Part III of a May 10 Interview
By Kevin Michael Grace
Q: Over the last year I’ve heard constantly that the prices of gold and silver mining stocks do not reflect the increases in the prices of silver and gold. This still seems to be the case, and in March most junior miners took a shellacking on the TSX. Why?
A: The mining industry, and junior miners in particulars, has become far more difficult for the average person to be involved with. First of all, financial services businesses were commissions driven; now they’re asset gatherers. There used to be lots of what we could call brokers, whose business was based on buying and selling stocks. Some of them would specialize as gold brokers; they would specialize in mining shares and what have you. This change, added to the deep discounting of commissions, took away a large group that used to be in there buying mining shares.
And in the US, there has been regulatory overkill regarding stocks that don’t trade on the NASDAQ or AMEX. Most U.S. brokerage firms now don’t allow solicitation of shares trading on the TSX. A lot of brokerage firms are now stopping unsolicited orders. The other thing that’s hurt the junior resource market is the shortening of the hold time on private placements, down to four months. Too much paper comes back into the market.
Q: I wrote about one of your clients, Abacus, recently. They seem to have all the factors necessary for a successful company, and yet their market cap is $37 million and they trade at 18 cents. I’ve noticed this with other companies as well, and it’s a mystery to me.
A: The other problem is the speculators. Now, with deep discounting of commissions, they can now afford to buy a few thousand shares, and if it goes up a penny, they can sell it and make a profit. This wasn’t possible before. And despite commodities becoming a more legitimized asset class, we’ve not seen any real increase in the overall interest in the mining industry. The percentage of people that own juniors is probably less now than it was 10 or 15 years ago. Case in point: wherever I go to speak at a conference at all it’s always the same dozen or so men and women speaking, the so-called experts. Whereas if you go to a technology or retail industry show, you’ll find dozens if not hundreds of different experts.
In fact, if you talk to people in the industry, they’re expecting to find it even more difficult to attract skilled labour, geologists, mining engineers, etc. At these shows, most people have gray hair like I do. It’s not an industry a lot of young people go into. All of these things, despite great metal increases, have handicapped mining share prices.
Q: Does this suggest companies should get as much institutional investment as they can?
A: That’s a plus and a minus. Yes, you can get one institution to buy a million shares versus a thousand people buying a thousand shares. The problem is that institutional investors are almost always trying to do it through private placements rather than buying in the market. As soon as they do, they’re looking for that mining company to increase retail interest so they can provide liquidity. And they don’t get it for many of the reasons we just discussed. Despite the price increases, institutional investors have not come to the junior market like they were before the financial crisis in 2008. We haven’t had an area play to bring institutions back, although the Yukon gold rush now is the closest we’ve had in quite some time.
With deep discounting of commissions, speculators can afford to buy a few thousand shares, and if it goes up a penny, they can now sell it and make a profit – Peter Grandich
Q: Vancouver is arguably the most important mining city in the world, and yet I note that the Vancouver Sun has almost no mining coverage. Considering how important mining is to Canada and given the 82% rise of silver last year and very healthy rise in gold, there is very little national mining coverage in this country. Why not?
A: I think it’s interesting for an American to look at because natural resources are Canada’s second nature. But at the same time the Canadian market itself is not large in terms of potential investors. The industry has never been able to broaden its appeal to increase demand. I’m prejudiced (and I’ll note that they’re clients of mine), but I certainly believe the Hunter Dickinson group of Vancouver is in the top three in the whole world of small to mid-sized mining groups. Yet you can ask American investors, and they’ve never even heard of them. Here’s a group that’s among the best capitalized, best staffed, with the best investors participating in their deals, and they’re hardly known in the US.
This lack of recognition is partly to blame on the industry itself. They’ve never come together to market themselves. Here in the US, retailers, car companies, etc, all have a lobby, association, what have you. The mining industry does have some big conferences, like PDAC, and for that short period the local media will cover it. But there’s never been an active campaign to persuade the investment community of the advantages in investing in junior miners. Of course the juniors don’t have a lot of capital, and what they have they need to expand their own businesses.
Again, I’m prejudiced, but you think investors would notice that there’s no real cobalt producer in North America. The only one that can hopefully become one is Formation Metals. You would think that Americans would start to understand how strategic cobalt is, but you know they don’t. When you talk to people about this company they don’t even know what cobalt does. Yet they’d be the first to tell you that we need green energy; we need to have electrical cars.
Q: What’s your rest-of-2011 forecast for the junior mining sector?
A: The good news is I don’t think we’re going to have a summer swoon, I think we’ve had this swoon already. The people who think the juniors are going to fall 20%, 30%, 40% more are in for a rude awakening. I think two weeks ago we saw the lows in the junior market. I don’t think we’re skyrocketing back up because things do get kind of quiet during the vacation season, but I think we’ve seen the lows, and part of that reason is we’ve seen the lows of the metal prices. At the same time I don’t think we’re anything close to like what you said earlier, to levels that we should be trading at, given where the prices are.
Peter Grandich is the founder of Grandich.com and Grandich Publications, LLC, and is editor of The Grandich Letter, first published in 1984. Grandich Publications, Inc. provides research, analysis, and investor relation services for certain of the companies featured in the articles appearing in its publications.