{"id":1153422,"date":"2019-12-04T13:39:38","date_gmt":"2019-12-04T19:39:38","guid":{"rendered":"https:\/\/juniorminingnews.com\/?p=1153422"},"modified":"2019-12-04T13:39:39","modified_gmt":"2019-12-04T19:39:39","slug":"a-crash-course-in-junior-mining","status":"publish","type":"post","link":"https:\/\/juniorminingnews.com\/?p=1153422","title":{"rendered":"A Crash Course in Junior Mining"},"content":{"rendered":"
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Collin Kettell
\nPalisades Goldcorp Ltd.
\ncollin@palisades.ca<\/p>\n

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A Crash Course in Junior Mining \u2013 what mining and technology share in common<\/h1>\n

Last week I spoke about\u00a0the impending junior mining mania that will soon unfold<\/a>. This move will be violent, extreme, and in many cases, the gains produced will be life changing.<\/p>\n

This week I want to explore how the junior sector operates and how\u00a0it fits into the overall commodity puzzle. In order to do so, I will draw\u00a0a direct analogy to the tech space. These two sectors independently\u00a0represent the two most volatile markets in the world and surprisingly\u00a0have a lot in common.<\/p>\n

Let\u2019s start with tech. In tech, there are a handful of companies that\u00a0produce a majority of the sector\u2019s profits and represent the lion\u2019s\u00a0share of the sector\u2019s market capitalization. Think of Google ($GOOG),\u00a0Apple ($APPL), Amazon ($AMZN), Microsoft ($MSFT), and Facebook\u00a0($FB) \u2013 the Giants.<\/p>\n

Next down the totem pole are companies that operate on solid cash\u00a0flow, but lack conglomerate status. They are less known and\u00a0ultimately serve as unsuspecting lunch should one of the top dogs\u00a0get hungry to acquire.<\/p>\n

Further down still are the start-ups \u2013 companies built to solve a\u00a0specific problem. Some of them are known, but generally they are\u00a0obscure and most fail to produce anything that gains market traction\u00a0or longevity.<\/p>\n

Start-ups serve an indispensable function in the technology space.\u00a0They feed innovative concepts and ideas that change the world.\u00a0Almost every technological revolution stems from a start-up. They\u00a0begin as an idea in the mind of an inventor, but ultimately become\u00a0capital intensive and rarely generate profit until maturation. The\u00a0potential monetary prize of these inventions, platforms, or apps is\u00a0exponential and thus warrants serious attention from the Giants.<\/p>\n

The technology ecosystem was not designed like this, but has\u00a0naturally evolved this way due to market forces. Tech Goliaths like\u00a0Facebook and Google are constantly investing in R&D, but they\u00a0simply cannot justify allocating the resources to create 2,000 startups in hopes of finding one gem. And even if they did, start-ups are\u00a0organic concepts \u2013 a result of an inventor solving a problem they\u00a0often times personally encountered.<\/p>\n

For these reasons, tech giants are forced to sit back and watch with\u00a0a checkbook in hand. When a start-up emerges that they deem to be\u00a0critically important, they are willing to pay massive premiums to\u00a0acquire that technology. Think of Google buying YouTube or\u00a0Facebook\u2019s purchase of Instagram. In both cases, these acquisitions\u00a0cost $1B and were thought ludicrous at the time due to a lack of\u00a0profit. They now contribute as massive profit centers for both\u00a0companies.\u00a0Investors trying to value technology start-ups on cash\u00a0flow, or lack thereof, possess a fundamental misunderstanding of the\u00a0sector.<\/em><\/p>\n

There is of course the rare case where a start-up makes it through\u00a0the maturation phase on its own. Facebook was famously offered\u00a0$1B by Yahoo, but declined the offer. Uber ($UBER) has not had a\u00a0credible takeout offer and is now public, but a sustainable cash\u00a0flowing model has yet to be demonstrated.<\/p>\n

Moving to mining, there similarly exist a handful of companies that\u00a0make up the majority of production and lion\u2019s share of the sector\u2019s\u00a0market capitalization \u2013 Barrick ($GOLD), Newmont ($NEM), Zijin,\u00a0Kirkland Lake ($KL.TO) are some of the names that come to mind.\u00a0These are the Majors, analogous to the Giants of technology.<\/p>\n

A Major\u2019s core competency rests in mining gold from the ground.\u00a0They do occasionally perform grass roots exploration, but for the\u00a0most part, are focused on development and extraction. A Major\u2019s\u00a0share price acts as a direct lever to the underlying commodity.\u00a0Higher gold prices equate to better operating margins, and translate\u00a0into a higher share price.<\/p>\n

A bit further down the ladder are the mid-tier producers. They\u00a0effectively perform the same duty as the Majors, but on a smaller\u00a0scale and as witnessed time and time again, they are lunch for a\u00a0hungry Major. Last week\u2019s acquisition of Detour Gold ($DGC.TO) by\u00a0Kirkland Lake is a prime example.<\/p>\n

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At the bottom of the hierarchical pyramid are the juniors, loosely\u00a0defined as companies with less than a $250M market cap (often\u00a0times below $10M). Juniors are focused on exploring for the mines\u00a0of tomorrow.<\/p>\n

These companies are the lifeblood of the mining business \u2013 without\u00a0them there would be no ounces to replace the depleting reserves at\u00a0operating gold mines. Just like technology start-ups, most of them\u00a0fail. As the saying goes, 1-in-3,000 targets becomes a viable deposit.\u00a0Ultimately those are pretty bad odds and why the majority of juniors\u00a0fail. It is also why most Majors cannot justify grass roots exploration\u00a0\u2013 it would bankrupt their operations.<\/p>\n

For argument\u2019s sake, a 1-in-3,000 success rate might be applicable\u00a0to not just the juniors, but also tech startups. Success in achieving\u00a0that pinnacle of discovery (or market relevance in the case of tech)\u00a0will translate into serious profit for investors.<\/p>\n

But, aside from market\/discovery success, there is a force at play\u00a0that is equally as important and that is the cycle itself. In technology\u00a0today, the start-up ecosystem is robust. Across the board,\u00a0companies have access to capital on terms that are not terribly\u00a0dilutive. This has led to the \u2018unicorn\u2019 nomenclature, reminiscent of\u00a0the dot-com bubble in 1999.<\/p>\n

During the dot-com bubble, money rushed into the sector without\u00a0prudence or precision. The value of tech companies rose in tandem\u00a0regardless of quality, and investors made a fortune. This created an\u00a0epic market bubble. The sector overcapitalized, capital was\u00a0misallocated, and the market ultimately burst. It took a few years to\u00a0come back, but money did ultimately return. The next cycle peak\u00a0occurred in 2008. Today, tech appears once again in the euphoric\u00a0portion of the cycle.<\/p>\n

Mining is even more predictably cyclical. Following the Bre-X scandal\u00a0in 1996, mining began a precipitous decline. The tides turned in 2000\u00a0and began an eleven-year bull market (minus the 2008 crash). Then\u00a0in 2011 the mining market shifted into bear market territory, steered\u00a0by the underlying commodity prices. In 2016, as a reaction to\u00a0extremely depressed prices, the mining stocks rallied. Today, they\u00a0remain depressed. But, positive indicators have emerged such as a\u00a0rally in commodity prices, matched by moves in the Majors.<\/p>\n

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