Some investors in the junior mining world talk about a summer effect – a decline in share prices over the quiet period while people are on summer vacation. In anticipation of that decline, they begin selling in May with the expectation that they will buy back in September. To a certain extent, Sell in May becomes a self-fulfilling prophecy. Last year, the TSX Venture Index dropped 10% by June, but was up 20% from the May level by early September.
Selling in May could be an effective strategy with regard to companies where management is planning to take the summer off. On the other hand, companies that deliver favorable results over the summer will be rewarded by investors. There will be many investors who keep in touch with the markets and their brokers over the summer and they will have first shot at reacting to news.
Not so long ago, seasonality worked the other way. Canadian explorers went into the field over the summer. The flow of results fueled investor interest and propelled share prices. Now, exploration is world-wide so that work programs and results are spread throughout the year.
The northern summer is a quiet time for some projects in the high Andes, facing winter. Some drilling programs in Canada are best done in winter when ice provides access over swamps and lakes. But, a great deal of field work is still conducted during the northern summer.
We believe that companies that deliver favorable results will see gains in their share prices, and those gains will be large in relation to any seasonal effect on share prices.
There remains a great deal of uncertainty with regard to the overall markets. The S&P 500 Index reached its highest level in 18 months on April 15, but reversed the next day with a mixed bag of news.
U.S., retail sales and factory production were up in March, however the unemployment rate is still at 9.7%. In the Eurozone, manufacturing activity was at a 40-month high in March.
China is firmly back to strong growth. Their first quarter GDP was up 11.9% year over year (the biggest gains since Q2 2007), industrial production was up 18.1% in March year over year and retail sales were up 18%. Chinese car sales were up 76% in Q1 compared to the year ago period. The government stimulus a year ago kick-started the economy, but the present level of activity is well beyond the impact of the stimulus. With growing concern in that country that the economy could overheat, China is reducing the pace of new loans and ordered banks to set aside more cash as reserves. North American headlines will undoubtedly focus on the impact of a slowing Chinese economy, but the important point is that they are attempting to constrain growth to around 10%.
Given the big rise in the major American markets, there may be a retrenchment in the near term. A decline in the major markets could impact the junior mining sector. However, we do not see a big downward move in the juniors in view of the exceptional strength in the metals markets. China remains, by far, the most important market for metals and the challenge in China now is to restrain the pace of growth to keep it manageable.
We reiterate our basic premise: Emerging metal companies will continue to increase in value as their projects advance toward production. The companies that we are following have aggressive work programs underway or soon to commence. Results from that work will provide share price momentum well beyond the impact from market moves.
