“These are sobering times,” Michael Kosowan told a Cambridge House audience in Vancouver on
January 20th. Michael has worked for Rick Rule at Sprott Global
Resource Investments Ltd. for 13 years and is now located in Sprott’s Toronto
office. Like Rick, he has made a fortune for himself betting on contrarian
ideas in bear markets… But Michael has a warning about 2014 in his speech
below…
There has been a collective exhale as the mining sector began 2014,
marching into the New Year with a strong up move in gold and high hopes of a
recovery.
Although there have been a few bright spots as gold reached $1,275 by
January 26, the ‘bonfire of the juniors’ has yet to occur. Endangered companies
fight tooth and nail merely to survive.
There are just too many companies out there with too little cash.
According to John Kaiser, a mining analyst who has been following the sector
for over 25 years, 1,025 companies out of a possible 1,770 trade below 10 cents
a share while 817 of these companies have less than $200,000 left in capital.1
So What’s Coming?
The big crisis point could come in April and May of this year when the
audited financials must be filed with SEDAR. Credit that was extended in 2013
is unlikely to be extended in 2014, forcing management to dig into their own
pockets which could precipitate a flurry of de-listings.
The current economic reality has fashioned a quality-control system,
albeit somewhat crude and often brutal. The inherently weak or flawed
juniors will likely be removed, leaving a leaner and fitter sector that will be
easier to navigate. The very first to go will be the ones that never
should have made it to the party in the first place – those built on dreams of
a get rich quick scheme, usually by ambitious but misguided geologists without
enough experience.
They will not be easily saved through mergers and acquisitions either.
Most seniors have frozen their M&A activity following an abysmal year of
heart-wrenching write-downs and impairments.
The seniors remain timid and many will be licking their wounds for a
while, even though the damage to their balance sheets is self-inflicted.
Overall, they are not taking advantage of the lower prices to buy juniors; they
are cautious and unaggressive this time around and are being decidedly more
discerning when it comes to acquisitions.
New Reality for Exploration
New finds are going to become ever more critical for the industry’s
future, but exploration is becoming both more complex and costly. A combination
of decreased funding and more difficult exploration targets makes it unlikely
that we will see many new legitimate discoveries this year. Should one
occur the resulting localized success will surely serve to baffle and confuse
investors, who might interpret one exploration win as a signal that the juniors
are all moving up. In fact, some companies can be headed higher while most of the
remaining companies continue their descent.
Get ‘Something for Nothing’
Nonetheless, some miners have taken advantage of this situation by
extracting favorable terms from junior companies at extremely competitive
prices. We are seeing acquisitions made ‘at cost’ and not accounting for the
expenses, headaches or risks that the company has overcome.
For example, B2Gold Corp. signed an agreement in October of 2013 to
acquire Volta Resources Inc.2The
deal valued Volta at $63 million, which is approximately what the company spent
on its drilling program that led to the discovery of a significant resource.
B2Gold received the value of Volta’s success ‘at cost’ of drilling, not taking
into account the risk taken on by Volta’s shareholders prior to the drilling
program and the intellectual capital that went into the success.
Because investment in exploration was relatively low over the past two
decades, there are few high-grade projects out there to be ‘scooped up’ by a
major. As a result, there are buying opportunities in companies that are
not glaringly obvious in terms of grade, size, and ease of extraction.
This also puts a higher premium on the ability to scrutinize and assess
these projects. Even the better-looking projects, for that matter, need to be
held to stringent scrutiny as to whether they make financial sense!
2014 will be the year of sobriety and bifurcation. The weak will simply
not survive; many companies will disappear. These are very sobering times.
The sector is still being culled and a rise in the price of gold will
not necessarily save them; do not bet on a high tide floatingallships
this time around.
Selectivity is key, which means having the best information and keeping
a close eye on developments in the sector. We should expect a lot fewer companies
in the space after 2014, and even by the summer, so the months ahead could
prove to be a highly determinant period for investors in the sector.
Michael Kosowan has recently moved to Toronto Ontario, where he has joined the Sprott
Private Wealth team. Having worked alongside Rick Rule since 2000, he will now
lead the investment advisory initiative for resource equities in the Toronto
office. Michael holds a Master’s Degree in Mining Engineering and is a
licensed professional engineer. He is also a registered representative in both
Canada and the United States.
With his extensive experience in resource
investing, Michael is able to provide insights and knowledge critical in helping
clients select and understand their investments.
You will find Michael as a speaker at several
natural resource conferences, on webcasts and radio interviews discussing the
resource sector.
To contact Michael e-mail him atMKosowan@sprottwealth.comor call 1.866.299.9906.
1http://resourceworld.uberflip.com/i/229125/31
2http://www.cbc.ca/news/business/b2gold-to-acquire-volta-resources-in-all-stock-deal-1.2254366
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