Tuesday, May 17, 2011

Brent Cook Cautious About Junior Exploration Stocks

After noting that a mini-bubble for both gold and silver has popped, Brent Cook notes that gold producers have underperformced gold itself since 2006.
Specifically, the gold price has gained 193% versus the Gold Equity Index's 75% gain. This data point validates the complaint of many funds that, despite getting the macro picture right (gold) they missed out on the leveraged gains they expected from the mining equities.

With regards to the index itself, it is comprised of a number of "troubled" companies. These troubles stem from permitting, geopolitical issues and just plain cost overruns and bad luck. These are inherent and inevitable in the mining industry—so much so that a sizeable portion of the money that might have gone into the sector in the good old days now ends up in Exchange Traded Funds (~67 million ounces of gold is held by ETFs).
He goes on to say that excitement over finding gold has spilled over into exploration companies with no revenues and iffy prospects having market caps in the hundreds of million of dollars. Companies are finding it very easy to raise capital on the private-placement, even those with dubious properties. He recommends caution with respect to the juniors, suggesting they'll sink a fair bit as the excitement fades.

From what I can tell, there has been a fade in the junior explorers. As is often the case, an underground sector tends to tank when it reaches mainstream attention.

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