Gold fuels rally in junior mining that has the TSX Venture on fire

Gold exploration and early stage companies in other sectors are fuelling a massive rally at the TSX-Venture exchange, which has come roaring back after hitting rock bottom earlier this year when the coronavirus pandemic froze most economic activity.

The S&P/TSX Venture Composite Index has more than doubled to 738.1 on Thursday afternoon, after dropping to a 10-year low of 358.04 on March 18.

Much of the surge has been driven by investors’ newfound interest in all things gold, including junior gold companies, which are suddenly back in vogue as the price of bullion sits near an all-time high, trading near US$1,945.86 per ounce as of Thursday afternoon.

The junior gold companies, many of which are still in the exploration stage, as well as mid-tier miners have by some metrics outperformed their senior counterparts.

For example, shares in VanEck Vectors Junior Gold Mine rs ETF (GDXJ), which tracks mid-tier gold mining companies, have surged 164 per cent to US$58.66 since March, while the VanEck Vectors Gold Miners ETF (GDX), which tracks more senior gold miners, rose 119 per cent during the same period.

“It’s been quite a run here over the past six months for junior mining,” said Dean McPherson, head of business development for global mining at TMX Group Ltd., which owns the TSX and the TSX-V exchanges. “Precious metals, of course, is what started it all.”

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Top performers on the TSX-V include Pure Gold Mining Inc., up 312 per cent since early March to $2.02 per share, and Great Bear Resources Ltd., up 272 per cent during the same period to $15.66. Both are developing gold projects near Red Lake, Ont., and Pure Gold plans to produce gold by the end of the year.

In the past month, McPherson said trading volumes of junior mining companies on the TSX-V for perhaps the first ever exceeded the trading volumes of mining companies on the TSX.

Of course, shares in other mineral exploration companies, as well as green-tech companies, have also spiked, as have those in internet and technology companies.

But the interest in gold miners and explorers comes after a long fallow period, during which many executives complained that it was hard to attract investors or raise money for exploration.

Now, they have the wind firmly at their back.

The aggregate market value of gold companies on the TSX and TSX-V reached $399 billion on June 30, which represented 87 per cent of the value of all mining companies on the exchanges, up from 63 per cent in 2015.

“Everything goes with the metal price,” Kerry Smith, an analyst at Haywood Capital Markets, said. “The (gold) metal price has improved and some investors are prepared to take on more risk and they’re prepared to own the exploration companies.”

Smith speculated that some generalist investors who made money on senior gold producers are “recycling their profits” by reinvesting in smaller-cap junior miners.

He noted the TSX-V “has just gone straight up like a stick, it’s incredible,” but added that the index remains far off its 2011 level above 2,400.

That year also marked the end of the last bull cycle for gold. For a roughly six-year period between mid-2013 and mid-2019, the price of gold remained largely rangebound between US$1,150 and US$1,350.

But gold prices began steadily climbing last summer, driven by declining global interest rates, a weakening U.S. dollar and general economic uncertainty. Since January, gold prices have risen 27 per cent and are now hovering close to the US$2,000 per ounce benchmark.

Meanwhile, exploration budgets have largely tracked the price of gold, according to an analysis done earlier this year by S&P Market Global Intelligence , which found that budgets remain far off their 2011 peak and declined more than any other commodity in 2019.

“There are no major gold discoveries on our list in the past three years, and only 25 in the past decade,” the S&P report said.

The scarcity of new gold discoveries in the past decade has now magnified demand for junior gold mining companies with strong projects, McPherson said.

“We’ve starved the exploitation space for so long, and a lot of majors don’t have the exploration projects lined up,” he said. “That’s why you see investors putting so much interest in the junior space.”

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