Resource World Magazine

30 www.resourceworld.com O C T O B E R / N O V E M B E R 2 0 1 9 Speculations by Leonard Melman T he past three months have seen a dramatic improvement in the per- formance of both gold and silver. Between mid-June and mid-September we have seen gold move from approximately $1,250/oz to near $1,500/oz while silver has rallied from about $15.00/oz to over 18.00/oz (all figures US$). In each case the prices improved by close to 20%. Given rallies of that magnitude, one might have confidently anticipated large rallies in the shares of mining companies in virtually all categories, but that has not been the case. While the major mining enterprises have indeed delivered outsized gains for the most part, it has been a far different story for many of the juniors. Consider the performance of four mining indexes during the past quarter year. First, we note action in two indexes which primarily focus on major mining companies. VanEck Vectors Gold Miners ETF [GDX-NYSE] has indeed put on a spectacu- lar three-month rally, rising from the '20' area to a recent peak at 31, a gain of 11 index points or about 55%. Action in GDX is confirmed by another well-known index, the Philadelphia Gold/Silver Index [XAU-NASDAQ] which rose from a June low of 66 to a September high (so far) of 102 – or a gain of 36 index points or 59%. Next, we compare those figures to action in two indexes which concentrate more on the junior mining sector. Sprott Junior Gold Miners ETF [SGDJ-NYSE] rallied from the '28' level in mid-June to a recent peak at 36 for a gain of 8 points – or just under 30%. This under-performance compared to the major indexes is more than con- firmed by trading in the S&P/TSX Venture Composite Index – also focused primarily on the juniors – which has simply moved sideways within a narrow trading range for the past six months. The obvious question – and it is a valid one – is: why the discrepancy? Another very relevant question is: will the juniors have a future bright day in the sun themselves? I believe the recent strong rally in the majors relates to the term leverage, par- ticularly in relation to the price of gold. The leverage comes from the fact that an improvement of 'x ' in the price of gold itself can lead to a much greater percentage improvement in the profitability of a min- ing enterprise with ongoing production. One of the most important calcula- tions in evaluating a producing mining company is their all-in cost of mining an ounce of gold (or silver, copper, etc.) In the case of gold, the round number of US $1,000 per ounce can serve as an example. So, when gold was priced near US $1,250 three months ago, one would note a profit of about $250 per mined ounce. However, thanks to leverage, the rapid recent rise to $1,500/oz, gold would now earn a mine net profit of nearly US $500/oz – or a gain in profits of 100% from a 25% move in gold's price. Therefore, investors are likely to pour into the majors or mid-tier producers when they see gold move sharply higher. The same is not necessarily true of the juniors since most of them produce no gold at all. Therefore, there can be no cal- culation of a near-term improvement in profitability and the juniors, for the most part, would remain speculative in nature. However, there is a historic trading pattern well worth noting. In previous great rallies in the precious metals, such as 1971-4; 1976-80 and 2004-11, inves- tors did indeed invest in 'quality' first. However, when it became apparent the rallies had legs, then a speculative bubble in the juniors took place and many of the later moves in the juniors were enormous. For example, during 1973 and 1974, when gold soared from US $50 to US $200/oz, analysts began feeding the higher gold price into the profitability equation for the speculative juniors and many of them soared by, quite literally, thousands of percent. Back then, the more speculative exchanges such as Spokane, Salt Lake City and Denver enjoyed true boom times. The implication from this informa- tion is that the juniors will have their 'day in the sun' when the belief becomes widespread that this rally in gold and silver will be both dynamic and long- lasting. n This material is taken from sources believed to be reliable and is provided for information only. Any investment decision should be made only after prior consultation with investment professionals. Leonard Melman is a financial and political writer who focuses on issues relat- ing to the resource sector. Mr. Melman lives in Nanoose Bay, British Columbia, Canada and can be reached at lmelman@shaw.ca Junior golds will have their day in the sun WHILE THE MAJOR MINING ENTERPRISES HAVE INDEED DELIVERED OUTSIZED GAINS FOR THE MOST PART, IT HAS BEEN A FAR DIFFERENT STORY FOR MANY OF THE JUNIORS.

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