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Former licensed commodity trader and financial adviser, specializing in identifying long term trends and selecting alternative investments for wealth preservation and growth.
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  • Can The Miners Bounce Back..and When? 0 comments
    Oct 7, 2013 4:41 PM

    The junior gold mining index (GDXJ) showed almost total capitulation during the summer, with hopes of a rebirth appearing and being shuttled as of late. The strong rebound from late June through September has largely been given back.

    (click to enlarge)

    The HUI, representing major precious metals companies that have generally underperformed, shows continued downward trending.

    (click to enlarge)

    Though neither of the above charts show it, there have been several stocks that have run counter to the majority of precious metal mining company charts, turning in admirable performances. Iamgold had a $4.00 to nearly $7.00 bounce from June to Aug 13. First Majestic rose over 60% over nearly the same period.

    Initially the majors benefited by the rally in metals and mining after the summer lows. Now that baton will likely pass to the junior sector as we would expect for the later stages of a long term bull market.

    That is, if any juniors and explorers survive the convergence of a financing crunch, higher input costs, increased political risks for formerly mining friendly regions, and the hot money leaving the sector for dead.

    According to Bloomberg News, junior explorers had on average 5.7 months of cash on their balance sheet, down 25% from a year ago. Diluting shares for raising capital hurts the share price as well as the current investors, while debt sets the explorer on the road to much higher costs and a limited runway to profitability or acquisition.

    The cash flowing producers will be snapping up promising explorers or juniors during the next phase of the market, as the small caps run low on operating capital. Therein lies the vein of profitable trades: find the juniors or explorers that are building value for an eventual buyout.

    Early on in the bull market, from about 2000 through 2007, picking several major miners could make a portfolio run green. Plenty of small cap junior explorers and producers 5 X - 10 X valuation jumps. profits for those brave enough to enter the market, and experienced enough to find the likely winning companies. Some of my early winners were Excellon (EXN.TO), Endeavour (EDV.TO), and First Majestic (FR.TO) towards the later stages.

    While the major metal producers offer more stability in a portfolio, the juniors bring life changing profits. Using a few key criteria for selecting the juniors, or probably better, choosing newsletters that employ that criteria, we can amp our profitable trade percentage well beyond the proverbial monkey with the darts.

    To answer the question posed about the miners bouncing back and when that is likely to begin, we can look at volumes and trends that are precursors.

    One of the best indicators is relative strength of the miners vs the general market.

    (click to enlarge)

    Metals crossed below the S&P500 performance around Q1 2012. The miners have appeared to bottom in relative performance during late Q2 2013, or the summer reversal point. From a nearly -30% relative performance to -20% and rising, the catchup phase seems to have begun.

    Experienced participants in the mining stocks and commodities as a whole know the underlying factor behind our favorite sector is the battle between currencies and currency equivalents. Some call this the dollar devaluation or inflation theme.

    Here the news for metals and miners becomes a neon sign shouting - Bull Market Starting NOW.

    Lower highs are a great indicator that the market does not have the strength to move the dollar back to its' former perch above 90. The USD Index chart below shows that not only has the dollar collapsed from the recent 100+ level, but has been unable to recapture territory despite repeated attempts to rise above near term resistance in the 84 range. The chart shows underlying weakness and suggests a new lower level ahead.

    (click to enlarge)

    Selecting Janet Yellen as the next Fed chairperson, a professed inflation promoter, confirms that the metals and the miners will become the next great place to hide.

    A few quotes regarding Janet Yellen serve as counter arguments to those suggesting she has been unfairly pegged as a money printer:

    (click to enlarge)

    She openly targets inflation using the lagging and unrealistic CPI. A 2% to 2.5% inflation reading on her meter works out to a wealth destroying 5-6% approximate inflation range for our daily lives. This translation comes courtesy of the widely acknowledged authority on accurate inflation numbers, ShadowStats.com Her conflict with Alfred Broaddus shows that she has been consistently for continued easing, debt monetization, and insuring inflation. This is one of the key macro backdrops necessary for gold and silver, and the small cap mining companies, to accelerate to the upside.

