While all of us are feeling the pain of declining share prices, a few investors are seeing the recent sell-off in junior mining companies as buying opportunities. After all, for every seller, there is a buyer. More importantly, the larger mining companies are evaluating the juniors as part of their on-going strategy to replace and to build resources. At current share prices, the juniors must look very attractive. Some of those evaluations have led to takeover offers. More are coming.
Most of the larger companies will be reluctant to make takeover offers in the face of the extreme economic uncertainty now facing the world. They will prefer to wait until the economic outlook clarifies somewhat before taking on a big acquisition. However, some mining companies have the conviction to act now, while prices are down.
An offer that came through recently emphasizes just how undervalued the junior companies are. B2Gold (BTO-TSXV) has offered to acquire Auryx Gold (AYX-TSX) in a share swap that values the junior at 78% above the recent market price.
A recent cash offer from a major for the shares of uranium explorer Hathor (HAT-TSXV) involved a similar-sized premium to the market price. Hathor shares continue to trade above the offer price. Inter-Citic (ICI-TSX) also reported a tentative takeover offer at a large premium, and promptly rejected the offer as inadequate.
The gold price, after falling sharply from a record high above $1,900, is again on an uptrend. The current price, although down substantially from record territory, is still about 30% ahead of the year-ago level. Not many asset classes gained by that amount over the past year.
My read is that the gold price got ahead of itself when it soared above $1,900. It over-corrected, and is now back on an uptrend.
Regardless of the near-term gold price, the gold mining industry needs to replace more than 80 million ounces of gold reserves each year just to stay flat. Much of those reserve ounces will continue to come from the juniors. The majors are making healthy profits at the current prices, giving them strong incentives – and the means – to maintain and expand their businesses.
The sell-off in juniors is a short-sighted reaction to the present economic outlook in the West. While the gold price is down from the recent peak, it remains far, far above the projected long-term figures that are being used to value gold companies. Few valuations use a price even as high as $1,200, with the assumption that the price will hold for 15 or 20 years.
The gold price is up from the year ago level, propelling the fundamental values, yet the share prices of gold companies are down sharply.
This situation goes beyond gold. The silver price has risen even more, in percentage terms, than gold. Silver companies have fallen even harder than gold companies.
A few weeks back, the copper price plunged briefly to $3.05 as investors contemplated an ocean of negative economic commentary. It appears most likely that the decline resulted from speculative holders beating a hasty retreat. Since then, the price has rebounded as users of the metal lock up cheap supplies. While down from the recent level, the copper price is still five-times higher than the copper price a decade ago.
Yes, Europe is facing a serious challenge. The U.S. is also facing an enormous debt load, slow growth and persistent high unemployment. Both of those situations will involve vast amounts of new money being used to prop up the systems. Both will lead to further devaluations in the currencies.
To some investors, the continuing devaluations may not be obvious, as the two leading currencies will be sinking in tandem. Those who simply measure one currency against the other may miss the overall decline.
Using gold as a hard measure of value, the U.S. dollar has lost 85% of its value in the past decade! Other currencies have declined in roughly similar proportions.
Much of that decline occurred before the present difficulties set in. Getting out of the present mess just might result in an acceleration in the debasement of currencies. Hard assets such as metals (especially precious metals) will hold their values as currencies sink.
Another important consideration in looking at junior mining shares is that many of the companies trade on the Canadian exchanges in Canadian dollars. The Canadian economy weathered the Global Financial Crisis much better than most of the major Western economies. The big Canadian banks are now judged among the soundest of any banks in the world. The Canadian dollar, once derided by Americans as the northern peso, now trades at a premium to the greenback. International investors may want to consider this currency angle as they contemplate their investments denominated in Euros or American dollars.
Whether metal prices go up, down or sideways in the near term, the longer-term outlook is very favourable. Even if investors fail to see the value in the juniors, the larger companies, which are flush with cash, will be bargain hunting. The likelihood of takeover offers will provide a solid underpinning to the values of the high quality juniors. At the same time, those companies offer an element of currency hedging as well as the upside potential inherent in growth companies.