The Market Event Junior Gold Mining Investors Can’t Afford to Ignore
It’s rare that a practiced junior miner investor has to pay attention to an ETF (Exchange Traded Fund). Most folks who fit into that category already have a well-constructed portfolio, usually with many of the same constituent companies featured in the ETF. But the circumstances surrounding one of the most successful financial products ever created, the Van Eck Vector Junior Gold Miners ETF (ticker GDXJ), are so extraordinary that investors can’t afford not to pay attention.
For every ETF, the ETF manager is charged with selecting the most promising companies from the representative industry. As the industry moves, the ETF will price accordingly. But the GDXJ has been so popular, has gotten so large, and has attracted so much capital, that it now drives the junior gold miners market: a complete reversal from the norm.
“Because of internal controls, the ETF is constrained to what percentage ownership it can hold of each stock.” A victim of its own success, the GDXJ has practically out-grown the market and has literally been forced to move up-market to purchase larger and larger companies. Rick Rule estimates that the average market capitalization for companies in the GDXJ is now around $3.8 billion – which hardly fits the definition of a junior. “We prefer companies with market capitalizations far below $1 billion.”
And this market move by GDXJ is creating massive opportunities for investors, particularly as the ETF is forced to “rebalance” in June 2017.
“The circumstance in front of us is such that we think that attractive, small junior companies already in the fund that are going to be reduced in the fund … they are being sold off not because of anything to do with corporate ownership.”
“We have seen companies come off nearly 25% or 30% merely because they are being reduced in the rebalancing of the ETF; merely because they are too small to take on the kind of capital that is coursing through the fund.”
But, as Rick explains, this is not the only opportunity we see to play the GDXJ. “There is an extraordinary difference in market performance, market capitalization and share price for the stocks which are in the ETF versus those which are not.” The stocks included in the fund get far more buying than stocks that are not, simply by virtue of their being in the ETF. So we see incredible discrepancies in the market capitalizations of companies: an ideal arbitrage opportunity.
This higher stock price equates to a lower cost of capital for the included companies. We think they will have to use that bigger share price to buy companies that are OUT of the index to take advantage of the lower cost of capital.
“We think if the valuation arbitrage doesn’t change, there will be takeovers and 50% premiums.”
To view the whole interview with Rick Rule, including greater detail on how to play to GDXJ, please click here.
To attend Rick’s GDXJ seminar in Vancouver, register here for the Vancouver Natural Resource Symposium in July and receive the downloadable audio recordings of a previous year’s event at no charge.
David Stockman is the ultimate Washington insider turned iconoclast. He began his career in Washington as a young man and quickly rose through the ranks of the Republican Party to become the Director of the Office of Management and Budget under President Ronald Reagan. After leaving the White House, Stockman had a 20-year career on Wall Street.
Stockman’s career in Washington began in 1970, when he served as a special assistant to U.S. Representative, John Anderson of Illinois. From 1972 to 1975, he was executive director of the U.S. House of Representatives Republican Conference. Stockman was elected as a Michigan Congressman in 1976 and held the position until his resignation in January 1981.
He then became Director of the Office of Management and Budget under President Ronald Reagan, serving from 1981 until August 1985. Stockman was the youngest cabinet member in the 20th century.
Although only in his early 30s, Stockman became well known to the public during this time concerning the role of the federal government in American society.
After leaving government, Stockman joined Wall Street investment bank Salomon Bros. He later became one of the original partners at New York-based private equity firm, The Blackstone Group. Stockman left Blackstone in 1999 to start his own private equity fund based in Greenwich, Connecticut.
Stockman was born in Ft. Hood, Texas. He received his B.A. from Michigan State University and pursued graduate studies at Harvard Divinity School.
He lives in Aspen, Colorado, with his wife Jennifer Blei Stockman. They have two daughters, Rachel and Victoria.
Join David Stockman in Vancouver.