BENJ GALLANDER and BEN STADELMANN
This year the mining sector has gone from bad to worse. The multiyear downdraft in the prices for metals has intensified, and the Venture Exchange has fallen below its 2008 bottom. Amid the fray, producers have cut back across the board, developers have delayed projects and explorers have mothballed drilling programs and gone into hibernation. Though the environment is bleak, there are potential opportunities to be had for the brave investor.
A recent tour of the Yukon was a fascinating opportunity to visit a number of mines, development projects and exploration sites. The week-long excursion provided the occasion to better comprehend the territory’s strengths and weaknesses and understand the evolving collaboration between government, First Nations and industry.
The territory is an intriguing enigma. On the one hand, the region is remote, the environment harsh and its infrastructure assets — including its roads, transmission lines, telecom and energy generation facilities — are reflective of a territory with a population smaller than Timmins, Ont., spread out over an area larger than California.
On the other hand, the stakeholders are tackling these challenges and are working together to alleviate the bottlenecks. The territory’s First Nations have settled 11 of 14 land claims and industry co-operation is high on the agenda. Furthermore, one cannot overlook the advantage of its position in a developed country with a free market economy and a stable political system based on the rule of law. The Yukon regularly ranks near the top of the Fraser Institute’s annual global survey of mining jurisdictions. Finally, the region’s trump card is its mineral endowment, which has fired the imagination of prospectors for more than a century.
Successfully choosing companies that explore and develop resources is not easy: In our 30 years of investing, we have had our share of fabulous hits and dismal misses. One Yukon candidate with reasonable odds of success is Strategic Metals Ltd. (SMD-TSX-V). Unlike most junior miners, Strategic is a project generator, meaning it advances properties to a drill-ready stage and sells the projects to other organizations. The enterprise currently has 130 properties — most of which are located in the Yukon. This makes SMD the largest claim holder in the territory and makes it diversified across precious, base and specialty metals. In addition to this land base, the corporation has eight royalty agreements and holds positions in other junior miners including Atac Resources Ltd. (ATC-TSX-V), Rockhaven Resources Ltd. (RK-TSX-V), Silver Range Resources Ltd. (SNG-TSX-V) and Precipitate Gold Corp. (PRG-TSX-V).
The geological and executive team at Strategic Metals has been operating in the territory for more than 30 years and knows their businesses inside out. Moreover, management understands the boom-bust nature of the industry, which has allowed them to ride the upswings and downswings. During the current downturn, for example, the corporation has deployed its cash on hand to increase its land position and has launched a modest share buyback program.
While this venture has a lot of irons in the fire and the business model is relatively robust, these features have not spared its shareholders from the drop in commodity prices. From a high of more than $4 in 2011, shares now trade at a lowly 28¢. If the bear market grinds on, it is unlikely that shareholders will be spared further losses.
SMD’s model is unique within the world of junior resources. An investment in this company is essentially a bet on an experienced team of geologists and executives to find promising targets, explore and hold these claims, and manage a portfolio of properties through the cycle. The stock, now on our watch list, is also a play on the Yukon and the old adage that the cure for low commodity prices is low commodity prices. Our fear is that these cycles usually take more time to run their course than most participants imagine. This is an ideal time to identify enterprises with the attributes needed to flourish when the next commodity bull market gets under way.