Resource World Magazine

epilogue David D uva l Are investors shunning Canadian juniors? T hese are troubled times for Canadian explorers, with capital pools for junior companies almost bone dry and no end in sight to the fiscal drought that has plagued this sector for years. In my opinion we've seen a fundamental shift in the mindset of speculative investors when it comes to junior mining stocks which they are shunning for perceived lower risk opportunities elsewhere in the marketplace – much of it on the technology side. The lack of new discoveries certainly hasn't helped foster investor expectations and the reincarnation of old exploration projects that weren't economic in the past and likely won't be any time soon, has seen many investors burned and understandably gun shy about returning to the marketplace. As one pundit said years ago, "You can put lipstick on a pig but it's still a pig." Major companies like Barrick and Kinross have also helped generate negative sentiment towards their junior counterparts, the former having grossly underestimated the cost of developing its Pascua-Lama gold project (which straddles the border between Chile and Argentina) and the latter having grossly overpaid for Red Back Mining's Tasiast gold project in Mauritania. If these companies can't control development and acquisition costs, can less sophisticated and inexperienced juniors do any better? By far, these aren't the only horror stories that create negative sentiment in the mining marketplace: issues cover the entire gambit, from outright expropriation of exploration and mining assets to legal theft via the tax system. In the case of juniors it's hard to reconcile non-exploration related expenses, including management salaries and the cost of regulatory compliance, accounting for such a disproportionate share of cor- 94 www.resourceworld.com porate expenses. Reading the financials of junior explorers with no revenue stream, it's positively shocking to see senior officers earning yearly salaries for managing projects that are sometimes seasonal in nature. Many of them hold positions with other companies under similar circumstances, suggesting the industry has become one huge gravy train for the well connected. This hardly serves shareholders well despite the fact the incidence of outright fraud in this sector is probably very low. As far as their financial reporting goes, clearly there is too much regulatory mandated money being spent by companies chasing too little risk. There should be clear and unambiguous penalties (financial and criminal) for anyone falsifying financial results and the same for misreporting assay results. "You do the crime, you do the time." Southwestern Resources's former CEO, John Patterson, is facing jail time; this will be a test of our legal system's resolve to deal with corporate fraud and bring investor confidence back into the marketplace. It can't happen soon enough in my opinion. Where have all the junior mining investors gone? That's an interesting question and not an easy one to answer. With everyone constantly glued to a touch screen of some sort these days, I've often wondered about the influence of technology on people's investment decisions. Compared to some price excesses in past mining market booms (Bre-X, Diamond Fields), the tech sector is simply in a league of its own when it comes to value determination. Not that long ago, Apple was trading at over $700 per share and was forecasted to reach $1,000, representing a market cap that was higher than the GDP of most countries including South Korea and Indonesia. At the opposite end of the scale are mining stocks – juniors in particular. These type valuations suggest, to me at least, that markets have lost their ability to ascertain real value. The metrics used nowadays to evaluate tech stocks, like Apple, I believe, puts the relevance of our entire business educational system into question,. A major issue with the junior market in particular is liquidity. For the most part, it's non-existent and when there is some activity in the marketplace it tends to be seasonal in nature, heavily dependent on work programs and the announcement of exploration results. With due respect to all you chartists out there, I'm not a big fan of the practice but concede it might be beneficial for trading equities on a short period basis. But chartists need volume to make their investment decisions and the lack of it has kept many of them out of the junior market, which in itself has served to reduce liquidity. Growing up in the Timmins mining camp, people like me understood mining and that's what we invested in. During the Hemlo gold discovery near Marathon, Ontario, in the mid-1980s I recall that Midland Doherty in Timmins accounted for most of the national trading volume in the juniors that were responsible for that world class discovery. The big money from the city slickers came in much later as the Timmins locals were hauling their speculative loot to the bank. With much of the nation's population choosing to live in major urban centres, I wonder about the mining industry's ability to sell their investment thesis to them. It's a vicious circle that probably won't end any time soon and I'm betting there will be a lot of casualties in the junior market before things turn around. n february 2013

• Cover