Resource markets remain extremely volatile in the face of global economic uncertainty. After a terrible beating in the first half of the year, resource company shares began to recover in August and September. A reversal of that uptrend in October leaves many companies still priced at irrationally low levels.
On a superficial analysis, the junior resource markets are merely treading water, with the TSX Venture Index barely ahead of the low point in June. A closer examination shows a very different story. Many companies are still losing share value, creating an aura of a flat or declining market. In fact, many companies with little or no cash and without tangible assets are still trading well above their fundamental values and will continue to sink.
On the other hand, a few tens of companies with strong management, good projects and which have cash are appreciating in value. We counted at least a dozen companies that we follow in Resource Opportunities which have appreciated by 50% to 200% in the past six months. Those big gains have come at a time when “the market” has been moving sideways.
While investors in general are not putting much value on the development-stage companies, larger mining companies can see the values, as evidenced by several takeover offers in recent weeks. The bid prices in those offers are well above market prices, with at least a couple of the deals priced at two-times the trading prices before the offers.
Interestingly, many of the takeover offers are coming from companies in emerging countries: Galway is being purchased by a private Brazilian company in a $300 million cash deal; Inter-Citic is being purchased for $250 million cash by a Chinese company.
Several of the companies that we are following are well positioned for takeovers, with large advanced-stage metal deposits. While many investors and analysts cast their eyes over the traditional developed world, for mining companies as the only players in the takeover game, the reality is that many, or most, of the offers in the future will come from rapidly growing mining companies in the developing world. Those companies can see the intense need for new resources and are prepared to pay reasonable prices. Investors in the developed world, taking a myopic view of the short-term issues close at hand, are missing the global picture and are under pricing resource assets.
A few investors, those who can identify the best companies, are coming back into the markets in a big way, quietly picking away at the higher quality companies. By the time that “the market” has turned around, the high quality companies will be trading at prices well above current levels.
The past year has been extremely difficult for resource investors. Looking forward, we believe that the extremely low valuations, the recent takeover offers and the improving global economic outlook provide strong evidence for a rebound in high quality development-stage companies. In due course, “the market” will also begin to move higher. In the meantime, we continue to present high quality companies which can generate big gains in spite of the near-term market sentiment.
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