We went from a period of complete market correlation, where everything traded up and down on the same issues, to the current market where nothing makes much sense.
Exhibit A: Freight rates have gone up 4-8 times for iron ore vessels over the last year and BHP/Rio/Vale are shipping lots of iron ore and getting good prices for it. At the same time, Vale is trading for $16 per share (which is a stupid-low price for that amount of profit) and iron ore juniors are trading for even less. Clearly, the freight rate got the message and someone is demanding ore, but the equity market did not get the memo.
Exhibit B: Gold juniors are trading for less than $5 per ounce of reserves, but the price of gold is still over $1,300. If gold is a storehouse of value, would it not make sense to buy it in the ground where it is nice, safe, and can wait to be mined until it is needed? Right now, gold junior prices have no connection to the actual price of gold.
In addition, zinc and copper are both down 20%, with zinc and copper juniors down 90+%.
There has been a complete decoupling from commodity and equity prices and global economic issues, and either of the two from reality. The fact is, the commodity market is coming back, but the equities are stuck in a depression/end-of-the-world state.
I think it’s through a combination of the above that we’ve burned out investors. Additionally, the lack of liquidity in the junior mining space has created market inefficiencies that limit the range of investors.
Big investors cannot put small investments into companies that do not fit their investment criteria. If they need $2m positions, and all they can put in is $200k positions due to the reduced market cap of all the companies in the sector, they stay out of the market.
However, if they were rational and understood that the $200k position had the economic value of a $2m position, maybe they would be going back into the market, but that would require institutional brains.
We’ve also wiped out the retail investor twice: once in 2008-2009 and again in 2011-2013. We spent their money, did not deliver results and rushed exploration with a limited number of viable projects because cash was available.
A recovery, one would assume, but it is going to take some companies dying, other management teams getting around to restructuring their companies, and some investors with some nerve who are willing to buy risk for free.