A year from now, as many as 1,000 junior resource companies are going to be bust.
If you’re holding one of these stocks, read today’s essay carefully.
Here are the facts…
There are about 1,300 mining companies listed on the Toronto Venture Exchange, the North American home for junior mining stocks. These companies have a total market value of $20.8 billion. That’s about half the market value of the entire Venture.
[ad#Google Adsense 336×280-IA]Of the 1,300 companies, the largest 10 (less than 1% of the population) represent almost 20% of the total market value.
The largest 100 (less than 8% of the population) total 57% of the market value.
And the largest 250 (20% of the population) total 77% of the market value.
That leaves over 1,000 companies (80% of the population) with just 23% of the market value… and those companies are in deep trouble.
Junior mining companies are unlike any companies you are likely to run into in the “normal” stock market.
Junior miners burn through capital in an attempt to make an economic mineral discovery.
Few actually manage that feat… But the ones that do, create value like almost no other investment in the world. It’s not uncommon to see a company rise 10-fold in value upon making a discovery. And that’s what fuels investment into the sector against incredibly long odds.
But the majority of publicly listed junior miners are traps for unwary investors. These companies exist merely to fund the fabulous lifestyles of CEOs and management types. I’ve seen these folks firsthand, and they live large at investors’ expense. But the reckoning is near.
I believe that over the next few months, we’re going to see a massive wipeout among the small 80%.
As I said, the junior miners burn through cash. The only way for these companies to refill the till is through issuing new shares.
And right now, there are no buyers. Investors who would normally line up to give their money out to junior miners are long gone. There is a cash-drought of historic proportions.
So most of these companies couldn’t raise capital right now at any price. Only the very best projects, run by the very best management teams can raise money… and then only at cruel terms.
There’s a purge coming. Shares of the smallest, poorest companies will fall below a penny. They’ll get delisted and disappear. All the invested cash will go to money heaven…
It’s pretty easy to know if your investments are at risk. Find out how much cash the companies you own have in the bank. Then compare it with how much they plan to spend this year. If the budget is bigger than the bank account, get out now. You can get all this data online or give the company a call. But don’t wait too long… Things are coming to a head soon.
In the long run, though, this is a positive development.
Here’s what my friend and fellow geologist Brent Cook wrote about the looming crash in his most recent Exploration Insights newsletter:
At the end of the pain there will be a much healthier and smaller herd of juniors headed by competent people, and what money is left will be focused on these successful survivors.
Only when (most of) the riff-raff is cleaned out of the system will new money wake up again to the astounding fact that, “Hey, by golly, the world needs metals and cannot economically meet demand without new deposits. There are billions of people that still want a house and a refrigerator.” At that point we will see the survivors take off again.
Investors need to remember that all resource investing is cyclical. The looming devastation among juniors means we are close to a bottom.
And when things can’t get any worse, they have to get better.
Good investing,
Matt Badiali
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Source: The Growth Stock Wire