Over the past few weeks, I've been experiencing a sense of déjà vu, reminiscent of a different period in the history of the junior mining market. However, before delving into that topic, let me emphasize that we are currently navigating a remarkably challenging junior mining market environment—one where losing one's way is all too easy. While there are some positive signs out there, the negativity is palpable and, in some ways, overwhelming.
I think we can pretty much flip a coin to try to figure out the market direction for the next month. After all, summer is drawing to a close, and people will be coming back to their desks after Labor Day. This should bring about an increase in trading volume, and in theory, increased buying interest. However, September is also the worst month of the year for the GDXJ historically, with an average monthly loss of 5.6% since 2009.
September stands out as a particularly poor month for GDXJ historically
Sentiment is the worst I have ever seen in the junior mining sector (yes, arguably worse than 2015). Companies are canceling conference attendance plans, investors don’t even bother waking up to read company news releases anymore, bashers are out in full force, and almost every set of drill results is a liquidity opportunity.
Meanwhile, the gold price is holding above $1900, and across the junior mining sector, we are seeing some of the best exploration results I've ever witnessed. Moreover, there is the promise of more good results to come throughout the fall.
Put plainly, the poor price action and extremely weak investor sentiment is in stark contrast to the fundamental reality.
At its core, the junior mining sector is extremely dependent on investor risk appetite, and to a lesser extent investor sentiment towards precious metals, namely gold. Unfortunately, the cost of capital has notably surged over the past couple of years, thereby diminishing investor risk tolerance. Indeed, when one can achieve a 5.50% return with virtually 'zero' risk, it sets the bar that much higher for considering alternative investments.
In many ways, the current environment is reminiscent of the summer of 2018. Those that have been around more than a few years will remember that 2018 was marked by some notable discoveries and some impressive junior mining stock run-ups on the back of these discoveries. Some of the big stories of 2018 were:
- Sokoman Iron
- Great Bear Resources
- Westhaven Ventures
- Amex Exploration (drilling took place in November/December 2018, with the discovery announced in January 2019)
Sokoman Iron (May 2018 to August 2019)
Sokoman jolted awake a dreary junior mining sector in July 2018 with bonanza-grade drill results from Newfoundland
There were others, such as Aben and Golden Ridge, that experienced short-lived rallies based on positive initial exploration results. Of these companies only Great Bear proved to be a raving success. The jury is still out on Amex and Westhaven (although both stocks are well off their all-time highs), and Sokoman has made a full round-trip due to a significant amount of dilution in the last five years.
What stood out about 2018 is that the gold price was extremely depressed (falling as low as $1167) but for those who were good stock pickers and chose wisely, it was a tremendous market environment for catching huge winners. Share prices and valuations were extremely low, making the eventual upside that much greater when companies announced big drill results.
I hate the expression “stock picker’s market” but that is what the junior mining sector is today. There are some winners, but they are few and far between. The junior mining speculator must be more selective than ever.
In 2018, gold bottomed in August and proceeded to rise ~75% over the next 24 months from $1167/oz to $2089/oz:
Markets do not repeat exactly; however, they do rhyme, and the situation is similar enough to August 2018 that I can't help but view the current risk/reward opportunity as compelling.
DISCLAIMER: The work included in this article is based on current events, technical charts, company news releases, and the author’s opinions. It may contain errors, and you shouldn’t make any investment decision based solely on what you read here. This publication contains forward-looking statements, including but not limited to comments regarding predictions and projections. Forward-looking statements address future events and conditions and therefore involve inherent risks and uncertainties. Actual results may differ materially from those currently anticipated in such statements. This publication is provided for informational and entertainment purposes only and is not a recommendation to buy or sell any security. Always thoroughly do your own due diligence and talk to a licensed investment adviser prior to making any investment decisions. Junior resource companies can easily lose 100% of their value so read company profiles on www.SEDAR.com for important risk disclosures. It’s your money and your responsibility.