posted by permission of published April 2006 © Mineweb

Junior Miners May Rival Dot-Com Era

By Dorothy Kosich

RENO--(Mineweb.com) Research published Tuesday by a New York-based international economic consulting firm declared that a major paradigm shift has occurred in the attitudes of institutional investors toward the junior gold, silver, energy and other natural resource companies.

KWR International believes that the growing willingness of institutional investors to embrace the mining sector has generated a respect and recognition of junior mining and exploration company stocks, that could rival the "giddy days" of the Dot-Com era.

The consulting firm provides economic, financial and political analysis for corporations, domestic and foreign governments, international agencies and NGOs. Its roster of clients include Barrick Gold, Republic Bank, the Japanese and Indonesian governments, the United Nations, the International Red Cross and others.

Authors Keith W. Rabin and Scott B. MacDonald suggested that "major financial institutions have finally begun to shift their orientation from one that disparaged the resource market as one inhabited by quirky gold bugs, survivalists, old-timers and those not wise enough to recognize the unchallenged appeal of technology and other sectors investors came to know and love in the 1990s." Rabin is the President of KWR, while MacDonald is the Senior Managing Director of Aladdin Capital and Senior Consultant at KWR.

"Today, these institutions appear to be slowly realizing the rise of commodities, metal and energy is not likely to be a short-term phenomenon, but rather one that will endure so long as growth and demographic trends continue at anywhere close to present levels," they asserted, adding that "one can see a distinct change in rhetoric within institutional research."

KWR suggested that the movement has many implications; "the primary one being large financial institutions do not move quickly. ...Once they do they try to make the most of their effort. Therefore, as these institutions begin to perceive value in the resource sectors, and to augment their staff of bankers, analysts and other professional with relevant expertise, these people will need to deals and move the product necessary to justify their existence."

"If they are to participate--there is a distinct need to bulk up the market caps that provide the liquidity and perceived sense of security needed," according to Rabin and MacDonald. Meanwhile, the resource sector has been depressed so long and fearful of commodity price meltdowns "that the industry has shied away from making investments in capacity," they said.

As gold supplies and stores of other commodities decline for the rest of the decade, and, if central banks begin to slow or cease their gold sales, "the value of exploration companies must also expand as demand simply overwhelms supply," Rabin and McDonald said. "This same paradigm--in which investors are coming to view these resources as a proxy on emerging world growth--is also affecting a wide range of other precious and industrial metals, energy and even agricultural and soft commodities."

KWR noted that the appetite for junior companies is definitely on the rise. "It should not be surprising the majors are now realizing the cheapest and fastest way to both bulk up their companies and possess numerous lottery tickets on future exploration opportunities is through acquisitions. That is radically transforming the appetite of investors toward junior companies," the firm explained.

Consolidation is also guiding the activities of entrepreneurs, such as Goldcorp founder Robert McEwen. "His use of U.S. Gold as a vehicle to create what he hopes will be Nevada's top junior exploration company, was arguably one of the developments that set off the current acceleration of interest in the junior market," according to KWR.

MARKET ENVIRONMENT CHANGES

The KWR analysis suggested that, while sharp corrections remain inevitable, "there are a number of factors that indicate we may not see the lengthy, multi-mouth corrections of the past few years for some time."

Rabin and MacDonald said the primary reason for their assertion is that "major institutions are just beginning to wake up to the promise and potential of the resource market. As a result, the relentless short selling seen in recent years by large hedge funds, speculators and others, who either sought to hedge their commodity purchases, earn trading profits, or some would claim to cap potential prices rises, is now far more dangerous."

"As deep-pocketed asset managers enter this market, short sellers no longer can remain totally confident of their ability to shake out and instill fear among small institutions, die-hard retail investors and others who are unable to withstand this pressure without risk of consequences," the report suggested. "As sell-side institutions build capacity and more resource companies list on U.S. exchanges, they will do their best to build and amortize their investments, by enlarging the base of investors with an interest in this sector."

WILL JUNIOR RESOURCES EMULATE THE DOT-COMS?

KWR explained that many of today's investors were around during the days of the Dot-Com investment craze. "That phenomenon went on far longer and showed far more upside on less tangible fundamentals than the resource mania now emerging," Rabin and MacDonald insisted. Meanwhile, a number of investors who did not get involved in Dot-Coms may "make sure that they do not miss the boat this time around" by investing in resource stocks, they suggested.

Nevertheless, Rabin and MacDonald warned investors to be really careful when making new investments in junior resource stocks. "One has to acknowledge the illiquidity and speculative nature of this sector of the market. ...We would also caution anyone seeking to get involved to start off small and to spread their capital over a number of names or mutual funds and consider phasing in over time. ...If one remains too focused on individual names or a few choices, the resulting portfolio represents more of a high-alpha gamble on the circumstances surrounding a particular country, firm, mine or management team, rather than a diversified play on the overall junior market."

As liquidity comes into the cash-starved energy and mining sectors, KWR suggested that "we are likely to see an acceleration of the consolidation now emerging." With the growing interest of larger institutions in the natural resource sector, "larger companies and entrepreneurs now have the funding and incentives necessary to invest in longer-term productive assets that have struggled under less-capitalized players," Rabin and MacDonald noted. "In addition, investors are far more prepared than they have been in decades to allocate capital and reward these firms through higher valuations."

JUNIORS WILL YIELD BEST RETURNS

KWR's analysis concluded that "one is likely to find the best returns at the exploration and junior end of the sector. Unlike the majors, these companies now seem to be valued more from a corporate finance and M&A perspective than one based on their short-term trading performance. Ironically, in some ways at least to date, this seems to be making them less prone to the tendency of the majors to trade up and down with every movement in the price of the underlying metal or commodity price."

Nevertheless, Rabin and MacDonald warned investors that junior miners and explorations remain "highly speculative and should only be purchased by investors who can deal with the potential for large losses, this allows the chance for much greater appreciation."

"While one can count on heightened volatility, shakeouts and continuing corrections--and one might wait for these opportunities to take on additional exposure--the underlying trend is likely to remain positive and reward the patient investor for many years to come," the men emphasized in their report.

To read the entire report, visit the firm's website at http://www.kwrintl.com/library/2006/InstitutionalEmbrace.htm