Sunday, 17 February 2013

Think Pieces on the Miners and Juniors - Brent Cook, - Quinton Hennigh - John Kaiser - Rick Rule

As the gold price dips and the mining ETFs tumble three of the industry players and writers who urged caution last year deliver some thoughts on the problems of the sector and what can turn it around. There is a clear expectation for a big clear-out of the weak companies on the venture, with no cash and no credibility to finance, but great potential for the winners to deliver the quality projects the industry desperately needs with a new focus on discovery after years of developing marginal projects which should work at higher metal prices but are seeing cost inflation catch up with them.
Opinions on the potential acquirers from Cook.

Brent Cook & Quinton Hennigh
John Kaiser
Rick Rule

RULE:  Most of the companies on the TSX V, Venture exchange, are worth nothing. They have no net present value. And we need to have a cleansing on the exchange. We need to have a period like, ’91, ‘92 and ‘93 where dozens of companies got delisted every month. We need for the bottom half of the exchange at least to go to its intrinsic value, which is zero. So we are going to feel like we’re in a bear market in the TSXV for probably 18 months. What that will disguise is that the best 10 percent of the companies on the TSX V have probably already bottomed. The market is going to start to bifurcate and the bifurcation will be those companies that can raise enough money to continue to add value and those companies that can’t.The old vets are going to do very, very, very well in 2013 ‘cause they can separate the wheat from the chaff. And as I say, my suspicion is that the best 10 percent of this market has already bottomed and is going to head up from low levels. This is going to occur for three reasons. One, we are starting from a cheap base. Some of the better companies that are listed on the exchange are down by 90 percent from their 2010 highs. So they’re simply oversold. They will come back because the sellers are exhausted and the buyers will dominate. The second reason is in the oil and gas and mining space between them there are probably 50 companies that will be taken over by larger companies. There will be consolidation, and this consolidation will add both cash and hope in the system. There will also be amalgamation that is horizontal amalgamations where three or four companies merge, reduce their combined G&A by 75 percent and become viable rather than non-viable entities. But the third thing that’s going to happen that people aren’t counting on right now is that because we have funded exploration very well for 10 years and because that’s what it takes, we’re coming into a discovery cycle. We talk about the fact that this market hasn’t performed but the industry hasn’t given the market very many reasons to perform. There hasn’t been very many discoveries. If you look at 2012, which was a dismal market from anybody’s point of view, and you look at companies like Reservoir Minerals, 26 cents to $3; Gold Quest, 6 cents to $2; Africa Oil, 80 cents to $10; you will see that the market performs when the industry gives it an excuse to perform. And as a consequence of having spent 10 years in the exploration cycle and being well-funded from 2003 to 2013, the industry is, I believe, on the cusp of a discovery cycle that will really, truly surprise people. So from my point of view, while 2013 and part of 2014 will feel dismal to market participants as a whole who don’t know how to segregate between the good, the bad and the ugly-- the part of the market that matters, the best 10 percent of the juniors, has already bottomed and are going to be heading up. And some of the upside move in some of the companies that make discoveries will be as explosive as the moves that we’ve just talked about, tenfold or fifteen fold. What could be really, really, really pleasant is participating in 2013 in private placements, with some of the better issuers, that have to issue full warrants to attract capital. And then experiencing the fifteen bagger that comes from exploration success, not only with the underlying stock but with the full warrant. Because that turns a fifteen bagger into a twenty-five bagger and that’s the thing that people will experience, the same way they experienced it in 2003 and 2004.

Cook: Mining companies are also exercising more caution and are unlikely to pay large premiums for mineral deposits. They not only need to have confidence in a resource but must be comfortable that social and political issues have been addressed. The poor junior exploration sector can’t thrive in this reality-based climate and is on the ropes. Almost any company short of cash, a stellar property, good share structure, and competent management could very well go down for the count this summer.
This puts the entire burden on the junior company to continue to advance the project and de-risk it. It is simply too costly right now. Nobody wants to invest in a company whose game plane is to spend a gazillion dollars in permitting, social relations, economic studies. This is pretty unsexy stuff compared to pulling out drill holes with lots of gold!--QH    
On a more positive note. . .
Still, the recent financial pain inflicted by the mining sector cannot last forever. As we have discussed too many times in the past, metal demand is increasing, mines are running out of ore, and economic discoveries are declining rapidly. Mining companies need to find or buy new deposits to stay in business. Scraping the low grade sides of a tired old deposit doesn’t cut it. That is a fact. Although many of the larger mining companies are caught like deer in the headlights, many others are not, and will use the current poor market to expand.
The list of companies potentially seeking an acquisition includes Yamana Gold, Centerra Gold, AngloGold [They’re screwed in S Africa, Tropicana has eaten them alive; costs are out of control--QH] Newcrest Gold [Also screwed, profits down 50%. They have terminated all serious new business activity--QH], Randgold, Alamos Gold, Iamgold [Cote was a bigass mistake, they are realizing this and pulling in their horns. What a waste of $600mil--QH], Osisko Mining, Endeavour Mining, Fortuna Silver, Dundee Precious Metals, McEwen Mining, Capstone, and Hudbay Minerals. These are the companies to keep on our radar screen and consider as possible acquirers of companies we own or may buy—our customers, if you will. 

No comments:

Post a Comment