Seeking Alpha

Gaining Exposure To The Junior Gold Mining Sector

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Includes: KGC
by: Bob Kirtley
Summary

A junior mining company that gets it right can produce spectacular returns in terms of a capital gain which is many multiples of its stock price.

However, if misfortune strikes then there exists the possibility for it to disappear due to bankruptcy.

Investment Funds spread the risk over a number of companies which unfortunately also dilutes the returns.

In order to outperform in this sector good quality junior stocks needto be hand-picked once the due diligence has been completed.

Introduction

The precious metals sector offers a number of vehicles in which we can participate in our quest to generate a profit. A junior mining company that gets it right can produce spectacular returns in terms of a capital gain which is many multiples of its stock price. However, if misfortune strikes then there exists the possibility for it to disappear due to bankruptcy. In order to separate the wheat from the chaff we need to do a lot of work in terms of research, stock comparisons, stock performance, financial statements, guidance, milestone achievements, management, geo-political stability, etc.

This sort of time and effort is difficult for many investors and so a fund offering to spread your cash over a number of companies is appealing and they do attract cash in a big way. As per usual the devil is in the detail, so we still need to understand exactly what a particular fund consists of such as which companies are included or excluded, the spread of cash between those companies, the amount of cash on hand, operating expenses, taxation, etc.

Today we will take a brief look at one of these funds, an ETF for Junior Mining Companies called VanEck Vectors Gold Miners ETF (NYSEARCA: GDXJ) We start by taking a quick look at some of components that make up this fund and we can see that the top three investments are companies that have market capitalization's in the billions of dollars and account for 16.83% of total assets and are as follows:

Source VanEck

Kinross Gold Corp (NYSE:KGC) 6.07%, market cap $8.054 Bln

Evolution Mining Ltd (OTCPK:CAHPF) 5.73%, market cap $7.954 Bln

Northern Star Resources Ltd (OTCPK:NESRF) (OTC:NHRNY) 5.03%, market cap $7.566 Bln

These are not juniors, nor either they mid-caps, they are some the largest gold mining companies on the planet. They have 73 holdings at the time of writing and some are of course juniors such as Dacian Gold Ltd (OTC:DCCNF) with a market cap of $336 million where the holding is 0.20%

We can see that this fund is a mixed bag of miners and not solely a vehicle for investing in the junior category of the precious metals sector.

The Performance Comparison Chart

This chart shows that this fund performs in a similar manner to the Gold Bugs Index, the HUI which consists of a portfolio of 14 major gold mining companies and includes the world’s biggest gold miners. So, we can conclude that this fund dose not replicate the movements of the junior mining sector as it replicates the performance of the HUI.

Financials

GDXJ commenced trading on the 10th November 2009 on the NYSE and has a 52-week high of $43.10 and 52 week low of $26.04, the liquidity is good with more than 18 million shares traded per day.

Conclusion

If the quest is to invest in fund that offers exposure to the Junior Mining sector, then this fund isn’t it and one should look elsewhere for such exposure.

This sort of fund consists of a number of mining companies and therefore spreads an investors cash accordingly so even when one particular stock performs badly this is usually negated by the performance of the other stocks. However, the stocks that do perform very well are also counter balanced with the laggards and therefore the returns tend to be average.

In order to outperform this sector good quality junior stocks need to be hand-picked once the due diligence has been completed.

Be selective and limit your acquisitions to a number that you personally understand and can keep track of on a weekly basis by monitoring news flow and developments within the sector and that company in particular as this will be critical to your success.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Disclaimer: http://www.gold-prices.biz/ makes no guarantee or warranty on the accuracy or completeness of the data provided. Nothing contained herein is intended or shall be deemed to be investment advice, implied or otherwise. This letter represents our views and replicates trades that we are making but nothing more than that. Always consult your registered adviser to assist you with your investments. We accept no liability for any loss arising from the use of the data contained on this letter. Options contain a high level of risk that may result in the loss of part or all invested capital and therefore are suitable for experienced and professional investors and traders only. Past performance is neither a guide nor guarantee of future success.