Tuesday, February 12, 2013
Lawrence Roulston comments on buying in a bear market
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"In the midst of all the companies that are really struggling, there are a few truly spectacular deals."

--- Lawrence Roulston, Resource Opportunities


QUARTERLY UPDATE


The resource markets, in general, remain in a deep funk. The gold price is down 7% from the high of last fall. The recent decline, for many people, masks the fact that gold remains on the track of its decade-long upward trend. Silver, in spite of its volatile nature, has spent the past couple of years in a fairly narrow trading range and is presently in the upper half of that range. Copper is showing remarkable strength in the face of so much financial uncertainty, even weathering the decline in GDP suffered by the American economy in the previous quarter.

The Toronto Stock Exchange Venture Index rebounded slightly in late December with the end of tax-loss selling, but that upward trajectory has fizzled. The flat-lining of the Venture Index is really a tale of two markets.

Many companies, perhaps the majority, are still declining in value. At the same time, a few companies with good projects, good management and with cash on hand or access to cash are enjoying strong investor support.

A few investors with a long-term outlook are recognizing the extraordinary value in some of these companies at this time.

Most people recognize that it makes sense to invest when prices are down. It is just so incredibly difficult to invest contrary to prevailing wisdom. However, that is what is required to make big profits as an investor.

The last two weeks have been intensely busy, with the Vancouver Resource Investment Conference followed by the Cordilleran Roundup, a big mining industry gathering -- the Vancouver equivalent of the PDAC. Thousands of geologists and mining company management have passed through Vancouver for one or both of those events, networking, seeking capital and making deals.

A good number of those geologists and company executives presented their stories to me, either at the venues or in my office. Many of the stories can be summed up as follows: good project, competent management, no cash and a share price in the toilet.

Some of those companies are attempting to raise money in nickel financings. Let's see: 80 million shares outstanding, $1 million at five cents a share with a full warrant. That comes to 120 million shares fully diluted, assuming that they do not have a bunch of cheap warrants still outstanding from the last nickel financing.

For that million dollars, they get to pay rent and salaries for a few months and, if shareholders are really lucky, they may drill a few holes. Unless they get exceptionally lucky, investors will get the chance to participate in another nickel financing in a few months.

A few management groups are starting to realize that they have to get a hole lot more creative than simply doing serial fund raising at progressively lower share prices. For example, a few companies are pursuing strategic alliances with larger companies, partnering with metal traders or metal users, and looking to streaming and royalty deals as an alternative source of funding. Many are seeking joint ventures with other juniors, but so many of the other companies are also broke.

In the midst of all the companies that are really struggling, there are a few truly spectacular deals. Some of the deals that were presented to me over the past couple of weeks seem too good to be true. In the course of the next level of due diligence, some will undoubtedly turn to be too good to be true. (It is funny how the investor relations people and even some management people forget to mention certain facts that are critical in valuing the company.) Those companies that stand up to close scrutiny will be presented in upcoming issues of Resource Opportunities.

--- Lawrence Roulston, Resource Opportunities