-- Posted 6 October, 2011 | | Discuss This Article - Comments:

Investing in a junior mining stock is a little like throwing your money in the trashcan--at least it feels that way.  Small cap stocks have enough on their plate, disadvantaged by the "risky" label relative to the safe and secure feeling that investors get with larger, blue chip stocks.

When you mix a small cap stock with a mining stock, you relearn what volatility means.  For one, Wall Street groups small cap stocks together in the umbrella of "risk trades," meaning they buy big on up days and sell fast on down days.  Furthermore, the underlying business of each miner has to deal with the same volatility.  Commodities rise with the economy, and fall on the rumor of recession.

A Hole in Financing

There is no shortage of mining firms scanning the available horizon for new metal producing mines.  Some junior miners are just getting their start, receiving reports back from official labs which tell whether a new operation is a boom or bust.  Other more experienced firms are revisiting old mines to see if mines which were unprofitable at $6 per ounce might be very profitable at a price of $30 per ounce.

As the volatility in the market continues on, one has to wonder how these new projects will be financed.  Large cap miners have their own cash hoards and investment bankers willing to underwrite their next issue, but what about the small firms?  What will happen if volatility pushes out investors and scares away creditors?

The return of fear in the markets is already underway.  Despite plunging yields for government debt, corporate yields have held constant, all the while corporate financing arms sell fewer and fewer new issues to raise capital.  If raising inexpensive capital for some of the largest and most successful companies proves to be a burden, what will happen for the many small to medium capitalization miners that are too volatile and unpredictable to finance?

Anyone with a sense of humor would suggest that junior miners could simply issue new stock to raise capital--share dilution is nearly synonymous with mining stocks--but investors burnt by the last commodities boom won't cosign that strategy.  Investors have plenty of other options that are already spewing cash that won't leave them to go a single night sleepless.

Delay in Production Growth

Companies never quite made it back to full production following the downturn in 2008, and it seems that few want to over leverage themselves to reach full potential.  As the world waits for the second coming of a global recession, small cap companies, especially junior miners, will find the financing market even more discriminatory.

For every single day the European debt crisis continues on, financing opportunities in new and exciting mines will stagnate.  So too will silver production, even though silver consumption is hardly held constant.  Silver consumption, thanks to an economy increasingly tethered to electronics, should post gains for years to come.

If there is any value in another recession, see it as yet another hurdle in the way of silver production.  Lower copper prices and fearful financiers should make for an excellent supply-side case for a long-term silver buy.