juniors have fallen by 80% from its 2007 high before finally appearing to have hit bottom this past December – and this in a period when the gold price has been strong;
• decimated stock prices and fleeting investor interest is a bad combination that does not bode well for the futures of many of these juniors. Ultimately they rely on bullish sentiment to survive, and (in Wright's view) many will now be strained to stay their course. Stated another way, selling begetting more selling has driven the stock prices of many gold juniors to alarmingly low levels over such a short period of time it has radically changed the landscape for junior gold stocks. For some of these companies the damage may be irreparable – with capital (new equity infusions) leaving the junior sector being "deadly for the survival of this species";
• Wright's believes his latest round of research on over 300 gold juniors has revealed ‘just how rotten the environment' is for this sector. He says "what I found was frightening". Only 3% of junior golds had market capitalizations over $300 million (the floor market capitalization of ‘small cap' per Investopedia.com) and only 15% had market capitalizations between $50 - $300 million (the definition of a micro-cap per Investopedia), leaving 82% being defined as ‘nano-caps'. Taking this further, Wright found just over 50% of all junior gold stocks have market caps under $10m;
• 85% of all junior gold stocks are currently trading under $1 per share, 75% are trading under $0.50, 59% are trading at less than $0.25, and nearly 40% are trading under $0.10;
• using 3-month average volume and the average share price for all the nano-cap juniors, the average daily trading value per stock only amounts to $44,000, and $18,000 for the ‘under $10 million market capitalization' juniors;
• when it comes to investor awareness, without a major discovery Wright believes ‘the smaller a company is the harder it is to attract interest', that a company's share price impacts their ability to raise capital going forward, that a company can release only so many shares to the market without disrupting share capital provisions and ‘diluting the heck out of existing shareholders', and if a junior tries to raise capital with an over-ambitious offering size relative to its market cap and existing shares outstanding it simply won't find the subscribers. To Wright this means that "many juniors with super-low share prices will have a difficult time raising capital in today's environment. And if they are able to find subscribers to new shares, they aren't likely to raise significant-enough capital to fund costly exploration programs";
• Wright concludes "the fact of the matter is it will be extremely difficult for many juniors to flex enough muscle to obtain the capital necessary to fund multi-million dollar exploration campaigns when they are so small";
• according to the Metals Economic Group, junior equity financings were down by $6 billion in 2008, with the juniors' overall share of worldwide exploration, falling under 50%. Further, with the magnitude of equity financings likely to decrease even further in 2009, there is likely to be a contraction in gold exploration which Metals Economic Group thinks will be in large part from lack of spending by the junior miners; and,
• those juniors that don't have cash will not be able to tap the equity markets in the fashion in which they had in the past, and those that do have cash will "reel in spending to conserve capital".
Having commented on what he sees has happened in the junior gold sector (which is consistent with how I see it as well) Wright then draws the following conclusions:
• many juniors will not be able to survive these current economic conditions. Those whose stock prices have ‘cratered' and have little cash ‘are in big trouble';
• a slowdown in exploration is ‘smashingly bullish' for gold's long-term fundamentals. The gold mining industry is already struggling to keep up with growing demand. Less exploration means less discovery, which in turn reduces the ability for gold producers to renew their reserves and build new mines;
• the extremely low market caps of the junior golds will open the door for acquisitions, and a noticeable consolidation in the junior gold stock sector is likely;
• those ‘elite juniors' with superior management, high-potential projects, and sound financials (among many important fundamentals) will be the ones to survive and thrive. Those ‘select' juniors will be able to overcome the current ‘malaise' and eventually provide investors with the spectacular gains they "should expect in this high-gold-price environment";
• the role of the junior golds in the gold lifecycle has not and will not diminish, as most of the big gold mining companies can't generate enough organic discoveries to sustain longevity;
• some of the best geologists in the world work for or run junior gold explorers, and these ‘rock jocks' need to explore for gold where geopolitics and geology may not always be favorable;
• as a result, while the junior gold sector may seem dead, Wright believes that now may be "the best time to consider speculation in this sector";
• as for picking the junior gold stocks in which to speculate, Wright believes quality is more important now than ever before. Irrespective of their current market capitalizations, the ‘elite juniors' able to maintain fundamental integrity will recover from their highly-sold-off levels;
• with strong gold prices it is only a matter of time before investors return to the junior gold sector. Wright believes that those investors who buy the ‘elite stocks' at the current "insanely-low levels" will likely score legendary gains.
Setting aside whether ‘Wright is right' with respect to now perhaps being "the best time to consider speculation in this sector" and the possibility of ‘legendary gains', I believe Wright is correct with respect to what is likely to transpire in the junior gold sector by way of consolidation, and what the future likely holds for that sector. For those readers interested in junior gold explorers the StockResearchPortal website is well suited to help ferret out what Wright calls the ‘elite junior golds'. As I have said in prior posts, I consider those to be ones that meet the criteria of having cash on hand to fund at least one year's operations, and having what appears to be – or pursuant to a pre-feasibility study has been likely determined to be - a commercially viable NI 43-101 Resource or Reserve located in a stable, mining-friendly, political environment physically close to both external infrastructure and third-party internal ore processing and refining infrastructure.
I recommend readers take the time to read Wright's article in its entirety and in context. I consider the time will be ‘time well spent' for those interested in the junior gold sector.
For Economic, Mining and Oil & Gas Stock Research click here.
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