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Retail investors, historically the “life blood” of the junior sector, are largely gone from the picture, but need to return for the sector to survive the current downturn, says John Kaiser.
The editor of Kaiser Research Online notes in the 1980s, retail investors depended largely on brokers to access information to invest in juniors. “To a large degree, it was a momentum driven market, and the focus in the ’80s was largely on gold exploration,” he said in early March at the Prospectors & Developers Association of Canada (PDAC) conference.
In 1990s, the sector uncovered several large discoveries, including the Voisey’s Bay nickel deposit and the Ekati diamond deposit, attracting institutional investors through private placements, Kaiser said. “That period was all about discovery exploration.” It also coincided with the deregulation of brokerage industry and the emergence of the Internet, which minimized the role of brokers as intermediaries between juniors and investors.
That discovery exploration phase came to a halt in 1997 following the Bre-X betrayal, “when the greatest gold deposit ever turned out to be a fraud,” Kaiser says. Consequently, the sector sank into a five-year bear market. But on a positive note, that scandal led to the introduction of the National Instrument 43-101 that required companies to backup their findings with technical reports, identifying project risks.
This injected new life into the Canadian exploration industry and “set the stage for the biggest bull market we have ever had,” Kaiser says. The commodities super-cycle lasted from 2003 to 2011.
This led majors to invest $140 billion in buying out 263 juniors on the Toronto Stock Exchange and TSX Venture Exchange in the past decade, Kaiser says. While institutional investors were largely part of that, he notes retail investors were marginalized, as it required “a lot of number crunching” and cash flow analysis that they were not used to.
“Now that has ended, and we are in the worst bear market of the decade, and the retail investor has completely left the room.”
The narratives that attract capital sources in the industry are currently not working, the analyst says. The commodity cycle, based on the belief metal prices will go higher because of macroeconomic reasons, is a narrative that institutional but not retail investors follow closely, Kaiser says. He predicts the current commodities downturn will continue for another year or two.
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