Senior Mining Stocks
Senior Mining Stocks (a.k.a. Seniors) are stocks of a considerably large commodity (e.g. gold) producing mining companies with an established position and relatively large market capitalization. Senior stocks are usually perceived as being less risky than junior stocks (stocks of my smaller mining companies) – they are more liquid and their prices are typically subject to less volatility.
Who Buys Senior Stocks?
Senior stocks may be bought both by individual and institutional investors. As the volatility of senior stocks is relatively low, they are attractive to institutional investors who are usually not limited by law or internal rules to invest in them. This means that there are more agents in the market, more transactions and therefore, seniors are usually liquid. Seniors can be traded both as long-term investment vehicles and as speculative stocks, depending on the buyer.
Market Participants and Market Depth
As institutional investors are important players in the seniors market, seniors are subject to advanced financial research, e.g. fundamental and technical analysis, mathematical and econometric modeling, corporate valuation etc. and subject to arbitrage. All of this results in a situation in which the mistakes of particular investors will be typically (however not always) adjusted by the market. In other words, it is very unlikely that a single transaction would move the price considerably. This means that price moves truly represent the sentiment of the market in general and that applying most quantitative tools is efficient.
Usually, the prices of senior stocks are more closely tied to the price of gold than small junior mining companies. This is because these prices reflect the potential profits of mining companies (the bigger the expected profit, the higher the stock price) and these profits rise as the price of gold appreciates. This implies that if gold moves higher, seniors will most likely move higher as well – the prices of seniors are positively correlated with the price of gold.
Seniors vs. Juniors
At some point in their investment career precious metals investors ask themselves: What should I pick? Seniors or juniors? Obviously, there is no easy answer. In some situations seniors might be more suitable to one’s needs, in others one might choose juniors over seniors and usually diversification between these two groups is a good idea Either way, it is important to appreciate the differences.
Seniors are usually a safer investment vehicle, which does not mean that they are completely safe. Their prices follow the price of gold closer than do the prices of juniors. It is relatively easy to sell seniors off since they are highly liquid.
On the other hand, juniors are more volatile, less liquid and do not follow the price of gold or the prices of juniors closely all the time and generally speaking, ar riskier than seniors. The trade-off is that under appropriate conditions the prices of juniors might take off and soar. Apart from that, juniors do not necessarily decline along with seniors during a sell-off. Because of that one might use juniors to profit from long positions during periods when this is impossible in the seniors market.
One should enter the juniors market only after thorough examination of all the risks inherent to juniors and after thorough research on the current situation in this market. Obviously, the same goes for seniors, but since juniors are usually riskier, it has to be stressed that one should be aware of the risks of the juniors market.Back