They Have to Sell

In this week's KII:

• The December 30 Sellers: Why investors dump mining stocks they still like
• Don't Wait for December: What I found in 24 winters on Canada's junior stock exchange
• My Shopping List: The two checks a cheap stock must pass before I buy

Pull up your account and find the mining stock that hurts the most to look at.

You still like the company. Someone else owns it too, and his accountant wants it sold by December 30.

Sellers like him are nothing new. A realtor has two words for a house you should move on fast: motivated seller.

In April 1942, four months after Pearl Harbor, a man named Sidney B. Wachtel showed that stocks tended to climb from December into January, and he blamed taxes.

Part of the discount you see this time of year is the seller's tax problem, and that part goes away once he's done selling.

We call it tax-loss selling now, and this year's deadline is less than seven weeks away.

Why Investors Sell Stocks They Still Like

For the seller, a losing stock works like a coupon.

The coupon takes money off his tax bill, because a loss on one stock cancels the tax on a gain somewhere else. He can only cash it by selling the stock.

The coupon also expires, and a Canadian must sell by December 30th. An American gets until December 31.

So he sells, even if he still likes the company. Then the rules keep him away, because buying the stock back within 30 days cancels the coupon.

That creates a seller with a deadline. I want to be the buyer.

What Happens After They Sell

I checked 24 years of the TSX Venture, the exchange where Canada's junior miners list.

• Since 2002, $100 held only from the end of November to the end of February grew to $584. The same $100 held only in the other nine months shrank to about $14.

The climb usually starts in December and it’s usually the Venture's best month of the year. By the end of January, the Venture sits almost 6% above its October close on average, and it rose in 16 of those 24 winters.

Wait for the last week of December and you're usually buying after the climb has started.

This Year There's More to Sell

The Venture gained 65% last year. Investors who sold into that run owe tax on their gains, so they want losses to set against them.

Canadians have one more reason. Canada lets you carry a loss back three years, so if you paid tax on a big win in 2023, this is the last December a loss can claw it back.

This year gave them plenty of losses to pick from. The Venture has lost more than a quarter of its value since February, and rising interest rates did much of the damage.

Commodity prices went the other way. Bloomberg's commodity index is up about 21% this year.

For a buyer, that makes this year's sale deeper than most.

Compare the Stock With Its Metal

A cheap stock still must earn its place on my list. The first thing I check is how the stock has done next to its metal.

• If you own Uranium miners, you're down 20% in a year the metal rose 12%.
• Copper is up 12%, and copper miners have gained only 4%.
• Nickel is up 3% too, and nickel miners are down 30%.

Lithium is the most hated of the lot. The metal is down 19% this year, and its miners have lost a third.

Silver is the exception. The metal has lost a quarter of its value this year while its miners held flat, so the discount isn't there.

In the other four, the stock has lagged the thing it digs up. That gap is where I shop.

Fewer Buyers, More New Shares

The second thing I check is cash, because trading on the Venture is drying up.

• C$7.3 billion of stock changed hands in January and only C$2.2 billion in October, a drop of more than two-thirds.

The companies still need money, including the small caps you own.

In October, they raised C$781 million by selling new shares, about C$1 for every C$3 that traded. A year ago, they raised C$1 for every C$5 traded.

A junior with no revenue pays its bills that way (raising money). If its stock falls 40%, it has to sell two-thirds more shares to raise the same money, and each new share shrinks your slice of the company.

So I buy the miner that already has the cash for its next drill program. I leave the one that has to raise money when nobody is buying.

Marin Katusa’s Shopping List

• I write my list and my buy prices now.
• My list only takes miners that have lagged their metal and have cash in the bank.
• I start buying now, in pieces under my price, and I let the sellers come to me.

The Venture lost ground in 8 of those 24 winters, and that is the reason I buy in pieces and stick to companies with cash.

Wachtel gave this trade away in the middle of a world war. Eighty-four years later, the coupon still expires in December, and the sellers still line up to cash it.

This year the line is longer, and I'll be at the counter with my list.

In Katusa's Resource Opportunities, I own a gold producer that pays me a dividend while I wait.

Get my list right here.

Regards,

Marin Katusa

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