Contrarian Strategies When the Market Is Down

December 1st, 2015 by

There’s only so much that an investor can do to improve or strengthen their position when the broader markets are down. Although the ability to short somewhat evens the playing field, making investing a “zero sum game” (one which produces winners at the expense of losers) in some respects, there are plenty of mining companies that are taking contrarian strategies themselves.

The Landscape

no-miningTo say the least, the market for precious metals has been trapped in a low price environment for an extended period. While that may simply be a boon for consumers and investors, it’s a conundrum for the mining companies themselves. In most cases, the capital required to extract the metals from the ground has already been committed long before the end-product is sold to refiners. This means that the metal price at which these sales are profitable has already been established; each progressive drop in price eats into their profit margins, or renders the transaction a loss. In fact, we’ve seen that many miners are continuing to sell wholly unprofitable gold.

Aside from these difficulties, when markets are down and profits are hard to come by, it complicates the outlook for determining which firms are strongest. Companies that seemed well-positioned before the downturn may appear to be in terrible shape now because they became over-leveraged during the boom. Think: Glencore (LON:GLEN). Where does this leave investors who focus on the mining and commodity sector?

Following the Contrarian Miners

In an interview with The Gold Report, 321gold.com founder Bob Moriarty shares his insights on a handful of mining firms that are pressing forward amid the persistent bear market rather than staggering backward under its weight.

In the same interview, Adrian Day, an asset manager, points out an important dynamic: “Investors tend to forget that commodities move up and down and you can’t kill a project because today’s price is too low. You have to weather through it.”

With this in mind, here are a few of the firms that these two experts see as weathering through.

  • Goldcorp (NYSE:GG; TSX:G) is one of the majors who continues to produce profitable gold from its mines. It is developing three new mines this year that are expected to come online just in time for the market to recover.

mine shaft

  • Almaden Minerals (NYSE:AAU; TSX:AMM) has been active in scooping up projects at a discount, taking advantage of the market woes to solidify and diversify its options.
  • There are a handful of junior miners who are wisely using the downturn to advance their projects, even if this means entering into partnerships or raising cash. So long as this fund-raising is done prudently, says Day, they are actively adding value to their best assets. He cites Midland Exploration (CVE:MD), Riverside Resources (CVE:RRI), Lara Exploration (CVE:LRA), and Pretium Resources (NYSE, TSX:PVG) as prime examples.
  • Another method of making the most out of a down market is entering into streaming deals. The best example of streaming is the model of Silver Wheaton (NYSE, TSX:SLV), which buys a chunk of an existing project in exchange for a portion of future metal flows from the mine. This cost-effective strategy has also been employed, to different degrees, by the likes of Franco-Nevada (NYSE, TSX:FNV), Osisko Gold (TSX:OR), and Royal Gold (NASDAQ:RGLD; TSX:RGL).

By pressing forward with growth, new projects, etc., these miners are more likely to be the ones who are going to come out on the other side of the bear market the strongest. For the complete interview, you can find more here.

 

The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.