Junior mining stocks used to be the equivalent of sleaze in Canadian investment circles. Riddled by stock scandals, rigged share price manipulation schemes and mostly unethical promoters, Canadian junior mining stocks traded on the Vancouver Stock Exchange were literally the equivalent of the Wild West of speculation. The odds of winning on a mining stock were probably worse than a blackjack game in Las Vegas.
But starting in 1999, the Vancouver Stock Exchange and Alberta Stock Exchange merged to form the Toronto TSX Venture Exchange, Canada’s new home for junior mining, energy and technology issues. To be sure, it’s a much smarter index than its predecessor in Vancouver with far more stringent regulation and greater transparency. However, junior mining remains a very risky and volatile business – if you don’t know how to trade these little rockets.
From their lows last fall, many Canadian junior mining stocks have sky-rocketed more than fivefold from their multi-year lows. Of course, some of these stocks, with no earnings, traded for pennies on the dollar or under one dollar per share, better known as “penny” stocks. And with natural resources in a bull market since 2002, it’s no wonder we’re seeing all sorts of speculation in the TSX Venture Exchange over the last few years as the rally broadens to include all segments of mining, including the base metals and gold.
I’ve always focused on those mining companies with tangible earnings. Otherwise, investing in just sheer speculation, or like I said before, the equivalent of Vegas gambling. Instead, I’ve turned my attention since February to those junior and mid-cap mining stocks with earnings -- some even issue dividends.
The bull market in metals, which includes a vast universe of base metals like aluminum, zinc, copper, nickel, lead, tin and many other sub-metals like molybdenum, have literally gone through the roof since 2002 on a combination of booming overseas demand (mainly Chinese) and the tightest supplies since the late 1970s. Not only have large-cap stocks like BHP Billiton and Rio Tinto rallied sharply over the last five years, but now, we’re seeing more trading volume in the smaller mining stocks in this sector.
A multitude of mid-cap mining stocks in Canada, Australia and South Africa have more than quadrupled since 2003 as the base metals have surged. Though I still like the long-term prospects for some base metals, the majority are worth avoiding at this stage of the economic cycle as wild speculation has gripped the sector. From a risk-adjusted and future profit perspective, the precious metals mining stocks offer far better upside over the next few years as gold, silver, platinum and eventually palladium, all head much higher. In addition to the speculative but incredibly profitable junior-mining issues, many of the large-cap gold stocks are still 25-35% off their highs and are huge bargains at these prices.
Back in 2001, my mentor and friend, Jim Rogers (Investment Biker), urged me to consider the new bull market in raw materials; I was so convinced he was right, that I started an investment service six years ago with The Sovereign Society called Commodity trend Alert (CTA), long before most investors were speculating in natural resources. I’m very proud to acknowledge that our track record has been excellent, despite using no leverage, no margin and barely any options. It’s just pure contrarian, deep-value, natural resource stock-picking in Toronto, New York and occasionally, international markets.
To be sure, there’s still great money to be made in natural resource stocks. The “easy money,” however, has already been made in most of the large-cap commodity stocks; but following steep corrections, which are perfectly normal in this cycle, we’re still buying great companies after a 35% to 40% decline from their peak. At the moment, I’m looking at depressed coal (CTA earned 251% and another 80% on two coal stocks since 2003), energy stocks, and of course, junior and mid-cap mining.
In my recent CTA Dirt-Diggers Report, I plugged several junior-mining stocks. With the exception of one stock, all of them are way up, including one slingshot stock which has surged from under C$1 to over C$2.50 now.
Since February, I’ve plugged four Canadian junior mining stocks – one in diversified base metals, another in copper (and finished molybdenum) and two in the gold-mining sector. The average gain is now 25%, including gains in the Canadian dollar vis-à-vis the U.S. dollar, which has recovered from its six-month correction.
CTA’s top-performing junior mining stock was purchased in November 2005 (a platinum company) at C$1.52; today, that same stock trades at C$3.64.
There are more profits coming our way as gold, silver, platinum and palladium break new highs in this historical bull market. Every short-term correction of the primary trend, however brutal, should be viewed as an opportunity to add to your positions.
