Junior mining stocks were all the rage back in the early stages of the gold bull market. During the time frame of 2002-2006 many junior miners were putting in annual gains of 200%, 300% or more. Some junior miners like Seabridge Gold (NYSE:SA) produced 3-year returns in excess of 1500%! It seemed like you could close your eyes and randomly point your finger at a list of junior gold miners, buy the stock and sell a few weeks later for a gain of 30% or more. No feasibility study, no permits, no management experience or path to production… no problem!
But volatile stocks are volatile in both directions and when the gold market corrected, junior miners lost all of those gains and then some. Amateur investors that were patting themselves on the back and recommending investments to their buddies based on their recent success were caught off-guard by the severity of the decline in the junior mining sector and suddenly found that they gave back most or all of their gains. To be sure, some booked profits and got out before the ship sank, but most were caught unsuspecting and unwilling to believe the party could be over so quickly. Many junior miners lost 80% or more of their market cap during the past year or two.
Precious metals investors have a sour taste in their mouth in regards to junior miners and have largely dismissed the entire sector as too risky. For many investors, junior miners have been removed from their portfolios, watch lists and consideration set for future investments. Newsletter writers and analysts that couldn’t contain their excitement over the next “5-bagger” rarely mention a word about juniors these days. While much of this condemnation is warranted, I think we should be careful not to throw the baby out with the bath water.
While I will acknowledge that 75% or more of junior mining companies are not good investments and many will go out of business with credit markets contracting, there are still quite a few impressive juniors that deserve a second look now that the dust has settled. Mine production is decreasing and the larger miners will need to acquire junior miners with quality properties in order to add to their pipeline and keep their production numbers growing. After a massive sell-off that brought the entire sector crashing down, some of the most promising juniors have finished a bottoming pattern, consolidated and have already began moving up very impressively. Cash-strapped investors and weak hands have been shaken free of their junior mining shares as the focus has shifted to more “safe” and liquid investments. Has this produced an opportunity for savvy precious metals investors to pick up quality mining companies at undervalued prices? Here are my main criteria for selecting which junior mining companies are worth my investment dollars.
- Already producing or moving toward production in the next 1-2 years
- Quality properties in politically-stable areas with necessary road access
- Proven and probable resources that justify a higher market cap
- Seasoned management that has a track record of bringing projects to production
- Healthy balance sheet with cash on hand and/or the ability to raise capital easily
Many of the companies that meet most or all of the criteria above have already bottomed and are quietly posting exceptional gains that outpace those of the major producers. Even with today’s decline in gold equities, many of my favorite juniors are up 100% or more since their respective Q4 2008 lows. A few of these companies were recommended in the premium subscription service and have been masked out of respect to paying subscribers. All of the gains listed below were produced in just 1-3 months and illustrate the explosion in junior miners that most analysts and newsletter writers seem to be missing.
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As the entire gold and silver sector has done well over the time period, I have included the PHLX Gold and Silver Index (XAU) index at the bottom for comparison sake. While the XAU is up 85%, the average gain for the junior mining companies that we track over the same time period is 171% or double the gain of XAU. Junior miners are not only joining in this latest rally, they are leading the rally and gaining at twice the pace of the major gold mining companies.
Those that are comfortable with a higher risk/reward proposition might want to take a second look at junior mining companies during 2009. If the trend continues or accelerates as investors warm back up to juniors, we could see the return of another explosive few years for junior mining companies as gold pushes above $1,000 on its way towards its inflation-adjusted high of $2,300.