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Will Junior Mining Stocks Be THE Investment of 2011?
If you think gold and silver as an asset class are severely
misunderstood, and it is, then multiply that misunderstanding 10 times, and you
will realize the level of misconceptions that exist around junior mining
stocks.
The typical propaganda disseminated by bankers that surround
gold and silver every single year when gold and silver corrections occur
dominates the mainstream financial landscape right now. In fact, even though a
rapid correction in gold/silver prices and gold/silver mining stocks is normal
behavior at least twice a year, for every single year of this 9-year gold and
silver bull, every single correction and consolidation phase has elicited
chatter from the same financial shills about the end of the precious metals
“bubble”. And amazingly every year, the mainstream financial media grants them
a platform to spread their disinformation to confuse investors. Last year, when
gold dipped from $1,421 an ounce to $1,332 an ounce in just 6 trading days in
November, an analyst I spoke to in Asia told me that he would not buy gold until
after the bubble completely burst and that he would consider buying gold when
it reached $600 an ounce. I believe that he is still waiting to buy today.
You may feel that this is an odd time to write a piece about
one of the riskiest sectors in the precious metal investment class, especially
as gold and silver prices continue to plummet in the futures markets but the
proper time to buy, of course, is when fear is high and prices are low.
However, once this correction ends, and I believe that it will end somewhere
around the $1,300 an ounce mark and within the next several days, and not with a further $250
an ounce correction and the $1,090 an ounce mark called for by Seabreeze Partners
Management’s GP Doug Kass, I expect junior miners to have a banner year. Even
with my expectation of increased volatility in precious metal stocks throughout
2011, I believe that 2011 will be another strong up year for junior mining
stocks after a very solid year last year. For now, I’m not going to worry about
Mr. Kass’s recent call for gold to shed another $250 an ounce unless gold
breaks below $1,300. Though none of us have a crystal ball that allows us to
predict the future with certainty, I will only readjust my stance that this
correction is days away from ending if gold breaks below $1,300. Furthermore,
as you can see from the chart below, the declaration of select financial
analysts in the mainstream media today that the current state of this gold bull
resembles the parabolic blow-off tops of the 2000 dot com bubble and the 2008
oil price spike is patently false.
Though I haven’t reproduced the 10-year silver chart here,
if one were to draw a long-term trend line through the last ten years of silver
prices, one would see that despite the short-term spike in silver prices to close
2010, there is no parabolic spike above the long-term trend line for silver
either. For now, I’m going to directly contradict Kass and predict a pop higher
of at least $40 -$50 an ounce in gold sometime during the 10 trading days
between January 28 and February 11th.
So now that we’ve established that there has been no
blow-off top for gold or silver yet, let’s turn our attention to the even more
misunderstood topic of junior gold and silver mining companies. To begin, let’s squash the notion that you can invest in
junior mining stocks by investing in the Junior Gold Miners Market Vectors ETF
GDXJ. Let’s take a look at the top
eight holdings of this ETF that comprise more than 27% of the ETF’s net assets:
Hecla Mining, European Goldfields, Coeur d’Alene Mines, Allied Nevada Gold,
Gabriel Resources, Alamos Gold and Silver Standard Resources. Hecla Mining has a market cap of 2.20
billion, European Goldfields, 2.74
billion, Couer d’Alene, 1.99 billion, Allied Nevada, 2.21 billion, Gabriel
Resources, 2.48 billion, Alamos Gold, 1.87 billion and Silver Standard 1.79
billion. Nearly all of the top 8
holdings in this “junior miner” ETF have market caps of near 2 billion dollars
and fit the definition of mid-cap stocks rather than the tiny, small cap stocks
that are representative of junior mining stocks.
