VANCOUVER (miningweekly.com) – Small-cap miners are expected to outperform their large-cap counterparts in the coming years in terms of financial health and share prices, as most commodity prices improve over the coming years to 2020, shows new analysis from BMI Research.
According to the firm’s newly published outlook for mining stocks, small-cap miners typically include companies with a market capitalisation of less than $10-billion and generally those in the early stages of business. They are presumed to have significant growth potential, but are not as financially strong or as established as larger companies.
“In this moderately bullish market, we expect the small-cap premium to reward investors who took on higher risks by investing in smaller mining companies," analysts stated.
Across a selection of mining companies, juniors typically recorded a smaller decrease in net income than larger companies in 2015. Further, in the past few months of rising commodity prices, junior miners' equities have been outperforming the majors, BMI advised.
The financial theory involving the small-cap premium states that stocks with low market capitalisations can be expected to earn higher returns than stocks with higher market capitalisations during bull markets, the research firm explained.
“Within the mining industry, we expect precious metals to outperform industrial metals in the coming years, with junior silver miners in the lead.”
Looking at gold companies, smaller gold companies were expected to outperform larger gold companies over the coming years, as gold prices were forecast to increase from a yearly average of $1 300/oz in 2016 to $1 500/oz by 2020.
In the gold sector, junior miners and explorers have borne the major costs and risks associated with discovering and developing new economically viable gold deposits, unlike miners of industrial metals like iron-ore or tin.
Larger gold miners rely on exploration and development by juniors, constantly acquiring them at a speed faster than other junior metals miners are acquired, buying their projects or partnering with them for development. Like all metal sectors, junior gold miners also lack the diversification across mines, projects and geopolitical jurisdictions that majors have, as they almost always have just one operating mine or one high-potential exploration project.
“Thus, junior gold miners carry a lot more risk than the majors, which will allow investors who invest in them to enjoy higher potential returns now that markets are improving,” BMI stated.
Within precious metals, BMI expects junior silver miners to outperform not only major silver miners, but also all gold miners.
Compared with gold, shares of silver mining companies are more thinly traded, being exchanged in lower volumes and with a limited number of interested buyers and sellers.
BMI explains that this illiquidity often leads to volatile changes in price when transactional activities increase, as a new dollar invested in the silver market has a much greater effect on the price than the gold market.
Investors who took on the higher illiquidity risk on top of the risks associated with smaller companies by investing in junior silver miners will, therefore, be rewarded now as commodity prices improve, according to BMI.