Junior explorers have grown their value by 65pc since 2016
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The numbers show sentiment is high in the junior explorer sector and cash is flowing for capital raisings, says junior resource expert and analyst Rob Murdoch of AUSTEX.
Junior explorers have led a resurgence in small and micro-cap stocks. What is the state of the sector?
At last count, there were 686 explorers or juniors that provided a 5B quarterly in September. (Non-producing explorers are required to lodge Appendix 5B cashflow reports with the ASX each quarter).
Of these, the resource that has had the highest cumulative share price rise in the past year is cobalt, off the back of all the talk of electric cars, as well as lithium.
Both have had their coming of age this year — every car maker has said they are making electric cars and that has given the market some strong signals that it really is going to happen.
Most recently, you can’t talk about resources without talking about conglomerate gold. The way I see it is that some people will make good but on the law of averages there will be heartache.
How much value has been created in the junior exploration sector in recent times?
We have seen a significant growth of capital in many of our junior explorers. Since Q1 2016 there has been a 65 per cent increase in enterprise value of juniors.
But they need a constant flow of capital in order to progress onto production.
In the past quarter, capital raisings valued more than $866 million — well above the average of $700 million for the past three years.
The numbers show sentiment is high and investors are making more money which leads to more cash being available for capital raisings.
Watching resource investment cycles, I would say we are currently in the optimistic stage, where increases in commodity prices have allowed for development and exploration, but just before the point of euphoria and eventual anxiety.
Which resources are investors overlooking?
For some reason nickel hasn’t been given the same emphasis that cobalt has, even though it occurs with cobalt and could be just as prevalent in batteries.
The truth is, even if you have an electric car and are focussed on cutting emissions, the average family has two cars and if you have two plugged in that are doing a reasonable number of miles, your electricity bill will double.
The only place you can get that much energy is from fossil fuels – coal and gas will continue to be the big winners.
We’re also seeing nuclear in the doldrums at the moment but if you look at the stats, nuclear has lower emissions than wind.
What tips do you have for retail investors getting into junior explorers?
Look for Stocks with good projects that are advancing through the evaluation stages with a higher grade resource than their peers in commodities in demand.
There is a danger in investing on a rumour or a maiden drill intersections or someone just picking up a high grade rock chip or nugget. Ok for those in early but there is a danger in following the pack, as if the project does not live up to market expectation prices will come down again.
An example of this is the current rush on conglomerate gold stories. There may well be substance in some of the stories but others that have entered the race may be in the wrong areas. The prevailing geological history of formation of the conglomerate gold deposits is critical, not that they are “conglomerate alone”.
Another example is pegmatite. Pegmatite is a very common rock type and most seem to contain around 1% lithium oxide. A pre-requisite for players in that space is to demonstrate to investor how they can turn the lithium oxide to battery grade carbonate or hydroxide and be within the lowest quartile of global producers. Off take agreements ideally should be with genuine end users.
Rob Murdoch is a Junior Resource Management specialist with 50 years of experience managing resource projects and companies, listed on ASX, TSX & AIM across a wide spectrum of commodities and from exploration to production.
Over the past two years Rob has developed AUSTEX as a specialist independent resources industry research and analysis advisory. Rob is a fellow of the AusIMM and a competent professional in geology and management.