Silver miners: juniors will beat majors
Junior silver miners are set to outperform not only major producers of the precious metal, but also all gold miners over the coming years to 2020, according to a new analysis from BMI Research.
By looking at a selection of companies included in BMI's newly published outlook for mining stocks— such as Tahoe Resources and KGHM Polska — the research firm states that as commodity prices improve, those who invested in smaller silver miners and embraced the illiquidity risk associated with their shares will be rewarded.
Investors who took on the higher illiquidity risk on top of the risks associated with smaller companies by investing in junior silver miners will be rewarded now, says BMI.
“Shares of silver mining companies are more thinly traded, being exchanged in lower volumes and with a limited number of interested buyers and sellers," it says.
"This illiquidity often leads to volatile changes in price when transactional activities increase, as a new dollar invested in the silver market has a much greater effect on the price than the gold market,” the report adds.
BMI bases its assertions on a couple of facts and one theory:
Fact 1: Juniors usually recorded a smaller decrease in net income than larger companies in 2015. For example, while Tahoe Resources registered -179.2% of net income growth in 2015, KGHM Polska registered -304.6%.
Fact 2: In the past few months of rising commodity prices, junior miners’ equities have been outperforming the majors.
Theory: The small cap premium theory indicates that stocks with low market capitalisations can be expected to earn higher returns than stocks with higher market capitalizations during bull markets.
Following the footsteps of small silver miners, their gold counterparts are also expected to outperform large cap miners when it comes to share prices and financial health. In 2015, for example, Kinross Gold’s registered -15.7% of net income growth, while GoldCorp registered -92.4%.
By forecasting an annual average of $1,500 an ounce by 2020, BMI predicts higher returns for investors who buy into smaller gold companies that carry a lot of risk. “Junior miners and explorers bear the major costs and risks associated with discovering and developing new economically-viable gold deposits,” they say. “Larger gold miners rely on exploration and development by juniors extensively, constantly acquiring them at a speed faster than acquisitions of other junior metals miners, buying their projects or partnering with them for development.”
To provide a better understanding of early stage companies with market capitalization of less than US$10bn, the firm outlined their main characteristics: