Editorial: A sober year ahead

One of the more pleasant modern traditions of the Canadian mineral exploration sector is kicking off the year with Cambridge House International’s large Vancouver Resource Investment Conference, now held each mid-January at the new Vancouver conference centre.

Here, breathing in the fresh Pacific Northwest air, we get a heady trifecta: the natural optimism of Western Canada, the promise of a new year, and the irrepressible confidence of mineral explorers.

But this year was less boisterous than years past, with the general consensus among speakers and delegates that we’re about half way through the current bear market for resource juniors, with another year to 18 months of tough slogging ahead before daylight.

Most everyone in our industry is convinced, though, that we’re experiencing only a pullback within a larger secular bull market for metals and other mined commodities that’s driven by the usual potent mix of maxed-out mine supply (particularly compelling for copper and gold), relentless demand increases from China and India, and a fundamentally crumbling U.S. dollar.

Today’s hard times for mining juniors wasn’t supposed to play out quite this way. As many predicted at the turn of the millennium, prices for most metals and mineral commodities are now actually good to very strong and trending sideways, and the top-line revenue growth for most major mining companies has responded in kind.

As we all know, though, the majors’ finances have been hit hard in recent years by the double whammy of wildly inflating capital costs at new development projects worldwide, and multi-billion-dollar write downs of assets bought at too steep a price in what was an overwhelming appetite in recent years for quantity over quality.

After blowing more than US$100 billion buying up juniors over the past eight years, the majors now have much less to spend on grassroots exploration, for joint-ventures with juniors and to take over mine developers and advanced explorers.

The result has been a particularly desultory share-price performance for almost all junior players over the past year. Just to hold your share value in 2012 made you a winner compared to so many fading juniors out there.

One of the funnier aspects of attending these kinds of shows is that newsletter writer extraordinaire John Kaiser, in his speeches, will gently mock the sincerity or astuteness of many of the other newsletter writers present, who in turn will admiringly quote his statistics and conclusions in their own talks.

This year, the number one statistic quoted by the speakers was Kaiser’s shocker that of the 1,802 publicly traded Canadian resource sector companies, 662 (or 37%) have less than $200,000 in working capital as of January 2013, which lets you do little more than keep the lights on at head office for another year and, as Kaiser says, “pretend to be a mining company.”

Just as bad, he notes that 60% of the resource sector is trading below 20¢, making any refinancing options highly dilutive.

As a result, many are predicting that 2013 is going to play out like a giant game of musical chairs, with only two chairs for every three mining companies, and bankruptcy looming for more than a few of the losers.

On the positive note, many of the savviest stock pickers are saying the coming months and the year ahead are going to be wonderful opportunities to establish long-term positions in carefully selected, high quality mining juniors at rock-bottom prices.

Despite the perennial griping about North America’s complex regulations, numerous taxes, environmental constraints and aboriginal issues, one of the themes for this year is the growing appeal for North American mineral explorers to stick close to home, particularly to Western Canada, the southwest U.S. and Mexico.

Another sector showing signs of life is the beaten-down uranium scene, which is enjoying a bit of a rebound with improving sentiment towards nuclear power in Japan and China’s very real plans to ramp up nuclear power generation to drive its economic growth and relieve its urban population now choking on air pollution from burning coal and diesel.