Junior Explorers vs Senior Producers

Which is the Better Investment?

By Rod Blake

In my 30-plus years as a broker I was often asked the above question – usually when the resource markets were at their extreme highs or lows. I’ve been exposed the mining markets for most of my life and I can recall times when either juniors or senior mining companies were the best value for investors. The key difference is that junior’s value is mainly determined by the drill bit while a senior’s share price is usually determined by bottom line economics.

Looking back, I was lucky enough to be part of the team that discovered the very high-grade Afton copper/gold mine near Kamloops, British Columbia. This discovery was very unique in that a good portion of the mineralization was in the form of 100% pure native copper. This created a feeding frenzy amongst investors and a bidding war amongst senior suitors that saw the share price of this up until then unknown junior explorer skyrocket from about $0.20-a-share to a final buy out price of some $45-a-share.

Amazingly, except for a few short term stoppages, this unique discovery still lives on some 50-years later as New Gold Inc.’s New Afton Mine. Conversely, I’ve also experienced the other side of the junior resource markets as I held a sizable position of David Minerals stock when this junior’s share price plummeted from about $22-a-share to $0 after the commodity markets blew off in 1981 and started their long descent to lows in 2000.

The remarkable thing was that both of these extreme wins and losses occurred in a relatively short time span of only a few years. This reality of the top and bottom of commodity markets was seared into my brain and I’ve carried this knowledge with me throughout my professional and investing life.

I’ve also worked for and invested in senior producers. The investment criteria for senior producers are whole different animal. Is the company a single or multiple mine company? What is the size and grade of the orebodies? Do they focus on a single mineral or do they produce two, three or a variety of products? Does their mine or mines have a history of or good chance for growth or expansion? Are the mines in investor friendly countries or could governments create problems?

Then one has to look at the current and future price of the minerals they are producing, and where we are in the economic cycle, keeping in mind that commodities are cyclical, and by their very nature are sensitive to subtle changes in the economy. Luckily, most senior producers have analysts that follow the companies and they produce very thorough reports and updates on the companies, minerals and economic outlook.

I usually tried to guide investors by their overall risk profile. Investing in junior explorers is not for the faint of heart. For while the upside of a discovery can be exhilarating, the downside of a failed project or company can be devastating, especially if one has a low risk tolerance.

Senior producers, on the other hand, usually don’t give the same market action of a new discovery, but they will give you overall growth and offer better protection to the downside as their share price generally doesn’t collapse due to one disappointing event or news release. To their credit, in recent years, senior producers have been focusing on their bottom lines by driving their production costs lower while initiating or raising their dividends to shareholders accordingly.

Whether one leans towards juniors or seniors can also be determined by the economic cycle we are in. While both juniors and seniors tend to perform well in an environment of rising commodity prices, the juniors tend to outperform as investors focus solely on the project news while senior investors are more focused on quarterly reports. Seniors tend to outperform juniors during times of falling commodity prices as those bottom line reports become more comforting than an exploration project that may not even be economical.

After bottoming out in 2019, I feel the commodity markets are in the early stages of long term multi-mineral bull market driven first by the greening of the planet and lately by the excess of COVID-19 induced funds that the world’s central banks have injected into the economy. Rarely have I seen an environment where so many minerals are all in demand at the same time.

This bodes well for both junior and seniors alike, but in the current environment I would favour the juniors for better overall performance. This is because the juniors – and using the TSX Venture Exchange as a reference – are coming up from a far deeper low that saw the junior exchange plunge from a high of 3,400 in 2007 to a record low of just 325 last year before recovering to about 1,000 in recent months. The juniors should give you better overall performance if the current cycle continues to trend towards the 2007 highs. But don’t lose sight of those dividends.