Juniors are poised to hit the financial wall in 2013. Learn why a still volatile economy is drying up available funding, and possibly creating the biggest contrarian play in mining history…
Explorers and developers are facing a serious predicament: there isn’t enough money to go around.
A combination of stagnant commodity prices and rising costs have made investors queasy and banks leery of putting up cash to keep juniors in business
That in turn has pulled down share prices for a number of mining companies who may not survive to see 2014.
According to data compiled by Bloomberg, 1,273 junior miners with market caps of less than $500 million have enough cash to last just 5.7 months.
A year ago, they would’ve lasted 7.1 months.
Even stock sales, the de facto means for smaller companies to raise funds, have dropped for a third straight year in 2012, Bloomberg noted.
One mining analyst estimates there are nearly 700 companies on the TSX Venture Exchange currently with less than $200,000 in their bank accounts.
In short, most of them are well on their way to the slaughterhouse.
As the juniors continue burning through their cash and funding channels keep drying up, the future appears bleak for this $1.5 trillion industry.
But for contrarians…the investment glass couldn’t be fuller.
You see, despite the widespread depression of company valuations in recent times – an investment opportunity of epic proportions is quietly emerging as a result.
It’s Bargain Hunting Time
With the struggle to get financing and investors shunning high-risk assets, conditions are now conducive for consolidation, says Rob McEwen, CEO of McEwen Mining Inc. and former head of Goldcorp Inc.
This means that cash-strapped miners with solid projects are ripe for a potential merger or as a takeover target by larger companies.
Analysts at Dundee Capital Markets predict that the juniors may sell their assets below net asset value, or look to merge with “rarer” cash-rich juniors that lack flagship projects.
Meanwhile, senior miners looking to shore up their precious metal reserves for the future will likely sniff out the small caps who have already done most of the exploratory legwork.
Fortunately for those who are blessed with a strong financial position during these volatile times, struggling companies can now be picked up for pennies on the dollar.
Needless to say, a fire sale is set to begin any moment now…
Just take a look at the chart below:
Judging by the amount of money the industry has poured into exploration spending the past few years – and with little new reserves to show for…M&A activity could be soaring very shortly.
In essence, this consolidation phase will help weed out the weaker players in a Darwinian sort of way.
By doing so, some are predicting an imminent rebound in the mining industry.
“The market is a bit gun-shy,” says Randy Smallwood, CEO of Vancouver-based Silver Wheaton. “At the same time, you’ve got these undervalued equities that are screaming out that there’s some pretty good deals out there in terms of acquisitions, so I don’t see that [sentiment] lasting very long.”
The moment we see the strong begin to rise to the surface, the industry’s rebound will be nothing short of spectacular.
But there’s yet another signal that’s indicating a mining resurgence is not that far off…
You see, with many investors running scared, corporate insiders are able to gobble up junior mining shares on the cheap.
INK Research is a firm that tracks transactions among corporate executives and directors within their own companies.
According to their research, for every 1 stock currently sold on the TSX Venture Exchange, 4 stocks are being bought by key insiders.
They say that insider transactions often are a strong indicator of which way a market will move in the next six to thirty-six months.
Seeing this level of buying activity, it looks like we’ll be right back in bullish territory in no time.
This is no doubt a huge upside for outside investors as it will allow plenty of time to identify the winners from the ones that are likely to fizzle out.
“Experienced value investors recognize that such periods of investor neglect often give rise to the best deals,” adds INK CEO Ted Dixon.
It’s safe to say that we are indeed in such a period.
Savvy investors take heed.
Yours in profits,
for Top Stock Millionaire