 Junior Mining Exploration
Companies
The Butterflies in the
Animal Farm of the investing world?
Alan Leishman
written 17 September, 2004
posted 1 October, 2004
With the price of gold having risen from its low of 255 us$/oz
in 1999 to around the 400 level today,
it is an interesting time to have a look at Precious Metal Stocks
(PMs).
The volatility in this sector,
particularly among the juniors, is legendary.
As Bill Bonner of the Daily
Reckoning has identified in his best seller, "Financial
Reckoning Day," there is a certain rythym measured in
decades as to what sector one should be investing in per decade,
as evidenced by the last 30 years.
From this perspective, the PMs had a good run in the
late 70s and again from 1993 to 96,( as in this chart
of the XAU
Gold and Silver index), parallel to the rise in price of gold
and other precious metals.
The PMs appear again to have started a secular bull market
in the last 4 years, (as seen in the HUI,
the more recently created gold bugs index).
Financial historians may search
in vain to trace some of the PM companies, (especially the juniors)
from one PM Bull Market to the next.
Why is this?
One way to explain this phenomenon
is to compare these Junior Mining companies(JMs) to the
world of butterflies (and moths).
The laws of Darwinian survival
of the fittest and the strategies for survival have some remarkable
parallels!
1) Birth
Many butterflies lay large batches of eggs for survival of
their species in an effort to avoid total liquidation by predators.
Similarly, there always seems
to be a great number of new JM companies being founded, probably
because of the high number of predators, and failure rate through
lack of finance!
2) The hungry Caterpillar
The young caterpillars need masses of food, and the ones
who survive, have massive growth, often shedding and renewing
their skins to accomodate their new girth several times, in the
spring and summer time.
JM companies that survive this
growth phase, are the ones that do numerous financings mainly
through Private Placements, giving exponential growth, and an
increasing number of fully diluted shares issued. The summer/
winter analogy corresponds to bull/bear market conditions for
the PM markets.
3) Surviving the winter
Depending on species, butterflies
can survive the winter with different strategies, some as caterpillars,
some as pupae, and some as adult butterflies... until the sun
rises again sufficiently to reactivate them.
Junior mining companies likewise.
Some shut down exploration and hibernate with zero costs... until
the metal prices rise again. Others transformed into dot.com
high tech companies during the last period of depressed metal
prices, only to re-emerge as PM companies again when the sector
revived.
The lucky PM companies, who
survived the winter as butterflies, went on to another bull market,
provided their wings were strong and undamaged enough to enable
them to fly.
4) Mating
Of course for the species to
survive, reproduction is necessary. Some male moths have antenna
that enable them to smell the pheromones of an interested female
at a distance of several kilometers. With the number of species
of moths running into the tens of thousands, and finding your
mate in the dark, this is perhaps a fortuitous Darwinian attribute.
Here the pheromones
represent resources in the ground measured in millions of Gold
ozs, and it takes first of all clever geologists to find it,
and later on good management with the right antenna to secure
it in the form of staking claims, joint ventures or similar deals.
5) Aesthetics
Butterflies are among the most beautiful of all insects;
the Peacock, Swallowtail, Red Admiral, Fritillaries, to name
but a few.
JM companies are also one of
the most exciting of all sectors of stocks. In a PM bull market,
there are always several JMs that are "10 baggers,"
( a stock that increases 10 times in value), and occasional 100
baggers!
Extreme leverage to the gold price combined with rerating of
the gold ounzes in the ground, as a junior drills its way towards
increasing ounzes, (and moving the ounzes from the resource to
reserve category), are the rocket fuel for the share price. Typical
valuations range from us$ 10/oz Gold at exploration debut to
100 $/oz at bankable feasability study stage and even higher
as production gets under way in a 7 year process.
However the process is reversable,
particularly with a downward maniuplated gold price, as argued
by Gata and more recently
in the Sprott
report.
But this is one of the very factors that produce the 10 and 100
baggers, the fact that the JM share prices can lose most of their
value in a PM bear market.
The few survivors plus the next generation of new juniors relaunch
at the beginning of the next bull market.
Facit: Timing (and DD) are very important keys to success
in the JM market.
6)Defense Mechanisms
Caterpillars, pupae, and butterflies
have developed various ways to discourage predators, such as
bright
warning colours or eye
shaped patterns.
