A utopian market which opens Gold at $+2000 levels may turn around the story for the junior players of the sector. The same pattern may follow with other metals and minerals. Investments in junior mining companies have been ruthlessly battered last year, naturally making them available at beat down prices and coupled with the brighter analyst forecast on the basic metal indices for Q4-2012 and further. The high risk selective small cap mining equities are receiving their due share in terms of paced up inflows involving the most conservative market participants as well.
Why not invest in Large Caps in wake of a positive forecast?
Large Cap Metal Miners are undoubtedly safer than their smaller cousins, but the dollars invested with small cap mining companies are tagged along with enticing high yield returns which in all probability will outperform the larger stocks and their respective benchmark metal returns. Senior miners are a definite yes for somebody long on the metal industry, but a diversification with the junior mining companies compliments it perfectly.
Any portfolio built around a positive outlook in basic metals should be considering buying in to junior miner stocks and ETFs, as any rise in the base metal must mean a higher return for them. Apart from the low valuations, smaller miners are placed favorably for merger and acquisitions activity. As per the market laws and in most cases, any such development will lead to superb cash flows for the companies acquired, in contrast to the temporary falls that the stocks of the buying company will experience.
Improving conditions of the emerging markets, a strong conviction in the metal run has restored the investors' risk appetite for volatile investment vehicles, which was completely non-existent last year. A better solution than a direct equity investment may be buying a Solactive Junior Miners Index backed fund. The biggest advantage here is, of course a direct exposure to the most liquid small cap metal miners listed around the world, which empowers the investor to claim his gains on the unique opportunities like a new mine find or a possible merger with a bigger miner.
Exposure this wide is not possible with direct stock picking and even if you have the money, there is simply too much risk involved here.
Junior Miners ETF. Buy it while it's cheap…
10% annual growth of Gold in 2011 didn't help the small cap mining companies stocks, which were battered beyond belief. For instance, Coeur d' Alene [primarily a gold and silver miner] has seen a fall upward of 20% in spite of the stock operating at a forward P/E [price to earnings ratio] of 9 and 2013 projected EPS [ earnings per share] at US$3.
Hecla Mining [NYSE ticker HL], a company with a market cap of just over $1.5billion, has posted positive earnings for 2012 even after weak market valuations and has a safe forecast of 41 cents per unit for 2013.
Hear this! Stock is still down 72% from its highs. Hecla being a top contender for M&A activity has all the potential to retouch a $12-$16 level; this means a 77% rate of returns for a well - timed entry.
More than the fundamentals, it is the risk aversion trends and panic selling that has caused damaged to most of the junior base metal mining entities. The demands from the growing economies like Brazil, China and India together with the existing first world demands are fair indicators as to where the prices of the base metals are headed.
This is not a strategy for the weak gutted as the volatility one experiences with the junior miner stocks is much higher than the sector's large cap equities. Individual company wise risk factors and lack of good research may lead to financial blunders that may take more than a rally to get evened out. Individuals looking at this unique asset class as a top yield product must consider a Junior Miners Equity Traded Fund for effective gains.
Global X Junior Miners ETF [JNR] holds a total of 96 equities and has a management fee of 0.69%. Coal and Copper are the dominant sector with 26% and 23% respective allocations trailed by Gold [13%], Iron [15%], and others [19%]. About 4% of the holdings are focused on Niobuim which is Rare Earth Element [REE] and an indispensible component of various alloys and technical applications. Coeur d'Alene Mines Corp, Au-Rico Gold and Alumina Ltd are the top three stocks. Hecla Mines at 2% allocation is also among the top ten stocks.
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