Should one occur, the resulting localized success will surely serve to baffle and confuse investors, who might interpret one exploration win as a signal that all juniors are moving up. In fact, some companies can be headed higher while most of the remaining companies continue their descent.
Get ‘Something for Nothing’
Nonetheless, some miners have taken advantage of this situation by extracting favorable terms from junior companies at extremely competitive prices. We are seeing acquisitions made ‘at cost’ and not accounting for the expenses, headaches or risks that the company has overcome.
For example, B2Gold Corp. signed an agreement in October of 2013 to acquire Volta Resources Inc.2 The deal valued Volta at $63 million, which is approximately what the company spent on its drilling program that led to the discovery of a significant resource. B2Gold received the value of Volta’s success ‘at cost’ of drilling, not taking into account the risk taken on by Volta’s shareholders prior to the drilling program and the intellectual capital that went into the success.
Because investment in exploration was relatively low over the past two decades, there are few high-grade projects out there to be ‘scooped up’ by a major. As a result, there are buying opportunities in companies that are not glaringly obvious in terms of grade, size, and ease of extraction.
This also puts a higher premium on the ability to scrutinize and assess these projects. Even the better-looking projects, for that matter, need to be held to stringent scrutiny as to whether they make financial sense!
2014 will be the year of sobriety and bifurcation. The weak will simply not survive; many companies will disappear. These are very sobering times.
The sector is still being culled and a rise in the price of gold will not necessarily save them; do not bet on a high tide floating all ships this time around.
Selectivity is key, which means having the best information and keeping a close eye on developments in the sector. We should expect a lot fewer companies in the space after 2014, and even by the summer, so the months ahead could prove to be a highly determinant period for investors in the sector.
Michael Kosowan has recently moved to Toronto Ontario, where he has joined the Sprott Private Wealth team. Having worked alongside Rick Rule since 2000, he will now lead the investment advisory initiative for resource equities in the Toronto office. Michael holds a Master’s Degree in Mining Engineering and is a licensed professional engineer. He is also a registered representative in both Canada and the United States.
With his extensive experience in resource investing, Michael is able to provide insights and knowledge critical in helping clients select and understand their investments.
You will find Michael as a speaker at several natural resource conferences, on webcasts and radio interviews discussing the resource sector.
To contact Michael e-mail him at MKosowan@sprottwealth.com or call 1.866.299.9906.
1 http://resourceworld.uberflip.com/i/229125/31
2 http://www.cbc.ca/news/business/b2gold-to-acquire-volta-resources-in-all-stock-deal-1.2254366
