A Contrarian’s Dream
The junior resource sector is trying to dig itself out of a bear market that has even the most experienced and successful contrarians “bored” with the sector.
The backdrop is one that I’ve described as a contrarian’s dream and one that I’m personally taking advantage of by increasing positions in my favorite companies.
Let me explain how we got here and where we’re going.
After years of misallocating capital, majors in the resource space essentially went on strike went it came to the exploration arms of their operations.
Mines were “high-graded” for years with companies choosing to mine out the richest — highest-grade and highest-margin — parts of their deposits instead of investing in exploration drilling to replace reserves.
This was done across the metals sector. Pick a commodity… Gold, silver, copper, etc.
While these companies were busy picking apart the best parts of their deposits, central banks around the world were engaging in a coordinated effort to reinvigorate the world economy by injecting massive amounts of cheap money into the system.
The result is one of the longest bull markets in the history of the U.S. stock market. The cheap money incentivized companies to buy back their own stock, which only added to higher stock prices.
Throw in triple- and four-digit returns in cryptocurrencies and cannabis deals, and speculators’ appetite for risk in the risky junior resource sector — where most of the exploration happens — became nearly non-existent.
In the meantime, the base metals markets were quietly building a bottom and then springboarding into a bull market.
Take a look at a five-year chart of copper:
Despite the clear trend, an interesting thing happened. For the most part, the stocks of companies that produce these metals did not keep up. The explorers were treated as a nuisance.
Take a look at a five-year chart of Freeport-McMoRan (NYSE: FCX), a copper bellwether here in the U.S.:
The company did what many companies did during the last commodity super cycle. It misallocated capital, took on too much debt, and had to sell off some of its better assets at fire-sale prices just to avoid bankruptcy.
Freeport was far from a one-off.
Here’s a five-year chart of Polish copper producer and mining giant KGHM:
The better management teams in the resource space recognized the opportunity and rushed to buy the best assets in the space for pennies on the dollar.
Just as the base metal stocks were starting to pick up momentum, talk of trade wars hit the headlines and prices for both the metals and the companies supplying and exploring for the metals took another hit.
It’s exploring for a metal where, just today, Reuters reported:
“...inventories in China languish at their lowest in a decade.”
The macro backdrop could not be better.
The most recent pullback provides a perfect entry point into this little-known junior which already has a discovery on its hands but will be drilling for new discoveries within weeks.
This company played the pullback in equity prices perfectly and bought an asset — in a safe jurisdiction — from a company that had already spent three times this company’s current market cap.
The management team cut its teeth exploring for and discovering this metal and has decades of experience doing so.
The best part is the company is not only using its field experience to make new discoveries, it’s using a technology that’s common in the oil & gas industry but had never been used before in this part of the world to look for these types of deposits.
Infrastructure around the world is crumbling.
Demand for this metal is set to surge at the same time that supply is dwindling. The tiny market cap of this small explorer sets shareholders up perfectly if it’s able to prove additional discoveries in the rich district it will be drilling soon.
It’s a perfect combination of factors and one I’m personally invested in.
To your wealth,
For the past decade, Gerardo Del Real has worked behind-the-scenes providing research, due diligence and advice to large institutional players, fund managers, newsletter writers and some of the most active high net worth investors in the resource space. Now, he is bringing his extensive experience to the public through Outsider Club, Junior Mining Monthly, and Junior Mining Trader. For more about Gerardo, check out his editor page.
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