Peter Grandich, The Grandich Letter

Peter Grandich has been following the metals and mining sector for over two decades.

Peter Grandich is the founder of Grandich Publications, the publisher of The Grandich Letter since 1984. His commentary on the metals and mining sector has been read by tens of thousands of people around the world. Today, The Grandich Letter is one of the most popular financial blogs on the internet.

In 1987, Peter was dubbed “The Wall Street Whiz Kid” by Good Morning America after accurately predicting the Black Monday stock market crash. Since then, Peter has been an advocate of metals and mining and a critic of U.S. monetary policy.

Peter caught widespread media attention in December, 2011 when he called out fellow financial commentator Dennis Gartman for stating the bull run in gold was “dead”. Grandich challenged Gartman to a one million dollar bet that gold would see $2,000 before it would see $1,000. A bet that was not accepted by his counterpart.

About gold and it’s lack of support from the financial community, Peter suggests that gold will never find universal overall support because to do so would undermine what drives the financial services industry worldwide – the buying and selling of financial assets.

We connected with Peter Grandich in the second installment of our Top Mining Minds series to learn his take on the mining equity markets.

What factors will drive the mining markets over the next 12 months?

Despite general metals prices much, much higher than a decade or two ago, the mining and exploration industry is far more challenged now than ever before. This is especially true as you move further down the food chain into the junior resource sector. Among the numerous reasons for plight in the junior sector are:

  • The audience for mining and especially exploration shares has shrunk despite the dramatic increases in metals prices themselves. A clear example of that is the dramatic drop in the primary “end users” that used to be a key part of the demand side – brokers.
  • Years back, hundreds if not thousands of brokers built part or much of their book of business around the buying and selling of mining and exploration stocks. They each had 100 or even 500 clients and many of them ended up buyers of these shares. Unfortunately, these folks are now asset gathers and commission-driven buying and selling is ancient history. They no longer are active in the mining and exploration sector. This is also unfolding in the Canadian financial industry.
  • While the 43-101 rule truly reformed what used to be like the Wild, Wild West in the junior sector, it also removed any sizzle from the promotional side of things. While not a bad thing when one recalls what use to go on in this area, the downside to it is companies who are mostly sizzle and not yet steak can’t even light a match when speaking of their potential, let alone stroke the fire.
  • Regulatory and/or compliance factors have made it much tougher for juniors to attract attention. Again, this may or may not be a good thing, but it’s a fact of life as far as I’m concerned. In the States, most brokerage firms no longer allow solicitation of companies not trading on the NYSE or major NASDAQ markets. Some don’t even allow unsolicited orders anymore. Many compliance departments have made it difficult or impossible for their advisers to buy juniors – period.
  • Canadian investors may be surprised to find most Americans don’t find natural resources as “second nature” to them. Americans’ biggest concerns about natural resources are availability of gas to drive their cars and oil to heat their homes. They’re not keen on natural resource stocks and still think for the most part a gold mine is a hole in the ground with a liar standing next to it.
  • The junior sector is a “pimple” of an industry, yet 1,000 to 1,500 juniors are trying to find a few dozen so-called experts who can appreciate and talk about them in a mostly what’s-in-it-for-me mindset. The ability to get their story known is perhaps the biggest challenge and drag for a junior these days.
  • Reducing the hold period on private placements to just four months has hampered the juniors. Companies just can’t advance themselves up the corporate ladder in such short periods to warrant enough new interest to gobble up all these new free-trading shares that come to market.
  • Investment bankers now play the “warrant” game in order to keep deal flow going. They turn to their institutional buyer and suggest selling the shares that are coming free trading for either side of breakeven and hold the warrant as their leverage. Meanwhile, they take the freed up capital and buy their next deal.
  • Discount brokerage has also greatly added to what seems like an endless supply of shares. Years back, one held juniors at times simply because they couldn’t profit from selling them after just a few cents rise. Now, thanks to deep discount commissions, one can profit from the sale even if the share price is barely up.

I’m certain there are other reasons, but I believe the above is a good part of why we’re where we’re at today. The question now is does this mean the mining and exploration stocks are no longer worthy?

What should investors be doing right now?

The TSX Venture has always been a boom/bust exchange. It’s extremely volatile. The exchange has existed for 11 years and during that time; it has gone through 7 bear markets of its own (market downturns of 20% or more). While the bust cycle can still linger, history suggests we’re on either side of a bottom. Assuming all sharp objects have been removed and the wife and kids have not left by now, junior resource players may want to “gamble” on history repeating itself one more time and look forward to celebrating the arrival of 2013.

Like in every vicious bear market, the baby gets thrown out with the bath water. In the junior resource sector, numerous companies with advanced-stage projects have literally gone on sale for pennies on the dollar. While it takes much more than simply throwing a dart at a list of juniors, an exchange traded fund (ETF) or mutual fund specializing in juniors and small to mid-size emerging producers seems highly favorable to the reward side at this point.

What are your top picks and why?

This mother of all gold bull markets was built on a foundation of dramatic changes in the gold market itself that began in earnest 10 years ago and propelled it up to where it is now. First, two significant negatives turned into positives. The gold market had basically capped due to constant central bank selling and producers being aggressive forward sellers of future gold production. However, starting with the Washington Accord in 1999, the central banks dramatically changed direction and agreed to limit gold sales. In fact, in the last two years the central banks have actually become net buyers. At the same time, gold producers have made hedging a thing of the past. Hedging has really become a four-letter word among investors.

The gold market finally started to rise and people realized that companies that were hedging were making less money than companies that were not hedging. In the ’80s and ’90s, the old American Barrick was almost a commodities trading house rather than a gold producer because it used the hedging derivatives to make money. But the great mother bull market made that counterproductive and investors began to shy away from any company that pre-sold gold.

The other factor fueling the bull market for gold is the introduction of ETFs. They brought in an enormous amount of new gold buying. In the ’80s and ’90s, institutional investors found it cumbersome to take a large position in gold. Physical gold purchasing was not only expensive, it involved storage costs and carrying costs. People tried to use mining shares as a proxy until they realized that when the market went down, mining shares went down with it. ETFs allow people to have direct exposure to the gold price. ETFs also offer tremendous liquidity and the ability to sell at reduced costs intraday.

Central bank gold selling, lack of hedging and the creation of ETFs are the main reasons why the gold bull market has done what it has done. The gold perma-bears who have not recognized these changes have missed out.

In the junior resource sector, I’ve made extremely large speculative bets on some companies I also work for, all of whom I can envision being taken over or merged in the next 12-24 months.

They include:

To read more interviews from our Top Mining Minds series – CLICK HERE.

Mike Luft

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