For example, more typical junior mining stocks like Greystar Resources currently has a market cap of approximately $276.24 million and Great Panther Silver, $224.27 million. On the other side of this spectrum, a large blue-chip company like Apple currently has a
market cap of about $308.10 billion. With respect to market cap,
it would take 1,115 to 1,373 companies the size of Greystar Resources or Great Panther to equal the size of Apple. In other
words, junior mining stocks are so small that a small amount of interest in a
fundamentally sound junior mining stock with a great story can move the stock
price higher by 30% in a matter of days.
Of course a hedge fund or one very wealthy investor that decides to
divest a substantial percent of shares in a junior mining company can also move
the price down 30% in a matter of days as well. Thus the combination of great risk and great reward that
exists in the junior mining sector.
So what are some of the biggest misconceptions that exist
with junior mining stocks? The nonsense surrounding the junior mining sector is
nonsense of a different nature than the nonsense that surrounds the major mining stocks and the
gold/silver futures market. Bankers manipulate everything that has to do with
gold and silver, including major and intermediate mining stocks, gold and
silver futures contracts, gold/silver ETFs, and even junior mining stocks. In
past years, it has been widely speculated that US hedge funds have unfairly
manipulated junior mining stocks downward by taking large short positions
against them to hedge their long positions in the major gold/silver miners
and/or long positions in the gold/silver futures markets. When many of the
junior mining stocks sold off by 75% during the latter half of 2008 after the
US Federal Reserve enlisted the help of their puppet bullion banks to
orchestrate a sell off of gold and silver in the futures markets, many investors
were permanently scared off from ever investing in junior miners again. In
fact, the share price of many junior miners have still not come back to par
since that time.
So why would I be advocating paying attention to junior miners now? Besides that fact that many of the best junior miners are on sale now, as
gold and silver prices complete their current correction/consolidation phase
and turn higher, I expect junior mining stocks to start attracting much more
attention along with higher gold and silver prices.
Many junior miners are among the lowest cost producers of
gold and silver in the world or are prime acquisition targets from larger gold
and silver companies that are suffering from depleting gold/silver reserves
today. As interest in junior
miners increase, if the rumors about hedge funds maintaining large short
interests against junior mining stocks are true, then maintaining these short positions will become a
very risky proposition in 2011. Furthermore, if these rumors are true, then
as the majority of shorts held against junior mining stocks run for the exits,
a lot of pent up energy in junior mining stocks will be released. I believe
this was largely why 2010 was a banner year for many of the best junior mining
stocks, as more than a handful rose by 200%, 300%, and 400% last year. Finally,
interest in any one junior mining stock by a billionaire or multi-millionaire
can be enough to blow the short interest of any hedge fund manager in a junior
mining stock out of the water. In other words, when dealing with stocks with
such small market caps, it only takes a small interest in them to cause their
share price to double or triple. So if you believe gold and silver prices will
continue to rise in 2011, you should most definitely consider learning more about
junior mining stocks.
That said, there are many pitfalls that you must avoid. Junior
mining stocks are notoriously volatile and they will remain volatile to the
downside at times even if hedge fund managers unwind all the supposed shorts
they hold on this class of stocks. The vast majority of drill assays reported
by junior mining companies will yield zero results and not significant
discoveries of gold and silver. Out of the hundreds of junior mining stocks that exist, probably no more than few dozen merit serious consideration for
investment. Exploration companies that actually discover an economically
mineable monster deposit will be few and far between and the exception to the
rule, not the norm. As the global monetary crisis intensifies, politics and government
regulations/taxation may move solid junior mining companies into a riskier investment class depending on the jurisdictions in which they operate.
In addition, junior mining stocks can also experience large
unexpected drops in share price for no fundamental reason, but merely because
one large investor decided to cash out, even if just to take profits.
When a junior mining company
is reported to have “discovered” a million ounces of gold, you should not take
this report at face value. Often further digging will reveal that said company
has no financing to bring the discovery to production, and that the million
ounce “discovery” is a wishful extrapolation of resource estimates based upon
only the best drill results and ignorance of all the bad drill results.
