Value of Junior Miners Stabilizes Relative to the Price of Gold

With many junior miners up 200-300% or more off of late 2008 lows, it's tempting to label the move a speculative fervor beckoning for a pullback. The argument has logical appeal, but what if gold holds steady or even rises from here?

To see the possibilities, one need only to pull up relative price charts that compare the price of junior miners, over time, with the price of gold. These charts were decimated last fall, as junior miners lost far more than the metal. It looks like the shares and the commodity are returning to a more normal relationship.

Take three of the so-called “speculative juniors” that many point to for signs of excess in precious metals: Apollo Gold (Amex:AGT), Claude Resources (Amex:CGR) and U.S. Gold (Amex:UXG). The huge gains over the past few weeks don’t look so speculative when compared to the underlying commodity.

Those relative charts don’t look like runaway speculation. Sure, I would prefer if they were not so “V-shaped,” as “v” reversals tend to break down. But the broader patterns leave no doubt that the bears pressed too hard in the fourth quarter of 2009, and as a result they are no longer in control.

Bottom line: If gold breaks down, all miners are vulnerable. But if gold can hold its own, I expect the junior miners to attract far more speculative interest. And if the yellow dog takes out last year’s highs, we could see moves in junior miners that would shock even the most die hard gold bugs.

DISCLOSURE: Long UXG and several other junior miners. No position in AGT or CGR.

Comments

[Ian R. Camp...:]

I think there is little doubt that common shares of Junior Gold Mining Companies – for the ‘right’ juniors – may rise significantly in the event of continuing escalation in the gold price. That said, to speak in generalities is in my view foolish. Buying shares in the ‘wrong junior gold mining companies’ likely won’t get you very far unless you get very lucky. Junior gold miners as a group were badly beaten down in price last fall. Many – particularly those without NI 43-101 (or in the case of non-Canadian listed companies the equivalent) Resources or Reserves, or without excellent incremental drilling prospects – perhaps should have been. If an investor knows how to screen for and analyze such companies, I think that in the current environment it may be appropriate to borrow the ‘back up the truck’ phrase often used by Doug Casey (a well-known Newsletter Writer) when he writes up a company he likes. If readers are interested in doing their own due diligence I suggest they read the 17 Post Series published last fall on stockresearchportalblo... titled ‘The Valuation of Mining Companies’. As discussed in that series of Blog posts, In any economic environment it goes without saying that investing in junior miners, be they 'gold' or prospective miners of any other metal, is highly speculative.

Feb 17 09:08 AM

[GMiki1:]

Even today with the great pop in UXG it's well, well below its high--and it's one of the popular ones. There are other great juniors out there with gold and silver in the ground that have been decimated. We all have our favorites. I like Bravo Gold, Impact Silver, Sabina Silver, Silver Wheaton, and a few others. I like NAK, which is way underpriced, but it seems to run with copper more than gold though it has one of the largest gold deposits in the world.

Feb 17 11:17 AM

[Asamanthinketh:]

Apollo Gold shareholders today are patiently awaiting news from the TSX expected by Friday Feb 20 that the $70 million financing agreed to by Bankers and Management can move forward. Apollo has 1,330,000 ounces proven gold at the Black Fox mine in Matheson Ontario and expects to be in production by April 15, 2009. Annual production is expected to top 150,000 ounces gold per year over the life of mine.
IMO Apollo Gold is one of the "right Juniors". I have been a shareholder for more than three years.
For details and photos see the company website apollogold.com

Feb 18 01:41 PM