Junior explorer's fortunes follow those of senior miners: Steve Todoruk

By Henry Bonner
Sprott Global Resource Investments Ltd. 

Key points: Major mining companies may begin to recover following wave of write-offs. Optimism for majors may benefit the juniors as well.

Is it finally time to get back into mining stocks? Steve Todoruk, an Investment Executive at Sprott Global Resource Investments Ltd., worked in the mining industry for nearly two decades before joining Sprott Global in 2003. I asked: “After the huge write-downs we saw in June, have mining companies bottomed?”

The past two months have seen a refreshing move up in the price of gold and silver, and with that the prices of many of the senior mining company stocks as well as many of the top-tier junior explorers.

Gold hit its recent low of $1,190 per ounce in the end of June, as did silver. Precious metals producers such as Barrick, Newmont, and Goldcorp also hit their 52-week lows around that time. Barrick hit an all-time low share price of $14.00 and recently hit a high of $21.02, a 50% gain off the bottom. Many of the other producers have shown similar increases.

Near the time of those lows, the producers were busy announcing their second quarter financial results, which were mostly horrific. Just about every company reported large write-downs and low earnings. They told us they were doing everything they could as quickly as possible to slash costs by laying off significant percentages of corporate head office personal, slashing their exploration budgets (which can be fatal –you need to discover new deposits so that you can replace your depleting resources), and in some cases selling non-core mines (as evidenced by Barrick Gold’s recent sale of three gold mines in Australia to Gold Fields for $300 million).

It has been very interesting to watch the majors go through this cleansing process while the price of gold has jumped up about $200 per ounce since those June lows.

I believe we could be setting up for a very nice set of quarterly earnings reports in another two months. The majors have cleaned house and have quickly slashed costs quite nicely; with the recent rise in gold (and silver) prices, the miners are likely to announce nice profits which, now that they’ve tightened their belts and are trying to run themselves like normal businesses, should be warmly received by investors and analysts.

Could that also benefit small exploration companies?

This should all bode well for the junior exploration companies because as the seniors go, so go the juniors. When the seniors are generating good profits from running their operations smartly and efficiently, that positive sentiment usually benefits the juniors as well. We have already started to see this with the recent rise in gold prices: Pretium for instance (a well-known and widely followed gold junior) moved from its low of $5.67 to its recent high of $10.14 (a 78% increase off its bottom).

By no means have all the juniors seen this kind of positive movement; for the most part, only the highest quality juniors have rebounded well. That is the way it should be — companies that have the goods (quality ounces in the ground) should be rewarded.

Juniors that do not have high quality properties see their share prices languishing near zero. Many of these companies are also out of money, and have little hope of raising more soon.  For many, this means closing up shop (just letting the lights go out and the company be delisted), a 10- or 20-for-one share rollback, or a meaningless merger with another weak junior.

I have been advising my clients to buy a very short list of top-tier junior stocks and to avoid the rest like the plague.

Hopefully, when the majors announce their next earnings report (in October), and with a little help from the gold price, we could see another nice step up in quality junior gold and silver stocks.

Steve Todoruk worked as a field geologist for major and junior mining exploration companies after he graduated with a B. Sc. in Geology from the University of British Columbia, in 1985. Steve joined Sprott Global Resource Investments Ltd. in 2003 as a Senior Investment Executive. To contact Steve, e-mail him at [email protected] or call him at 1.800.477.7853.