We all know that the market for junior resource companies is in a terrible state. We also know that this industry is cyclical, and no matter how bad it gets, it eventually turns around.
I have experienced a few cycles in the resource industry. In some ways, this is the worst situation that I have ever seen. But, this time is different and it is important to understand those differences to know what to do next.
In 2008, the resource industry was clobbered, along with most investments around the world. That sharp selloff was driven by external forces. Everything went down sharply, but then everything rebounded in tandem. Over the next two years, the TSX Venture index tripled.
If we look back a little further, 1999 through 2001 was considered the “nuclear winter” of the mining industry. At that time, the mining industry was still in the classic era, when high metal prices led to increased production which led to oversupply and declining prices. Several big new mines had just come on stream and demand for metals was sluggish. At that time, nobody dreamed that China and the rest of the developing world would soon begin to take off. Metal prices were down: copper, at $.60 a pound, was at the lowest price ever in real terms; gold hit a low of $252 an ounce. The producing companies were losing money.
Market commentators called mining a “sunset industry”, implying that the world's need for metals was going to suddenly evaporate.
It took real courage at that time to look beyond the moment. To be an investor, you had to believe that there would be a fundamental change in the mining industry – that metal prices would eventually rebound to a level that would make it profitable to develop and operate mines.