Finally, Some Momentum for Junior Golds

Gold is the one commodity that has performed in recent months, so it is no surprise that the producers are doing well. But according to analysts at Canaccord Adams, there is finally some momentum building in the long-dormant juniors as well.

The senior and intermediate producers are booming because of a combination of high prices, falling costs and favourable currency moves. Canaccord analysts Wendell Zerb, Eric Zaunscherb and Nicholas Campbell estimated that the are trading at a price-to-NAV multiple of 1.5 times, up from 1.13 times last October.

That is trickling down into junior producers and developers as well, the analysts wrote. They calculated that the average market value for in-situ ounces of gold is $29.20 an ounce, up 22% in three months.

They wrote in a note to clients:

As the multiples on larger-cap precious metal producers expand, investors tend to switch some of their investments from the producers that have outperformed to smaller-cap gold producers where multiple expansion is slower to take hold. This trend toward smaller caps, and in theory better value, eventually reaches into the explorecos.

Given the recent wave of senior gold financings, they also predicted that another round of consolidation could take hold in the junior space. Kinross Gold Corp. (KGC), for example, just raised $360-million and is eager to make acquisitions. The analysts suggested that junior targets could include Andina Minerals Inc. (ADMNF.PK), Detour Gold Corp. (DRGDF.PK), Exeter Resources Corp. (XRA), Osisko Mining Corp. (OSKFF.PK), and Rainy River Resources Ltd. (RRFFF.PK).

But they also left a word of caution: the second quarter tends to be weak for gold prices and equities, and there has been little exploration success to get investors excited about M&A. And if the gold price retrenches back to $750 an ounce, the small caps could sink back to recent lows.

Comments

[silverwood:]

At some point in time the major gold/silver producers will need to replace resources. Given the current pricing of junior explorers and small cap producers, aquistion will be far less costly and faster to develop than for the majors to crank up their own drills. Acquiring juniors with good deposits in favorable location, that is mining friendly countries and not too remote will be a much rewarding endevour.

Jan 29 11:45 AM

[ROLEX18K:]

It is true that most Gold stocks ( ABX, NEM up almost 100% from the lows, not only juniors are up ) went up from the lows, but it is also true that even after rising 100-300% most Gold/Silver mining stocks are still down for the year between 40%-70%.
So not all Gold investors are equal, for those who bought Gold stocks last year at the same Gold price as now, they are still losing big time, those who bought since Gold was 700$ are doing excellent.
But I suspect that those investors who are losing are overweighting winners by 1:10 ratio.

Jan 29 02:03 PM

[Ian R. Camp...:]

Following from this article, I think readers might find the following statistics interesting - particularly in light of currency exchange rates generally, and the obvious need to continually monitor them in the context of their mining company investments.

There are approximately 1,350 base metal, gold, silver and uranium mining companies listed for trading on the Toronto and Toronto Venture Stock Exchanges. These companies can be distinguished between those that only explore for metals, and those that both explore for and produce metals. Collectively, these companies conduct their principal operations in almost 90 countries around the world. To put this number of companies in perspective, our analysis suggests - which many readers may find surprising - that these 1,350 companies may represent as much as 60% of all mining companies listed for trading on all world stock exchanges.

Aside from the price of gold, it is obvious that anyone owning shares in those 1,350 companies whose principal operations are in a country other than Canada need to continually monitor the currency exchange rate between Canada and the country(ies) where their investee companies principally conduct business. Using physical gold as a simple example of the effect of changes in currency exchange rates, in mid 2008 the Canadian and U.S. dollars were approximately at par. If a Canadian purchased an ounce of gold then at $800 they would have paid CDn$800 for it. Last Friday the Canadian dollar would buy U.S.$0.80, gold closed around U.S.$925. The Canadian who bought that ounce of gold mid-year last could have sold it on Friday for approximately Cdn$1,150, a gain in Canadian $ of about 45%, whereas an American purchasing that same ounce of gold would have had gain on Friday measured in U.S.$ of about 15%. The prices of goods and services in Canada generally have adjusted downward since mid-2008. Accordingly, in my example my hypothetical Canadian is significantly better off in purchasing power today than he/she was 7 months ago.

Shareholders in Canadian mining companies need to continuously assess the positive or negative affect of currency fluctuations on each of their investee companies. Where there is a large short-term currency fluctuation I suggest the quickest way to determine its affect is to call the company’s President or CFO and question them about its affect(s). I find these people are readily available to shareholders. My advice – don’t hesitate to pick up the telephone.

If readers are interested, they can find find up-to-date geopolitical and economic write-ups on most of those 90 countries, and up-to-date currency exchange statistics for nine of the major world currencies in the stockresearchportal.co... website. In both cases this data can be found under the Economic Research tab of the website in the Left Navigation column under 'Country Detail' and 'Currency Exchange' respectively.

Feb 01 11:32 AM