So yes, the risks can be significant for an investor that
dives headfirst into junior mining stocks without any experience, so much so
that even gold mining executives that invest in junior mining companies have
relayed expectations of only a 20% success rate among their junior mining
investments. In conclusion, I believe that success rates with junior miners can
be upwards of 30%, 40% or even 50% or more with a little bit of due diligence and under the right circumstances, such as those that will exist in 2011. Just don’t be suckered into
purchasing junior mining investments sold to you be analysts that don’t
understand this sector and that you yourself do not understand. With junior
mining stocks you must always perform some research yourself to ensure that you understand each junior mining company you own at all times. Never violate this rule and you should be able to
use junior mining company investments to considerably boost your profits in
2011.
About the author: JS Kim is the managing director of
SmartKnowledgeU, a fiercely independent investment research and consulting firm
designed to help Main Street beat the fraud of Wall Street. Last year, his
Platinum Membership helped clients achieve an 89.66% success rate with 29
junior gold and silver stocks, with the top five junior gold and silver stocks
in his 2010 Platinum Stock & Asset Guide returning 457.14%, 346.22%, 346.23%,
342.11%, and 221.50% within a 12-month period.
»
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I hope we can continue with these articles. As the one post mentioned above perhaps we could discuss valuing miners, gas and oil explorers or coal explorers. I have been making a spread sheet with many of the metrics I believe Flak made above. Juniors or micro caps. Whichever.
Also looking for books/articles on the subject if anyone knows some good ones. I have read Caseys 8 whatever he calls them.
This has been one of the better discussions in a long time- as gold and miners are a possible theoritical solution to either hyperinflation or deflation( gold is currency and highly liquid between jurisdictions.)
In the 1840s we went off the gold standard, had a big bubble and it exploded. The Civil war ensued.
Bubble explosions are typically followed by a war and a race to a monetary standard you can trust( gold.)
FDR had a legal limit to how high gold could go, plus he confiscated private holdings. Homestake kicked ass for 25 years after that. Barrick is basically the successor.
So imagine if gold is an unregulated( ha) backup senior currency as everyone races to devalue currencies and add debt in a deflationary death spiral.
Less money, each one worth less.
Meanwhile gold is having a great "real" value race against other commodities and hard assets.
Everytime there is a speculative dip, 2 a year, people panic and look for the gold "bubble" to end.
But whats the real bubble here?
The bubble is trust in government. 30 year bull run in trust just went kablowee
Yes, indeed, a good discussion. Thanks to all
This has been one of the better discussions in a long time...
In the 1840s we (US) went off the gold standard...it exploded. The Civil war ensued...
I still contend not many people realize the tremendous impact the west had on the outcome of the civil war. If not for the banking interests of NYC, (even though they could individually buy their way out of the fight), and their ties to the Comstock and Mother Lode regions of NV and CA our little experiment in a republican form of government may have ended with the Falcons being the nation's capitol maskot.
As it is, the CFTC's head may still be trying an end around. That smoke has a way of lingering.
imo.
Sit tight on your junior gold and buy the dips.
http://www.youtube.com/watch?v=XLYsdkmaHXw
I sold most of my gold miners and bought silver miners. Silver is scarce and once buyers break the ability of the Fed banksters to manipulate the PMs with naked shorts, (late 2011?) it will rise far more than gold as a free market moves toward the traditional 16 to 1 ratio. I buy on margin, so far so good. Fingers crossed. And I have a nice stash of metal hidden in a cave behind a waterfall. Map for sale.
Treeplanter:
I think enjoy living on the edge. I just want safe juniors to make a small easy fortune.
It's a shaft and the avg g/t is 8.5. That is high grade ore. Dig a little deeper and you'll see.
I don't diversify. I own one stock and treat in like a minority ownership. I spend at least an hour a day going over anyting I can find on the company I own. No different than owning any other business.
