In introductory presentation to the Denver Gold Group Asia Pacific Forum in San Francisco Tuesday, Senior Research Analyst David Mallalieu revealed that small cap metals and mining equities have been outperforming gold and precious metals stocks on a total return basis.
However, he added. The small cap precious metal and mining equities have been underperforming their peer large caps since August 2007.
Mallalieu--who provides research analysis for Geological Resource Partners and also serves as Managing Director of Gaultheria Mineral Services-said that the implied market cap/oz for the proxy of the junior universe has declined by 30% over in the last few months.
He also highlighted several factors that have impacted junior mining company equities including:
· The credit crisis precipitated a re-evaluation of levels of risk.
· Inflation of capital and operating costs are endemic in the system.
· Nationalistic saber rattling is on the rise, which has a greater impact on small cap companies doing business in Ecuador, Bolivia, Venezuela, Mongolia, DRC and others.
· Banking syndicates are not financing junior company projects on reasonable terms.
· Liquidity issues-magnitude in difference in time to free up capital invested in small cap v. large cap.
· Many junior company project stories revolved around recycled projects, whose cash flow margins have not improved even with the increase in commodity prices.
· Companies are punished for success as a project discovery at the junior company level implies equity dilution.
· Investors prefer net free cash flow and low probability of dilution in their mining company investments.
Fortunately for junior miners and explorationists, the current mining reserve situation can also prove to be positive, according to Mallalieu. For instance, symbiotic relationships have developed between explorers/developers and producers. Producers with excess cash flow and requirement for reserves will increasingly serve as ‘banker' and ‘buyer' of small cap companies, he advised.
Meanwhile, Mallalieu suggested that the gap between overvaluation and undervaluation of mining companies is arguably increasing, which presents opportunity for investors.
He highlighted several potential scenarios that could re-energize the junior explorer/developer sector including:
· Discovery of a material deposit by a junior (as was the case with Cerro Negro's Fruta del Norte) could refocus the attention of the investment community on junior explorers/developers.
· Events, such as failure of a large operation or termination of a marginal component of production, could highlight mining supply side vulnerability.
· Base metals prices jump start in anticipation of supply side shortages.
· Astute mergers aimed at creating mid-cap producers, such as the New Gold transaction, and
· Fear and greed reinvigorating the gold price.