Similarly small (JM) companies often try to develop poison
pill or other defense mechanisms against take over by a major.
So now let's leave
butterflies for a moment and have a closer look at another aspect
of mining companies.
Proximity or Area Plays
A classic form for junior mining
stock speculation is to piggy back onto an exisiting successful
mine or major prospect discovery. Claims are staked all round
the hot property and sometimes promoters attempt to run up the
stock with claims that they are just about to make the big strike.
Most large mining areas are
usually shared between many companies. For example Newmont is
only one of several companies with land positions and gold mines
in the
Carlin Trend.
Occasionally a junior manages to gain control of a whole district,
area or very large mine, by various methods, including staking
claims, joint ventures, or takeovers or buyouts.
This is a classic route for a junior to grow into a major, and
in so doing increase its market cap by a factor of several
times.
Historical examples with reference to diamonds, nickel, gold,
and copper include:
- Cecil Rhodes Consolidated
de Beers mine, which bought out from 1871 onwards
all the other claims to the "big hole" diamond mine
at Kimberley, SA
.
- Chuck Fipke's Ekati
mine where the The great Canadian diamond rush was
on...
On Nov. 5th 1991 the JV had
to go public with a news release on the finds. Yellowknife went
wild. Helicopters were buzzing in from all over the country.
By spring 1992 de Beers alone was operating 26 helicopters for
staking. Chuck had claimed 1 million acres, all prime targets.
De Beers soon surpassed that and claimed 10 mill acres, all on
the off chance something might be there. END
- Robert Friedland's Diamond
Filed Resources Voisey
Bay. When RF began to realise that VB could turn out to be
one of the largest Nickel deposits in the world, he is quoted
as saying... "I don't care how much money it costs, stake
the whole of Labrador" Friedland quote 1995.
.
- Freeport
McMoran's
Grasberg copper and gold mine.
Summary
PM companies and in particular
Juniors are among the most attractive stocks to invest in, when
the market fundamentals are favourable, as currently in a secular
gold and silver bull market.
Many of the JM stocks do not
survive from one PM bull market to the next. Some fail financially,
others leave the sector, some return, others are taken over.
A small minority survive to
become majors.
The winners often increase in market cap by multiple factors
of 10 or more.
What criteria can we use to
try and spot the winners in the JM gold market?
Your antenna should be sniffing through the darkness for the following
pheromones.
Search
for companies with:
1. good (track record)
management
2. no debt
3. well financed
4. unhedged, (ie no forward sales of Gold through futures
or derivatives)
5. good portfolio of properties, (exploration and/or production)
6. in politically stable countries
7. focused on environmental issues
8. plans for enhancing local employment, access roads,
electric power structures
9. area plays
Most important of all Do
Your Own Due Dilligence: Study
the official company filings on all news releases, feasability
studies, of their principle projects to ensure they are economically,
environmentally, and otherwise viable, without hedging of the
gold price.
Alan Leishman
Copyright ©2004 Alan Leishman
dalhn@freesurf.ch
George Orwell has become a popular internet quoted
author with recent world geopolitical events. His "Animal
Farm" provided the inspiration for this metaphorical
essay in another attempt to compare a segment of human activity
with life in the animal kingdom.
Literature sources for further
info:
The Big Score - Robert Friedland
and the Voisey's Bay Hustle - Jacquie McNish
Fire into Ice - Charles Fipke & the great diamond hunt -
Vernon Frolick
Some Dreams Come True - Alpheus F Williams (Being a sheaf
of short stories leading up to the discovery of Copper, Diamonds,
and Gold in Southern Africa, and of the pioneers who took part
in the excitement of those early days).
Disclaimer
Alan
Leishman is not a registered Investment Advisor or a Broker/Dealer. Readers are advised that the information contained
herein is issued solely for information purposes and is not constructed
as an offer to sell or the solicitation of an offer to buy. The opinions and analysis included herein are
based from sources believed to be reliable and in good faith
but no representation or warranty, expressed or implied is made
as to their accuracy, completeness or correctness.
Readers are urged to consult with their own independent financial
advisors with respect to any investment. All information contained
in this report should be independently verified with the companies
mentioned.
________________
321gold Inc
|
