What 's Wrong With The Junior Gold Sector?

By Stephen Clayson
08 Aug 2008 at 03:24 PM GMT-04:00

So far this year junior gold stocks have performed poorly. Why?

LONDON (ResourceInvestor.com) -- Looking back on 2008 so far, an uninitiated observer might assume that investors in gold sector equities would be a pretty happy bunch. The price of the yellow metal has hit record nominal levels. Even with this week’s slump, gold is well ahead of where it was this time last year.

If those investors had been focused on the sector’s bigger players, that uninitiated observer might have been right. For example, using London prices, Randgold Resources (RRS; GOLD) has gained 22% to 2305p from 5 January to close of trade today while Peter Hambro Mining (POG) has fallen 32% to 888p and Yamana Gold (YAU) has lost 25% to 547p over the same period. Granted, Peter Hambro and Yamana are down, but they have fared reasonably well in a very testing environment for equities of any hue, and much of the damage has actually been done this week as the gold price has weakened.

Contrast this with Central America-focused explorer Condor Resources (CNR), which is down 75% to 1.05p over the same timescale. Or junior producers Hambledon Mining (HMB) and Mercator Gold (MCR), which have come down 72% to 5.75p and 75% to 21.25p respectively.

Although a lot of juniors have come down with the gold price this week, most didn’t really go up with it, owing to the catastrophic effect that the credit crunch and associated economic maladies have had on junior markets the world over.

That said, maybe this is the market’s way of flagging that there are actually a lot of no-hopers out there; companies with development projects that simply don’t stack up, exploration projects that will never reach critical mass, or cringe-worthy political risk profiles.

It is also a reflection of the new reality in the gold mining business; that a lot of mines in high cost locales like Australia are now borderline viable, and won’t stand much more cost pressure unless their management really pull something special out of the bag. Alas numerous juniors have all their eggs in one high cost basket, and are at real risk of going kaput. A few have already gone under, Monarch Gold and View Resources being two.

Bad hedge positions are also an issue. The big players can buy back hedges they don’t fancy anymore, albeit at immense cost, but that may not be an option for a junior, especially with equity markets strained at all levels. European Minerals’ merger with Lero Gold to form Orsu Metals (OSU) was a neat way to give European Minerals a way out of having to keep buying gold in the market to deliver into its hedges as a result of commissioning delays at its Varvarinskoye mine in Kazakhstan, but not everyone will be so lucky.

People who buy gold bullion are frequently not the same people who buy junior gold shares, though there is some overlap. Juniors depend to a great extent on retail investors, but retail investors as a group are under pressure in all major Western mining markets, having been pummelled by falling home prices; a tightening credit environment, which has led to margin calls from many brokers; and rising real world prices, especially of fuel and food, even if for many the impact of these is as much psychological as anything else.

The lack of significant discoveries being made by juniors is a worry. But more important is that the minerals boom has triggered an explosion of competition for good assets, from state-backed Asian (primarily Chinese) entities and from the big Western mining companies.

By and large, mining and exploration are no longer businesses in which likable amateurs, that perennial fixture of the junior mining sector, can expect to muddle through. It takes big money to succeed nowadays; money to hire good people, to motivate suppliers, to fund ever burgeoning corporate social responsibility programmes. And that skews the field against the juniors more than ever before.

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