Why Gold Juniors Have Not Yet Popped

The Current Situation

We have seen incredible rises in precious metals in the last few months - with gold having been over $1000 and silver above $20. Numerous senior mining producers have seen tremendous gains in stock prices in these market conditions. Junior companies, on the other hand have been quite lackluster in their performance. The Canadian Venture Stock Exchange ($CDNX) is a good benchmark of junior companies since it’s heavily weighted toward smaller mining companies. A look at the CDNX versus HUI ($HUI) shows that the performance of the venture exchange has been more than disappointing versus the index of unhedged gold producers. In fact, this comparison shows that the CDNX has depreciated by almost half of its value versus HUI in eight months.

Reasons Why Juniors Have Not Yet Popped

With gold reaching record levels, it only makes sense that junior companies ought to soar right? Wrong. As with most industries, things are not always what they seem; there are often numerous extraneous factors that affect the performance of companies, and it seems like junior gold companies have become a victim of these extraneous factors. The good news is that investors are beginning to understand what these factors are, what they mean and how they will likely affect the market in the future. Let us now explore some of the reasons why junior mining companies have not performed up to expectations:

1. Rising production costs – it is becoming increasingly more difficult to extract gold. This increasing difficulty coupled with the high energy intensive production has made it more expensive to mine this precious metal. For junior companies, this becomes even tougher due to the lack of scale economies. In addition, the weak dollar has eroded profits for many North American companies (the US is the world’s third largest producer, next to China and South Africa). For example, Gammon Resources (GRS) saw a net loss of $44MM in Q3 of 2007 despite skyrocketing prices.
2. Increasing popularity of ETFs – The first gold exchange-traded fund GLD was launched in 2004. ETFs make investing in gold easy and cheap; in addition, ETFs reduce mining risks, company risks and country risks. GLD has gained immense popularity with investors; it is now the eighth largest holder of gold in the world. This popularity will only increase as investors seek more diversified investment vehicles.
3. Growing fear of recession and the credit crisis – Junior mining companies tend to be more volatile and more speculative than established companies. The recession has changed many investors’ psychology, and the appetite for speculation has certainly seen a dramatic reduction. As a result, investors are staying away from the more speculative junior stocks.
4. Majority of juniors are speculative exploration companies and are not producers themselves – Exploration companies do not produce gold, and are unlikely to benefit from the surge in gold prices. It’s important to note that a majority of junior companies on the stock exchanges are classified as exploration – they do not have the capital or the skills to produce and process the gold themselves.

Time To Pick Up Some Junior Shares

The question on everyone’s mind is whether or not juniors will experience the same surge in stock prices as experienced by gold and many senior companies. I think the answer is likely to be yes. With the state of precious metals continuing to be wildly bullish, right now is the time to pick up shares of junior companies as they are tremendously undervalued. When the uptrend begins, it’s going to be over very quickly due to the low prices and relatively high volatility of these companies. The prudent investor will have a portion of their portfolio dedicated to junior companies to ensure that they’re ‘in the game’ when the time comes. Although this is a speculative play, the odds for these companies look good; and with sound analysis, you might just be able to pick the next ten-bagger.

Comments

[tew]

I give up - how / where can a small investor in the U.S. efficiently invest in these stocks, preferrably as a basket?

[tennorio]

About four years ago I finally met the family of my wife's favorite cousin, at the wedding of her son that took place in western Newfoundland. He's a geologist who works for a junior gold company with main operations in the Red Lake gold field of northern Ontario. Basically, he drills holes.
Out of curiosity I bought shares in the company, Rubicon Minerals (AMEX RBY) for $0.96. Over the course of my investment the shares have just about doubled, including the spin off of two companies. One is a major interest in a copper mine in the Congo. The other has found promising mineral deposits in Newfoundland.
So it is possible make profitable investments in junior mineral exploration companies. But maybe I just got lucky in terms of my wife's relatives.

[JKC1967]

This is about the 10th article I've seen on why Juniors haven't popped yet! I think though that unless one has huge amounts of time to devote to this, picking individual junior stocks is too much of a crapshoot. I agree with the first comment from tew, are there any mutual funds or ETFs out there that capture juniors - something like the equivalent of GDX but for juniors??

