New discovery needed to revive intestors’ interest

The scene two years ago was one of strong gold prices — which hit $500(US) per oz by late 1987 — and an insatiable investor appetite for flow-through shares all enveloped in an almost giddy psychology which exuded only one message — share prices are going to keep going up, way up.

That positive spirit met a sudden death on October 19, 1987, Black Monday. During the ensuing 14 months, as high capitalized issues shrank into very low capitalized issues, investor psychology continued to sour. Shares, which some investors were willing to pay several dollars for, can now be had for mere pennies. Which brings us to 1989. Investors have become further turned off by reams of broken promises from companies as new mines quickly shut down due to a variety of technical problems. And to top it all off, gold prices have continued their slide to a 3-year low of around $360(US) per oz.

The bottom line is that it’s tough to be a junior today and nearly impossible to raise cash for exploration.

“This is the greatest period of depression in the junior gold sector that I’ve ever seen,” Ian McAvity, president of MVP Capital, told his shareholders recently. MVP holds a portfolio of junior gold shares — a portfolio which vividly reflects the almost 80% decline junior shares have suffered since 1987.

The one consolation to both the juniors and their long-suffering shareholders is that, if one believes in cycles, what goes down must go up again.

Many analysts feel that the current downturn could last a year. However, several factors could spark a resurgence in the sector much sooner.

“We see a possible turnaround by late 1989,” Eric Zaunscherb, mines and metals analyst with Yorkton Securities, told The Northern Miner. “Gold prices appear to have bottomed. This could mark the beginning of an uptrend by year-end.”

Zaunscherb also points out that the junior sector could get a boost from specific discoveries. “We may see an exciting nickel play develop in the Lac St. Jean area of Quebec this summer. This may spur the junior market.”

The Lac St. Jean play has attracted the attention of more than 20 juniors which have staked ground around a promising nickel- copper discovery held by McNickel Inc. (COATS) St. Philips Resources (VSE) and Ramcor Resources (VSE). Drilling began this month.

Apart from the need for a discovery to spark investor interest, the juniors’ most pressing and immediate problem is money. The majority of junior companies, from 1985-1987, gorged themselves at the flow-through trough which raised more than $1 billion in 1987 alone from investors eager for tax deductions. Even this pillar of the industry came under attack in 1988 as the federal government proposed to kill the program.

An intensive industry lobbying campaign managed to force the government to change its plans by offering a modified alternative to the original program. The new program is known as the Canadian Exploration Incentive Program.

Despite the retention of the flow- through program, the majority of juniors are likely to still find raising even tax-driven exploration dollars difficult. CMP Funds, one of the largest flow-through funds in Canada, plans to place the bulk of the money it raises this year into companies with market capitalizations in excess of $20 million.

“Less than 45% of our money will go into companies with market capitalizations of less than $20 million,” Jean-Guy Masse, president of CMP Funds Management told The Northern Miner.

It all boils down to liquidity. Two years ago, the junior sector was buoyant and relatively liquid. Today, volumes have shrunk and moving large blocks of “penny dreadfuls” is difficult.

“We want a liquid portfolio. As a result we’re heavily invested in the majors,” Masse explained.

Masse estimates that overall flow-through expenditures this year will be less than $250 million — far off the peak reached in 1987 when more than a billion dollars fueled an exploration boom.

Equity financing is equally as tough. Most junior company executives are loath to issue paper from treasury at depressed prices which would trigger massive dilution. And investors are just as reluctant to buy. “You couldn’t do a financing today in a junior,” Fred Knight, mining analyst with Can arim Investment Corp. told The Northern Miner. “Even in Europe, the interest is negligible.”

The result is that most companies are simply trying to weather the downturn by conserving cash, limiting high risk exploration and spending what money they do have on their most advanced projects.

The turnaround, when it does come, will probably be signalled by an improvement in the senior gold issues, Knight says.

“The juniors won’t turnaround until the senior golds turn. And even when it does turn, the market will be much more selective,” he added.

Issues which collapsed from several dollars per share to pennies a share, can’t attribute their entire collapse to gold prices alone, Knight explained. Many of these companies suffered from failing to deliver on production promises.

“Some issues were over priced such as Pioneer Metals,” Knight said. Others such as Augmitto, Noramco, D’or Val and Belmoral never had the reserves or grades that they anticipated.

“Non-performers such as these will not rebound. They will likely be replaced by new companies,” Knight explained.

The concensus among most industry experts is that the junior sector is in for more of the same for at least the remainder of 1989. For the time being, industry and investors alike are sitting out the storm and thinking wishfully of the good old days way back in ’87.

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