The airline tried to zap us with an overweight luggage fee on our flight home from the Casey Summit in Tucson. I was toting piles of notes and ideas to share with our readers, and I had to open two suitcases for the whole world to see. Your 73-year-old scribe was on his hands and knees moving clothes and folders between suitcases, but I managed to sneak in under the weight limit.
A few notes on the junior mining sector were among the stacks of paper I had to shuffle around. Lately the price of gold is seemingly going nowhere, and junior mining stocks are in the tank. Nevertheless, people had a tremendous level of interest in these companies, as evidenced by the crowds around their tables in the Map Room.
What was going on? My colleague Louis James and I sat down after the conference to discuss some possible explanations. To bring everyone up to speed, here are a few highlights from my interview with Louis in the March issue of Money Forever.
- Junior mining companies look for precious metals in quantities large enough to be mined profitably.
- Juniors are like the research and development arm of the mining industry. When larger companies buy them out, junior mining shareholders often see spectacular results.
- Most junior mining companies either hit it big or go bust. There are substantial risks, but also the possibility of phenomenal rewards.
- Research is the key to finding the right ones. ETFs and mutual funds that invest in junior mining companies use the basket approach, which dilutes the potential for fantastic gains. A qualified, experienced research team, however, can pick the winners out of the field of losers.
Now, back to my more recent chat with Louis:
Dennis Miller: Louis, for a sector that is really beaten down, there seems to be an awful lot of interest. What is going on?
Louis James: The interest you saw at our Summit was not representative of most investors, few of whom have the courage to be true contrarians, like Doug Casey.
The mining sector as a whole is being taken out behind the woodshed and thoroughly thrashed. This is understandable; metals prices across the board are lower than they were a year ago. Worse, while metals prices were rising, shareholders rewarded management for growth above all else, even profitability. Now that prices are not as high as in recent years, shareholders are screaming for healthier balance sheets and bottom lines.
Shareholders are fleeing these “ships” in droves, whether they are actually sinking or not, and they’re taking their money with them. This reduced liquidity is making it difficult to finance projects, even for large companies, and many of the smaller ones that don’t have much money are facing extinction.
It’s quite grim.
However, people like Rick Rule and Doug Casey are almost salivating at the opportunities shaping up. Most of our readers understand why: we want to “buy low and sell high”—and some terrific bargains along these lines are coming into focus.
Of course, you have to believe that metals prices will rebound, and that as a consequence share prices in companies that explore for and mine them will soar. Otherwise, this “opportunity” will look like a chance to jump on a sinking ship. Emotionally, that’s hard for many people to grasp.
Logically, however, it’s a no-brainer; global population continues to grow, as does the affluence of the now two-billion-strong worldwide middle class. The demand for metals may fluctuate in the short term, but it can only go up over time. That is true even as increasing environmental regulations, taxes, nationalization, and “not in my back yard” thinking drastically constrain supply around the world.
I dislike using abused expressions, but there really is a “perfect storm” brewing, and that’s exciting for the speculators who recognize the opportunity.