[bhakta]

I am heavily in the Venture exchange and many of my shares are down 75% or more. I am sticking with these because we know the assets they have in the ground are very valuable and the shares have been way over sold. It is an excellent time for bargain hunting on some first class juniors.

[curious cat]

i made my own basket with GNMT and DHNA. they are significantly oversold and will eventually benefit from their efforts and gold prices. while you're at it, you can add MIVT to your basket, it's a small medical device company that makes stents and XDSL, which just dramatically improved batteries with nano-technological breakthroughs. a little gold, a little medical and a little nano. i'm betting that one of these or more will be a huge gold mine!

[rkizer]

Very true on most points however keep in mind that there are juniors out there in development that are producing only outside N.A. and using efficient new technologies. No legacy methods.

[Kiwi]

As a writer you are missing the main reason why the juniors are down and out, that is they are heavily shorted by the hedge funds.

This will not last an it will soon be time to reap the rewards as the PPT or US government Working Group for Financial Markets will be unable to manipulate the markets any longer.

Google Jim Sinclair and or GATA.

[whey2play]

I agree that shorts have made a killing in these "junior" stocks. I also agree with the comments about GNMT. Turns out their mining interest is literally a goldmine "island" surrounded by Newmont's Phoenix mine which is actually the largest gold mine in the U.S. Now, that GNMT is closer than ever to actually mining their interest and if you take into account their proximity to Newmont's along with the fact that GNMT's drilling has shown greater than originally projected results, I'm holding and "....waiting and ...hoping ...and praying..." and believe this stock can and should make it back to the $.50 per share price that it enjoyed a year or so ago.

[leh]

As a small speculator who's looked at and occasionally invested in the juniors I concur with the comment above from JKC about this sector being too much of an unknown crapshoot for most investors. I also think the ETFs will take a lot of money flow out of these stocks. Why bother playing this small--and easily manipulated--corner of the market when the big miners like KGC offer
great liquidity, tight spreads, and very active options trading? No thanks--the risk/reward ratio here stinks IMO, and I've abandoned the juniors as a playground.

[jt]

Kiwi is right on...the entire junior sector has been shorted almost beyond recognition. In fact, it would appear that it has been a sort of a "hedge" by hedgies, but to the max...long majors/short juniors. But it has been pushed to the max by the Cartel. They know they're losing, if not already lost, their grip on the physical market.

Their hope is twofold: to discourage money from coming out of the genl equity market (some unreal number like $170$TTTTRillion) and see ANY significant part go into these juniors. Even 1% would set off 10-baggers all over the place, esp as smashed down as they are right now. But the second is more sinister--that is, to hopefully buy up some of these juniors on the VERY cheap...in what they call "deep storage gold." (There are many who do not believe we have the gold in FtKnox that TPTB say we do...that it has been used for many years now to lease or swap out and sell into the market to continuously suppress its price by the Fed, our Treasury dept, by the other Western central banks, and by bullion banks here like JPMorgain4Elites and GoldmanSuchs. The large part of the gold supposedly there has had its label changed to "deep storage gold." Why?...those in the know believe that it isn't there and that they are counting on buying out oz in the ground by buying out cheap these juniors...ie, "deep" storage...but that's another story...or maybe not). But that's going to take some VERY fancy footwork...the very smell of these hedgies covering is going to sky some of the juniors, and the rest of the market will jump in with both feet.

I have a significant position in many of the juniors, and am down varying amounts on many of them. But I simply continue to review what they have and nibble here and there, almost on a daily basis....gold, silver, and uranium...another sector unbelievably shorted.

All of the reasons that Howard has given are good reasons why a junior MIGHT not be successful...but ALL of them are secondary presently to the massive shorting of these companies by hedgies directed by the anti-gold cartel. jt

[gerold]

