What I learned about junior mining stocks could shock you
From Matt Badiali, editor, S&A Resource Report:
From January 2005 to May 2007, the Toronto Venture Exchange (TSX V) rose 254%. That’s a huge move higher for an index. The TSX V is the home to nearly all of North America’s junior mining stocks. So that steep climb includes the performance of the junior miners.
I believe we are in the early stage of a new bull market in junior mining stocks. In order to understand what we could see over the next few years, I’m going to take a closer look at what happened to those stocks from 2005 to 2007 on the way up and then from 2007 to 2008, when the whole thing collapsed.
The index, however, doesn’t tell the whole story. The mining stocks listed on the TSX V performed quite differently from the whole index, as you would expect. When we break out the individual performances, we see some important differences.
The average gain of the whole group of junior mining stocks was 877%.
Junior mining companies are tiny and thinly traded, so we usually see outsized gains as a stock goes from pennies to a dollar or two. However, that’s not what I found. The average share price was $1.67 at the start in 2005. The average share price at the top in 2007 was $8.13.
Share price doesn’t tell us much though. I’m more interested in how the stocks performed as a group. So I examined performance by quartiles (25% increments, with Q1 being the top 25% with the biggest gains). The table below shows the gains on the way up and the losses on the way back down.
For example, the best performing quartile rose an average of 2,733%. The second best quartile rose 579%. That’s a huge difference in performance. But it gets even better.
Expert junior mining financier Rick Rule often quotes the 80/20 rule. That says 80% of the work is done by 20% of the people. He likes to say that you can take that out a second time… that 16% of the group does the most work. My data prove that there’s something to that idea.
The best 16% returned 8,172%. That’s three times the return of the best quartile. Here are some of the best performers from that group:
Those are some fantastic gains… the kind that could make once-in-a-lifetime trades for savvy investors. However, the losses are catastrophic. I knew folks who rode their largest gains down over 90%. That’s how you take a fantastic investment and turn it into a complete disaster.
Now that we have a basic understanding of what happened, we can figure out what worked then. We can also figure out how to avoid the crushing loss that came during the fall. Most important, we can see how this cycle might be playing out again today…
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