Junior/Mid-Tier Metal Producers

All commodities are booming whether is be gold, silver, copper, molybdenum, uranium, oil, wheat, corn, etc. The spot price in all of them have skyrocketed over the past few years and the trend seems poised to continue given the huge demand and lack of supply. However there has been a divergence lately and I will show you what that is and how we can exploit it. The divergence is in the junior/mid-tier metal producing stocks which have lagged and even moved against the uptrend of metal prices. The market perception in the junior miners' industry is poor because of the credit crises as most investors prefer the flight to quality in names such as Rio Tinto (RTP), BHP Billiton (BHP), Vale (RIO), Barrick Gold (ABX), Goldcorp (GG), Silver Wheaton (SLW), Teck Cominco (TCK), Freeport-McMoran (FCX), and the list goes on. Other speculators prefer to park their money, without having to deal with mining exposures, in ETFs such as GLD, SLV, DBA, etc. Junior miners (the play on words get me every time) need a lot of funding to start operations and the perception is that banks will not loan them money and the company shares will have to be diluted in stock offerings. Cost overruns are frequent in this group and delays are never a surprise.

So why do I like the juniors when most write them off? Well, to be frank, I do not like the junior miners, as a whole, too. To clarify, I do not like the risks involved with the junior 'explorers and developers,' but I do love the junior 'producers.' There is a huge difference, in my opinion, on how one values a company and most people put the junior miners in the 'explorers and developers,' category; thus, overlooking the corporations that are already in the production. Many investors have not investigated enough on the internals of the juniors and leave some gems buried. The production stage allows a company to become what I call a "cash cow" since they become self financed from operational cash flow (OCF) and can function as a bank once they generate copious amounts of net income. These companies then move into the mid-tier category like Yamana (AUY) by either ramping up production internally or through mergers and acquisitions (M&A). The major corporations' source of growth comes from gobbling up the smaller fish so the junior producers are primed as likely takeout canditates. The lack of M&A in the juniors does not show poor economics as most would like to believe, but rather the juniors are asking for more than what the big fish are bidding (pennies on the dollar). The junior producers want to become part of the elite and will not take offers unless the bid increases substantially. M&A picks up when business is unfavorable and slows down when business is booming (remember buy low and sell high?). The market is pricing the junior 'producers' as 'exploration and development' entities. The current metals boom is allowing the juniors to further grow their business and the low valuation in their stock offers us huge opportunity.

Although most of the junior producers are Canadian stocks with little exposure to US retailers, it does not mean one cannot make an offering on the AMEX or NYSE. I believe that exposure to more exchanges provides a short term pop, but the long run fundamentals will dictate the company's worth as in most cases and initial public offering (IPO) examples. As you will see in the Excel spreadsheet, a lot of them are trading at OIBDA [Operating Income Before Depreciation and Amortization (may exclude Tax and Interest)] multiples <5. I used OIBDA in my calculations because it measures the core operations of a business. Of course these are rough estimates and the actual earnings will differ when the other measures are factored in. I do know if and/or how to upload the spreadsheet here so please email a request and I will get it to you ASAP and for FREE!