Editors' Note: This article covers stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.
On March 29th 2013, we released an article on Seeking Alpha entitled 'One Small Secret To Pick Winning Gold And Silver Miners'. We wrote that miners with excellent management teams are much more likely to survive and thrive. As evidence, we analyzed the share price of gold and silver miners that are run by managers in "The Next 10" of Casey Research, a selection of highly talented and young entrepreneurs in the resource sector.
At that time, our conclusion was:
"Miners with strong and talented management teams are able to track the performance of the TSX (which we used as a basis), or in several cases truly outperform the index."
Now, almost one year later, we are following up to see whether our conclusion still holds. In other words, is the assumption still correct that miners with excellent management teams are more likely to survive after the carnage and double bottom in the mining industry? Also, have the miners with excellent management teams been the winners in the rally that followed after the bottom?
Before looking in detail to the selected junior miners, we take a moment to review the performance of the broad precious metals miners, based the GDX Mining Index (NYSEARCA:GDX).
The following two charts show that the gold mining index has closely tracked the directions of the gold price (NYSEARCA:GLD) over the past 2 years. Unsurprisingly, the miners are more leveraged than the price of gold. GDX lost 63% of its value between its peak in October 2012 and its bottom in December 2013 (on the 2 year chart) while the gold price went 35% lower from peak to bottom.
It is common sense that he rewards of the miners are higher in an uptrend and their risk is higher in a downtrend. Yet, some investors have a hard time to follow this golden investment rule.
There is even more leverage in the junior space, which implies that the choice of a junior miner is as important as picking the timing of a junior mining investment. That brings us to the success criteria for selecting junior miners.
In the remainder of this article, we analyze the stock price of the junior miners we discussed in our previous article (see first paragraph). By doing so, we seek for a confirmation that excellent management teams have a high probability of outperforming their peers. The companies we discuss in the following section are exactly the same as the ones from our previous update.
Altius Minerals (OTC:OTCPK:ATUSF)
The stock was trading $11.74 at end of March 2013. It is trading at $15.10 at the close of business on January 31st 2014. The stock made its low in June at $9.09 and stands 66% off its lows. The stock has been struggling but exploded higher after it announced an acquisition a month ago, which happened to be at the same time of gold's bottom.
Brazil Resources (OTC:OTCQX:BRIZF)
The stock was trading $1.10 at end of March 2013. It is trading $0.74 at the close of business on January 31st 2014. The stock made its low in December at $0.50 and stands 48% off its lows. The stock has held up remarkably well during gold's collapse but broke through support when gold retested its bottom. It has recovered very quickly since then.
Bear Creek Mining (OTC:OTCPK:BCEKF)
The stock was trading $2.79 at end of March 2013. It is trading $2.03 on the close of business on January 31st 2014. The stock made its low in December at $1.17 and stands 59% off its lows. The stock was closely tracking the price of gold (with the exception of October and November), but with significant leverage.
Luna Gold (OTC:OTCQX:LGCUF)
The stock was trading $3.22 at end of March 2013. It is trading $1.43 on the close of business on January 31st 2014. The stock made its low in December at $1.04 and stands 40% off its lows. It has collapsed after our previous update and has been holding well since gold's first bottom.
Almaden Minerals (NYSEMKT:AAU)
The stock was trading $2.15 at end of March 2013. It is trading $1.54 on the close of business on January 31st 2014. The stock made its low in December at $1.08 and stands 42% off its lows. The stock has been tracking the gold price quite well, but with leverage.
Colossus Minerals was trading at $3.02 when we wrote our first update. The company had a high grade flagship project (75% owned Serra Pelada gold-platinum-palladium Mine) but ran into serious dewatering issues. It was not able recover from those issues and the market lost trust. Colossus Minerals was delisted from TSX on January 31st 2014 at $0.04.
The bankruptcy from Colossus Minerals shows the need to diversify a junior mining portfolio, no matter how high grade projects are and how promising the management team is. Instead of having all eggs in one basket, it is better to allocate the available investment funds to a couple of companies in order to mitigate risk.
Let us compare the shares of the miners listed above with the most relevant indexes:
The Junior Gold Miner ETF (NYSEARCA:GDXJ) went from 68 at end of March 2013 and is trading at 35.39 on January 31st 2014. The index bottomed at 28.82 and is now 23% off its lows.
The TSX Venture Index (CDNX) went from 1095 at end of March 2013 and is trading at 951 on January 31st 2014. The index bottomed at 868 and is now 23% off its lows.
We can easily confirm the conclusion that excellent management teams are a key success factor for junior mining companies. The analyzed companies outperformed significantly the relevant junior mining indexes (except one company). Our key assumption is confirmed so far, and superior returns should lie ahead for these miners.
Let us take a look at recent accomplishments of each miner to uncover strengths or weaknesses.
The company recently acquired 51% of Sherritt's Canadian Coal and Potash Royalty Portfolio, a diversification of their precious metals mining business, with a purchase price of $21 million.
Altius had a net loss of $1.3 million during the first six months ended October 31st.
It had $135 million in Treasury in September 2013 and no debt.
We have found some noteworthy accomplishments in the past months:
- A private placement was completed at the end of December. Shareholders oversubscribed and the intended $5 million was increased to $6.4 million. The private placement attracted $1 million from Casey Capital Strategies (Rick Rule and Doug Casey) and also $1 million from Rick Rule.
- Working capital: $1.5 million.
- The company has no debt.
- The project portfolio contains in total 4 million ounces in gold resources (in both indicated and inferred resources).
HC Wainwright & Co issued a price target of C$2.25 on January 27th 2014, three times current share price (source: The Gold Report).
These are some company highlights from the third quarter:
- Gross profit: $7.1 million
- Cost of gold production (all-in): $958
- Gold inventory: 3,655 ounces
- Working capital: $24 million (September 30th 2013)
Luna Gold received funding of $10 million by Sandstorm Gold.
Some company highlights from the third quarter include:
- Gross profit: $7.1 million
- Cost of gold production (all-in): $958
- Gold inventory: 1,597 ounces
- Available cash: $14.6 million
The flagship project Ixtaca has close to 3 million ounces in gold resources (in both indicated and inferred resources).
The company closed a $5.47 million private placement in July. It has no debt.
Brien Lundin from Gold Newsletter writes that "the company represents such remarkable long-term value that we'll make it a Buy near current levels" (source: The Gold Report).