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Friday, July 15, 2016 Derek Macpherson

Smaller Cos likely to Outperform in New Bull Market


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Data continues to support our view that we are in the early innings for a new bull market for precious metals and the related equities. Smaller gold company’s materially outperformed in the last two bull markets as evidenced in the charts below. While the investment in smaller companies, particularly in the early stages of a bull market, comes with inherently more risk, this can be outweighed by the potential for better returns. We note that while a rising tide can float all boats, investors should remain selective when choosing which small cap gold companies to invest in.


Last two bull markets saw smaller cap companies outperform. In the last two gold bull markets (2001-2004 and 2008-2011), the early stages saw gold companies of all sizes outperform together; however, as the bull market progressed, smaller companies ultimately outperformed (Figures 1 and 2). While we are in the early days of this new bull market, we anticipate that as it progresses, smaller companies are likely to outperform over the longer term.



M&A also favors smaller companies; activity likely to pick-up as the bull market progresses. One of the likely consequences of a new bull market in gold is that senior companies, which for the most part have well documented declining production profiles, are likely to grow via acquisition. In our view, this favors exploration and development stage companies, with scarce assets. In our opinion a scarce asset is of size that matters to the acquirer, in a good jurisdiction, with robust economics and a high-likelihood that it can be permitted and built in a reasonable time frame. While we have seen a slight increase in M&A activity, it is likely to pick-up as this bull market progresses.

While a rising tide floats all boats; investors should remain selective. As we have stated previously, not all mining companies are created equal. In our view besides quality management and a good asset, companies should also fit into the three themes we highlighted last month:
1. Scarcity – quality projects/mines in good jurisdictions
2. Viability – Company is capable of demonstrating improved viability to the market
3. Catalysts – the company is capable of delivering good news
For more details see the full post here. In our view it is important that investors are selective when picking small cap gold stocks, as this helps to mitigate the inherent risk of this type of investment.

Disclaimer
Red Cloud Klondike Strike Inc. is registered as an Exempt Market Dealer in British Columbia, Alberta, Saskatchewan, Manitoba, Ontario, Quebec, New Brunswick, Nova Scotia, Prince Edward Island, Newfoundland & Labrador, and the Yukon. Part of Red Cloud Klondike Strike Inc.'s business is to connect mining companies with suitable investors that qualify under available regulatory exemptions (the "Red Cloud KS Business"). Red Cloud Klondike Strike Inc., its affiliates and associates, and their respective officers, directors, representatives, researchers and members of their families (collectively, "Red Cloud KS") may hold positions in the companies mentioned in this publication and may buy or sell, or buy and sell their securities or securities of the same class on the market or otherwise. Additionally, Red Cloud KS may have provided in the past, and may provide in the future, certain advisory or corporate finance services and receive financial and other incentives from issuers as consideration for the provision of such services.

Red Cloud KS has prepared this publication for general information purposes only, NOT as part of the Red Cloud KS Business. This document should not be considered a solicitation to purchase or sell securities or a recommendation to buy or sell securities. The information provided by Red Cloud KS for the purposes of this publication has been derived from sources believed to be accurate, but cannot be guaranteed. Opinions or analysis contained in this publication may be subject to change and Red Cloud KS does not undertake to advise the reader of such changes. This publication does NOT take into account the particular investment objectives, financial situations, or needs of individual recipients and other issues (e.g. prohibitions to investments due to law, jurisdiction issues, etc.) which may exist for certain persons. Recipients should rely on their own investigations and take their own professional advice before investment. Red Cloud KS will not treat recipients of this publication as customers or clients by virtue of having viewed this report.





 

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