Bottom-fishing during summer doldrums - Kaiser on juniors

John Kaiser, in this Mining Report interview, gives his advice on how to catch a good fish during a slow summer.

Author: JT Long
Posted: Wednesday , 14 May 2014

(The Mining Report) -

The Mining Report: The last time we talked, you predicted that the commodity supercycle would reappear in 2017. Does that mean three more years of tough going for mining companies?

John Kaiser: I would say mining companies have one more year of tough going, not three. We are in a transition zone.

China and the U.S. are weaning their economies off the interventionist stimulation that followed the 2008 crash. China has curtailed its infrastructure stimulus program and is pulling in its shadow banking system. Its real estate market is cooling off; a real estate bubble implosion would significantly hurt the Chinese economy. The U.S. continues to taper quantitative easing. The drip feed solution to the Great Recession and the inevitable uncertainty associated with it has discouraged businesses from making the significant capital investments that stimulate employment, and discouraged banks from lending to consumers.

Uncertainty will persist through the transition. Metal prices will languish. Right now, we're working through the stockpiles generated in the last five years as a result of new mine supply mobilized in response to the higher metal prices of the past decade and weaker-than-expected demand. It will take about a year to know if the weaning process is over, and the economy is growing organically again. If we are growing, metals prices will creep up, along with the valuations of mining stocks. After one more year of misery, a gradual upward trend for the mining sector will culminate with the supercycle being back on track in 2017.

TMR: What about growth in Europe?

JK: Europe is the problem child. It listened to the austerity siren call of the semi-libertarian ideologues, and put the Eurozone into a very slow recovery mode. Now, it is grappling with deflation and the conflict between Russia and Ukraine. The Eurozone is very dependent on raw material supplies from Russia. Russia depends on the cash from its sales of oil, gas and other materials to Europe. If the problem does not get resolved, both sides will be hurt. Overall, I do not see any great help for the global economy coming from the Eurozone.

TMR: Do the recent Toronto Stock Exchange (TSX) company filings confirm your thesis from last year about the likely disappearance of as many as 500 companies from the Venture exchange (TSX.V)? Are the healthy companies the only ones left?

JK: The statistics are grim. Of the 1,700 companies we cover, 40% have negative working capital. These are zombie companies, still listed and trading, but in no position to create new wealth. Another 20% have between $0–500,000 ($0–500K) working capital. To me these represent good bottom-fishing territory because the market has already written them off as future zombie companies. Unfortunately, these statistics do not yet include the Dec. 31, 2013 annual filings for about 600 TSX.V-listed companies. Once we process those filings, we will know what the numbers are. I expect them to be worse because monthly financing activity among the resource juniors is back to what it was in 2003 and during the six-month trough straddling 2008-2009.

To date, about 600 junior companies remain in reasonable financial shape. But even they hesitate to spend money, because they don't see any easy way to replace it except in the case of outstanding results. The whole idea of a venture capital market as a funding mechanism is stalled. In the absence of upward trends in metals prices, this makes it hard for investors to be optimistic about the sector. And with little money going into discovery exploration, the chances of a world-class discovery that brings investors running back are low.

TMR: How do you determine if a company might be one of the survivors?

JK: Ideally, it will have sufficient capital to continue to advance its prospect in the next year, be that an exploration play or a mine development play. It might have plenty of working capital or it might have farmed the project out to another company with deep pockets to advance the project, without worrying about what the market in general is doing.

TMR: What are the most important factors someone reading your company profiles should look for?

JK: It's the standard triad of people, capital and story. Is there a well-rounded team of people involved? For this to be the case, the company needs sufficient working capital to pay salaries that will keep the technical and executive teams intact and at work. You also need capital to advance the project. And of course, there has to be something compelling about the story.

On the exploration side, that story would be a strategy or an idea that makes investors believe that the company can increase the stock price 10, 20 or even 30 times—a discovery play. The story behind an existing deposit would be the grades and cost structure that could allow the deposit to be developed at current prices. However, at current prices, most of the projects in the hands of juniors are not very exciting. Their projects have become options on higher metal prices.

The strategy for investors now would be to buy juniors, stash them away and hope they do not get bought up cheap by bigger companies planning to inventory them until the metal price cycle turns positive.

TMR: What's your message for the Cambridge House Vancouver Resource Investment Conference in June?

JK: It's the unfortunate message that we appear to be in the fourth year of a resource sector bear market. Without significantly higher gold prices, it will be difficult for companies to raise capital for feasibility demonstration or discovery exploration without the cost of hideous dilution.

Investors need to look for stories that can attract capital, even if it involves a rollback and dilutionary financing.

We're in the trough of a turning point. Stock prices are likely to weaken again in the summer doldrums. It will be an excellent bottom-fishing opportunity, especially with so many companies clearly sidelined. But there will be competition from high-net-worth groups looking to scoop the better stories. Minority shareholders will see their stake reduced, as their companies get rolled back and refinanced by new money.

Going forward, there will be opportunity to make significant money, but 700 companies will be left in the dust. They have no story. They will be shells waiting for whatever the momentum traders are willing to pile into next.

TMR: John, thanks for your time and insights.

DISCLOSURE:
1) JT Long conducted this interview for Streetwise Reports LLC, publisher of The Gold Report, The Energy Report, The Life Sciences Report and The Mining Report, and provides services to Streetwise Reports as an employee. She owns, or her family owns, shares of the company mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of Streetwise Reports: Clifton Star Resources and Probe Mines Limited. Streetwise Reports does not accept stock in exchange for its services or as sponsorship payment.
3) John Kaiser: I own or my family owns shares of the following companies mentioned in this interview: InZinc Mining Ltd., Adamera Minerals Corp., Avrupa Minerals Ltd., and EMC Metals Corp. I personally am or my family is paid by the following companies mentioned in this interview: None. My company has a financial relationship with the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.
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