I agree with Howard Sun as well as some of the comments. However, I wouldn't hold my breath waiting for juniors to "pop" any time soon. The price of both gold and silver have been manipulated and artificially suppressed by various arms of the government for decades - the Fed, Treasury, PPT, SEC, COMEX, etc. because gold and silver are seen by the public as a barometer of fiat currency and the government needs to maintain confidence ("con job") in paper dollars that are becoming increasingly worthless.
As a result, the cost of mining has outpaced the increase in metals prices and therefore kept a lid on the major producer's share prices which directly affects the valuation of mid-tier and juniors.
Many "gold bugs" feel this can't keep up forever yet it's been going on for decades; they feel that the government's stooge bullion bank's margin calls will wipe them out but they don't understand that they aren't getting margin calls because the SEC, COMEX and CFTS are complicit in this manipulation. Bernake has said and has shown through the Fed's actions that the govenment will do everything it can to keep the lid on.
So what's an investor to do? Personally, I keep trading some juniors (both mining and exploration) because they are in my comfort zone having grown up in a northern Canadian mining town and worked in several mines. I keep trading costs low with an online brokerage. I subscribe to several newsletters (there's a lot of garbage out there but I highly recommend Doug Casey's "International Speculator" as well as Lawrence Roulston's "Resource Opportunities.") I'm able to trade on the Toronto Venture stock exchange which I believe is difficult to do from the U.S. without going through a high-priced broker. I watch my stocks daily as well as a watchlist of promising stocks. However, to make any money I have to be very nimble trading in and out and cutting losses.
For instance, I sold Serengeti (SIR) after it climbed 138% in one day recently on heavy volume which indicates fund(s) buying and I'm waiting for it to bottom out before buying back in (it has long term promise.) I know from experience as soon as it gets 10% to 20% above it's high the fund will sell large volumes sending the price down again (funds are dumb.) I realize that not everyone is able or willing to spend the kind of time that I do. However, if making a bit of money were easy everyone would be doing it. Increasing financial turmoil will increase volatility and make for greater trading opportunities but if all you're going to do is buy and hold you may have to hold for a long time and you better be prepared for a rollercoaster ride.
I stay in the game hoping, like everyone else, that the gold sector will take off ("Hope is not a plan") but I'm not holding my breath.

[Jake2]

Looks like the myhical quick fix to me. The only quick fix is horse in the arm and that'll kill you.

[guntherd20]

All said and done, they will start popping when they are done pooping - and not before.

[loaddown]

PATIENCE! That is what brings the reward. I bought Wheaton River Minerals in 2003, held to 2005, when it became part of Goldcorp. Today, that investment has gained 1000%. I don't think all the trading and commissions would equal that. I will sit a while longer.......
Yes, there are juniors that will pop, due diligence will find them. Day trading will not allow you to collect when they are gobbled by the majors though.

[ritr54]

Does anyone know a good warrants play in precious metals? I remember when no one wanted Agnico Eagle warrants at $2 and they went to $40?
PS: the high cost producers and the juniors with provable reserves will eventually quadruple from here. When they do, that's the end of this PM cycle. Meanwhile base metals and dry bulk shipper paying nice dividends should work over a longer time period.

[six17]

Jr. Take a look at Central Sun Mining, you have to go with proven talent. Peter Tagliamonte was brought in to rescue a disaster in the making. He averted, what would have been one of mining greatest environmental mishaps in Costa Rica. Talk about a horror story (2006-2007) Mr. Tagliamonte did the right thing in closure in BellaVista and in Trononto; he closed out the old Glencairn MGT, brought in his guys from the DEZ days.
Mr. Tagliamonte is rebuilding the former la Libertad now Orosi with the Gretchel mill. A double savings in both cost and time. The expected recoveries rate doubles to 95%, coupled with the drilling result from Dr. Bill Pearson. There is soon the be a new resource and reserves for this gold district.
Just when it sounds to good to be true we are in Nicaragua with Danny “oh boy “Ortega shade of pink as the Presidenta. CSM relationships to the people of Nicaragua woven in as the 3rd largest employers adding schools, medical clinic ,company stores ,housing and a partnership with the government to building a new power supply, updating and adding to the existing grid.
Mr. Tagliamonte is not one with a history to sugar coat or over promise. His track record is one of over delivering, is going to look pretty pretty good in 2009 with a forecasted 250k oz gold produced.
Back to auy Peter Marrone, I once called him a “schoolyard bully”. AUY owns quite bit of CSM, has since the American league trade of one mine and one fine mine manager for 20% of Glee. You think Peter M would have made a call during the slippage of BellaVista? As the writer pointed out he had his hands full or was that tied? My best guess is and was that Peter M was trying to get all the glee for nothing. Mr. Tagliamonte stood up to him. He made some tough decisions, brought in some of “his guys”, and got rid of the sleepy reputation of the former mgt. Might I suggest a wakeup article for your readers.

