The days of “easy money” for junior miners may be over, according to Rick Rule, president of Sprott U.S., who sees record levels of financing for even low-quality junior mining projects as a sign of caution.
“The space itself, I think is substantially overbought. The truth is, scores of companies have been able to do very, very large financings,” Rule told Kitco News.
This year saw miners access capital with enormous ease, a trend which may “dampen” the sector, Rule said.
“The quantum of those financings, both in terms of the pre-money valuations that they went off on, but simply also the amount of money they consumed, that is to say took out of the market, I think is going to dampen the sector for a while,” he said.
A key indicator is the fact that financings were available to those companies that may otherwise not have received capital.
“Out of 1,500 junior listings worldwide, probably only 200 or 300 are viable. Many of those viable ones have become a little less viable simply as a consequence of their market capitalization, and amazingly, many of the non-viable ones have gotten financed,” he said.
Additionally, valuations of financings have not aligned with the companies’ intrinsic values.
“We’ve reviewed an awful lot of financings at Sprott. There were companies that we suggested at risk-adjusted net present values at current commodity prices of sort of $15 or $20 million. They commanded pre-money valuations of $100 million, and went out to raise $20 and came back with $50 million,” he said.
Rule said that he has been rotating capital into the senior producers now that valuations for the junior sector show overbought signals.
“I have been rotating capital out of the some of the juniors, taking profits where I thought that profits have been given to me too easily, and moving up the quality trail,” he said.
Importantly, the sector is attracting new demographics of investors, particularly from younger people.
“There is a lot of new money coming into the sector,” Rule said. “When somebody comes to me to establish a gold portfolio, somebody who is new to the sector from another industry, I’m putting that money in the best of the best. I’m hoping that they participate in the beta without trying to generate alpha by owning smaller names,” he said.
Assuming that gold prices head much higher, Rule said that “the amount of money you’ll make in the best of the best stocks, I think could be eye-popping.”
“I’m even willing, for new money, to underperform the index by owning the best five or six companies in the index. In other words, if I can de-risk the index, I’m actually willing to underperform because I think the index will perform so well for new money,” he said.