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PDAC ROUNDUP 2013 Panelists Debate Strategies to Revive the Juniors An International Panel Luncheon was held on Tuesday, March 5, at the PDAC convention. The theme of the discussion was: Strategies to Revive the Juniors. The three panelists were Eric Sprott, CEO and chief investment officer, Sprott Asset Management; John Kaiser, editor, Kaiser Research Online; and Ned Goodman, president and CEO, Dundee Corp. Raymond Goldie, vice president and senior mining analyst, Salman Partners, moderated the discussion. In his opening remarks, Goldie explained that one of the panelists has forecast a mass extinction among junior mining exploration companies. "Our purpose of the discussion today is to determine how we can avoid such an outcome," Goldie said. "Are unforeseen forces causing shenanigans in metal markets? How much are metal stocks being driven by metals prices? "Traders see the longterm prices for copper remaining above $3.50/lb forever, Goldie explained. The average long-term copper price implied by the prices of stocks on the TSX is $2.43/lb—the long-term prices it would take to make a company's net asset value per share equal to its share prices. "So you could buy copper more cheaply on the stock exchange than on the LME," Goldie said. Can juniors take advantage of the disconnection between metals markets and stock markets? Goldie asked. "Yes they can," Goldie said. "One of the things the CEO of a junior can do that seniors cannot is auction the company to the highest bidder. In the past, for a takeover to occur, you needed a 30% premium. Now no one will look at it unless it's 50% to 75%. Does this still stand true?" Goldie presented a third option: Raising money on the stock exchange. "One of our panelists [Kaiser] says that fundamentals-oriented investors have withdrawn from the stock market and that makes equity financial difficult," Goldie said. "He also said that traders Eric Sprott 52 E&MJ; • APRIL 2013 John Kaiser have been replaced by machines. So do we need more regulation of equity markets?" As a fourth topic for debate, he proposed debt financing as as an alternative. Seniors use debt financing with interest rates of 7% and they raise hundreds of millions of dollars, Goldie explained. "But, the debt market seems closed to juniors or they have interest rates in the teens," Goldie said. Should juniors consider royalty and offtake deals? If you have a zinc mine, should you ask a smelter or a royalty fund for financing based on an off-take agreement? Goldie asked. "If you produce a metal that doesn't trade on an exchange, a third party off-take agreement is almost obligatory," Goldie said. "For other metals, royalty deals are an increasingly popular form of financing. So is Rob McEwen correct in blaming royalty financing for the negative correlation between the price of gold and gold equities?" After setting the tone for the discussion, he opened the forum with the panelists. Topic 1: Are there dark doings in metals markets? And how closely do metals markets drive the prices of mining stocks? Sprott, who manages $10 billion and recently won the Absolute Return Award for 2010 Hedge Fund of the Year, fielded the question first. Sprott: Do stock prices follow the metal prices? They will follow the metal, but the metal must have some momentum in a particular direction. It's unsatisfactory to say that gold is trading at $1,600/oz, a stock price should be this price. People are more concerned about where the metal prices are headed. If they think it's going up, they will buy metal stocks. If they think it's going down, they won't buy metal stocks. In the last 18 to 20 months, we have seen prices go down. That has taken interest away from the stocks. Ned Goodman I believe that the stocks will under- or out-perform the metal by 2:1 or 3:1. If we get a 10% decline in metals prices, you could see a 30% drop in metal stock prices and vice versa. There is a relationship but you have to establish a pattern. I am a huge nonbeliever in Comex markets. The trading data is an absolute joke. They are trading 1 billion oz of silver a day and we are only mining 800 million oz/y. There is no physical metal. We see these wild gyrations in the paper markets, where the metals crash and all of this volume takes place. As much as 30% of the year's silver supply is sold in five minutes. Those traders do not have that supply, they are just affecting the market. Why are they affecting the markets? There are way more buyers of gold than there is physical supply. I believe the central banks have supplied that gold surreptitiously. They want to suppress the price of gold because their monetary policies are ridiculous and irresponsible. They are printing money and buying up bonds. We get that. But, they do not want to see that ridiculousness manifested in gold and silver markets. Kaiser is an independent analyst who has been covering the junior sector since the early 1980s. He founded Kaiser Research Online, which covers 1,800 resource companies and their relationship to macro trends. Kaiser: Gold and copper are still pretty high compared to 10 years ago. Yet, since 2011 we have seen the equities, in the junior market in particular, decline substantially. Part of the problem is that this sector is held prisoner by a counterproductive narrative—the gold bug narrative of imminent apocalyptic collapse and fiat currency debasement. All of this stuff would result in arithmetically higher gold prices. So the bias in the market is the expectation that things are going to fall apart soon, which will be bad for the global economy. Junior miners are all about the future. The system is biased toward the downside. Metal prices do affect junior stock prices. Anytime gold or copper prices move a little bit, even though it is meaningless in percentage terms, it is used by traders to hammer down or crank up the juniors. They are using small movements in metal prices to extract trading profits from the junior sector. Because of the downward bias created by this harmful narrative, we are seeing everywww.e-mj.com