Re: News Releases - Thursday, April 04, 2013
Lawrence Roulston discusses reasons behind the severe selloff
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"The most commonly ascribed reason for the severe selloff has been the general investor flight from risk, in large part due to global financial uncertainty. There are other contributors, which are in reality more significant in understanding the present market condition."

--- Lawrence Roulston, Resource Opportunities


THE STATE OF THE MINING MARKETS

Share prices of junior mining companies have been beaten down to such an extent that one can find companies with capable management teams and quality assets in companies which are trading for a few percent of their net asset values.

The most commonly ascribed reason for the severe selloff has been the general investor flight from risk, in large part due to global financial uncertainty. There are other contributors, which are in reality more significant in understanding the present market condition.

The terrible operating performance of many of the major mining companies in the past couple of years seriously impacted investor confidence. The majors took write-offs last year exceeding $50 billion. In spite of reasonably strong metal prices, operating performance fell short of expectations because of escalating operating costs.

In part to restore investor confidence, the major mining companies have deferred tens of billions of dollars of capital expenditures that were slated to have been spent over the next few years. The dismal performance of the majors and the deferral of capital expenditure programs have created a sense among investors that the majors will not be developing new mines and therefore will not be buying junior resource companies, thus further dampening demand for shares of the juniors.

The situation among the junior miners is far worse than for the majors,
largely for reasons internal to the industry.

Companies listed on the Toronto Stock Exchange venture board raised a record $26 billion of new capital over the previous three years. (The majority of that money went into junior resource companies, but we don't have a definitive split of resource versus other companies.) Much of that new money was spent by exploration companies without generating value, either through administrative expenses or on exploration programs which were not successful. The total value of the resource companies on the venture exchange is presently around $10 billion.

The $26 billion of new capital was sourced largely from institutional investors who had little understanding of the resource industry. Over the past year, redemptions and funds being wound up have created intense selling pressure at a time when few investors have any appetite for acquiring junior resource shares.

Political unrest and government intervention in many areas has further rattled nervous investors, adding to the selling pressures for companies that are operating in parts of Africa and several Latin American countries, for example.

The good companies have been sold off along with the lesser quality companies, creating unprecedented opportunities for investors who can differentiate the worthwhile companies from the rest of the pack.

In spite of the slow economic growth over the past few years, metal consumption continues to increase. The rapidly growing emerging economies, most notably China, use far more metal per unit of economic activity than do the developed economies. Growth in metal consumption is thus outpacing average global economic growth.

Over the past few years, the mining industry has benefited from the first wave of metal demand from the emerging economies, which has been driven largely by infrastructure development. As infrastructure development in China lightens up, other emerging economies, such as India, are accelerating their infrastructure build-out. A second wave is just getting underway, driven by the hundreds of millions of new middleclass consumers and by the even larger number of lower class
consumers who are now gaining the ability for the first time to buy tangible assets.

--- Lawrence Roulston, Resource Opportunities