If This Keeps Up, Small Resource Stocks Will Get Killed Off

Small resource stocks are about to die from a lack of (financial) oxygen

We’re about 2-3 months from half the companies on the Venture exchange in Canada going out of business. Why? Many of these companies are running out of cash. And with no cash to keep operations going, they’re done.

Why don’t they have cash and why can’t they get more? Because they are in the unique business of exploring for resources. A process that can take a decade to move from exploration, to discovery, to development and monetization of a discovered asset (and that’s assuming you discover an actual “economic” asset).

I spoke on the phone last week with executives from two small resource companies  (both of which I invest in). These two were not the bad ones. They both had enough cash in the bank to keep operations going for at least 3-4 years in one case and likely 10 years in the other. And they both have promising projects that might be developed in 2-3 years or sooner. Nonetheless, there is a bear market in resource stocks and even with much potential, these stocks have fallen right next to the junk that will soon go out of business Рmuch to the chagrin of these executives.

I don’t think there is any help for the bad companies. The bear market will continue, their shares will sink further and their properties (the good ones at least) will be purchased for a song by other resource companies with cash. And the good ones will likely rise to ridiculous valuations someday again in the future. But for now, many of the good ones are trading for cash on the books or a bit more – and that’s cheap. Unless you think the world is ending.

Note: the only thing that saves these companies (temporarily) is a big stimulus from the Fed, stirring up inflation worries and giving these companies a chance to pump some more stock into dumb investors’ hands and raise some money- but in my opinion, that won’t come before they run out of cash.