Why junior explorers will emerge from the dust

No doubt 2023 has been a difficult year for the junior mining sector. Across the board we’ve seen small-cap explorers sell-down toward multi-year lows.

A decade of underinvestment in new supply and an enormous metal intensive energy transition have offered little incentive for investors to back the next generation of deposits.

The depth of this correction has certainly caught a lot of pundits by surprise. In fact, the situation right now has some folks calling this a repeat of the ugly days of 2016.

If you’re not familiar, that year marked a major cyclical bottom for the mining industry.

There are certainly some interesting parallels to draw from. Just like today, junior mining stocks were capital starved, and also like today, junior mining stocks were trading around multi-year lows.

But there are key differences in today’s market.

Commodity prices are far higher than they were back in 2016. Just take our old friend copper.

In 2016, this commodity was in the gutter. It traded for just US$2 per pound. Today, it sits at US$3.60 per lb. — around 80% higher.

 

It’s a similar picture across the commodity landscape.

Nickel traded for just US$8,400 per tonne back in 2016, it now trades 120% higher, hovering at US$18,300 per tonne.

Meanwhile, precious metals bottomed slightly earlier in late 2015. Back then gold traded as low as US$1,020 per ounce. It’s now hovering around US$1,900 per ounce.

Silver is also much higher. It bottomed out at US$13 per ounce. Now it trades 80% higher at US$22 per ounce.

You get the point! Across the board, commodity prices remain well above their cyclical lows.

But despite that, junior mining stocks have been in deep sell-off mode for most of 2023.

Fortune favours the juniors?

Investors made a fortune buying stocks at 2016 levels. But in my mind, the opportunity in today’s market is better still.

With commodity prices remaining relatively high, there’s a gaping mismatch between the fundamental strength of the resource sector versus equity valuations.

Now, I’m not talking about all mining equities. The large caps have held up well in 2023.

The real opportunity comes from explorers and developers offering cents on the dollar value from where they traded two years ago.

It’s why investors should consider positioning themselves for a possible re-pricing as we head into 2024. But what could be the catalyst?

There are numerous factors that might spur a sudden return back to the juniors.

Broad economic stimulus aimed at reviving China’s shaky property market could be one.

So far, the Chinese government has been tepid in its approach, fearing inflation could spike with an injection of liquidity into its economy.

But with deflation fears now weighing heavily on China’s political leadership, a heavy dose of stimulus could be in the cards at any time.

Expect a rapid repricing of junior mining stocks if this happens.

Another catalyst might be an earlier than expected rate cut by the U.S. Federal Reserve.

This would put pressure on the U.S. dollar, offering tailwinds for commodities priced in greenbacks.

There’s also the geopolitical angle.

A sudden export ban on any number of critical metals dominated by China as relations continue to sour with the west.

It’s the type of playbook Russia might follow, helping deepen supply chain disruption to western manufacturers.

Combined, Russia and China are major suppliers of energy, grains, fertilizer, and critical metals.

Any one of these events could spark a rapid change in sentiment for junior mining stocks.

Game-changing event

Don’t expect a gradual recovery like we witnessed in 2016.

The resource sector is not emerging from a cyclical low like it was back then. It remains in the upward leg of a multi-year bull market.

That might be hard to see right now, given the brutal sell-off amongst junior mining stocks in 2023.

However, investors must keep reminding themselves that commodity prices remain high.

This is the foundation that will support a recovery in junior mining stocks.

Meanwhile, commodity supply chains remain tight and projected demand remains strong. History shows these are the conditions that foster mass speculation in the resource sector. I don’t believe this cycle will be any different.

We’ve already had a sneak preview on how this will play out.

In early 2022, junior mining stocks exploded. That was thanks to Russia’s invasion of Ukraine and sudden fears of commodity shortages.

It’s why stocks from companies like Galileo Mining (ASX: GAL) surged 750% in just three weeks.

During that time, the London Metal Exchange cancelled contracts and halted trading as nickel prices catapulted to record-breaking highs.

Events like this are not supposed to take place in stable markets. But these are the conditions born out of years of underinvestment in the industry and a deep underappreciation of future supply.

Large cracks remain in this system. The opportunity lies in holding stocks and waiting for the inevitable event that exposes the fragility of commodity supply chains.

.James Cooper is a geologist and mining analyst based in Melbourne. You can follow him on X (Twitter) @JCooperGeo.