PDAC: Survival tips for juniors

In a market, where majors are struggling to perform, there seems little hope that juniors will weather the storm, making strategies to survive a popular theme at this year’s Prospectors and Developers Association of Canada (PDAC) convention.

At the International Panel Luncheon held on March 5, speakers discussed how commodity prices, regulations, financing options and macroeconomics are affecting the junior sector, providing some insight on how juniors could make use of the current situation.  

Moderated by Raymond Goldie, a senior mining analyst at Salman Partners, the panel featured Eric Sprott, CEO and chief investment officer of Sprott Asset Management, Ned Goodman, president and CEO of Dundee Corp., and John Kaiser, mining analyst and  editor of Kaiser Research Online.

Goldie started off the discussion by saying gold stocks and gold prices have been marching to the beat of different drummers, posing the question how closely stock prices follow the prices of metals.

“The important thing we have to realize is they will follow the metal, but the metal must have some momentum in a particular direction,” Sprott said. “It’s not satisfactory for us to say ‘gold is (US$) 1,600, so the stock should be this,’ because people are more concerned about where the price of gold is going.”

Sprott then expressed his contempt for the Comex market where commodities are traded at high volumes, affecting the prices of metals. “It is an absolute joke that we can trade a billion ounces of silver a day, when we produce 800 million oz. a year.”

He contended central bankers are part to blame as they are supplying more gold and silver than physically available to suppress metal prices as a way to distract people from their “totally ridiculous and irresponsible” monetary policy.

Kaiser added the sector is being held prisoner by a gold bug narrative of “an imminent apocalyptic collapse” which has created a poor environment for juniors. This is because whenever metal prices slightly go up or down “it is used by the trading culture to hammer down or crank up the juniors.”    

He predicts there will be a massive buy out likely coming from China to clean up the junior space. “Hopefully we don’t lose all these projects at ridiculously cheap prices when they are taken out at 100% premiums from very low bottoms that are being sort of engineered now not so much by the gold price trends but by the entire market bias towards the downside which is linked to the negative interpretation or implementations of the gold bug narrative.”

Goodman, agreeing with Sprott that governments are part responsible for the current global situation, said that mining stocks are driven by the anticipated future metal prices and not the commodity prices of today or tomorrow.

“I’m a long-term investor,” he remarked, explaining he pays little attention to what commodity traders and central bankers are doing on a daily basis. “To me the market is driven by Mr. Market.”

Given there is a discrepancy between metal and stock prices, Goldie asked how juniors could use that to their advantage, and eventually be taken over.

Kaiser, who covers 1,800 Canadian-listed junior companies, said it’s questionable whether a bulk of them could even last another year. Out of the 1,800 juniors on his list, he said 675 have less than $200,000 in their treasuries.

Looking at the more than 520 companies participating at the PDAC, he commented 22% of them have less than $200,000 on hand and 47% were trading below 20¢. After painting a bleak picture, he stated the juniors — the ones capable of surviving — need to disconnect from the current situation and focus on what their worth.  

“All these companies intrinsically have zero value, but insofar they have a real project, a target they are working on, and there is an optionality value. And the way to disconnect from the metal prices is to focus on what is it that you are doing on the ground, what is the fundamental outcome and plug in US$3.50 copper and plug in US$1,600 to 2,000 gold because the trend in real price terms is upwards going forward.”  

Sprott agreed that junior producers could do something about their fate as can a senior producer. “The fate is nobody likes you anymore.” That said, he explained juniors that are able to convert their cash flows to dividends instead of putting it in their next mine could dramatically improve their market capitalization. This in turn could allow them to buy other exploration properties, consolidating the space.

Goodman, who’s also a geologist, securities analyst and professor, pointed out he uses the metal and stock price disconnect to his advantage. “Because when they (juniors) show up and need some money and the markets hate them, it is usually when I want to buy them.”

Asked whether the market needs more regulations, the consensus was no. But the general attitude was regulators need to do a better job at regulating and giving juniors a chance to attract funds.

Moving on to whether juniors should access debt, Sprott argued that if a junior isn’t producing then debt should be off limits. But if a company has substantial cash flow, he believes a small amount of debt could be taken on, with interest rates being as low as they are.

While agreeing with Sprott, Goodman cautioned: “Debt is an interesting thing because you could lose your whole company if you can’t repay it . . . we are still in a secular bear market that still probably has five, six or seven years to run. And if that’s the case you have to be careful on taking on debt,” he said, suggesting equity financings as a safer alternative.

Kaiser said while debt should be avoided by juniors, offtake agreements are good for obscure metals like rare earth elements and sometimes base metals. But he conceded the trend of juniors selling royalties could be harmful in some cases where jurisdictions have “super royalties.”  

“For example, Guyana has a 7 to 8% gross royalty and when you start stacking up a 2 to 3% royalty on top of this… Then all those projects that are then encumbered with the private royalty, they are all dead in the water and the royalty stream will absolutely never happen.”

Sprott had a more optimistic view on offtake and royalty agreements, stating “anyone who can fund the industry is good for the industry.” But he admitted he would never advise junior producers to sell their precious metals in an off-take agreement, but had “no objections” with them letting go of their base metals.

Goodman explained off-take agreements can make money or keep a company in business. But suggested juniors should try to get offtake buyers to also become a strategic partner if possible. In regards to royalties, he opined in some cases they don’t make sense especially if the price of a metal is too low. “It’s an arithmetic lesson you have to go through to see if you really want to do a royalty.”

Sharing their views on where gold is heading in the near term. Goodman said he sees gold as “real money” and as a hedge against “the stupidity of the idiotic governments.” He predicts the price will increase, without giving specifics.

“I look at gold as a store of wealth and a hedge against uncertainty,” stressed Kaiser. In the next two to three years he projects the price of gold stabilizing
between US$1,400 and US$1,700 per oz.

China and central banks have many reasons to buy gold and once they start mopping up the ounces, the price will start to trend towards $2,000 per oz., Kaiser said.  

Sprott — who believes the price of gold will continue to rise with the uncertainty in the global recovery — added: “It’s chaos out there, and I don’t know where the tipping point is going to be . . . so you got to have precious metals.”