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Conventional wisdom is that there is never a better time to invest in a sector than when it's been beaten up, and it's hard to imagine a sector that's more beaten up than junior mining. Does that mean there are bargain basement investment opportunities to be had? Perhaps a handful – but exercise extreme caution.
Junior miners live and die based on investor appetite, which runs either boiling hot or ice cold. When commodity prices are rising, a lot of small companies can raise a few million dollars at a go from eager investors to finance exploration and development on their speculative properties. When the financing window closes, as it did last year, it is the death knell for many of these companies that haven't raised enough or advanced far enough in their plans.
Actually building a mine is a costly venture, typically nine figures – well beyond the financial capacity of juniors. Where they create value is by exploring, drilling and proving out the resource they have, making the property more valuable to deeper-pocketed players. But that alone can cost tens of millions of dollars, so juniors have to keep raising money from investors and hope at the end of the day there are buyers for their ready-to-mine assets.
Undeterred prospective (let's call them daredevil) investors should bear two things in mind.
First, many of the larger mining companies that would be natural acquirers of smaller mining firms are in less of a buying mood after making costly purchases at the top of the market cycle. Those few firms that can afford to buy – New Gold Inc. and Yamana Gold Inc. come to mind – are that way because they are prudently managed, generate free cash flow from producing properties, and avoided stupid acquisitions when others barrelled in. If they are willing to buy anything now, it will be quality assets on the cheap, preferably projects that are producing or in advanced stages of development.
The other mistake is for investors to hunt for bargains by looking at which juniors are sitting on sizable sums of cash. That seemingly compelling line item can prove a fleeting thing. For example, Vancouver-based Sennen Resources Ltd., which fended off a hostile takeover by fellow junior Liberty Silver Corp. last fall, was sitting on nearly $13-million in cash at the end of its last quarter. But then in December, Sennen spent $4.1-million – and issued 10 million shares – to pay for a 51-per-cent interest in a potash project in Utah, which – like most speculative mining investments – isn't guaranteed to make money for anyone, ever.
Remember, too, that juniors, with little to no revenue until they sell a property, need cash to pay for executive salaries, office costs and regulatory filing fees, none of which creates value for shareholders (at least, in the short-to-medium term). A sure sign of trouble is a company going out in a lousy market and raising little more than a few hundred thousand dollars at low prices. That tells investors the company is more focused on paying staff a bit longer than on protecting their interests: those shares are dilutive, and the money isn't doing anything to advance the development projects toward greater value creation.
That's not to say the entire junior sector should be dismissed out of hand. But those with a prospect of creating value without the benefit of new investor dollars will prove to be exceptionally rare finds.
Sean Silcoff is a contributor to ROB Insight, the business commentary service available to Globe Unlimited subscribers. Click here for more of his Insights, and follow Sean on Twitter at @seansilcoff .
Sean Silcoff