Canaccord Adams: The worst for junior mining ‘is likely behind us'

Canaccord Adams metals analysts suggest that it may be time to accumulate small cap/mining exploration stocks that offer good value.

Author: Dorothy Kosich
Posted: Tuesday , 23 Dec 2008

RENO, NV -

Although the small-cap mining sector "has just been through its worst, most precipitous decline in modern history," metals analysts at Canaccord Adams say they believe "the worst is likely behind us."

Nevertheless, they noted a sustainable recovery in the junior mining sector will depend "upon the perception that an overall recovery in global demand for metals in imminent."

However, that turnaround will "likely depend on the efficacy of the government stimulus packages being implemented around the globe," they added.

"The year 2008 has shattered investor confidence, and market valuations reflect risk-averse investor sentiment," the analysts advised. "We believe that, to achieve a sustainable rally in the junior mining sector in 2009, investors must regain confidence in broader equity markets. "

"Given the ongoing issues in the global equity and credit markets, we believe that investors are likely to remain somewhat risk adverse. That said, opportunities to exist in the junior sector even under more subdued investor interest."

Canaccord Adams stressed that, in the current environment, investors should focus on companies with "balance sheet strength, above-average project portfolios and strong management sheets."

Junior mining companies with strong balance sheets "are more likely to survive prolonged sector weakness, which gives an investor an opportunity to benefit when the rebound in junior mining equities occurs," the analysts suggested.

In their report, the analysts outlined key mining sector drivers for 2009 including:

• Base metals prices: "The global outlook for metals demand remains grim." But low prices could be close to leveling off.

• Precious metals prices: "Credit concerns, a trend to further Fed easing...political tensions, diversification of central bank reserve holdings and the high US current account deficit all suggest a strain on the US dollar, and therefore strength in US-denominated bullion."

• Uranium: "We expect uranium to fare well through 2009 and beyond as the current global fleet of 439 plants is expanded by 39 plants under construction and as plans and proposal for an additional 379 plants are advanced; the price may be further enhanced as supply concerns arise."

• Diamonds: "This has been the least interesting sector in mining over the past five years in our view. ...With metal prices off, rumours suggest BHP and Rio Tinto are ramping up diamond exploration activities. In addition, advanced plays by Peregrine and Diamonds North could create renewed interest."

• US dollar: "As capital diversifies, will the U.S. dollar decline? If so it could be good for all metals."

• The TSX and Dow Jones: "If the US has been in recession since December 2007, we may have already seen the bottom of the market. If we are halfway through the recession we have good hopes for the markets in H2/09."

• The TSX Venture Index: While Canaccord Adams noted that the TSX-V has been down as much as 80% over the last 18 months, "We think the worst is over, but will the recovery be V-shaped or will prolonged consolidation kick in before a sustainable recovery emerges?"

• Although the availability of capital has been constrained on all levels, the analysts said they have witnessed successful equity underwritings of several small to mid-cap equities. Nevertheless, they advised that, until "a shift in sentiment towards explorecos improves, we expect capital to remain tight among the small caps." Canaccord believes equity raised next year for explorers and developers "will be limited to above-average opportunities."

• M&A Activity: "We believe the circumstances currently prevailing within the small cap mining space could open the potential for a series of mergers and acquisitions. Compounding this is the lack of capital available to juniors, which could be also a motivating factor to build on the M&A environment."

• New Discoveries: ‘With fewer explorecos actually conducting exploration work, the chances of a discovery in 2009 are declining. That said an attention-grabbing discovery could have a greater impact given the small circle of active explorers for investors to concentrate on."

• Industry Challenges: "Access to capital, declining metal prices and an apathetic investment climate are serious concerns in 2009."

Given the unknowns associated with a broad junior mining market turnaround, the analysts suggested that small-cap exposure "be associated with well-managed, cash-rich companies that will maintain active, but modest, exploration/development programs on top quality targets over the next 6-18 months."

Canaccord Adams highlighted 12 small-cap mineral exploration/development companies that have "strong working capital positions, above-average strong portfolios and strong management teams." They include B2Gold, Colossus Minerals, Exeter Resources, Fronteer Development Group, Hathor Exploration, Lake Shore Gold, MAG Silver, Minera Andes, Northern Dynasty Minerals, Rainy River Resources, Silverstone Resources, and Ur-Energy.

The currently prevailing circumstances prevailing within small-cap mining "create the potential for a series of mergers and acquisitions," the analysts suggested.

"ergers among the small caps could increase as management teams become ‘humbled' by current market conditions and recognize that combined entities could, in the long term, result in improved shareholders value," they noted. "In other cases, the combination of cash-rich companies with property-rich companies could synergistically result in improved shareholder value."

"We expect additional M&A activity to drive some renewed speculative appeal over the next several months," the analysts advised. Canaccord Adams outlined several possible M&A targets including Anatolia Minerals, Andina Minerals, Aquiline Resources, Bear Creek Mining, Candente Resources, Canplats Resources, CGA Mining, Colossus Minerals, Comaplex Minerals, and Corriente Resources.

Other prospective M&A targets include Detour Gold, Donner Metals, GlobeStar Mining, Grayd Resource, Hathor Exploration, International Tower Hill Mine, Minera Andes, Osisko Mining, Rainy River Resources, Rubicon Minerals, Tournigan Energy, Ur-Energy and VMS Ventures.