2019: Junior Resource Recovery?

Canada gold, junior mining companies

And here we go!

The junior resources markets had a generally miserable 2018 and many of our readers are very happy to draw a double line under the year. Our cannabis friends were going great guns right up until the actual legalization date in Canada at which point the Canadian Marijuana Index fell by half. Fun on the way up, sobering on the way down.

The one bright spot in 2018 was the precious metals rally in December. Gold went from $1230 to $1280, silver from $14.30 to $15.40. In both cases, this restored a bit of confidence to the markets and we saw a bit of price firming in junior resource stocks.

Historically, the first quarter of the year tends to be good for precious metals and the companies who find them. We’ll see if this holds in 2019. As ever, management and cash on hand matter a lot. A prospective deposit is wonderful but it takes skill and money to develop that deposit. That’s one of the reasons motherlodetv.net tries to interview CEOs so that our readers can get a feel for management’s plans.

The other thing which matters investing in junior resource companies is “entry point” what price did you get your shares at. Coming into 2019 the market is littered with excellent companies with great properties selling at a fraction of their 2018 highs. To take one example, Golden Predator (V.GPY) opened 2018 at over $0.80, today you can buy shares for $0.26. If you dig a little you’ll find that GPY has completed a successful drilling season at its Yukon 3 Aces project, has undertaken important metallurgical drilling at its Brewery Creek project and bulk sampled 7 thousand tons at 3 Aces. That bulk sample has been 10% processed and the first doré bar has been poured 13,261 grams. 13.26 Kg at $41,429 USD per kilo. Call it $550,000 USD and there is much more material to process. It is a stronger company selling at a 60% discount.

The junior resource landscape has dozens of stories of good companies selling at a fraction of their yearly highs. The first months of 2019 look to be the “buy low” phase of the “buy low, sell high” investing mantra.

Meanwhile, to my not very great surprise, the manic phase of the marijuana market peaked just as the reality of legalization hit and the sheer incompetence of Health Canada’s licencing people was cast into stark relief. If a company was betting the farm – or grow-op – on the speedy creation of a regulated legalized market for pot in Canada they bet wrong. Only in Canada would legalization day be greeted with a nation wide shortage of legal pot. And it has not got a whole lot better in the months following legalization. As people point out, you have to grow cannabis and that takes time. If Canada goes the way of the US states which have legalized we can now expect the pendulum to swing the other way. Shortage will be replaced by abundance and then, fairly quickly, glut. As FSD Pharma’s (C.HUGE) Anthony Durkacz put it in an motherlodetv.net interview last year, “recreational marijuana is a race to zero”.

What this means to cannabis investors is that paying really close attention to management, plans and cash on hand is critical to picking winners in the marijuana market. There are a lot of opportunities in cannabis, almost none of them are in straight production for the recreational market. Look for the pharma side – pills, controlled dosage, innovative specific uses for cannabis molecules. And look for companies which are leveraging Canada’s first-mover legalization position to access foreign markets. Once again, entry point is important. Cannabis companies were beaten up in the last quarter of 2018 but some dove a lot further than others.  A company like HUGE, which peaked at $0.90 and is now trading at $0.30, while moving ahead with its plans and facilities is probably worth another look.

So, we open 2019 with a big sale on junior equities in both the precious metals and the cannabis space. Valuations have parted company with value in many cases and there is an opportunity to build positions for pennies on the dollar. As always, prepare for news flow as we come up to the Vancouver Cambridge Conference and even more so as PDAC draws closer in early March. News is the lifeblood of the junior sector but this past year a lot of good news was treated as a liquidity event by the market.

The TSX-V dropped from over 900 to less than 600 in 2018. We’ve seen similar drops in the past and then the market roars back. If we see a sustained improvement in precious metals prices through Q1 2019 we may very well see the overall junior market and especially the stocks which have really been beaten down, return to more normal levels. If precious metal take off – and the secular events of Mr. Trump, China, Brexit, tottering German banks and a host of others could ignite such a take-off – investing in junior resource stocks at current price levels will look very smart indeed.

So, have a Happy and Prosperous 2019 and keep reading motherlodetv.net.

[Note: I have corrected the bulk sample numbers for Golden Predator. This is our error as I did not call Janet Lee-Sheriff to check before posting. She was kind enough to send along the correction.]




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