[six17]

Jr. Take a look at Central Sun Mining, you have to go with proven talent. Peter Tagliamonte was brought in to rescue a disaster in the making. He averted, what would have been one of mining greatest environmental mishaps in Costa Rica. Talk about a horror story (2006-2007) Mr. Tagliamonte did the right thing in closure in BellaVista and in Trononto; he closed out the old Glencairn MGT, brought in his guys from the DEZ days.
Mr. Tagliamonte is rebuilding the former la Libertad now Orosi with the Gretchel mill. A double savings in both cost and time. The expected recoveries rate doubles to 95%, coupled with the drilling result from Dr. Bill Pearson. There is soon the be a new resource and reserves for this gold district.
Just when it sounds to good to be true we are in Nicaragua with Danny “oh boy “Ortega shade of pink as the Presidenta. CSM relationships to the people of Nicaragua woven in as the 3rd largest employers adding schools, medical clinic ,company stores ,housing and a partnership with the government to building a new power supply, updating and adding to the existing grid.
Mr. Tagliamonte is not one with a history to sugar coat or over promise. His track record is one of over delivering, is going to look pretty pretty good in 2009 with a forecasted 250k oz gold produced.
Back to auy Peter Marrone, I once called him a “schoolyard bully”. AUY owns quite bit of CSM, has since the American league trade of one mine and one fine mine manager for 20% of Glee. You think Peter M would have made a call during the slippage of BellaVista? As the writer pointed out he had his hands full or was that tied? My best guess is and was that Peter M was trying to get all the glee for nothing. Mr. Tagliamonte stood up to him. He made some tough decisions, brought in some of “his guys”, and got rid of the sleepy reputation of the former mgt. Might I suggest a wakeup article for your readers.

[six17]

sorry guys typo 150 oz forecasted....

[emc]

Hard to find a junior etf. The US equivalent to the Canadian Sprott Gold and Precious Metals Fund is the Tocqueville Mutual Fund. Expense ratio is higher than the others but they also hold a lot of juniors. Face it, the junior mining sector is a thrill ride but will pay off at some point. I'm looking at microcap nat gas and agriculture stocks these days while still holding about 7 juniors that I like.

[RRA]

Few Junior companies ever make it to production. One of those I have been watching for a few years is worth a look. I suggest you do your own research as I don't give advice. Obviously I like the company but then again every person is responsible for their own decisions. Santa Fe Gold Corporation has good solid management. Small company with only about 5 board members one of them a former Executive VP of Exxon Minerals. The president of the company has a Phd. in this field and a great reputation for integrity and success with a number of big companies including Exxon. They have the monies to begin mining their Summit Gold/Silver mine. They have the permits and have begun the preparations necessary to begin mining. In addition they have the 90 square mile Ortiz gold field in New Mexico the same state where the Summit is also located. The reports on the Ortiz look very promising even though only a small section of this large area has been tested. Thomas Edison tried to mine gold here but failed because of lack of water requied at that time. In additon to these properites the company has other mineral properites which alone could make the company successful, all of which are in the United States. This is one Junior Exporation Company which seems to be on the verge of some exciting times going from exploration to production this year. Do your own research but for me I am so glad I found this company and have stayed with them for all this time.

[darren d]

Agree with lowdown...patience is the KEY on the tsx and venture exch...you will NEVER make any money jumping in and out of these juniors. Find yourself some undervalued companies with good potential - there are PLENTY out there atm....in a years time from now they have a good chance of doubling...just remember: patience! While you´re at it - check out CZS.V Good luck!

[ArabianMoney]

Once we get the first takeover of a junior with gold prices at this level then the sector will fly and the hedges will go long. You can not divorce the cost of mining claims from the underlying commodity, and that is what is happening at the moment. Size the moment and buy the juniors - those who sell are going to feel really sick!

[JCS]

I think a good fund that offers a basket of Juniors is Pinetree Capital, Their website is www.pinetreecapital.co.../