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 State of the Junior Resource Sector
    Publisher: Kaiser Research Online
    Author: Copyright 2019 John A. Kaiser

 
The State of the Junior Resource Sector
The 2008 financial crisis caused the resource juniors to crash as the market effectively went no bid. In Q2 of 2009 a remarkable rebound got underway which tracked gold's ascent and surprise demand for base metals as China undertook a $600 billion infrastructure spending boom to keep its economy from collapsing. By 2011 the United States and Europe had come under the sway of the austerity scolds and the opportunity for a robust fiscal response disappeared, leaving in place monetary policy as the primary driver for economic growth. Gold peaked at $1,900 in August 2011 and by 2014 the mining industry's supply mobilization response had collided with feeble global economic growth. The resource juniors shifted into a bear market in 2011 from which they only briefly emerged in 2016 and did so selectively. As of 2019 the resource juniors are in the eighth year of a bear market. This State of the Junior Resource Sector report is designed to allow daily monitoring for evidence that a turnaround into a bull cycle is getting underway.
These 3 charts are variations of the same data which pertain to TSXV daily traded value and average daily traded share price. KRO tracks all TSXV listings involved in the resource sector which allows us to calculate the portion of daily value traded attributable to resource and non-resource listings. The blue and green bar charts represented daily traded value for resource and non-resource listings respectively. The yellow and red lines represent the corresponding average daily traded share price. Visit TSXV Resource Junior Traded Value Leaders to see a company list sorted by traded value. The chart above going back to 2009 helps us see how recent resource sector activity compares to the peak of the resource junior post 2008 bull cycle in Q1 of 2011. The chart below puts the false turnaround in 2016 into context and shows the shortlived effect of Novo's Pilbara bubble in H2 of 2017. The spike in March 2018 is a one day event created by Novo being added to the GDXJ. The non-resource boomlets are mainly related to cannabis and crypto-blockchain listings though the latter only participated in the Q4 2017 thru Q1 2018 boom. The chart on the left which starts with 2019 is the one to monitor for early signs of a resource junior turnaround.
The chart above shows how average price traded has since 2016, a shorter time frame than the main one above. While you can eyeball the "green" non-resource traded value compared to the "blue" resource traded value, the chart below shows the relative daily percentage resource and non-resource traded value. Since May 2019 the split between resource and non-resource traded value has started to converge. To a large degree this has been due to the fading of the cannabis bubble, for the blue value traded is not clearly in an uptrend. What we want to watch for is a crossover in the relative percentage against a backdrop of steadily increasing resource sector traded value. As of August 12, 2019 we are only seeing sporadically high resource sector traded value days. The resource junior "game on" inflection is still waiting to happen.
The chart below depicts monthly TSXV trading activity for resource (blue line) and non-resource (yellow line) listings. The bars represent only financing activity by resource listings most of which occurs in the form of the private placement mechanism. The slumps in Sept 2018 and Feb 2019 are troubling. This chart gets updated in the second week of each month after the TSXV publishes its monthly bulletin.
The chart on the left slots TSXV resource listings that are still trading into working capital ranges. Working capital is defined as current assets less current liabilities. The ones to be avoided are those with negative working capital. Companies with positive working capital are effectively useless because they do not have sufficient funds to alter the fundamentals of their projects. Exceptions would be companies which have projects farmed out to others, or where the timing of the most recent quarterly financials captures a working capital lull following a recent exploration program.
The chart on the left shows the total working capital for TSXV resource listings that are still trading which have positive working capital and those with negative working capital, and assigns these separate totals to the price range into which that security falls as of the chart date. The main takeaway is that companies with negative working capital trade below a dime. These are debts that will never be repaid with cash.
The chart on the left shows how many TSXV resource listings that are still trading do so in each price range. The insert depicts how many have less than $200,000 working capital and are thus likely not viable in the absence of new financing. It also shows how many of those with more than $200,000 working capital have a flagship project at the feasibility demonstration stage and how many are focused on discovery exploration.

Although the short term trend for gold has no implications for resource juniors engaged in discovery exploration, and needs to be in a sustained uptrend to affect the outlook for advanced "optionality" resource juniors, the reality is that the daily movement of gold does affect the mood of the resource junior audience. Gold needs to breach $1,400 (accomplished in June) and establish an uptrend (only time establishes an uptrend, which may mean it is January 2020 before a uptrend is visible enough to be believed) to swing the glass half full for the entire resource junior sector. There are many reasons to believe gold will do this, all linked to uncertainty, but there are only a few reasons why the other bellwether, copper, can develop an uptrend: supply-demand imbalances arising from macroeconomic trends or geopolitical supply disruptions. Imbalances can be of a longer super-cycle nature such as when China hit the growth tipping point in 2003, or the result of the business cycle. The current threat to copper and equity markets in general is a global economic downturn and an end to the general equity bull market that begin in 2009.
The gold price has long been compared to the level of the Dow Jones Industrial Average index through a simple ratio. The idea is that a high Dow to gold ratio inevitably leads to a lower ratio. This can be accomplished by the Dow going down, or gold going up. As we saw in 2008, general equity markets falling sharply is not good for resource juniors because when investors are losing trillions in the value of their "senior" equity portfolios, why would they be interested in considerably higher risk equities? Also, a sharp fall in equity values creates liquidity problems, and gold ultimately is the most liquid asset class, so it gets sold in a market meltdown. The uptrend in gold happens after the market downturn has stabilized, provided the outlook is one of a reset rather than a catastrophic Humpty Dumpty event.
It is shocking how lukewarmly the market is responding to gold's uptrend, at least in terms of embracing the junior resource sector as a leveraged proxy for gold. Partly to blame is the conflicted state of the traditional "gold bug" audience which recognizes that a "Thumbs Up for gold is a Thumbs Down for Trump". I have often been told that I would have a much greater audience if I did not view gold bugs as hypocritical dimwits or cynical ideologues. I am instead placing a bet on the other half of the population which has always ignored gold as the blunt instrument of libertarian thugs or self-righteous authoritarians and can now see gold as an orphan open for adoption by anybody who disagrees with the direction Trump is mapping for the future and how America fits into it. And if by some chance Trump loses the 2020 elections and concedes defeat without imposing marshal law on the premise that victory was stolen from him, well all the traditional gold bugs will no longer feel conflicted, will remember all their objections to the rising American debt, and will embrace a "Thumbs up for Gold as a Thumbs down for post-Trump reality". It will be a perfect storm because the other half of the US population will know that putting Humpty Dumpty together again is a hopeless task. Gold blowing through $2,000 over the next year and establshing a new real price base in the $2,000-$3,000 range is akin to what happened in the late seventies when the United States appeared to have lost all credibility as the Iranians sent the American Shah puppet packing, OPEC put the screws to America's oil dependent economy, and the Soviet Union had the brilliant idea of invading Afghanistan on Christmas Eve 1979.
 
 

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