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Junior exploration sector poised for value investment, say analysts

Filo del Sol hosts a high-sulphidation epithermal copper-gold-silver deposit associated with a large porphyry copper-gold system. (Image courtesy of Filo Mining)

The beaten-down junior mining complex currently sits at an attractive investment entry point as the sector continues to trade lower relative to gold and other equities, Haywood Capital Markets analysts conclude in their third Junior Exploration Report for 2022.

Haywood’s analysts argue that with the GDXJ trading down about 21% in the year to date, as of Aug. 25, and several high-quality juniors are down even more, the junior segment offers deep contrarian value at a low-risk entry point.

“Exploration by definition is a high-risk endeavour, with economic discoveries coming very infrequently, and extraordinary share price gains if a junior explorer can make a discovery,” wrote lead author Pierre Vaillancourt.

According to Haywood, Filo Mining (TSX: FIL) is probably the latest example of a big success story in exploration (the shares traded in the $2 per share range in early 2021 and rose to over $27 per share in May 2022), with Rupert Resources (TSXV: RUP) a close second with its Ikkari gold discovery in Finland.

“In both cases, senior producers BHP (NYSE: BHP; LSE: BHP; ASX: BHP)and Agnico Eagle Mines (TSX: AEM; NYSE: AEM) have contributed significant equity funding to advance these projects, along with conventional equity funding from risk-tolerant mining investors. It takes good science, adequate funding, and a strong management team to deliver a discovery,” wrote the Haywood analysts, adding that junior explorerss are much more efficient at grassroots exploration than larger mining companies.

Market volatility

The market is currently characterized by volatility in the gold price and the equity share prices, which conspire to reduce the availability of risk capital for exploration. However, strong management teams with prospective projects are still getting funded, although perhaps not to their desired levels.

After retracing its run to above $2,050 per oz. in March, the gold price traded as low as $1,681 per oz. in July and is now holding in the $1,750 per oz. range. Silver is currently trading at around $19 per oz., after reaching a low of about $18 per oz. in July and a high of $27 per oz. in March.

Junior exploration sector poised for value investment, say analysts

Haywood describes base metals prices at “reasonable” levels, with copper around $3.70 per lb. today after the low of $3.15 per lb. in July. While a recession would not help base metal prices, Haywood analysts expect supply constraints in the industry are likely to keep copper prices above the $2.75-per-lb. level going forward.

“We believe gold remains in a longer-term secular bullish uptrend – acting as a quasi-hedge to inflation; and with mining equities trading at multi-year lows relative to both gold and the broader equities overall, they still present an attractive investment opportunity,” wrote Vaillancourt.

Royalty opportunity

Exploration Insights analyst Joe Mazumdar says that juniors are having to get creative to deal with the current finance crunch that is especially pronounced in the precious metals sector.