The Tide Is Coming in for Mining Juniors

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Includes: ANDPF, EGO, GDX, GDXJ, GG, GLD, KGC, RBIFF
by: Goombarh

The Bull Market Tide

“There is a tide in the affairs of men”… and so forth; yes readers, the tide is coming in for mining Juniors. That is, the major stock markets are turning around presently as witnessed by this news of “Housing starts rose more than forecast”, or this official news of the recession having ended in June 2009. This will now ensure a fresh supply of investors, feeling flush with their monies, still withheld from the markets in the previous fearful stances of safety in bonds, and re-entering the markets with a scanning eye of where to put their monies in.

Doctor Copper has certainly forecasted an uptick in economic activity, having returned to a similar high prior to the 2008 crash. The price of copper, now at $3.50 USD/pound, usually leads the markets as industry depends upon this metal for construction and growth. As confirmation for Doctor Copper, the prices of 19 key commodities in the Commodities Research Bureau - CRB Commodities Index are also coming back to the highs prior to the 2008 crash as shown in the chart below:

click to enlarge

Click to enlarge
Figure 1: The CCI chart is indicating robust economic activity forthcoming.

With economic activity predicted to increase, the first segments of the economy to move forward should include the basic materials sector, especially mining companies. This author specializes in mining companies, especially in Junior mining companies, and welcomes the incoming investment tide and its possible effect on the Junior miners.

Other Seasoned Pros’ Opinion

What is this “Tide” you ask, and what will its impact be on the sector? Well, Mr. Otto Rock, a favorite of this author’s and noted South American focused mining commentator, has quite an exciting description and examples in his Incakola blog article of Sept 15, 2010 here, “When all boats rise” . Mr. Rock states:

People aren’t asking too many questions. People want in to the market for gold, for copper, for juniors, for precious and base metals exposure. People with fresh money are suddenly finding great value in stocks that longtime followers of juniors saw as great value a year ago and at fractions of today’s prices.

Also noted technical chartist Clive Maund in his Sept 19th analysis of the precious metals sector here, has already committed a market entry to a basket of mining equities, even though in his words “Precious Metals stocks indices HAVE NOT YET BROKEN OUT to new highs”. This is quite uncharacteristic of Mr. Maund, because for all the time that I have read his articles, he always sits on the fence. Further, Mr. Maund points out that for the mining Juniors:

This is why the charts of many junior mining stocks, which have been trampled into the dust in recent months, are now looking so bullish - they have MASSIVE upside potential, and are unlikely to drop even if gold and silver now correct back.

Junior Leverage seen in Action

Why is there interest in mining Juniors you ask, relative to established miners and the underlying metals ETFs? Well, the author explored the idea of a “Sweet Spot” for mining juniors in a previous article. Essentially, mining juniors are usually focused on only one project, and the potential success of that project or price moves of the underlying metal has a large impact on that junior company. For a larger miner, the success of just one project is only incremental to all the other activity in the larger company, so the impact of the success is far muted.

For further confirmation of the leverage of Junior miners, here is in a previous article where the author documents the recent moves of the GLD Gold ETF, the HUI (Index of 15 large gold miners), GDX (ETF of Major gold miners) and GDXJ ( ETF of Junior Gold miners). The short version of the story is that for a certain Gold price move, large miners are leveraging 170%, and Junior miners are leveraging by 300%.

Rising Prices Sparks Mergers & Acquisitions

With the rise in prices, the space is heating up with merger and acquisition activity. In the Gold space recently, we have seen the takeover of Red Back Mining (OTC:RBIFF) by Kinross Gold (NYSE:KGC) and the Gold Corp (NYSE:GG) battle for Andean Resources (OTC:ANDPF) against Eldorado Gold (NYSE:EGO).

In the Kinross deal the premium paid was 21% for Red Back. In the Gold Corp deal the premium was 35% for Andean. Just here is an example of premiums for Juniors, as Red Back is in production whereas Andean is a Junior which only has resources in the ground. The author penned an opinion that Gold Corp over paid for Andean in this article here.

In the Juniors space recently, we have just seen the Sept 20th 2010, proposed reverse merger of Silvermex Resources (SLVSF, TSXV:SMR) with Genco Resources (GGCRF, TSX:GGC), both Mexico focused Silver mining stories. The premium offered for Genco Resources was 38%.

Which Metal; Gold or Silver?

The precious metals are marching forward this fall and are poised to reach new highs. Which metal is the one that will likely move the furthest? The author believes the indicators are pointing to the shiny Silver metal as explained in the Silver break of the Gold Silver Ratio article.

In answering my own question as to whether Gold or Silver will move best, the author has suggested “Six Silver Stocks” as possibilities last week. One business day later, on Sept 21st 2010, Genco Resources was offered a merger agreement driving the stock price 30% higher. All three Silver Juniors, of the six mentioned Silver stocks, US Silver Corp (USSIF, TSXV:USA), Genco Resources (GGCRF, TSX:GGC) and Canadian Zinc (CZICF, TSX:CZN) enjoyed double digit moves that day. This is just a small indicator of the Public’s interest in Junior Silver stocks.

Summary

There is a tide in the affairs of men, which, taken at the flood, leads on to fortune.
- William Shakespeare.

So reader, if you recognize the tide, then in this author’s opinion, Silver mining Juniors may offer the best return in the next while. Always, do your own investigation and make your own decisions as it is your own money. Also, please recognize that Juniors may offer higher returns, but there is also the risk of a higher loss.

Disclosure: The author is long Silver mining equities.