"To begin, let’s squash the notion that you can invest in junior mining stocks by investing in the Junior Gold Miners Market Vectors ETF GDXJ. ... Nearly all of the top 8 holdings in this “junior miner” ETF have market caps of near 2 billion dollars and fit the definition of mid-cap stocks."
There's now, since early November, an ETF for smaller gold stocks, (GLDX).
Look at Pinetree Capital PNP.TO probabaly the easiest way to play the micro-cap gold explorers and producers.
Funny, I actually owned some shares from a junior, inherited them from a relative's estate. I sold them off, because I wasn't into investing at the time. Now I'm actually looking at buying back into it.
some contrary thoughts: 1) gold mining stocks is an etf of the Dow Jones Industrial Average. 2)There is no such thing as a blow-off top (Bob Prechter). 3) see 1 & 2 before you get too comfortable with your bull market charting skills 4) you'll know when the Juniors are in full speculative mode, as the mines with the least proven reserves, have the highest PE(?) Casey I think? 5) gold still in the ground may someday be counted as reserve, unlike oil you don't have to use it, you merely have to prove you have it 6) the destruction of fiat money will take years, and at the bottom the gold miners should be bought. 7) countries with gold reserves high relative to their currency float should prosper more than countries with lots of paper money and little gold. US would be a nanogram per dollar if that?. You want to pick your gold producing country carefully. 8) SA will be a financial center in twenty years?
5) gold still in the ground may someday be counted as reserve, unlike oil you don't have to use it, you merely have to prove you have it...
You make a very interesting point here. You can't eat it however, and as holder of deeded mineral rights attesting to known reserves contained in the "deed", I've been extremely concerned with all the hub bub regarding fraudclosure and the cavalier attitude the financial establishment has shown the judiciary in seperating deeds from notes.
Prove you have it.
eminent domain comes to mind. the US moves to a gold backed currency, and places all domestic gold production under government regulation. they place the same restrictions on anything, like rare earths, or oil. recall what happened in WWII, which history tells us ended the first great depression. we don't need the war, just a complete government control of resources and labor to protect our economy, all for national security reasons.
This particular CA property was operating profitably up until WWII when it was shuttered for manpower concerns. Bullets can be more important ya know. It subsequently flooded, collapsed and has been waiting for a reason to resurrect.
After the last gubernatorial election, I suspect it will remain dormant for the foreseeable future. Funny thing about Au though, it doesn't rot.
Got maps?
The names I listed are explorers or prospectors. juniors are already a discovered class of miner, but still have a good run up.
Senior miners will grind it out higher, but basically they are running out of ore and propert and must acquire smaller comoanies to keep their production up.
Lets look at Clifton Star. An explorer with like 3 million ounces in the ground with a 43-101 resource. Next month they complete surveys and drilling which will yield another 2 million or so.
If you have an open pit and large property you can make money on 1 gram per ounce in Nevada or 12 month drillers.thats Klondex. These are guys that are sitting on money in the ground because gold is money. And this money rarely has a nominal price collapse unless Paul Volker shows up again and raises interest rates
I've tinkered around with a deeded mineral right on several hundred acres with proven reserves left over from a family venture in the early 1980's. 165K oz in 600K tons of ore, <300' down. Your criterea to evaluate value is spot on but may I add the open pit vs hardrock costs could escalate due to remedial activities local jurisdictions may impose at the conclusion of extraction. Think superfund.
Hardrock target deposits are typically higher yeilding, (hotter) and may require far less overburden removal to reach a much denser ore, reducing milling expenses and leaving a much smaller footprint for cleaning up afterwards. Perhaps more suitable for higher risk regulatory rich targets like CA.
Give us some tickers to go with GDXJ.
It's interesting to see many struggle to save their ponzi produced ill gotten gains after the immoral system utilizes an additional immoral manipulative tactic to take them away.
