Gold Loses it's Lustre

  • 19 May 2012
  • National Post - (Latest Edition)
  • PETER HODSON Peter Hodson, CFA, is CEO of 5i Research Inc., a conflictfree independent investment research network.

Despite a rising price for bullion, junior miners are less than glittering.

Hey, junior gold mining investors: Are you having fun yet? The gold sector, as you no doubt know if you’re a participant, has been absolutely decimated this year.

Companies that were the toast of Bay Street less than two years ago are being shunned and treated like vermin. It’s now common to see gold mining companies’ shares down 40%, 50% or even 70% this year alone. This despite gold rising in price for 11 years in a row and it’s more or less flat so far this year.

Sure, market sentiment overall is bad, but it seems junior-gold sentiment is worse than everything else. What are the possible reasons for gold stocks to be singled out more than others? Here are a few possible reasons:

SELLING BEGETS MORE SELLING

Once a sector such as junior golds starts to decline, it can often bring about more selling from both individual investors receiving margin calls, and gold funds seeing redemptions. A massive amount of money has poured into the sector over the past few years, and liquidity works both ways.

We would strongly advise against using margin to buy junior golds, so at least you won’t be forced out of the sector at the exact wrong time.

POLITICAL RISKS

Investors used to have a love affair with Extorre Gold

Mines Ltd. (XG/TSX) — and why not? The company was rapidly expanding its Cerro Moro gold deposit in Argentina, resources were increasing and its share price was surging. However, that all changed earlier this year when Argentina decided to nationalize YPF, the local oil unit of Spanish energy firm Repsol, leading to fears it might do so in other resource sectors.

Extorre’s shares are down 68% this year, and gold investors are now worried about companies potentially losing assets in almost every country outside North America. In some cases, it may be justified. For example, a coup in Mali, where Avion Gold Corp. ( AVR/TSX) operates, has caused the company’s stock to also drop 68% in 2012, and the company has delayed its mill expansion because of the uncertainty.

FINANCING RISKS

Junior gold companies always need a constant source of funds. Whether they need money to drill resource targets or millions (or billions) to develop their mines, most gold companies continually tap the market time and time again for funds. Now that the junior gold market has venomously turned, investors are fretting that some companies won’t be able to raise the necessary capital to grow, or even continue operations.

Even being able to successfully raise money doesn’t necessarily help much. Take Guyana Goldfields Inc.

(GUY/TSX). It recently managed to raise $31-million, at $2.91 per share, but the stock has still dropped 40% from that issue, which closed less than a month ago.

LACK OF TAKEOVERS

In the good ol’ days, junior gold investors could count on a few takeovers to boost their overall returns. But in this market, even that isn’t happening. 

Jaguar Mining Inc. (JAG/TSX) surged late last year on talk of a possible takeover by Shandong Gold Group Co. in a deal that would have valued Jaguar at $9.30 per share. The t a keover di dn’ t go through, and Jaguar’s shares are down 80% this year, it’s reducing costs and it still needs to deal with a nowoverhanging debt burden. To underscore how bad things have become in the gold sector, Jaguar’s shares are now trading for around $1.32.

POOR STUDIES

Finally, bad feasibility and resource studies are also taking the sector down. Canaco Resources Inc. (CAN/TSX) this week released an initial resource estimate that was nowhere near what investors expected. The news dropped the already-declining shares of the company another 66% and it is now down 78% on the year Hana Mining Ltd. (HMG/

TSX) also disappointed investors this week with its update on its Botswana project. The stock dropped 68% on Tuesday and 86% so far in 2012.

What will it take to turn this sector around? Generally, when things are so bad investors get sick to their stomachs, a bottom is usually close at hand. Talking to investors recently, we have to believe we are near — or even past — that point already.

Community Talk

Re: Gold Loses it's Lustre

Contarians have guts and usually win the day especially trading on short term turnarounds like RDK today...nice 12% gain if you bought at .35 and sold at .41. I am in for the longer haul myself. My resource stock favs for bid sitting are #1 choice t.RDK and #2 choice v.GRR. Don't know it, check it out. Was $1.50 a while back and traded volume at $0.75 today which is the strike price of outstanding wts ...my stink bids $0.55 to $0.60 rnge maybe back to the $0.45 PP as anything is possible. Why because its a hidden gem in nicaragua that no one knows about. Likely gobble it up after my RDK takes a run during the next 4-6 mos. Trend on GRR is south so be patient even though their Au-Ag Project is absolutely outstanding with great Geo heading up field work.

Sharing ideas, being frank with crticism, seeing another's pt. of view, and researching for an edge in a co. and its sector are key to success and don't ignore Mngt's Credentials good or bad play a big part in a successful outcome. Pull the pin  o

Re: Gold Loses it's Lustre

As some good cos get beat up , its stink bid time, just make sure not to catch a falling knife as I have of late. OOPS!

Sharing ideas, being frank with crticism, seeing another's pt. of view, and researching for an edge in a co. and its sector are key to success and don't ignore Mngt's Credentials good or bad play a big part in a successful outcome. Pull the pin  o