It’s morning again on Howe Street.
That’s right, Howe Street, the ancestral home of “pump and dump,” is rising again. This time, however, it is not the push of aggressive promotion, but the powerful pull of fundamentals that is creating opportunity for our city’s most notorious industry.
Precious metals are soaring as gold and silver become re-established as monetary standards. Base metal demand is set to expand rapidly in the large-population economies of Asia and South America. Metal stocks are cheap compared to bullion prices. The world economy is desperately short mine production. These are the opportunities Howe Street exists for.
Howe Street’s resurgence, and the return of the speculative mining issue to mainstream portfolios, will create bountiful profits for some. Others will make losses. As we head into another potentially euphoric period for mining equities, it may help investors to recall a little history.
Howe Street, The First Generation
Until the mid 1960’s, the Vancouver Stock Exchange existed as a sleepy regional market, focussed largely on timber companies. That changed with the strike in 1965 of a rich lead-zinc deposit in the Northwest Territories by the interestingly-named Pyramid Mines Ltd. The company’s stock which, for its time, was relatively widely held across Canada, shot from 25c to $22 almost overnight. . Ultimately the company was sold to a senior entity, Pine Point Mines, for $33 million. [While that doesn’t sound like much, recall at the time that a Big Mac was 15c and Berkshire Hathaway stock was trading at $18.]
The Pyramid Mines discovery started a bonanza that brought mining investors and promoters from around the world to Vancouver. Amongst these was the inimitable Murray Pezim, formerly a Toronto-area butcher, who quickly became Howe Street’s promoter-in-chief.
For a while, the momentum was unstoppable. Buy orders placed in the morning showed profits by the afternoon. Cars stopped in the middle of Howe Street as drivers rushed into the exchange building to place trades.
Buy on Mystery, Sell on History
And there were other successes. Carolin Mines was another 40-bagger gold discovery. Dia Met and Diamond Fields also worked out well later on. But unfortunately, Howe Street’s reputation was made mostly by the scam artists who preyed on the gullible in the decades following the Pyramid Mines success.
The schemes were often “close-ology” plays, with promoters staking nearby tracts to large discoveries. “Wash trades” within a close circle of insiders would drive up prices steeply in advance of the release of bogus drilling results. Hapless investors would buy in at the peak, only to watch share values plummet. Insiders profited from outsiders. It was the Vancouver way.
But by the 1980’s the inflationary fundamentals that had underpinned Howe Street’s rise went into reverse. In the era of 20% interest rates, bonds and blue chips were far better values than $800 gold bullion or junior gold speculations. The Dow Jones Industrials grew by more than 10x from 1982 to 1999, while the VSE Composite index tanked. Initiated at 1000 pts in 1982, the VSE Composite closed in October 1999 at 395.
And in 1999, just as bottom of the gold cycle was being reached, Howe Street’s exchange was disbanded and merged into the CDNX. Ironically, the end of the VSE marked the point of extreme fundamental undervaluation of this city’s mining juniors. Alas, by 1999 those who understood the fundamentals were so discredited that no one would listen. Buy on mystery, sell on history. The strategy of the know-nothing retail investor was ultimately applied to the VSE itself.
What to do now
In the last ten years mining stocks have recovered and the safe money has been made. However, my read of this cycle is that a speculative blow-off phase lies ahead. The gold market didn’t spend 20 years bumping along around $350 per ounce to stop at a mere quadrupling, in my view.
Likewise junior mining stocks that can deliver reserve growth breakthroughs appear to be very fertile territory. I spend time these days looking at the tier of juniors just below the size of companies that are eligible for the exchange-traded funds. Within this class, companies with capable management teams and decent properties should be the basis of a portfolio that can properly capitalize on the return of Howe Street.
I’m doing my own digging into junior miners with potential, but if any of the esteemed readers of this blog have particular names they think I should investigate or avoid I’m all ears.