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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. 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 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 and establish an uptrend 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.

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