Here’s Why Your Resource Holdings Are Struggling

Here’s an analogy, to help illustrate and give you a better feel for what’s happening in the “junior” resource space…

Have you ever read up on paleontology? If not, did your children go through a phase when they liked dinosaurs? Heck, did you see the movie Jurassic Park? My point is that way back in the age of dinosaurs, tiny mammals lived in the brush, barely surviving amidst the big feet and sharp teeth of much larger dinosaur critters.

I mention this because today, like back then, small-cap resource companies live in an investment ecosystem dominated by big beasts. That is, in general, when people say that “the stock market is up,” they often mean the Dow Jones index is up. Or that the S&P 500 index is up. Or that the Nasdaq is up… more or less. They mean that indices dominated by big companies are up.

But that may not be the same for your smaller resource holdings…

Let’s digress, for a brief moment. Even though the stock market is “up,” is the overall economy — the rest of the world, so to speak — doing well, as reflected just by major indices? Or is something else at work? Not to get too metaphysical, but are you seeing what you think you see? Or do you see what others are telling you to see?

Along those lines, it helps when the Federal Reserve pumps liquidity into the deep canyons of Wall Street, to the tune of $85 billion per month. Investment bankers can make their yacht payments, although it’s uncertain how much of the cash sloshes down the sluice to Main Street.

The Small-Cap Funding Drought

Indeed, we have the ongoing issue of how to encourage business creators and developers of the world, many of whom are starved for capital. Or to change metaphors, there’s a drought of funds for small-cap plays.

Despite the aforementioned Fed funds, and the ensuing Wall Street ebullience, one of my junior resource acquaintances recently emailed me. He was depressingly blunt, stating that “In my 44 years of working with small-cap companies, public and private, I have never seen a time more difficult to raise funding.”

In the resource space, when people talk about the health of, say, the mining industry, often as not they refer to well-established, deep-pocketed titans, with large cash flows, like BHP Billiton or Rio Tinto. Big guys. But the big guys are in a far different boat than the small-cap guys.

When discussing gold, much of the conventional wisdom focuses on the likes of Barrick or Goldcorp, etc. It’s an entirely different financial environment for the small guys, the little developers or prospect generators.

When people discuss the oil biz, poster children include Exxon Mobil, Chevron, BP or Shell or service companies like Halliburton or Schlumberger. More big guys. Again, the small developer guys are hurting for funds.

Covering the Resource Space — Big and Small

Consider how many analysts follow Exxon Mobil or BHP Billiton. Hundreds. The investor list includes pension funds, hedge funds, sovereign wealth groups and family offices across the world. How many analysts cover a company like, say, Schlumberger? Many dozens. And so it goes.

Basically, it’s day-to-day coverage of big guys that serves the big money of the world and seems to “make” the big news while setting big market perceptions.

Of course, it’s not hard to understand why much of the media coverage of junior plays is what it is. The investment bank analysis, brokerage research and such all focus on large plays, because it’s simply more cost-effective to write reports on large companies with big market caps and many shareholders.

In this sense, it’s similar to why natural history museums are filled with skeletons of big dinosaurs. That’s what people want to see, so curators give it to them.

But what about these small-cap juniors — similar to those little ancient mammals running around on the forest floors of the Mesozoic Era? If you spend even a little time dealing with the overall junior investment space, you quickly realize that it’s company-specific. The share price points, and future prospects for success, are all over the map.

One company can hold fabulous acreage in the oil or mining patch with a great project, strong management and money in the bank. And its share price might go nowhere. Another company can be much more problematic, yet its share price soars because of all manner of investor psychology.

On the best of days, it’s difficult to say which of the small resource guys will survive, evolve and build their own niche within the future business environment. That’s why I spend so much time doing my own research, meeting with management teams, traveling and visiting sites, reviewing other outside data and more.

Looking for Basics and Constants

I look at a number of basic items every day. Even in the most fluid of times — in good and bad markets — I keep an eye peeled for constant reference points.

For example, right now the gold price is floundering under $1,600 per ounce, just slightly more than the price of platinum. Silver prices are in the $27 per ounce range. For good measure, copper prices are hovering near $3.50 per pound.

Could precious metal prices tumble? Well, anything is possible, especially if the global economy unwinds — always a possibility.

Still, I think that the market has badly underpriced the fact that central banks across the globe (except for dumb ones, like in the U.S. and Britain) are buying gold and silver. If the U.S. had smart policymakers, the nation would be buying gold and bragging about it.

Indeed, China’s central bank is breaking records and (quietly) accumulating gold hand over fist, while Russia is also building a gold stash — and bragging about it.

OPEC’s Energy Problem

With energy, a barrel of West Texas Intermediate (WTI) crude oil sells for around $95 per barrel, while oil from the geographically stranded, landlocked oil sands of Alberta goes for much steeper discounts — into the $80 range, and even into the $70s per barrel.

Meanwhile, Brent Crude — against which many international OPEC contracts are set — is hovering in the $105-110 per barrel range. On this point, my hunch is that even with Brent near $110 per barrel, OPEC managers are sleeping fitfully.

Why? Because every new barrel of WTI and Canadian oil — of which there are more and more, thanks to fracking — displaces a barrel of OPEC oil in the North American market. Thus, the U.S. is importing less and less oil, and that’s not just a temporary thing. It’s a long-term trend. Because of new technology, the “new” barrels are coming.

Yet OPEC barrels are also still coming to the surface, every day, in fields across the Middle East, Africa and elsewhere. That OPEC oil has to go somewhere, and many of the barrels are going to Europe. There, they place downward pressure on the Brent price.

The bottom line is that OPEC is big and important. Collectively, OPEC players produce a lot of oil. But to paraphrase the late Paul Harvey, the “rest of the story” is that OPEC is losing pricing power over its oil.

Sure, any OPEC nation is welcome to close the valves, starve the markets for oil and help goose the Brent price upward. And then that nation is faced with selling less oil, even at a higher price. How long can that work?

More of That Big Picture

Let’s sum up. After the first quarter, the “big” indices are up, which is good if you invest heavily in big index kinds of companies. Still, the name-brand indices may not reflect the underlying lack of strength within the economy.

Yes, Wall Street is doing OK, but Main Street needs help. Business formation is slow, and many firms are starved for capital — including many small-cap junior resource plays.

Meanwhile, energy prices are holding steady. Plus, through it all, the dollar is chronically mismanaged. The rest of the world mistrusts the dollar enough that most foreign central banks — certainly the ones that matter — are stocking up on precious metals. That’s good for the long-term prospects of gold, silver and platinum.

Hang in there. Stay tuned.

Best wishes…

Byron W. King

Original article posted on Daily Resource Hunter

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Byron King

A Harvard-trained geologist and former aide to the United States Chief of Naval Operations, Byron King is our resident gold and mining expert, and we are proud to have him on board as the managing editor of Whiskey & Gunpowder.

This “old rock hound” uses his expertise and connections in global resource industries to bring...

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