Juniors a safer bet as culling nears completion

TORONTO (miningweekly.com) – Most middling- to poor-quality juniors have finally been eradicated or left impotent by the downturn, which has enabled investors to back the survivors with greater certainty, head of Kaiser Research John Kaiser told attendees at the newsletter writers’ day during the recent Prospectors and Developers Association of Canada convention.

“Almost three-quarters of the companies have been side-lined, marginalised and taken out of the equation,” he said. “The garbage is gone.”

“It’s going to be a smaller universe of about 400 or 500 companies, making life easier for us because the remainder will have mutated into something else,” he added. “So now is the best time to get out there and kick some tyres.”

As well as raising the technical bar, the downturn had also made the investment community more discriminating about which companies to back.

With the ‘lifestyle management’ companies falling away, the narrative could also change into one dominated by discovery-exploration, akin to that experienced in the 1980s and 1990s.

However, the broader capital market structures remained unsound, exacerbated by red tape and a breakdown in the client-relationship model for brokers, particularly when investors wanted to back higher-risk ventures in the junior space.

The banks’ capital-stripping system of shortselling and leaning into order books still compounded junior difficulties, he said. “Basically, it’s very difficult for [juniors'] stocks to develop an uptrend and finance at better prices.”

Seniors continued to shutter unprofitable mines or mothball unviable projects. However, the supply overhangs remained in place for many metals and minerals, weighing on price performance. For example, rare earths were at levels comparable with the start of 2009.

Gold’s rally was largely driven by exchange-traded fund (ETF) buying tied into fears surrounding negative interest rates in the developing world, said Kaiser.

“Around 500 000 oz have gone into the GLD [ETF] just this year so far,” he noted. “This rally could easily stall if people started dumping their ETFs.” However, he hoped the trading band between $1 200/oz and 1 400/oz was concrete, adding increased stability and allowing for upside potential.

At the more macro level, Kaiser warned that instability held the potential to disrupt both the global economy and its supply chains. He highlighted the Middle East, which remained a festering wound, as well as Vladimir Putin, who still harboured “Tsarist ambitions” and Beijing, which wanted to assert Chinese hegemony over the South China Sea.

There was the possibility that the effects of globalisation were starting to diminish because of the disorder, while nations dependent on oil exports had experienced major economic upheaval. Saudi Arabia’s efforts to undercut the US shale industry added further risk.

“And we also have Donald Trump, an actor and performance artist satirising every bad idea the Republicans have nurtured in the past couple of decades by taking them to their logical extreme,” he said. “He’s injecting extraordinary instability into everything.”

“In fact, the uncertainty about what the world might look like with Donald Trump as US President could be a good reason to own gold,” he quipped. “Maybe Trump is the key to a higher gold price.”