The subsector is in a vicious bear market, says Dominic Frisby. That means it’s time to scoop up the best bets
Mining is notoriously cyclical. But if ever there was an industry that blows desert hot and arctic cold, it is the subsector of small-cap and early-stage companies known as junior miners. And boy has it been blowing cold. Many of the old hands are saying this is the worst bear market they have ever known, worse than between 2013 and 2015, when junior mining had a near-death experience following the boom of the 2000s; worse than the bear market of the 1990s that came with hugely depressed metals prices at the end of a 20-year commodities downturn, followed by the Bre-X scandal.
Bre-X was one of the scams of the century. The Canadian gold-mining company falsified gold samples from its mine in the middle of nowhere in Indonesia. The stock went up more than 1,000-fold, from pennies to a C$6bn (£3.5m) valuation before the fraud was exposed. The sector went into a prolonged depression, starving it of capital. The story became the basis for the film Gold, starring Matthew McConaughey.
Mining needs capital. It typically takes more than 15 years to take a mine from discovery to production. That’s 15 years of drilling, development and mine building with no chance profit in sight, unless you sell your deposit to someone else, who then has to find the capital to take it into production. Millions, sometimes billions of dollars are needed. There is no immediate return, there is no guaranteed return. Why invest in something with such long time horizons when you can invest in some technology play that could generate revenue in months?
A lot can happen in those 15 years developing a mine. The metals markets can change, from supply shortages sending prices higher to gluts sending prices lower. The money markets can change – interest rates can go up, for example. Politicians might seize strategic assets or impose windfall taxes; anti-mining lobby groups might block development. It may be that after ten years of drilling you discover the deposit is not quite as economic as you had hoped.
The cycle turns
Mining is hard. Many walk away. Then there’s no capital in the sector. With no capital, there’s no new metal supply coming to market. Then there’s a shortage of metal. Then, suddenly, we need to invest. Then capital floods the sector. It all starts to look rosy again. People make lots of money. Proje