    On my blog, http://www.financialsurvivalcenter.com, I posted that when Yellen was confirmed as the next Fed head, that would signal the next phase of the bull market in metals and mining. If her short lived opposition, Larry Summers, had become the next lead central banker, the macro environment for miners would have been more cloudy. The overall trend is towards inflationary policy, but Summers was more mercurial towards his inflation stance. That question mark is gone. Inflation until the end is the new marching order. And march fast..they will.

    Summarizing the indicators, the relative performance of the metals and miners versus the S&P500 shows early signs of regaining lost ground. The dollar index shows a breakdown continuing. The political climate, with Yellen moving into the decision making role on the Fed, could not be more conducive to inflationary policies. Bad news for our living standards, but great news for our mining portfolios.

    With the macro backdrop on reasonably sound footing, the question is where to jump aboard for the next, and probably most explosive, leg up? Juniors miners and legitimate explorers are the place to be. The big cap mining companies will be the buyers of the small cap miners.

    The base criteria for selecting juniors and explorers include:

    Number 1 - Experienced and previously successful management with both mining development and financial market backgrounds.

    Number 2 - Promising land packages in politically friendly environments with qualified exploration and development talent.

    Number 3 - Heavily invested management, plus the cash or financing in place for their plans. Minimizing share dilution through tight financing and management participation.

    Number 4 - Astute marketing, investor relations (IR), partnering, and acquisition orientation. Going it alone often means dying alone. Getting the story out through IR, advertising, and promotion is almost as critical as having a great land package. One of my early junior buying techniques was buying miners that advertised on the sites I read. Of course I performed research to validate the company had prospects. The fact that they advertised, showed their detailed documents, and kept a high profile, suggested they knew they had potential.

    Number 5 - Ideally, and this is rare, the small cap should have a source of revenue such as a pilot project, or residual income from leasing a mine. This was one of the reasons for my investing in junior mining/explorer at about $.13 with a producing pilot mine. They were nearly self-funding. It later became a $5+ stock.

    Surprisingly, many of the small cap stocks that performed so spectacularly early on in this decade plus gold and silver bull market, are back within their pre-bull market ranges. EXN.TO and EDV.TO have been clobbered. So have most of the juniors and explorers. This is the setting for huge run-ups, just as it was early on for the same exact macro backdrop.

    One of the new stocks that I have positively evaluated - and please note that this is for my own trading so I am invested in the positive performance of this stock so I definitely profit by the performance - is Wishbone Gold PLC. (All investors need to perform their own research as I am not providing financial advice.) Wishbone Gold (OTC: WISHY) meets all of my criteria mentioned above but goes one better.

    The head of WISHY, Richard Poulden, is the same genius that took Sirius Minerals to a 100 fold increase in shareholder value while finding the world's largest polyhalite (largely potash) mine. He has the unusual pedigree of an Oxford degree, plus an M.B.A., and a merchant banking background. His company, Wishbone Gold, is largely unknown except on the London exchange. Their listing on the OTC brings WISHY into the American gold mining market, though it also has silver, lead and copper potential.

    Much like Poulden handled Sirius Minerals, his objective is to grow by acquisition, with land packages close to producing or past productive mines. Wishbone currently has around 34,000 hectares (roughly 84,000 acres) in mining friendly Australia. It also has an experienced team following the same veins that have historically produced in the area.

    The company presentation shows page upon page of past production either within the land package or along the same veins with both high grade and lower grade mines. Their key reports will be issued soon, and I have no idea exactly what the news will be, but based on the region and the geo exploration talent, they will probably add to the already positive reports.

    More importantly, management has nearly a 30% stake in the company, with the remaining shares relatively tightly held. Poulden's merchant banking background has enabled him to keep the company afloat while less financial astute mining CEOs are unable to raise funding.

    Http://www.ultrapoint.net/ has the information and full presentation about WISHY, plus an exhaustive geological report for those interested in the mining details. I leave that area to the experts, but skim the major projects and the highlighted numbers. They were impressive.

    This is one of the many companies I will be investing in and following for the next leg up, and possibly the last major one, for this continuing metals bull market. Some of the other companies include: First Majestic, EXN, EDV, Silver Wheaton, and Iamgold.

    We are once again at the start of another round up in the metals markets, and it will probably be the biggest profit opportunity of the entire bull market.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Additional disclosure: I work with the IR firm regarding WISHY as a compensated writer. I am also a firm believer in the stock, regardless of compensation.

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