You might be successful if you have a very long time frame, have a resolve of steel, the ability to forget the PHYS you have stashed, and a well developed ability to compartmentalize yourself and enjoy the wonders of the moment.
If you're going to put the miners in your pocket, do it without margin.
Risk:Reward shaping up nicely in this sector. Thanks for the article, Flak.
A solid company but speculative play: Sandstorm Resources Ltd. (SSL.V)
I also like Rubicon Resources (RBY), and KGN and AAU are approaching buys..
Thanks... but it isn't my article, though I have toyed with contributing one like it!
RBY is an interesting play, I have been accumalating shares. It will be volatile...
Check out Platmin PPN.TO.....
I should have also mentioned that if you play the juniors you must be diversified. If you have $20,000 to play with, pick 10-20 companies, limiting your self to no more than 10% per company. Upon purchase, immediately put a limit order to sell 1/2 at twice the price. Take the proceeds and buy another junior....
My "little" portfolio has 27 positions and despite the volatility of individual stocks, the portfolio is not so.
Yes, good advice Flak.
Low volume and a TSX exchange will have your bids and asks way out of left field. Expect to pay about 3-5 cents more a share on a junior or an explorer. Don't buy or sell without a limit order or your ass is raped.
Spread your money around and make sure your read their mineral reports and COST per ounce of gold. It should be no more than 600 and no forward hedges.
- open pit mining is cheaper, yields less grams per ton but faster to get out of the ground. So, like a Klondex would be cheaper to mine a low 3 grams per ton as opposed to San Gold which could have like 30 ounces a ton but underground mine shafts are super expensive.
- use their cost per ounce versus market price per ounce times resource to figure out the value of the gold. Divide that by the shares outstanding for a ballpark gold per share. Most I have found are almost 50 times cheaper than the gold value per share.
- good management ensures these guys are not yahoos and can actually get it out of the ground.
- call the management up. They are mostly sitting around if they have a resource report and have a lot to talk about
- a good junior, explorer is basically Gringotts Bank. Hobgoblins guarding gold money and only they can get it.
Good luck!
- a miner in a good area
The only position I own is Klondex. 45k shares. Mackie has a 8.60cad target on it.
No prob....hope it works out for you.
I'm heavily invested in gold juniors. Gold being the great countercyclical asset class in deflations( see gold after south seas bubble, great depression, depression of 1848.
Gold does not act like a commodity in a really bad defaltion- it becomes money. A senior currency. All banks are hoarding it.The price fall is PM futures- paper.
Jay Taylor has a nice newsletter on juniors and a podcast. Al Korelin economics reports too.
With them, I purchase clifton star, pelangio exploration, klondex, cheaspeake,midlands, metanor, brigus gold, seabridge, new crocodile gold,timmins gold,magellan, coral gold,pc gold, riverside resources, new gold and some others. Good miners can have gold in the ground valued at only 20 bucks an ounce in situ,
For investing, i pick miners who are not in a rush because gold will be higher every year. Even if not, their labor and expenses are getting cheaper. The real price of gold- not nominal. So a junior can make money on 1200 an ounce. Average extraction being 550 an ounce. Cat h the wave now since they are 20% down like clifton which has gobs of gold
You are heavily weighted to explorers... very high beta.
Financials and true disclosure can charitably be described as opaque on these canadian exchanges like toronto. Watch them carefully.for any hints they might need additional financing if you play individual names versus the gdxj. Insiders will know the terms.of the new placement well in advance and the stock is relentlessly sold to retailers until coincidentally it matches the secondary offer price then the insiders by back in and commit to.additional private placement purchases of the secondary offering ecuxf was an eggregious example several years ago of blatant abuse of the retail trader. p>
I though people learned their lessons during the dotcom bust regarding pump-n-dump schemes and low volume, dog shit, micro-cap stocks.
Apparently some folks need a refresher course.
