The situation looks bad for the junior mining, crypto and blockchain heavy TSX-Venture exchange.
Take a look…
So is there a saving grace? Maybe.
On a cumulative basis, mining companies have better cash positions now than they have in the last six years. Below is the cumulative cash position for the TSX-Venture mining sector since 2004.
Cumulative cash positions in the sector today total over CAD$2.2 billion. This is the most cash held in companies’ bank accounts since the end of the bull market in 2012.
Taking a deeper dive into these cash balances is important to see the true health of the mining sector. Below is a chart which shows the median cash position for each year since 2004.
The current median cash position is a little over CAD$400,000. The cash position has been improving since the bear market low in 2015. Take note that in the mining world, $400,000 is peanuts. To be frank, it is barely enough to keep the lights on. Let alone create any shareholder value.
(Side note: I always get the comment “Yeah, but Marin, we are going to bring a major to joint venture in our project”.
Good luck.
The smartest prospect generators never allow themselves to have less than $2 million in the bank. The majors know how to read a balance sheet. And they will use the limited cash balance to their advantage.)
No meaningful mineral exploration can be done with a couple hundred thousand dollars. Even if the company comes up with positive geophysics or grab/trench samples, more money will have to be raised to complete further exploration.
More money means share dilution. Then the share price will suffer. And so will the shareholders.
In the current market, avoid companies with less than $2 million in the bank like the plague. Unless you’re a hard-core gambler.
Being an alligator and selective with your speculations is crucial to making money in the resource space.
Many Mining Companies hold a lot of Cash in the Till
There are more companies with over CAD$5 million in cash right now than there have been since 2012.
This is good because it funds exploration and fuels company takeovers. Below is a chart which shows the number of companies with over $5 million in cash.
This makes for an interesting situation in the markets.
Commodity prices are getting hammered, but there are over 90 companies that are flush with cash.
I am following these companies very closely. A smart management team will use this cash in a bear market to create significant shareholder value.
Should we be Buying New Positions Now?
Not yet.
I have built my core positions in my two core gold companies (I bought a lot more of one earlier this month) and will add more during market weakness.
And I am also fine-tuning my spreadsheets for new positions on my watch list. Many companies are hitting valuations and prices faster than I thought.
The alligator is getting ready to pounce. But not yet.
The old investment saying is “buy when there’s blood in the streets”. But resource investors should take that saying with a very large grain of salt.
Bear markets can last a long time and share prices can always go lower. I believe we have not seen the worst of it yet.
The Gold Price and the U.S. Dollar
Next up, you’ll see a few charts which lead me to believe we are still at least a few months away from a major buying opportunity.
And we have to be prepared for any capitulation that can happen.
First, we should not fight gravity. Below is a chart which shows the price of gold since the beginning of the year.
There is nothing that tells me from a technical or fundamental perspective that the price of gold has bottomed out. This is a very ugly chart with gold breaking below $1,200 per ounce.
The next chart is the U.S. dollar index. This index measures the U.S. dollar against a basket of currencies (Canadian Dollar, Euro, Swiss Franc, and others). Right now, the U.S. dollar index is hovering at YTD highs. A high number indicates U.S. dollar strength.
I don’t see any reason that the U.S. dollar will weaken. I’ve been writing about a strong U.S. dollar for many years now. And I hold about 60% of my cash position in USD. The rest is in Canadian dollars, my home currency.
Over to an important industrial metal, the price of copper is breaking down.
Prices have rapidly deteriorated from $3 per pound in a matter of a few weeks. A chart of year-to-date copper prices is below.
I wrote in my 2018 outlook that I expected the U.S. dollar to be strong, and I cited it as the main factor in suppressed commodity prices. Nothing has changed in this view.
I know I sound like a broken record in saying I want to be an alligator and wait for prices to come to me. But from the charts I have put together, I do not see a scenario in which the market does not deteriorate further.
I am a major bull on copper, and I have been on the board of Canada’s third-largest copper mine for 12 years.
But that does not mean that the price of copper will not experience near-term downward pressure. What we want and what we must prepare for are two different things.
I have built my entire career and net worth off of being patient and a contrarian. It tests my patience often. But readers and subscribers are writing to us in droves.
They’re starting to “get it”.
Where to Target Your Buys in Resources
Right now, there are a handful of companies I would love to own. But I am practicing discipline and waiting for lower share prices. Because why pay more than you have to.
And when the buying starts, there are only two types of companies I want in my portfolio:
- Takeover targets
- World-class companies. These are the ones that I want to build long-term core positions in. And add to my position during periods of market weakness
I know what you’re thinking:
Marin, I don’t spend $100,000 per year on data terminals and services. Where can I find takeover targets?
To start your search for gold stock takeover targets, take a look at our free Market Intelligence Center.
And remember we are in a marathon, not a sprint. Our strategy is proven to work if you stick with it.
Keep your eyes on your email inbox. In next week’s Katusa’s Investment Insights, I’ll reveal a company that’s an alligator on the prowl for junior mining stocks.
Regards,
Marin
