Canaccord reflects on juniors

In its last issue of the year, Canaccord Genuity’s Junior Mining Weekly takes a look back at 2012 and offers predictions for what lies ahead in 2013.

The year marked the second in a row that the S&P/TSX Venture Index posted “significant negative returns,” Canaccord’s mining analysts write, while commodities generally outperformed equities as risk aversion put downward pressure on the equity valuations of juniors and trimmed trading volumes.

The macroeconomic themes that impacted global markets in 2012 — the U.S. economic recovery, slowing growth in China and concerns about the debt crisis in Europe — have not abated, they add, making them cautious about the outlook for 2013.   

Having said that, however, there were still a number of outperformers this year in the junior mining space, including: Argonaut Gold, +42%; Belo Sun Mining, +59.6%; MAG Silver, +47%; Primero Mining, +100%; Silvercrest Mines, +29%; and Sandstorm Gold, +106.2%.

The analysts have come up with a list of 14 junior companies to watch next year based on criteria ranging from their quality of management and 2013 catalysts to asset potential and leverage to positive metal price movements. Their primary goal was to “identify technically proficient management teams that are well-versed in capital markets to mitigate the overlying financial risk with an asset portfolio in a manageable geopolitical risk environment.”

Canaccord’s 2013 watch list contains the following juniors: Almaden Minerals, Amerix Precious Metals, Atico Mining, Coventry Resources, Esperanza Resources, Graphite One Resources, Mansfield Minerals, Midas Gold, Midway Gold, Pilot Gold, Plata Latina Minerals, Riverstone Resources, Silver Bull Resources and Solitario Exploration & Royalty. (Canaccord says it does not have formal research coverage of the companies on the list, and that their inclusion does not constitute a recommendation.)

They say major themes to watch in the junior mining sector next year are financing, geopolitical risk, mergers and acquisitions, the skills shortage, “creeping nationalism” in the form of increasing taxes and royalties and “greater state involvement in mining interests.” The analysts also predict that financing risks will mean smaller budgets for some companies next year, and that “underperforming equities with attractive assets will likely see a mergers and acquisitions bid.”

There are reasons why investors should be “cautiously optimistic on the prospects for the junior mining sector,” they argue. These reasons include a low interest rate environment, higher-than-average metal prices, improving balance sheets of producers, a positive outlook for bullion and a weeding out of companies in the junior mining space that will “reduce the random noise that we see in the market today that distracts investors from some of the higher-quality junior names.” They also contend that lower spending and fewer active companies should help relieve labour shortages that are affecting the industry, and could even reduce labour costs.

They say that “from our perspective, we believe that selective junior mining companies remain fundamentally undervalued and offer upside potential, particularly with a change in market sentiment.”