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7/24/08

Why are junior miners so cheap right now, anyway?

This is kinda long and rambly, but that's the way it has come out. So be it. In the last couple of days I've had various meetings with various miner-y people in crappy, godforsaken, sunless, dank and miserable Lima*. Luckily the people I spoke with are far more charming than the city itself and I'd like to thank them all for their time (they know who they are). The single thing all the chats, formal and informal, had in common was "why are juniors so cheap right now?" Here's what I learned:
  • Everyone was stunned into amazement by Otto's sharp analysis and explanation of the current PPS situation.
  • What they didn't know was that the hat Otto left at the table while going to the toilet/dessert buffet table/outside for a phone call was, in fact bugged.
  • I therefore overheard them saying "That Otto is a loud-mouth, know-nothing jerk" and things to that effect.
  • But we'll just ignore that, and go back to my sparkling analysis, shall we?
What with the seven types of financial mayhem in the States (ABCP, fannie, freddie BSC, Indymac, and all their cousins and second cousins) the debt market has totally frozen. This means that those junior miners (especially the explorers) need to do placements and dilute the outstanding share numbers in order to raise the necessary money to continue operations. Without access to freely flowing credit, options on raising money have been cut to one. And my stars, don't the Canadian market controllers know it! Here's an example: A few days ago, somebody wrote to me and pointed me towards Virgin Metals (VMG.to), an interesting little explorer with two promising molybdenum/copper plays in Mexico. The share price has been whacked and whacked down to its current 11c price.....
....and the project is "worth" far more than that. But what happens is that if the markets know...I mean KNOW...that Virgen is running out of exploration funds, and at any given moment it will dilute the share base by X million shares, they sell sell sell the stock. Therefore when it's time to go to market, instead of picking up $3m in funds by placing 20m shares at 15, the company is forced into selling 30m shares at 10 to get the needed moolah. So the stock gets hammered again down to 5c before the next tranche, and suddenly there's another 50m shares on board...etc etc. So for those wanting to make money out of this, the answer is to whack these shares down, down and down again. Screw that explorer into the ground.

And then down some more. VGM.to is just one of many, and it's really unfair to pick on that stock right now. Look at how Candente Resources (DNT.to) has been whacked. Look at Baja Mining (BAJ.to). There are literally hundred of stocks out there getting screwed into the ground by blatant, full-on capitalist vultures in Vancouver and Toronto because they know these small explorers can choose between the placement market and nothing. Whack...whack...whack again.

There are even worse examples. Look at Nilam Resources (NILR.ob). It has gone from $2.15 to literally pennies because it lost the right to buy into its main deal in Peru.
And it lost that right because the company couldn't raise a piddly $3m. What happened was that it had a lender all lined up but because the market became so uncertain the lender backed out, leaving Nilam in the lurch. So the vendor pulled out, leaving Nilam with basically bog all. Result? PPS death spiral.

The good news is that this cannot last forever. So when the worm turns (and eventually it will), expect two things:

1) The rebound in these beaten down juniors will be extremely fast (to the point of vengeance), because current market caps on these things bear no relation whatsoever to the asset value of these companies.

2) Those screwing them on the way down will have filled up at the bargain basement prices and will make even more money on the way back up.

These Canadian top dog bullyboys can't lose, frankly. The whole of the Canadian markets are wildly twisted in favour of the big players anyway. Little guys are just the cannon fodder for them. Against these odds, the only way to beat them is to buy cheap and hold through the bullshit. The strong hands will make money. They always do.

*Question: Why does one of the most stunningly beautiful countries in the world have the most insipid and drab capital cities? All explanations gladly received.