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The Resource Market's TransformationDr Richard
Appel February 26, 2006 - The stocks within the junior exploration sector have recently become influenced by a new mind-set. Earlier in their Bull Market these companies were affected by two primary factors. The first was the price of gold. The yellow metal struck its Bear Market $252.50 low in August,1999. After displaying an initial burst of strength it again declined and posted a double bottom at $255 in early 2001. It has since doubled in price and, until now, the junior stocks have tended to mirror gold's price action. Each yellow metal up-wave saw a delayed overflow of excitement enter the juniors moving them higher in price, while each gold set-back made their stocks whither. The second heretofore major influence driving the junior shares was a spill-over of emotion and capital from the major gold stocks. As a group, the gold producers tended to move in lock-step fashion with gold, with the exploration companies carried by their tailwinds. For newcomers to this sector I believe that it is important to recognize that the gold and gold producer Bull Markets have influenced virtually all stocks within the mineral exploration universe. It hasn't greatly mattered whether these small enterprises explored for gold, silver, copper, nickel, uranium or any other precious or base metal. One should view this sector as a world unto itself. Investors and speculators that enter this arena tend to commit a certain portion of their speculative capital to it. They may initially be seeking exposure to gold explorers, but once their money enters it influences the entire group. An analogy would be a small town or country, where one or more sectors for one reason or another attract a large influx of new capital. Most of the shops, factories or other enterprises will experience an increase in business. This will encourage a further rise in spending which benefits the financial state of the entire community. Salaries and incomes will improve, and the citizens will become more prosperous as money flows from one hand to another. So it is with the junior exploration sector. Once exposed to the market, investors witness copper, uranium or other exploration companies generate substantial profits for their stockholders. This moves many to invest in non-gold explorers in their desire to similarly profit. Further, given the numerous Bull Markets in which various precious and base metals find themselves, most stocks within this group attract further capital from other investors for the specific metals for which they search. I believe that a bit of history from my experience is warranted at this juncture. The early stages of a gold Bull Market, which can last for a few years or more, sees little money entering junior companies from the general public. Those who first purchase gold stocks either recognize the birth of a new Bull Market, are resource funds, or are speculators. They are all familiar with the market. The early major money enters from generalist funds. They will take positions in the major companies such as Barrick Gold and Newmont Mining and move their prices higher. They acquire shares of the best known companies as they do in all market areas that they trade. The secondary producers will also do well because some money will flow into them in anticipation that escalating gold prices will drive their profits higher. The pending producers will also attract some capital because profits from their future production now seems assured. The junior companies will float higher in price primarily based upon the "hope" that they will "strike it rich". Of utmost importance is that all gold stock advances historically follow a similar pattern. They tend to begin with the major companies first leaving their lows behind. This is followed by the secondary producers moving higher, and later by the pending producers. After these sectors are trending higher the junior companies join them, and the entire group rises together. LATER IN THE GOLD CYCLE As gold's Bull Market progresses, the producing companies continue to strike new highs. Their price appreciations are surpassed by the expected producers whose investors hope will one day generate income. During this period the market capitalizations of the producers and future producers sharply escalate in value. At some point one or more experts announce that "the large caps are too expensive", and that profits should be taken. They recommend that the money should be reinvested in lower quality gold related companies. For the first time, significant outside money begins to flow into the various levels of exploration and developmental companies. Its main target is companies with large, advanced projects that higher gold prices are expected to make economically viable. Investors by this time witnessed major profits accrue to those who bought junior companies that rose from pennies to dollars, on the back of their impending production. Throughout gold's Bull Market most investors watched from the sidelines while the large known but earlier uneconomic deposits approached or were brought into production. Their hearts sank while they observed the stock prices and market capitalizations of these companies soar without their participation. Finally, a company or two announce impressive drill results. Earlier, their share prices would have attracted attention, but little excitement. However, now, more and more investors become frightened that they will miss yet another huge score. They compare the new exploration results to those of the "pending producers" that they failed to invest in and fantasize. They dream that their new stock will rise in price and generate huge market capitalizations such as their comparisons. This marks the birth of a "drill hole market". The metamorphosis that exploration stocks have just undergone is of great importance to investors. It appears that the last few months of 2005 marked the birth of a "drill hole market". These are rare and are characterized by the great excitement and soaring stock prices that accompany impressive drill results. Investors now compare single drill assays with those that companies with substantial projects and market capitalizations have reported to the market. Investor's imaginations take control and they believe that their company will become a producer, and rocket to a market capitalization of an advanced successful "look alike company". Their fear of lower metal prices evaporates. These are times when "the luck of a single drill hole into a mountain of geological uncertainty" will stun the market and multiply a tiny company's share price. These markets can last for years, and I believe we have just entered such a market. The above was excerpted from the March 2006 issue of Financial Insights © February 26, 2006. Dr Richard
Appel Appel Archives. I publish Financial Insights. It is a monthly newsletter in which I discuss gold, the financial markets, as well as various junior resource stocks that I believe offer great price appreciation potential. Disclaimer. Please visit my website www.financialinsights.org where you will be able to view previous issues of Financial Insights, as well as the companies that I am presently following. You will also be able to learn about me and about a special subscription offer.
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