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Nick Brusatore wanted to create a leading Canadian medical marijuana company. So he turned to a logical source: a hopeless junior mining company.
He bought a controlling interest in Affinor Resources Inc. in March, and then met with the management team. His pitch was simple: the great marijuana gold rush of our generation is just starting, while the junior mining gold rush is pretty much dead. The Affinor team listened and loved what they heard.
“They were clearly looking for something to do with this shell that they’d been keeping on the market, because the mining thing just kind of went bust,” Mr. Brusatore said in a matter-of-fact tone.
Affinor followed his lead, and was wise to do so. Its stock price has shot up an astounding 2,600% in the nine weeks since the company moved into pot, meaning its market cap has jumped to roughly $50-million from less than $2-million. Quitting the mining universe was clearly the smartest thing this company ever did, but it’s not the only one doing it.
More than a dozen Canadian mining companies have announced shifts into medical marijuana. Given that raising capital for exploration is impossible for most juniors, the moves make sense if they want to do something productive.
This “Breaking Bad” strategy has generated some chuckles in the investment community. But it underlines the fact that investor interest in mining stocks has fallen to a shocking low. And there is no consensus on when that will change, or what catalyst will turn things around.
The malaise is being felt right across the industry, from the tiniest junior to the largest producer. The hot money has moved on to stocks in technology, oil and gas, health care and other sectors where returns have been superior to mining, which is just about all of them.
The sector continues to chug along and generate decent earnings, but the lack of noise about them on the street is almost deafening. To take one example, the HUI gold equity index is at roughly the same level it was 10 years ago, when gold prices were below US$400 an ounce.
People who talk about the lack of investor interest in mining almost always boil it down to two issues: weaker metal prices due to slowing Chinese growth, and self-inflicted damage by the mining companies through poor cost control and/or terrible acquisitions at the top of the cycle.
Those are certainly central issues. But experts wonder if there are other deeper root causes.
One of them may just be fatigue. Metal prices have been in an overall bull market (albeit a rocky one with big ups and downs) since 2002. History suggests that 12 years is fairly short by the standards of commodity cycles, which can last for two decades or more.
Metal prices are below their 2011 highs, but they are still fairly healthy (coal and iron ore aside). National Bank economist Stefane Marion said this week that commodity prices overall are at their highest point since 2008, even after stripping out energy.
But investment horizons have become so short that many people never think about the sector that way. To them, the cycle has been going on for an eternity and the upside is long gone.
The short-term horizon has also affected the companies, which are being asked to deliver more profits and production growth in increasingly short periods of time. Not surprisingly, they have failed, and that line of thinking has pushed companies into many foolish acquisitions that backfired.
“People don’t understand,” said Terry Ortslan, an independent mining analyst. “They think you press a button, drill a hole and discover your ore body.”
He offered up another key reason for investor frustration: mining companies during this entire commodity upswing have failed to make a single world-class discovery that has created real value, despite many claims to the contrary by the industry. “Let’s get real,” he said.
For the rest of this article, click here: http://business.financialpost.com/2014/05/31/why-canadas-junior-mining-sector-is-going-to-pot-literally/