Have a look at Arian Silver (AGQ:GB) check the fly-over vid of their San Jose property on their website.
http://www.ariansilver.com/s/Sanjose.asp
Great Panther Silver management has a bad history of flipping and repricing options with reckless abandon.
I have not heard that but they do have properties that have cranked out a billion oz. silver in the past. And they have just done more studies that says there is a lot of silver the deeper they go.
Tinka Resources is by far the most undervalued silver junior. TK.V Buy it. B/c once they get permits in the next 10 days, this .30 cent stock, will be $3 by year end.
I would include a research casey
Totally concur with The Nagus. I watch the insider activity on all my Canadian juniors on the excellent website http://www.canadianinsider.com/index.php
You either believe in the Tooth Fairy or you do your homework - take your pick.
Nice site... just added to my list of links. I should add the somewhat obvious:
http://www.tmxmoney.com/
is also a good place to monitor things short of having a brokerage account with access to the Toronto exchange
When digging deeper (pun intended)
http://www.infomine.com/news/
and
http://www.mineweb.com
and to a lesser extent
http://www.resourceinvestor.com
Also know that if you invest in junior miners that say, trade on the Canadian stock exchanges, and you buy with US dollars, your investment will be converted into Canadian currency. It's another way to hedge against a USD decline.
Don't forget the number one jr mining stock.....GORO. Zero cost to remove the gold ore? Don't get much better than that! Oh yeah,,,a dividend has been paid since the mine started producing........yes, you read it right....a dividend!
Dude, nice! And GORO is having a 10% off sale today!
"With junior mining stocks you must always perform some research yourself to ensure that you understand each junior mining company you own at all times."
The best advice you can get. I would add to this article that in researching a Junior Miner, look at the board members closely, or at least, more closely than usual. You are really betting on their ability to develop a cash flow from scratch most of the time.
If you are looking for something off of the radar today, that will be on it by the end of 2011, take a look at Vanadium mining. ex: Energizer Resources.
having a pair of balls helps too. Its a low volume market so your stocks can fall 20% with no company specific bad news. Anything I don't have in bullion, is invested in gold mining.
Balls, or Lobes. But yes, got to have 'em. I had one go from $.70 to $.02, then back to $.70 over a year or two. Owning a junior is alot like owning your own business. Need to put your own research & thesis ahead of the daily valuation.
I believe junior mining stocks have increased about tenfold in the last decade haven't they? It sounds like a mo mo investment now to me. Looking rather toppish at the moment in some respects but you can't argue with that chart. I can't tell if you the author are hopelessly behind the curve, or an even more sophisticated contrarian by taking the contrarian's contrairian position! We shall see. At least smartknowledgeu will give it's calls before the fact, rather than brag after the fact of it's perfect timing and mythical five bagger like we see sometimes on the hedge.
The mining stock bear market ended in 2008, not 2001 like the bullion bear market.
Junior mining stocks can go up 10 fold in a year or 2, not ten years.
It has been a pretty amazing brace of years, hasn't it?
A good introduction, but you need to discuss what make a good junior miner.
1) Ore quality
2) Proximity to existing infrastructure
3) Political risk
4) Source of development capital: e.g. is there a senior partner
5) Resonable fundamentals: i.e, modest leverage
6) Production schedule
Companies that fit my bill include
FRG
AVR.TO
PTQ.TO
NWM.TO
IPT.TO
AMC.TO
Don't forget people! Strong management makes all the difference.
Flack....
That is it. Those are the same criteria I use as well in addition to share structure (THE number one scanning criteria).
Take a look at KDX.TO. The most undervalued jr given risk I know of.
ummm.. thats Flak BTW
Yes, KDX.TO looks good at first blush... Would need to dig deeper, is Fire Creek an open pit prospect? If not, the metal value per tonne is low for an underground mine.
For shits and giggles, look at KS.TO, try to pick it up at 0.035.
Flak why do you like Klondike Silver? With shares fully diluted at 300 million isn't that a bit risky?