Managing Risk

Managing risk is a key part of investing in junior mining stocks. There are two levels of approach here: stock specific and sector wide.

I’ve discussed the stock specific factors many times and don’t go into them here. The considerations at play include timing of results, share price moves ahead of or in response to news, area play influences, the need to finance, a free trade date releasing whack of inexpensive stock to trade, and the seasonality of a project. All should play a role when considering when to enter or exit, in part or in full, a junior stock.

What I want to talk about today is the sector wide stuff.

Some years it’s easy: buy in December. Sell in late February. Buy again May through July, starting with northern explorers whose share prices rise ahead of the summer field season in anticipation. Sell in late September or October. Repeat.

That cycle is pretty darn reliable for precious metals stocks. It’s so reliable, in fact, that it has become self-reinforcing – enough people play seasonality that they add to seasonality!

Will it be in play this year? Tough to know, as it’s a pretty weird year. There are big, unusual forces at play, the main ones being COVID (vaccine rollouts, stimulus packages, case numbers and lockdowns) and Biden (infrastructure spending, scale of stimulus, messaging around confidence, monetary support staying the course).

What are the possibilities? Let’s simplify:

Green are the scenarios I think most likely; yellow are second in line and red are least likely but still possible.

It’s apparent I’m concerned we have some weakness ahead.

I remain very confident in the fundamentals, in the thesis that a strong gold bull market is unfolding. But when I look at the broad stock market, I hesitate on the near term. Investors are tripping over themselves to buy tech and biotech stocks with nary a thought to risk. That doesn’t put gold front and center. And without front and center attention, seasonal patterns could well take over.

I do think that gold miners’ robust balance sheets and cash flows and their strong and rising dividends will attract generalist interest, but that will take a bit of time. Think about turning a giant ocean-going freighter – it takes patience.

As you can see I am much more bullish on copper, zinc, nickel, and uranium in the near term. They are much less seasonal than gold stock to start with and the big picture forces at play right now support their cause.

I could absolutely be wrong. The technical analyst I respect most in the mining space, Jordan Roy-Byrne of The Daily Gold, thinks gold stocks might have bottomed late last week. He explained his thinking in an article titled Gold Miners & Juniors Hit Bottom and I encourage everyone to take a read. It’s an angle on the space that I do not work, namely chart patterns and volumes and retracements and moving averages and support levels and oversold/overbought metrics and retests and and and.

Long story short, Jordan thinks right now is a time to buy. He notes “an interesting set of cross currents, with the dollar rallying, bonds plunging, and stocks soaring,” which aren’t pro-gold…but to him the charts are saying Buy.

When I don’t know what the macro signs are saying in the near term, I tend to the conservative. I’m selling a bit. Of course I wish I’d sold five months ago, but I didn’t. And I would rather sell a few partial positions at current levels than ride them down farther should the slide-for-a-few-months scenario play out.

How much am I selling? Enough to pay the tax bill I’m going to get in a few months and enough to put my usual amount in another half dozen private placements over the next few months. That’s all.

Oh yes – I will still be investing in financing. Because my overall outlook hasn’t changed. I just (1) don’t have endless capital so do need to sell at times to raise funds for new opportunities and (2) hate to ignore that sneaking suspicion that things might range from boring to darn it down for until we’re mid summer.

There are exceptions. As you’ll read in Advanced Assets…Stocks In Limbo below, I am holding my advanced asset companies because they are all takeout targets and deals can happen anytime. I am holding stocks where I’ve already reduced my cost base. And I am holding stocks with near-term news expected that’s pertinent to the investment thesis, like drill results.