All of us are aware of the never-ending money printing by the US Federal Reserve/Federal Government and the subsequent decrease in the value of the US Dollar. We look for investments that preserve the purchasing power of our savings. One of the well-known investment vehicles is Precious Metals, Gold and Silver.
Precious Metals investments can be grouped under the following 5 buckets. Based on our risk appetite, we can hold different percentages in these buckets.
#1 Physical Metals. Example: Physical Gold or Silver Bars/Coins
#2 PM ETFs. Example: PSLV, PHYS
#3 PM Royalties/Streamers. Example: FNV, WPM, SAND
#4 PM Majors/Intermediates. Example: NEM, GOLD, AEM
#5 PM Juniors. Example: MGM.V, OIII.V
Buying and holding Physical Metals (#1) is the preferred option for precious metal investors. Non-physical ‘paper’ options like ETFs(#2), Royalties/Streamers(#3), and PM Miners(#4, #5) are not equivalent to Physical Metals(#1). After having sufficient physical holding, you may want to venture into ‘paper’ options (#2, #3, #4, and #5) for safety, price appreciation, and ease of transaction. Within ‘paper’ options, the risk level goes higher from PM ETFs (#2) to Royalties/Streamers (#3) to Majors/ Intermediates (#4) to Juniors (#5). PM Junior Miners are the riskiest investment option in the 5 buckets listed above.
Now (July 2022) may appear to be the worst time to invest in Junior Miners. You are not alone in viewing that way. We can look at long-term charts of PM miner indices like GDX, GDXJ, or HUI and notice similar relentless selling in 2008, 2015, and 2020 as well.
After going through these crashes and subsequent price appreciations, I developed a set of rules for buying and selling Junior miners. I am sharing them in this note.
This is not professional advice. This note is not to convince you to invest in PM Junior miners. It is to share some tips that I learned over the years.
Important Warning:
- Please invest only the savings that you would be fine to lose completely. This is very important. If you doubt my premise, please check out the history of Bre-X Minerals. There are so many Bernie Madoffs in the junior mining space inflating their company mineral resources, using their companies as their lifestyle supporting ventures, and siphoning off investor wealth every year. Behind every 10x or 20x returns, there are 10 to 20 busts. So please be extremely cautious in your approach.
- I maintain two separate brokerage accounts, one for Growth and another one for Dividend Income. I buy Gold/Silver/Uranium Miners in the Growth account only. In this way, I know how much I am putting into high-risk stocks. In addition, I limit my total investment in a PM Junior to 3% of the total in the growth account.
Selecting a Junior Miner:
In general, stock investors decide on their investments based on fundamental analysis or technical analysis, or a combination of both.
In the case of Junior Miners, we need to employ a new analysis to decide on our investments. It is called Lassonde Curve. It is a chart that depicts the lifecycle of a miner from conception to operating a mine. Visual Capitalist has a good picture of this lifecycle that is worth referring to.
It consists of the following stages:
#1 Conception
#2 Discovery
#3 Feasibility
#4 Development
#5 Operating a Mine
The biggest stock price appreciations happen during stages #2-Discovery and #4-Development. Therefore, investors focus on the companies in those stages and get out at the end of the price appreciations. There is nothing wrong with this approach. It is the best approach for growing the portfolio value. For example, my first investment in a PM miner was in AUY – Yamana Gold in 2003. If you look at the long-term price chart of this stock, you will find it appalling considering the amount of money printing by the central banks and the loss in the value of the dollar.
I usually invest in companies that are in stage #2 and stage #5, #2 for price appreciation, and #5 for dividends.
- In terms of purchasing criteria, my order of evaluation has been,
- Location
- Proven Ounces of metals or Intercept Levels
- Enterprise Value / Number of Ounces
- Management track record
- I choose Tier-1 jurisdictions only– Canada, USA Australia, Ireland, and Nordic Countries. I follow this rule for 80% of my holdings. For the remaining 20%, I deviate a little bit if I find a severely beaten down miner. However, I sell it as soon as the stock is in profits or after impulsive moves.
