Gold & Silver Equities: Time for the Juniors to Catch Up?

Having been through the latest pullback, I think the precious metals markets are looking pretty good.

If you look at the larger precious metals ETFs, such as the VanEck Gold Miners ETF (GDX) and the Global X Silver Miners ETF (SIL), their charts look respectable. The same goes for the VanEck Junior Gold Miners ETF (GDXJ) and the Amplify Junior Silver Miners ETF (SILJ).

All of these ETFs have bounced from near multi-year lows to lukewarm levels, but they might have further to go. Q2 was favorable with high precious metals prices and stable input costs, which should translate to good earnings for the companies in these ETFs.

However, if we then look at something like the S&P/TSX Venture Precious Metals & Minerals (Sub Industry) Index, which tracks a basket of smaller precious metals juniors traded on the TSX Venture Exchange, we can see that they are still not far from multi-year lows. It’s not perfect, but the chart is a decent proxy for a lot of the juniors I’m familiar with.

This is classic for precious metals bull markets. As precious metals prices move higher, investors tend to buy high-quality, “go-to” stocks that have immediate leverage to gold and silver prices first.

These are the stocks that populate the larger indexes that produce precious metals, have royalties on them, or in some other way get higher cash flows as gold and silver prices go up.

That’s great, but what is not as obvious is why these higher gold and silver prices then translate into higher prices for the smaller junior equities, which in many cases don’t even produce gold or silver.

As the larger producers become flush with cash because of the higher margins they are able to obtain, they can then go out and do something with that cash. For example, they can invest that cash internally, pay down debt, or return that cash to shareholders.

What the larger producers can also do is use cash or their elevated shares to buy new assets held by juniors. This makes a lot of sense now given the current bifurcation between them and the smaller juniors.

As the producers have more cash on their hands and want to maintain their production profile and have a pipeline of projects, they will likely start bidding up for these juniors. That has already started to happen with increased M&A activity, and I believe it will continue as the rationale for doing so becomes better and better.

So, if this precious metals bull market continues, which I suspect it will, the undervaluation in the junior mining equities is unlikely to last. I think there is still a great opportunity to be a buyer of good junior mining equities and then just wait until they go from being incredibly undervalued to being bid up by producing companies that need to replenish their asset pipeline.

Thanks for reading!

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Disclaimer: This article is for informational purposes only and does not constitute investing advice. Please consult with a qualified financial advisor before making any investment decisions.