For the past couple of years, investors have been wondering when (or if) we will ever hit the bottom of the market. Investors held to the hope that if they could buy at the bottom, they could ride the market upwards. But it persisted in a downward spiral for so long that many of those hopefuls left the resource industry altogether and put their investment dollars somewhere else.
But the bottom is here, according to John Kaiser, and now is the time to start putting money back into the smart opportunities.
We
spoke with John Kaiser at the Cambridge House International’s Vancouver
Resource Investment Conference in January 2014. Mr. Kaiser is the founder of
Kaiser Bottom Fish, now Kaiser Research, and he specializes in finding
speculative value opportunities in the resource sector.
“I
think the worst of this 3 year slide is now behind us,” he told us. “The market
has bottomed.” That is good news for investors, although just because we’ve
reached a bottom, it doesn’t mean that investors can start throwing money at
any stock. Mr. Kaiser explained: “There are still 600-plus companies with
negative working capital, which are going to just wither away. But I think we
are now at the early stages of a selective bull market where the survivors are
now getting up from a battlefield where the bodies were just systematically
mowed down in the last few years. And an audience is coming in and sensing
[that] we’re not heading into a monster bull market any time soon but the real
companies – the ones with good stories, good management, and hopefully some
money in the treasury – those are the ones that are going to move up. And
evaluations are extremely low so this is like a very good value market right
now.”
So
if you’re an investor who is looking to get back into the resource market, what
should you do? Mr. Kaiser advises: “Be wary of any company that has negative
working capital. The regulators have allowed companies to do a 10-for-1
rollback without shareholder approval; we saw a record number of rollbacks in
December. What companies are doing rollbacks, the stocks are coming down;
they’re going to have to settle their debts for paper. They’ll create a huge
amount of paper owed to creditors with no value left in the companies. These
companies will do another 10-for-1 rollback another year later. And then [their
share price] will go down 90% and then they’ll restructure as a shell for 2015
or 2016 when the base of the bull market should be spreading. So avoid
companies that are financially challenged. Look for companies that have money
in the treasury that don’t have to go to market right now.”
Mr.
Kaiser continued to describe the bottom, and the market bottom for gold in
particular: “I think the gold price has bottomed. They worked very hard to get
it to close below $1200 by year end, but they failed. Even Bloomberg’s
editorial agenda, to mock gold and bring it down, has changed the tone of the
language it uses in its articles. There is no more physical gold to be
extracted from anywhere. Much of it has been moved overseas. The GLD is down
almost 42% from the high in early December 2012.” But Mr. Kaiser cautions
investors from getting too excited about these numbers and thinking that gold
has nowhere to go but up: “Frankly, $1200 gold is only 14% higher than the
inflation-adjusted gold from 1980. But there’s a big difference: Back then,
when gold went from $35 to $850 and back to $400 where it stabilized, that was
a 400% real gain and it made a lot of high-hanging fruit, low-hanging fruit.
During the last 30 years, the mining industry has produced 2.3 billion ounces.
It has literally harvested all of that low-hanging fruit. Now we have a gold
price that is almost 3 times higher and you would think that it should be great
but it isn’t: We’ve harvested all the low-hanging fruit. So if the world wants
more physical gold than the 5.5 billion ounces that exists now, it is going to
have to pay a higher price to get it from someone else or to get it out from
the ground.”
With
Mr. Kaiser’s access to a massive database of junior resource companies, he’s
noticed some changes to the industry: “We’re seeing a cleaning up right now.
It’s very healthy. In the past decade, with so much money coming into the
sector, we’ve seen companies do things that made no sense. We’ve seen a lot of
pretend companies, who don’t really know what they’re doing, and they’re now
being forced to get out of all the [properties and projects] that have no
potential. This bear market has sharpened the focus, which makes this a very
interesting market, especially for discovery companies. I don’t see any
significant help on the upside from metal prices for some time – we’re stuck
with the metal prices that we have. We have to explore for new discoveries. The
geologists will be focusing on where they can deliver the big discovery.”
How
can investors find new opportunities in the market that we’ll be seeing in the
coming months and years? Mr. Kaiser points investors to one area in particular:
“Because we’re going to see this clean-up, we’re shifting to discovery
exploration. Now we look for juniors that are generating prospects that are
going to give us the high-grade discoveries that works at the current prices.
That’s where the biggest money is made in the sector. That’s where you get
something going up 10, 20, sometimes 100 times in price because some obscure
junior with a clever story, drilling a blind target suddenly has a big new
discovery where the grade and scale is such that the capital starts flowing…
and it doesn’t matter what the gold price is doing on a day-by-day basis on
discovery plays like that.”
And
specifically, Mr. Kaiser points to another type of discovery that few investors
are paying attention to: “Poly-metallic plays will be interesting, too. VMS
plays. Copper, gold, zinc, all adding to the value, so who cares what gold is doing
today because all those other metals are balancing it out. Those will also
become an intriguing driver in this space.”
Also,
Mr. Kaiser predicts some changes to the players in the markets: “We are in a
clean-up for the broader market. The super-cycle was from 2005 to 2008 based on
China’s emergence, higher base metal prices and so-on. The gold pessimism cycle
was from 2009 until now when fiat currency debasement and quantitative easing
was going to make gold go up, up, up forever. That’s over now. Now we are in
the clean-up phase where private equity and bigger companies are now scooping
the advanced juniors at very modest mark-ups at the rock-bottoms they hit last
year. There will be a wave of takeover bids that will boost things 25% to 100%
higher. That will take away all the stocks that would benefit enormously if
they could hang on long enough for another year, when I think gold will be back
over $1500 – with a solid narrative behind it, not this end-of-the-world
non-sense that a lot of people in the sector have been spewing for the past 5
years.”
We
asked Mr. Kaiser if he had any companies he was paying particular attention to
and he shared one with us: “Probe Mines (TSX-V: PRB) is now drilling an
extension on a high grade zone that they found a year and a half ago at the
edge of a large 5 million ounce 1-gram per ton system that they found several
years ago. That would have made the company very valuable at $1600 or $1700
gold; it’s not as an open pit mine [at today’s prices]. But this higher grade
zone they’re now developing will be an underground mine that should work very
well at current prices and it’s in an area where there’s not supposed to be anything.
If it turns out that there’s more gold there, it could become a regional play…
just as over 30 years ago, what happened at Hemlo, which was an area with
pitiful little showings and nothing very big, and then, on hole 80, they hit a
20 million ounce gold system and the whole area goes berserk.”
Investors
should always do their own due diligence before investing in any stock and Mr.
Kaiser’s company, Kaiser Research, helps them do just that. As he describes, “We
hunt for speculative value in this sector. KaiserResearch.com. There are a
couple of links that are unrestricted [available for anyone to view]. Gold
Resource Sector and Junior Resource Crisis Center. If you want any of the
really good material, you’ll need to subscribe. There’s a $100 30-day renewal
option. You get not just my commentary on the stocks, you get access to my
search engine. If you know what you are looking for, you can put together a
very complex query and find companies [to perform due diligence upon]. I have a
lot of material there and you can very rapidly decide whether any particular
company meets your criteria to invest in.”
Investors
will be glad to hear that the bottom is here and now the market is potentially
in an upswing. But Mr. Kaiser cautions investors to approach the recovering
marketing carefully to ensure that they find companies that have money in their
treasury to survive the next few years and to invest in discovery
opportunities.
REFERENCES
Cambridge
House International’s Vancouver Resource Investment Conference: http://cambridgehouse.com/event/vancouver-resource-investment-conference-2014
Kaiser
Research: http://kaiserresearch.com/s/Home.asp