- I completely avoid miners from Western Africa and miners from South American countries like Bolivia, Colombia, and Nicaragua. I fear that as precious metals reach higher and higher values, many countries will come up with outright nationalization of mines or windfall taxes, or other drastic measures to limit the profits of western companies operating in their countries. Recent attempts in Bolivia during Eva Morales or Venezuela during Hugo Chavez reinforced my fear. Therefore, I stick to a few selected countries for investments.
- I normally go for miners with proven resources (minimum of 1 to 2 million ounces of Gold) or the ones with clear intercepts. This is like buying with some sort of insurance. Though any number of variables like stock dilution, mine development cost issues, or management issues can damage the stock price, the probability of miners with proven resources going to $0 is greatly reduced.
Purchasing a Junior Miner:
- Please maintain a watch list and periodically look for any weakness in price. I always invest incrementally (1/3rd or 1/5th at a time). Every one of my multi-baggers went down more than 25% after the initial purchases. We cannot avoid the drawdowns. The only option we have is how we manage it.
- During downturns, many miners sell for very low Enterprise Value per Proven Ounces. That could be the best time to start your position or average down. In addition, we can see some weakness in junior miner prices during November or December of every year due to tax-related portfolio adjustments.
- Please do not chase a stock or get attached to a position. We will always find value somewhere. In junior miner space, pump-and-dump is more prevalent than in other areas. Small investment dollars can move the price quite a bit. Therefore, we need to be watchful of herd mentality.
Exiting Our Position:
- We can decide on our selling based on technical parameters like MACD, RSI, etc. However, due to the illiquid nature of many of the junior miners, these technical parameters may not work consistently. Therefore, I follow the following set of rules that have helped me over the years.
- If I find a miner with good resources in a good jurisdiction, and with good management, I wait for the price to double. Once the price is doubled, I always sell half of the holding and take out the initial investment. I follow this rule without any exception regardless of how attractive the miner looks. This one rule saved me from so many crashes and my portfolio has about 50% ‘free’ stocks. I keep the rest of the ‘free’ holding and hold it until something changes fundamentally.
- Other than doubling in price, I sell the miners/juniors under the following scenarios,
- if the resource levels or ore quality turn out to be questionable (Example: Pretium Resources. I made a good profit on my initial investment, but the questions on ore quality dampened the momentum and I ended up selling it before it got acquired.)
- if the miner gets acquired by another player that has properties outside our areas of interest (Example: SSRM by Alacer Gold. Alacer Gold had a presence in Turkey which was outside my area of interest.)
- I reduce or sell the holdings if the management starts raising funds in inopportune times, does not make progress on exploration/development goals, insiders start selling their holdings, etc.
- I will sell the whole non-physical PM (Gold/Silver) portfolio if and when Dow Jones Index is less than or equal to 3 times the Price of one Ounce of Gold. For example, Dow at 30000 and Gold at 10000/Oz. This is not an arbitrary number. Dow/Gold ratio was equal to 3 in 1934 and 1.62 in 1980. Therefore, I am fully convinced that we would reach a similar level in this decade.
Helpful Resources:
- I check out the websites of the mining companies for basic details on the company. I look for the location of the mines, the total number of proven ounces, management details, and any prominent outside investments in the company.
- I follow the news of the companies on the stockhouse.com website and the conversations on the CEO.CA website. I verify the facts of the conversations before deciding on the investments.
- In addition, I follow few good analysts in Twitter – Don Durrett(@DonDurrett), Surf City(@SurfCity_Cycles), Northstar(@NorthstarCharts), Norvast(@ColinSt30481392), Patrick Karim(@badcharts1)
Final word:
I may be completely wrong in the approach described above. However, I found them to be helpful for my temperament, risk appetite, and investment goals.
Therefore, please do your research and formulate your investment plan before investing your hard-earned dollars.
Please share your thoughts on my approach.
Thank you for reading.