It was negative 16 degrees Celsius when I landed at Pearson Airport in Toronto. Ice covered the ground, as well as the shores of Lakes Ontario, Huron and Michigan.
As a former resident of Toronto, I recall the winters quite vividly. And flying over the frozen lakes and ice-laden farms affirmed my decision to move to a warmer climate some 30 years ago!
I was headed to PDAC, the Prospectors and Developers Conference in the heart of Toronto.
The huge convention facility was absolutely packed with thousands of attendees. And it was full of company banners from any and every firm that’s involved in mining for resources (apparently marketing budgets are still intact).
What was most shocking about the turnout, however, was the number of junior miners that were in attendance. The reason for my surprise is simple…
I couldn’t believe so many were actually still in business! Here’s why…
The Beginning of a Consolidation Trend
The junior miners are all struggling. And even though gold prices have rallied, many won’t make it past the current year.
They’re undercapitalized, top heavy with executives, and most are simply prospectors with no real source of income other than raising funds on a regular basis from investors.
Indeed, they’ll continue to raise funds at more depressed levels. And they’ll be receiving the money from venture groups – under brutal terms, of course, that the juniors will never recover from.
So, even when the market for miners does take a legitimate turn, many of the juniors will be sitting on so many shares outstanding that even a significant resource find will do little for valuations.
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Ultimately, this sector is still in need of a major shakeout, and 2014 could (and should) be the year for that to happen.
My friend Rick Rule and several others estimate that more than half of the companies in the junior mining sector are little more than dead weight, grasping at straws for survival.
But that could turn out to be excellent news for us, considering that it’ll soon be fertile ground for consolidation and purchasing assets on the cheap.
That’s not the only opportunity I noticed, however…
Senior Miners Pull Off a 180
On the other end of the spectrum, the senior mining companies look like they’re finally getting their acts together.
The first step was coming clean last year with the “true” cost of getting an ounce out of the ground.
You see, for decades, we relied on the companies to provide hard data about costs. Instead, what they provided was completely understated numbers.
Numbers like $300 per ounce were commonplace. But then a funny thing happened…
Gold prices soared to $1,900 per ounce, yet these companies weren’t reporting stellar results – and many were still reporting numbers that were marginal at best.
Imagine being in a conventional business where your retail price increased six-fold in 10 years, yet your profits increased by only a factor of one or two.
Of course, the issue was that the cost per ounce for these companies was three to four times what they were stating. So they were looking at costs that were closer to $800 to $1,200 per ounce “all in.”
In the end, this turned out to be the perfect recipe for a massive price correction, which we witnessed in 2013 when gold prices crashed.
Now, in the next issue, we’ll look at the plays in the sector that aren’t only benefiting from the recent rise in prices – but will also provide stability if prices head south again.
And “the chase” continues,