Junior Gold Stocks Raise Anxiety

Published Every Thursday

Financial CrashJunior Stocks Suffer Dramatic Value Losses
The Junior Resource Market has been in a frightening fall since the spring of 2012. Most charts look like the steep downward slope of a ski hill. Even the producing mines, or the established mineral deposit companies, or the producing energy companies show the same type of heart wrenching downward slope in their stock prices.

The senior resource stocks have not escaped this carnage either. Whether it be Barrick which fell from $42 to $29, or Detour which fell from $29 to $19, or Newmont which fell from $64 to $41, barely any stock in the resource sector has escaped the meltdown.

Commodity Prices Show Surprising Strength
Yet, commodity prices have shown remarkably stability during this entire period. Gold, although weak, was only slightly higher 1 year ago. It was slightly over $1,600 per oz; now it is slightly under $1,600 per oz. Silver was slightly under $30; now it is slightly under $28. Copper was around $3.80; now it is around $3.40.

This is quite remarkable. What the market is telling us is that the commodities remain in demand at a more or less stable level, while the producers and creators of those commodities are regarded as relatively valueless. Doesn’t this remarkable divergence seem odd to you?

The Market is the Last Place to Look for Fair Value
As we have remarked so many times, the stock market is a place that ebbs and flows with sentiment and with little regard for fair value. A quote from Warren Buffet is appropriate here: “We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.” Warren knows that emotions like hope, greed, and fear dictate stock prices rather than logic and value. When people are panicky or fearful (as in a bear market) he takes that chance to buy great companies at cheap prices.

If you can’t stand the heat, get out of the kitchen. Sell your stocks and buy Savings Bonds. But for those that take a longer term view, one has to only go back over the last 6 years. In 2006, stocks were on fire and the price of just about every piece of junk was far greater than its value. Yet investors scrambled to buy something, anything. Jump on the bandwagon and get rich.

The market valued stocks at incredibly lofty valuations. Then came 2008, and everything crashed, Nothing had value and investors rushed for the exits. The same stock that was worth $10 in 2006-7, was unloaded at $1 in 2008, and the seller was thankful to get the $1. Once again, the market value bore zero relationship to real value. The sentiment said “Head for the Hills”, and value became zero value.

In 2009 and 2010, the same stock that was worth $1 in 2008 rose to $10 and then to much higher values. Those that did not panic, those that had nerves of steel, made truckloads of money.

A Repeat of the Same Scenario, Again
So here we are again. Resource stocks once again have no value. Investors fear the EU will financially disintegrate, or China will slow down, or King Kong will return. Abandon resource stocks at any price.

Yet, commodity prices, which reflect demand in the real world, are surprisingly strong. Steel is still needed to build bridges. Oil is still needed to power engines. Copper is still needed for electrical wiring. Demand for all commodities remains robust.

Guess What Will Happen to the Value of Resource Stocks?
In due course, probably very soon, there will be a realization in the market (the market that ignores real value) and the price of resource stocks will do what they did the last time this sort of meltdown occurred. They will do what they did in 2009 – they will rise.

Those that ignore this certainty will miss the train. They will buy after these stocks are valued at far more than their real value. Those with intestinal fortitude will buy when stocks are valued at stupidly low prices. History does have this habit of repeating itself – over and over again.

 

Sign up for CymorFund’s Stock Pick investor newsletter at www.cymorfund.com. Articles on specific stocks as well as commentary and explanation of the stock markets and stock trends.

 

 

We may or may not have positions in the securities we name. In making an investment decision numerous factors must be considered including portfolio balancing, timing, cash and capital reserves, asset allocation and other factors. Readers are strongly advised to do their own research. Matters discussed contain forward-looking statements that are subject to risks and uncertainties and actual results may differ materially from any future results, performance or achievements expressed or implied.

Views expressed are opinions and not investment advice. Persons investing should retain a licensed professional to guide them and  not rely on the opinions expressed herein. This report is neither a solicitation nor a recommendation to buy or sell securities. We are not a registered investment advisor nor a broker-dealer. The information contained herein is based on sources which we believe reliable but is not guaranteed as being accurate or a complete statement or summary of the available data.

By Larry Cyna

Mr. Cyna is an accomplished investor in the Canadian public markets for over 20 years, and has managed significant portfolios. He is a financing specialist for private and public companies, and has expertise in real estate and debt obligations. He has assisted private companies accessing the public markets, has been a founding director of public companies and continues as a strategic consultant to selected clientele. He is and has been a director, a senior officer and on the Advisory Board of a number of TSX and TSXV public companies in the mining, resource, technology and telecommunications sectors, and the Founding Director of two CPC’s with qualifying transactions in mining and minerals. He was an honorary director of the Rotman School of Management MBA IMC program, has completed the Canadian Securities Institute Canadian Securities Course & Institute Conduct and Practices Handbook Course, was a former Manager under contract to an Investment Manager at BMO Nesbitt Burns, a roster mediator under the Ontario Mandatory Mediation Program, Toronto, a member of the Institute of Corporate Directors of Ontario, a member of the Upper Canada Dispute Resolution Group, and the Ontario Bar Association, Alternate Dispute Resolution section. He obtained his designation as a Chartered Accountant in Ontario in 1971 and was the recipient of the Founder’s Prize for academic achievement together with a cash reward. He became a CPA in the State of Illinois, USA in 1999 under IQEX with a grade of 92%. He is a Member of the Institute of Chartered Accountants of Ontario and the Canadian Institute of Chartered Accountants. He holds certificates in Advanced ADR & in Civil Justice in Ontario, Faculty of Law, University of Windsor, certificate in Dispute Resolution from the Ontario Institute of Chartered Accountants. Previous accomplishments are Manager of Cymor Risk Consultants LP specializing in Risk Management Assessment; CEO of Cyna & Associates specializing in mediation and ADR; Founder & Senior Partner of Cyna & Co, Chartered Accountants, a fully licensed and accredited public accountancy firm with international affiliations; and was a partner in a large public accountancy firm. Mr. Cyna is well known in the Canadian Investing community. He is invited to, and attends presentations given by public companies usually 3 or 4 times each week. These presentations are intended by the various hosting companies to present their inside story to sophisticated parties and Investment Managers for the purpose of attracting funding, or of making parties more interested in acquiring shares of those companies. Being a part of this keeps Mr. Cyna deeply involved in the current market and leads to numerous investment opportunities.