Where are smart investors looking for value right now?
Well, one place they are looking is the mining sector. Why? Because mining stocks – especially the juniors – are being devalued due to the continuing price decline of precious metals like gold.
The value of gold has risen to over $1,600 an ounce. A lot of that value is not reflected in the price of some mining stocks.
Don’t believe me? Check out these 3 resources about the mining sector to whet your appetite.
In a recent interview broadcast on 28 February2013, Rick Rule explains his view on the junior miners. In short Rule states that the natural resource sector is undergoing a period of extreme unpopularity with the general investing public.
If you are not accustomed to valuing junior miners then apart from classic value investing criteria, you need to focus your research on:
- The geopolitical area in which the mining company has its operations – this means that if the majority of the company’s operations are in parts of the world that are unfriendly to miners then steer clear. The most notable of the friendlier nations include Canada, Australia, United States, Mexico, Columbia and Chile.
- The value of the resources in the ground – this is essential because natural resources are finite. Knowing how much a company has left to mine will give you a better understanding of its current future prospects.
- How good/bad management are– this one should be be in every value investor’s written investing strategy. But in regard to miners, you really need to answer three basic questions: do managers have a good track record of building mines? Are managements interests aligned with shareholders? Do managers own (or are they buying) a lot of the company’s stock?
- Multiple mining projects – It’s no use buying into a junior miner that only has one profitable mine. Although there are exceptions it is better to err on the side of caution and ensure that any potential addition to your portfolio has a number of mining projects at once , that they are profitable and can sustain production into the future. Is the company issuing positive or negative exploration results? Look at a minimum of 5 years’ worth of public announcements in this regard.
- Tangible book value – when calculating book value, take a good hard look at the tangible assets. Is the fact that a licence granted from the government which has been explored and found to contain no viable resources to mine an asset? Make sure that you are not overpaying for your stock on an asset based approach by reading the notes to the balance sheet accounts. I’m sure you don’t need reminding but ensure you also check off balance sheet liabilities such as operating leases.
- How much cash does the company have – Miners spend a lot of time and money on obtaining licences, finding deposits, building infrastructure, physical mining and processing. Make sure that the miner has a enough cash to finance these operations as well as any future financial setbacks. Little or no debt is a must.
Today I build and ran a screener in ADVFN taking the closing prices from Friday 1 March looking for undervalued miners, junior or otherwise, that are domiciled in Canada and listed on The Toronto Stock Exchange. ADR’s were excluded.
It threw up A LOT of garbage.
Out of the 74 names that I managed to whittle it down to, there are a handful of very interesting, beaten up and clearly undervalued companies that merit further research using the techniques described – classic value investing criteria and sector specific considerations.
Here is a 16 year price chart of one of them Iamgold (IMG) highlighting the low price it made in the fourth quarter of 2008:
And here is a 5 year price chart of the same stock, again highlighting the low price it made measured on a weekly basis of 3.37 (CAD):
Not quite a junior miner with a market cap of $2.5billion 🙂
Still, its useful to have access to a screener in order to assist with the valuation process. For example you could screen for miners that are trading at or below their tangible book value per share with a debt to equity ratio of 1 or below.
To focus on the juniors and with a bit of tweaking, ADVFN can return results for miners listed on TSX Venture Exchange.
Bargains can also be found on Toronto’s main exchange from amongst the miners. There really are no hard and fast rules so long as you are using value orientated criteria for your screeners.
This week I’ll be sharing the results of deeper analysis from the list of 74 miners via the newsletter. Its free 🙂
Thank you for taking the time out to read today’s post and please always do your own due diligence before even considering adding a new position to your portfolio.
All the best
Disclosure: I do not own any stocks mentioned in this article and neither am I compensated by any company mentioned in this article to publish information on their behalf. I am and always will be independent.