Gold News

Junior Mining: Destroyer of Wealth

Just what is the junior miners' problem...?
THOM CALANDRA was co-founder and chief columnist of MarketWatch before it was sold to Dow Jones in 2005.
After taking a few years off, he returned with The Calandra Report, a mining-focused newsletter. Here he speaks Hard Asset Investor's sister site, IndexUniverse...
IndexUniverse: When it comes to junior gold miners, geographically, where in the world are you investing?
Calandra: If you're in an ETF like GDXJ [the Market Vectors Junior Gold Miners] or GDX [the Market Vectors Gold Miners], you're all over the world; doesn't matter which ETF, whether you're investing in the majors or the minors. The indexes that underlie gold miner funds usually have at least 10 companies. For perspective, a new index running out of Germany that a friend of mine, Michael Koch, started about six months ago, has 80 companies, and the geography is everywhere.
But let's just say you're in the juniors. Speaking just in terms of GDXJ, you're going to have Kinross; you're going to have probably Yamana Gold, so you're going to be in Latin America, Central America, North America, Asia. You're going to be in every single jurisdiction, whether they're safe or not.
IU: Then junior gold miners are very much a global investment?
Calandra: It's totally fair to say that. With any ETF, unless it's totally specialized, you're getting the whole melting pot.
IU: Junior miners are considered to be a more speculative investment than an actual established mining fund. Why is that?
Calandra: Because some junior miners have zero production! Now, let's say the junior miner actually has production. Lately, practically no one in the world has been able to make good on their promises to lower the production cost of gold. Add to that the current uncertainty about the price of gold – it's not $1900 anymore, it's back to $1275.
With junior miners, it's not just volatility – they've gotten crushed. Recently, they've probably hit their lowest point ever, or close to it.
IU: Are junior miners just silver and gold?
Calandra: No. When people say "junior miner," they mean everything – platinum, palladium, copper, nickel, rare earth metals, even the energy companies you can say are juniors. And most of them aren't miners; most of them are prospectors. Furthermore, most of them really aren't even juniors. Most of them are like micros.
What was that old term? The "penny dreadfuls". Nearly all of them are becoming penny dreadfuls because their stock prices are as low as pennies.
IU: A colleague referred to junior miners as "investors' favorite way to lose money." I take it you'd agree with that?
Calandra: Well, my wife says I'm the great destroyer of capital wealth. And it's true. We had some great years up until about 2009. This whole downturn in the resource equities started in February or March 2011. So you've had almost three full years of down. It doesn't matter how well you run your company. Add to that the fact that, in the meantime, everything else in the stock market universe has gone higher.
It's painful to stick with this. I know I've stuck with almost everything in the last five or six years, and I can tell you just the value of that portfolio, which is almost 100 percent resource equity, is down 60 percent in three years, easy.
IU: What are we looking at when we say "resource equity"?
Calandra: Anything that produces or prospects metal or energy. Gold, silver, copper, platinum, nickel, oil, some natural gas. Also, some specialty metals like molybdenum or tantalum.
IU: If the downturn's been going on for so long, why do people keep investing in these resource equities?
Calandra: Apparently, not too many people are investing. It's beyond depression. Why? Maybe a better question might be, When are people going to start coming back to the sector so that we can see a rising trend again?
I keep thinking, oh, it's about to happen. And then the promise fails, the potential fails. I don't know. I think operating costs have to continue to fall, so you need to have a lot of companies producing gold, and it needs to cost them $800 per ounce not $1100. But that's not happening.
IU: Why the broad abandonment of metals production investments?
Calandra: The fact is that there are other things that are very attractive out there, such as technology, like Internet companies. Also, inflation's usually good for gold, but right now we have a pretty tame pace of inflation. Just looking at North America and parts of Europe, we're probably only running 2.5 to 3.5 percent inflation.
Plus, when the Dollar is still relatively strong, it's still a safe-haven currency; people still flock to the Dollar. When the Dollar is strong, gold is weak, period.
My favorite reason, though? Resource equities over the last five or six years just issued way too much paper. They all thought this was going to go on for a long time, and from about 2002 to 2009, they just kept raising more and more money and issuing equity. The conclusion? Now, you can't even figure out now how much paper is out there.
Everyone keeps saying the market's going to contract; companies are going to disappear; that's good for the market. But they never disappear. They always come back in some other bizarre form.
IU: Is the endgame for junior mining companies to get absorbed by a major?
Calandra: Yes, almost always. But if there are 10,000 of these companies in the world – which there are, publicly traded – then 9,500 of them will never produce one speck of metal.
IU: Is there a foreseeable solution to the "junior miners problem?"
Calandra: I would love to see some acquisitions between miners before the end of the year. That would definitely help us out. The last time we saw a huge deal was when Newmont bought Fronteer, a Nevada miner, for around $2.5 billion. That was 2 1/2, three years ago.
But I'd love that: Wake up on Monday morning to a handful of mergers and acquisitions.
IU: You think that could ignite the sector?
Calandra: I hope so. It certainly would ignite my portfolio. is a research-oriented website devoted to sharing ideas about investing in the natural resources sector. Published by Van Eck Associates Corporation, the site offers an educational resource for both individual and institutional investors interested in learning more about commodity equities, commodity futures, and gold – the three major components of the hard assets marketplace.

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