Volatility Reigns

by Lawrence Roulston | August 18, 2008

Extracted from July 2008-1 issue

This year has been the most brutal period in a decade for junior resource stocks. The last couple of weeks have been particularly painful, in part because buyers were on holiday in Canada and the United States.

A few companies are facing significant selling pressure. Undoubtedly, there are some large holders who have made the decision to exit the sector and are pushing stock onto the market for whatever they can get. Until recently, there were buyers willing to take up any stock that came on to the market, albeit at progressively lower prices.

For most companies, the problem is not so much the selling pressure as a lack of buyers. There are numerous examples of share prices being pushed sharply lower by sales of a few thousand shares.

Most of the commentary that I read and the people I talk with concur that the markets will rebound, pointing to September as the most likely turning point. With that outlook, there has not been a hurry to take advantage of bargains at this time. As a result, the prices just keep sagging when shareholders insist in selling.

Companies with good management and good projects are generally being rewarded for positive news. There were setbacks over the past couple of weeks, but quite a number of companies have realized substantial gains in value even as the markets trended downwards over the course of this year.

Those high-quality companies will continue to attract investor interest and will almost certainly be trading at higher prices as the summer comes to an end. Those investors who wait until September will pay significantly more for the good companies – or alternatively, they will get the second or third tier companies at what appear to be bargain prices.

There is a certain amount of negativity hanging over the metals markets. The gold bugs are disappointed that the gold price did not keep rising when it passed $1000 in March. It is important to remember the fact that gold is $125 an ounce higher now than it was at the start of the year – a 15% gain in six months. The story is similar for silver, starting the year at $15, reaching a high of $21and trading now at nearly $19.

The copper price hit $4.08 earlier this July, the highest price ever. The other base metals are still trading well above the long-term average prices, with nothing to suggest a return to those levels. Some of the prices are at or near all-time record highs. Food prices around the world are soaring, and it is only natural that the fertilizer prices follow that lead. Potash and Phosphate, two fertilizer components derived from mines, have become flavors of the month among mining investors.

With the current state of the markets, there is a severe lack of liquidity at present. We expect to see improvements in liquidity for some of these companies in the near future. Buying interest might come from announcements of work getting underway, from results or from promotional efforts. Those "liquidity events" will provide at least modest improvements in price, but more importantly, improved liquidity in the markets will provide an opportunity for selling stock.