The Capital Cycle: Junior Mining

The Capital Cycle: Junior Mining

Goethe, the poet-philosopher, wrote: “I find more and more that it is well to be on the side of the minority, since it is always the motre intelligent.

The urge that first sent me on a quest that ended in the Theory of Contrary Opinion was the disappointments and disillusionment that come to everyone who seeks a method “to beat the stock market.”

Take many chart-reading ideas, as an example. One can interpret charts almost any way he wishes. He can read into their “formations” just about any probable result he hopes for. Which is to say, that if one is bullish at heart his chart reading is liely to be interpreted optimistically; if bearishly inclined, charts accommodatingly will “say” that the market is going down.

So it was that I soon learned (the hard way) that not only were individual opions frequently wrong but that my own judgement was often unprofitably faulty.

Accordingly, I turned to a study of mass psychology in the hope of finding the answer to the riddle of “why the public is so often wrong.” (and that meant why I was so often wrong).

If individual opinions are unreliable, why not go opposite to crowd opinion—that is, contrary t0o general opinions which are so often wrong?

That said and with severe pessimism coming back into miners and gold circa end 2015/early 2016, take another look. I suggest reading reports several years back so you can see how managements react to the cycle.

The junior mining sector

The mining sector, representing 61% of the TSX-V exchange, posted a 65% increase in market capitalization to $22.9 billion in 2010. The average market capitalization for the top 100 mining companies on the exchange increased to $127 million from $88 million in 2009. Within the mining sector, the top 100 companies made up 55% of the market capitalization which was down from 62% in both 2008 and 2009, indicating a slightly more even distribution of capital across the sector.

In 2010 the number of mining companies with market capitalizations of more than $200 million increased to 12 from nine in 2009, but in both years, there were only two producers among them. This is a significant drop from 2008, when there were six producers among the 22 companies with market capitalization of more than $200 million.

The top five companies had a total market capitalization of $3.45 billion compared to $2.71 billion for the 2009 group, a 27% increase that is largely attributable to greater representation from companies with market capitalizations of more than $400 million. All five managed to at least double their individual market capitalizations over the year.

The difference between the market capitalizations of the top company and the 100th company remained relatively steady at $1.2 billion compared to $1.3 billion in 2009. The number one company, San Gold Corporation, had a market cap of $1.26 billion similar to SouthGobi’s $1.29 billion in 2009, while the 100th company, Bakerville Gold Mines, had a market cap of $43.6 million compared to JNR Resources’ $18.9 million in 2009.

High turnover in the sector continued as only 52 companies in last year’s top 100 remained on the 2010 list. The number of development companies more than doubled to 34 from 16, while the number of exploration companies dropped 28% from 71 to 51. The shift from exploration to development is likely a result of greater access to capital in the markets. The number of producers remained relatively steady at 15 compared to 13 in 2009.

Principal Commodity Mined

Gold continued to build dominance as the main commodity of interest with 56% of companies either exploring for, developing or mining the precious metal, up from 50% in 2009 and 42% in 2008. The increasing focus on gold reflects the steady climb in the gold price from US$925 per oz. in June 2009 to US$1240 per oz. in June 2010.

Otherwise, the overall distribution of commodities among companies has remained fairly consistent over the five years since we launched our report. Silver moved to third place with seven companies as the price of silver increased from US$13.62 to US$18.57per oz at June 30, 2010. Copper moved into second place with nine companies (up from 5 last year) and uranium dropped to fourth place with three companies (down from 8 in 2009), reflecting price swings in these commodities from year to year. The copper price increased from US$2.55 to $US$3.27 per lb. while the uranium price dropped from US$55 to US$42 per lb. Similar to 2009, there were two companies focused on diamonds, compared to six in 2008. “Other” minerals, included chromite, platinum, zircon, potash and molybdenum and made up 7 of the top 100 companies.

Headquarters

Mining tax incentives, especially flow through shares, continue to make Canada the premier jurisdiction for junior mining companies. Four of the top 100 companies were headquartered in the United States, up from three in 2009, of which two were incorporated in Canada. As such, these may still be able to benefit from flow through shares. Among the provinces, British Columbia remained the most common location for headquarters, but the percentage of top 100 companies based there fell to 60% in 2010 from 69% in 2009 and 73% the year earlier. Ontario increased its share from 18% to 22%, while Alberta hosted just three companies, down from six in 2009. Quebec remained home to six companies.

Top Five Companies

For the first year since our junior mining review was launched five years go, all of the companies in the top five are gold companies. The dominance of gold at the top of the list is unsurprising given
the steady increase in the gold price over the past five years, especially in comparison to the volatility of most other commodities over this period. The other commonality of this year’s top five is that all but one (East Asia Minerals) have projects in North America in contrast to previous years, when the projects had a more global reach. Shifting government policies regarding certainty of property rights and taxes on mining have affected major projects in several countries this past year including for example Venezuela and the DRC, creating uncertainty and greater political risk. Parts of Canada and the United States are considered relatively low risk jurisdictions.

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