Fire Sales to Come as Mining Juniors go Broke

Jim Rogers admitted today on Bloomberg TV today that he thought the dollar could rally for a year. From him, this came as quite a surprise, even though he has been calling for a bounce for several months. He also admitted that he was losing money in foreign currencies and commodities, and said that the best play right now was on the short side of the stock market. I respect his ultra-long view, but he has just been asking for trouble by holding Chinese stocks and commodities right through manic tops and now down the backside.

Hard Assets Less Bad than Financial Assets

One other take-away from Roger’s comments is that if you believe this will be a “never-ending global recession” you will be better off with commodities than stocks. Of course, I think they are both going down a lot more, but the fact is that the world will always need raw materials. Zinc ingots will always have a bid, but you can’t be express such certainty about GE common.

Fire Sales to come as Juniors go Bust

That is not to say commodity stocks will weather the storm — I suspect that many miners and exploration companies will go under in the next couple of years if they cannot finance themselves with cash flows (same goes for non-earners of all stripes, which is why the NASDAQ is toast). Just as JP Morgan picked up a nice brokerage when Bear Stearns went bust, BHP BIlliton and other big boys will salvage some fine properties as outside funding dries up for juniors. That may not be so long from now, as recent buyers of private placements are getting burned.

To get an idea of the pain being experienced, take a peak at GDX, a gold stock ETF laden with formerly high-flying juniors (I was fortunate to have some puts on this):

Click image for sharper view. Source: Yahoo! Finance

Be Extra-Choosy about Geography

I wouldn’t touch anything in Latin America or Africa anymore, as the political gangsters in those countries have even more disregard for property rights than those in North America, and in economic downturns the trend is toward more populism and theft. As foreign owners of properties cut back on expenses and can’t hire as many locals or spend on public projects like schools and roads (thereby legally greasing the palms of politicians with contractor businesses), those politicos may decide to use the courts and police to snatch up the properties for themselves. They will either mothball them or make a mess of them, but either way the equity holders will be left with bupkis.

For the cautious, there will be some great buys in good jurisdictions (Australia and Canada should be ok), preferably of producing mines that can self-finance. That is, unless you are playing with bigger bucks and can buy whole exploration or development stage properties outright for pennies on the dollar compared their current owners’ market caps. Just mothball them and wait for the market to come back, which it should if China picks up humanity’s civilization project where the West left off.

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