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Resource Juniors are like Cockroaches

Posted by nexvucapital on April 19, 2013

We collectively have 75 years of experience in the Junior Resource sector…obviously we had no desire to make our parents proud. My personal experience spans 20 years and multiple market cycles. Today we wanted to set the record straight. For some time now we have been hearing about the death of the Junior Resource Market and pundit after pundit laying out the gory details of how hundreds of public junior resource companies will die. I am using the “buried and gone” definition of “die” here. The truth is that killing a public junior resource company is actually harder than getting rid of cockroaches and generally what we will see going forward is more akin to a sale at Walmart.

RollBack

First, let’s look at a few basic facts:

  1. TSX Venture companies generally cannot finance below $0.05 unless in conjunction with a rollback
  2. Rollback’s require a shareholder vote at an Annual General Meeting or a Special General Meeting
  3. Majority of TSX Venture companies have a December 31 Fiscal Year End and Audited Financials due April 30
  4. Failure to file Audited Financials results in a trading halt subject to the Audited Financials being filed
  5. Auditors need to make money too…killing their clients is not good for business

A search of TSX Venture companies trading at or below $0.05 based on yesterday’s close produced 737 companies. Some of these companies will have funds available to make it across the valley of death while the others will require financing to keep their asset(s) and continue operations even at the most minimal levels. Those with limited funds and trading substantially lower than $0.05 will be forced to rollback their shares issued and outstanding.

The effect of the above will be a substantial reduction in the gross number of shares trading on the TSX Venture (wink, wink) but a limited reduction in the number of companies trading on the Exchange. Just like the Rollback sale at Walmart this presents a smart-money buying opportunity.

The TSX Venture Exchange has been around for decades in various forms because it actually serves a vital purpose in the global economy. The companies listed on the Exchange discover resources. These resources are then developed and the commodities they produce are used everyday by people. The general use of these commodities has only increased over time but within any particular time period the demand for and supply of these commodities varies.

We are currently in a period where the demand for commodities is relatively high (as reflected in the prices) but demand has been waning as the world works its way through its acute debt/growth issues. The companies that have been charged with the discovery of the planet’s future supply of these basic materials, currently trade at prices that reflect the value of their general pursuit as worthless.

As optimists by nature and buttressed by history we see this current disconnect in valuation as an opportunity. The question becomes one of timing the opportunity, so lets evaluate that. If something is trading at a half a penny it really cannot go much lower (unless it is the rare cockroach that does actually die). The rollback mechanism is really to give the resulting share price a fighting chance of staying higher than $0.05 so that a financing can be completed under the rules of the TSX Venture Exchange.

An Example:

ABC Resources Inc. (Symbol: ABC)

Current Shares Issued: 100 million

Projected Rollback: 10 for 1

Post-Rollback Shares Issued: 10 million

Projected Post-Rollback Price: $0.05

With 10 million post rollback shares, ABC will now try to finance at $0.05 to raise the funds required to stay alive. If one can participate in that financing (and get a warrant) then one should wait for that event. If one does not expect to be invited to the $0.05 financing then one should look at the opportunity afforded by the current liquidity knowing that a Company with 10 million shares issued has far less liquidity than one with 100 million shares issued.

We also suggest the following fundamental guidelines:

  • Focus on management teams with a history of being able to raise non-institutional funds (in the junior resource space institutions are generally top-feeders)
  • Focus on Big Bang projects…small is always small whether the market is good or bad (if one has to choose between two lotteries which have the same entry price and same odds of success then one should buy a ticket in the lottery that offers the biggest prize)
  • A public company has intrinsic value (factoring in the cost and time to complete an IPO)
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