Cashless juniors! Off with their heads!

Watch out for the coming junior zombieland - for both danger and opportunity as cash-poor juniors are culled, say Kaiser, Coffin and Roulston.

VANCOUVER, BC (MINEWEB) - Author: Kip Keen
Posted: Monday , 21 Jan 2013

It’s not a new call, a new argument, a new macabre hope for the end of what some consider a worthless class of underperforming, cashless and asset-poor juniors.
But calls for the culling of a fair chunk of juniors on the TSX Venture Exchange are undoubtedly growing and were especially evident in Vancouver on Sunday in the presentations of newsletter writers to the Cambridge House investment conference. 

One of the closest to the subject is John Kaiser, of Kaiser Research, who, since about mid last year, has been putting hard numbers to the otherwise obvious reality that faces or will face juniors that have not been able to replenish their cash piles for some time over the past year or so.

Since climbing Mount Exuberance in 2010 - having fallen off it in 2008 after an equal peaking - investors have refused to fund the exploration plans of many juniors. That of course is a serious problem for an endeavour that is predicated on the pursuit of the big payoff but does not, by and large, generate revenue to get it there.
It does not help that many juniors, having received loads of cash in the past five years, have not, despite their best efforts, made a plethora of major discoveries the likes of which inspire even the slow ink of backwater community newspapers. More importantly, the kind of discoveries that, the argument goes, can inspire risk taking.

Among junior watchers Kaiser has put the greatest effort into chronicling the imminent doom over which many others also fret. Kaiser recently expanded on the issue in blog postings pointing out that, of some 1,400-odd juniors on the TSX-Venture nearly half - 632 - have less than $200,000 in the bank.

Of course, running a serious exploration company, with grand exploration plans, multiple staff, including geologists that no longer come cheap, in any number of jurisdictions while paying lawyers and listing fees with that much money at hand, is sort of like trying to build a coliseum with proceeds from a six year old’s lemonade stand.

Kaiser’s argument, expanded at some length in the link above, comes down to the probability these most of these cash-poor juniors will vanish and, in turn, that this will be good for coming exploration investment.

“The departure of 500 resource juniors would be a healthy development for the sector because when the retail investor does return to this sector, we want the field of choices not to be diluted with worthless distractions,” Kaiser recently wrote.

Eric Coffin, of Hard Rock Analyst, noted in a presentation Sunday that we “need to see 500 [juniors] or so go away”.

Lawrence Roulston, of Resource Opportunities, also speaking Sunday, put it in terms of the market bottom that we may not yet have reached on the Venture.
Roulston said there were many juniors whose “Fundamental value is zero.” Thus the cent or two in value the shares of these juniors enjoy rather distorts the Venture upward, he argues. By extension, with more junior extinction, there is, according to Roulston, still some ways to fall on the Venture, assuming few make notable gains on the whole.
 Kaiser rendered his opinion on the majority of the 632 juniors with less than $200,000 as this: “Most of them are useless companies that pretend to be in the exploration game.”

These newsletter writers take their arguments and thoughts on the opportunities and outcome of the impending junior liquidation to different places.

Kaiser, in his public talks and online missives, is particularly concerned about exchange-related factors that may compromise the immune system of the already hurting Venture patient. He excoriates the Canadian exchange owners for allowing algorithmic trading without transaction fees on a risk-obsessed exchange where it is difficult for fundamental values to be easily assigned to companies.
More rational, financial based analysis that might help combat the distortion that comes with programmed trading (here imagine one bot in battle with the other and rushing to liquidity and affecting shareprices) on the Venture is impossible, he said. 

Remember that juniors, which by and large don’t make money, trade on ideas of what money they might make, if their exploration plans, which must be judged or bet on by the investor, pan out in lucrative discoveries.

Kaiser reckons some simple fees on algorithmic trading might help level the playing field. In the extreme - perhaps an exaggeration inspired by a desire to effect change - Kaiser predicts the Australian and Chinese resource investing class will leave Canadians in the dust if we don’t make fixes to the way we trade. 

Coffin, like Kaiser, also spent some time criticizing the powers that be in Toronto. He noted one worry is that the exchanges refuse to pull the plug on companies in a vegetative state. Letting the Venture ventilators pump, of course, ensures listing fees keep on coming. 

But, before we get too negative, all three believe that there are opportunities within this 'junior zombieland', as Kaiser calls it.

Roulston and Coffin paid particular attention to merger and acquisition activity. They expect to see more of that in 2013. This might sound a little bit like the crumbs many analysts and newsletter writers dropped last year and the year before - ones that didn’t seem to lead anywhere. But, rather than a false trail, it may just have been a slow path. Takeovers did have a flurry in late 2012, as Coffin and Roulston noted, though they may have come at prices in comparison to recent shareprice highs that are somewhat disappointing.
Kaiser sees potential in both early and advanced stage juniors, but emphasizes the former. “The group to watch during 2013 will be the 428 juniors with advanced projects undergoing feasibility demonstration,” he wrote in December. “These may benefit from a slingshot effect if the market decides the macroeconomic glass is half full rather than half empty, rapidly boosting prices 100 percent to 200 percent as M&A fever kicks in.

He then continues on to his key point: “But the really interesting companies to investigate will be the 506 juniors that have more than $200,000 working capital and have projects that could deliver a major discovery that provides 10, 20, 30-fold price gains from their current depressed levels.” 

A major discovery. Now that would be something. If these could be made, juniors may then revenge the coming guillotine. Kaiser’s zombies turned hydra. But where? And how? Probably questions for another day.