SMALL CAP IDEA: The junior mining suffers ‘medieval ordeal’

The old adage that even in the worst of times the best of projects will win through has never been tested more severely.

Junior mining has for several years been undergoing a kind of medieval ordeal – a death by a thousand cuts – that hasn’t been quite the same as previous cyclical troughs.

Certainly, we’ve not known anything quite like it in 25 years.

What, then, makes this downswing different from all the others?

At the bottom of every investment cycle is a recognizable period called capitulation.

We’re in that period now. But whereas previously, such capitulation phases have lasted one year, perhaps 18 months, perhaps even two years, this time round the downturn has lasted much longer.

And there are as yet, no clear signs that it’s anywhere near over.

Bright acquisition: Shanta Gold looks a potential takeover target after gold production from its Tanzanian mines hit an annualised 100,000 ounces per year

Is the sector as a whole broken beyond recovery? Or is making a statement like that just the mother of all capitulations?

The answer is almost certainly the latter, and that upswing will eventually come.

But it’s far from clear when or how.

There’s an easy illustration to point to the truth of this.

The gold price has broken all records in recent months, as US economic and foreign policy both have continued to generate demand for safe haven assets. So far, so good for the mining sector.

Shares in the bigger companies, like Newmont, Centerra, Agnico Eagle and Barrick have all risen over the past 12 months, as the gold price has boosted margins.

Smaller companies that are in production, like Shanta Gold, Anglo Asian or Caledonia Mining are just about holding their heads above water.

Caledonia’s down a bit (880p) on the past 12 months, both in New York and in London, while now a bid target Shanta (13.1p) is up by more than 20 per cent after a wobble mid-year and Anglo Asian (60.5p) is down by around 30 per cent.

If there is a discernible pattern to be had amongst the majors and the mid-tiers, it’s that investors are buying individual stories, and not sectors.

There were no tides that raised or lowered boats in 2023. It’s every man for himself.

Right at the junior end, the picture is clearer though: bear market all the way.

Some companies have taken evasive action by forming action groups, like the anti-short selling group Save Canadian Mining, which was formed in 2019 by Power Nickel’s Terry Lynch.

There are many ways the shorts operate, but one common pattern involves targeting a company that needs to raise money, driving the shares lower and keeping them low, buying into the funding at an artificially depressed price and then selling later.

Sometimes the shorts don’t bother buying, they just close out, knowing that the company in any case will be forced to discount its own shares just to carry on existing.

It’s a cruel world.

Short-sellers have less sway in a bull market, though, and if only the market would turn, then pressure groups like Save Canadian Mining would have less to fret about.

So, will 2024 see the end of capitulation and the start of recovery?

If there is a recovery, it’s likely to be slow, at least at first.

Because, although the market has stayed open in Canada to a degree that’s not been the case in London, it remains true that if sentiment does improve, it’ll be the better-placed companies with the most marketable assets that take the initial prizes.

A second-phase drill campaign on an already attractive target is more likely to bring the money in than the speculative imaginings of a geologist in an area that’s largely untested.

And there’s also the question of which commodities are likely to signal the upswing.

As we’ve noted, the strength in gold hasn’t particularly favoured junior gold explorers, most of which are struggling to raise funds just to stay alive.

As was the case after the global financial crisis, it’s now no longer uncommon to hear about directors foregoing salaries and wider administrative budgets slashed to the bone.

But on the other hand, there’s uranium.

Here, perhaps is a harbinger of recovery.

In uranium, it’s been possible to raise money for exploration, as CanAlaska demonstrated in November.

And in London, one rare sign of life has been the pending listing as an independent entity of the Athabasca assets of Power Metal Resources (0.85p).

As a project generator, Power Metal Resources was one of the only companies capable of putting together a mining IPO in London at any time during the past 12 months, when it spun out Australia-focused Golden Metal.

Since first dealings last May, shares in Golden Metal have more than doubled to 16.5p helped by some encouraging drill indications.

So, if the Power Metal Resources commodity of choice at the beginning of 2024 is uranium, others take note.

More generally, though, the prolonged bear market in junior miners is likely, in the end, to bring in the bottom fishers.

There will come a time – and many valuations are now so low it may not be long now – when such bottom fishing activity also coincides with some other form of positive newsflow.

Copper, for example, seems to be moving once again to the US$4.00 mark.

A coincidence of significant bottom-feeding activity with an uplift in the macro picture might be just enough of a spark to reignite interest and turn sentiment.

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This post first appeared on Dailymail.co.uk