Friday, 13 October 2023

By James Cooper Editor, Fat Tail Commodities

Twitter: @JCooperGeo

[6 min read]

Dear Reader,

No doubt 2023 has been a difficult year for the junior mining sector.

Across the board, we’ve seen small-cap explorers sell-down towards multi-year lows.

A decade of underinvestment in new supply and an enormous metal intensive energy transition have offered little incentive for investors to back the next generation of deposits.

The depth of this correction has certainly caught a lot of pundits by surprise.

In fact, the situation right now has some folks calling this a repeat of the ugly days of 2016.

If you’re not familiar, that year marked a major cyclical bottom for the mining industry.

There’re certainly some interesting parallels to draw from.

Just like today, junior mining stocks were capital starved.

Just like in 2016, junior mining stocks were trading around multi-year lows.

But there are key difference in today’s market.

Commodity PRICES are far higher than they were back in 2016…just take our old friend copper…

In 2016, this commodity was in the gutter…it traded for just US$2 per pound.

Today it sits at US$3.60 per pound…around 80% higher.

It’s a similar picture across the commodity landscape…

Nickel traded for just US$8,400 per tonne back in 2016. It now trades 120% higher, hovering at US$18,500 per tonne.

Meanwhile, precious metals bottomed slightly earlier in late 2015…

Back then gold traded as low as US$1,020 per ounce. It’s now hovering around US$1,900 per ounce.

Silver is also much higher…

It bottomed out at US$13 per ounce. Now it trades 80% higher at US$22 per ounce.

You get the point!

Across the board, commodity prices remain well above their cyclical lows.

But despite that, junior mining stocks have been in deep sell-off mode for most of 2023.

Your opportunity awaits as explorers emerge from the dust

Investors made a fortune buying stocks at 2016 levels…this was where the 10-bagger or even 100-bagger returns were made.

But in my mind, the opportunity in today’s market is better still.

With commodity prices remaining relatively high, there’s a gaping mismatch between fundamental strength of the resource sector versus equity valuations.

Now I’m not talking about all mining equities…the large caps have held up well in 2023.

The real opportunity comes from explorers and developers offering cents on the dollar value from where they traded two years ago.

It’s why you should be preparing for a possible repricing as we head into 2024.

But what could be the catalyst?

There are numerous factors that might see a sudden return back to the juniors...

Broad economic stimulus aimed at reviving China’s shaky property market could be one.

So far, the Chinese government has been tepid in its approach, fearing inflation could spike with an injection of liquidity into its economy.

But with deflation fears now weighing heavily on China’s political leadership, a heavy dose of stimulus could be on the cards.

This could happen at any time.

Expect a rapid repricing of junior mining stocks if this happens.

Another catalyst might be an earlier than expected rate cut by the US Federal Reserve.

This would put pressure on the US dollar offering tailwinds for commodities priced in US dollars.

There’s also the geopolitical angle…

A sudden export ban on any number of critical metals dominated by China as relations continue to sour with the west.

It’s the type of playbook Russia might follow, helping deepen supply chain disruption to western manufacturers.

Combined, Russia and China are major suppliers of energy, grains, fertiliser, and critical metals.

Any one of these events could spark a rapid change in sentiment for junior mining stocks.

So, how might investors position for a game-changing EVENT in the resource sector?

Don’t expect a gradual recovery like we witnessed in 2016.

The resource sector is not emerging from a cyclical low like it was back then…it remains in the upward leg of a multi-year bull market.

That might be hard to see right now, given the brutal sell-off among junior mining stocks in 2023.

However, investors must keep reminding themselves that commodity prices remain high.

This is the foundation that will support a recovery in junior mining stocks.

Meanwhile, commodity supply chains remain tight...projected demand remains strong.

History shows these are the conditions that foster mass speculation in the resource sector.

I don’t believe this cycle will be any different.

We’ve already had a sneak preview on how this will play out...

In early 2022, junior mining stocks exploded…That was thanks to Russia’s invasion of Ukraine and sudden fears of commodity shortages.

It’s why stocks like Galileo Mining [ASX:GAL] surged 750% in just three weeks.

During that time, the London Metal Exchange (LOM) cancelled contracts and halted trading as nickel prices catapulted into record-breaking highs.

Events like this are not supposed to take place in stable markets.

But these are the conditions born out of years of underinvestment in the industry and a deep underappreciation of future supply.

Large cracks remain in this system. The opportunity lies in holding stocks and waiting for the inevitable event that exposes the fragility of commodity supply chains.

In fact, I’ve just moved perhaps one of the world’s most exciting copper explorers from a HOLD to a BUY in the Diggers & Drillers portfolio.

The company is drilling into perhaps one of the world’s largest underdeveloped copper projects.

Right now, it trades at a steep discount, making it an excellent time to add this emerging giant to your portfolio.

You can find out more here.

Until next time,

James Cooper,
Editor, Fat Tail Commodities