Is it still possible to make money on junior mining stocks?

The carnage on the Canadian TSX-V seems to have slowed down in July, however the exchange’s index is still down 59% since the beginning of 2011 and 24% to date in 2013 alone. Many investors are asking themselves a question, do junior stocks still offer potential for high returns? Let’s look at the underdog of the current markets, the mining sector.

A major factor in the junior stock return analysis is stock liquidity. Liquidity is a problem for junior stocks as the trading volume on TSX-V in 2012 fell 45% to $23.6 billion or $41,000 per stock daily (this and further stock trading information is obtained at http://www.tmx.com).

Mining stocks on TSX-V did even worse with an average daily trading volume at $24,500 in 2012, down to 14,600 in January-May 2013.

To analyze whether junior miners still present opportunities for high returns, we picked the stocks with more than $200,000/day average trading volumes. In 2012, there were 33 such mining stocks on TSX-V, while in 5M/2013, only 15.

Among the stocks with $200,000+ trading volumes per average session in 2012, there were three penny stocks with prices that stayed below 50 cents for the most part of 2012 (Calibre Mining Corp (current price $0.03), Great Western Minerals Group Ltd. ($0.12) and Encanto Potash Corp ($0.27)). In 5M/2013, none of the stocks from this price category reached this level of trading volume which shows that the current market has hit smaller stocks the hardest.

In the 2013 sample of 15 stocks, an average market capitalization is $122 million, ranging from $48 million to $300 million. All 15 stocks in 5M/2013 had periods of largely uninterrupted growth which lasted from a couple of days to several months. During these upward periods, 14 out of 15 stocks grew on average by 42%, with growth rates ranging from 20% to 87%. One stock jumped 974% in less than one month.

This shows that junior mining stocks still present growth opportunities. However, in the sample, 10 out of 15 stocks posted negative returns in 2013 to date. Thus, to benefit from the growth periods would on average have been very difficult because the market has been generally downward.

Let’s consider the four stocks from the sample which have posted positive returns this year:

Reservoir Minerals Inc.  (TSX-V:RMC): 38% up in 2013 year-to-date (YTD). The stock grew 48% between March 25 – April 2 2013 after the company reported a drill Intersection of 291 m grading 7.17%  CuEq at the Timok Cu-Au Project. The company has been included in the 2013 TSX Venture 50 and ranked as a top ten performer in the mining sector.

Reservoir Minerals Inc.  (TSX-V:RMC) Stock Price in the past 12 Months

Colorado Resources Ltd (TSX-V:CXO): 310% up in 2013 YTD. The stock went up from 16 cents on April 24, 2013 to $1.56 on May 21, 2013, a 974% return in less than a month. The jump was instigated by the news that the company drilled 242 m of 0.63 % copper and 0.85 g/t gold in the first hole on its North ROK Property. The stock has since subsided and now trades at around 80 cents.

Colorado Resources Ltd (TSX-V:CXO) Stock Price in the past 12 Months

Alpha Minerals Inc. (TSX-V:AMW):  196% up in 2013 YTD. In November 5, 2012, Alpha Minerals and its Joint Venture partner, Fission Energy Corp. (now  Fission Uranium Corp.), reported on a discovery hole with high radioactivity on the Patterson Lake South project in the Athabasca Basin. Between that time and March 25, 2013, the stock grew ten-fold from $0.49 to $4.92. The growth was supported by a constant flow of successful drill results from the project which have allowed to widen the target zones. The stock price has been volatile since and currently crossed a $5.00 level on new successful drilling results.

Alpha Minerals Inc. (TSX-V:AMW) Stock Price in the past 12 Months

Zenyatta Ventures Ltd. (TSX-V:ZEN): 390% up in 2013 YTD. The growth has occurred on the back of a string of positive news starting with significant assay results from the hole #10 on the 100% owned Albany (Hydrothermal) Graphite Deposit in northeastern Ontario. The hole intersected 361 m of graphite mineralization with an average grade of 5.1% Carbon.

Zenyatta Ventures Ltd. (TSX-V:ZEN) Stock Price in the past 12 Months

All four companies are exploration-stage junior miners and yet their stocks are up significantly in 2013, and their trading volumes are the envy of most fellow juniors. Their success stories are mostly about outstanding exploration results and strong cash positions (see below). Evidently, this kind of performance is rather an exception these days on TSX-V.

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Disclaimer: I, Yuri Belinsky, at the time of issuance of this article do not own, directly or indirectly, any shares of the companies mentioned in the article. I strongly discourage you from trading in the mentioned above or other stocks without prior thorough research and consultations with your financial advisor.