Reevaluating Resource Companies for a Potentential Rebound

Author : Jim LetourneauA common theme is emerging in the junior resource sector Companies with cash are being told to “keep their powder dry” Survival is the name of the game While we like the plucky optimism of most junior companies (as opposed to the creeping arrogance of many over funded under qualified management groups), there is no reason for investors to be putting money into a company that is hunkering down for two plus years of care and maintenance

The global financial crisis has hit the resource sector hard A powerful commodity bull market started in 2003 and most investors were expecting historical returns Jim Rogers was consistently saying “Throughout history, bull markets in commodities have lasted a long time They’ve averaged about 18 years or 19 years The shortest I could find was fifteen years; the longest was 23 years ” There is a long wait between sustainable demand for a commodity and the development of new supplies It takes about 10 years for a mine to be discovered, financed, permitted, and built The recent commodity cycle was interrupted after only 5 years

In, January 2009 most major mining companies have cut their staff by 5-10% and their uneconomic mines are being closed Projects that were going into the mine construction phase have been mothballed as there was no money forthcoming to pay for the construction If demand for metals returns (and history indicates that it will), there will be a large time lag to recommission recently closed mines It can take 6 months or longer to put together a technical team capable of running or constructing a mine The decision to proceed will require a sustained period of higher commodity prices The global economy will have to wait a few years before new commodity supplies become available We are witnessing a swift destruction of commodity supplies

The drill bit provides the hope of discovery That is what excites investors who often care little about the difference between an anomaly, discovery, or economic ore deposit When the money is flowing junior companies spend it on drilling Unfortunately, skyrocketing costs and diminishing productivity were creating a large sinkhole for investors An experienced driller can out perform a novice by 50-100% Some exploration programs came back with no drill results at all because of inexperienced field workers

Many companies were strong armed into drilling by their “investors” with little time for targeting or reinterpretation of old data The boom and bust cycles of the junior resource sector make continuity an unaffordable luxury Geologists and geophysicists are continually dusting off old projects completed by others with precious little time to incorporate new exploration methods or interpretations The recent correction of the commodity bull market has given investors a great opportunity Marginal companies are disappearing, and the strong ones are gaining a greater share of investors attention

It is time for resource investors to regroup The shares of companies with stellar management teams and strong projects are trading for less than their cash value The strongest companies with the best projects will bounce back quickly when demand for commodities return Do you research on junior resource stocks when they are unloved and under followed You will be ahead of the crowd Jim Letourneau, P.Geol. is a geologist, speaker, investment newsletter editor and investor relations specialist living Calgary, Alberta.

Jim has been blogging at http://www.jimletourneau.com since 2004.

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