A 4-Step Method To Finding "Junior" Bargains
Late last week I was in New York, attending a conference — a small affair with some of my favorite names in the junior resource sector.
Specialty metals, technology plays and something I call “dirty gold”… this intimate gathering had them all.
I gave the kickoff talk at the event. In short, I offered some macro-views about the junior resource space, including my ideas on what to look for in the current yucky market.
For you, I want to go into a little more depth. Below you’ll find a 4-step method to evaluating junior resource plays. Let’s get started…
Right now, the U.S. economy as muddling along. Big companies are hoarding cash, while the middle and small tiers wake up nervous every day. Business formation and job creation are weak, although the economy has a couple of strong sectors like energy, aerospace and geography-specific housing, to some extent.
One key problem is the size and regulatory weight of government at every level.
Obamacare looms — with its impending large premium increases next year. Government is way too big, and spends too much — and that’s when it’s not downloading your emails and cross-referencing them to your phone calls and credit card purchases, while tracking your whereabouts from your cell phone signal.
In general, the broad markets seem concerned about the looming end for the Federal Reserve’s policy of “Quantitative Easing” (QE), as well as the long (too long, some say!) period of low interest rates. Bond prices are weakening, as evidenced by Apple’s famous 30-year bond of late, now down 10% — three years’ worth of the face coupon.
In other macro-worry issues, we have the China economic slowdown, which has sucked wind from the sails of numerous commodity plays — iron ore, coal, copper and more.
Elsewhere, we have seemingly permanent Eurozone stagnation, the long-term moribund situation in Japan, and the slowdown in emerging markets across the globe.
These kinds of big issues tend to blur the optics of even the best of resource ideas. Still, for all the market pain of late, in the junior space — pain over the past year, actually — I believe there are numerous beaten down bargains across a spectrum of categories. That is, look for:
- Exploration Stories
- Development Stories
- Technology Stories
- Joint Venture and Takeover Stories
In a stock-picking market, you want to look for an investment inflection point, typically where the pace of discovery or development is about to accelerate. That, and look for positive, unique characteristics in a company, especially when they’re associated with significant de-risking events. For example:
- Resource Update
- Potential New Development Angle
- Technical Breakthrough
- Pathway to Cash Flow or Exit Point
Basically, you’re looking for solid assets with great management. Cash is fabulous, although right now the fact is that a lot of companies are running on fumes. So there’s financing risk out there with many plays with otherwise strong merits. Look at it as your chance to buy in on the next fund-raise, and pick up more shares of promising plays at a relative bargain.
Eventually, the markets for junior plays will turn — well, for the good ones. The world really does need a resource development pipeline. The future is bleak if the markets starve this kind of business model into oblivion. For now, the idea is to look for excellent ideas, and figure out if there’s something that can give the story a boost.
That’s all for now. Thanks for reading.
Byron W. King
Original article posted on Daily Resource Hunter