Mining’s old guard needs strong medicine
A new report details subpar investor returns in the mining industry over the last decade, particularly big cap diversified companies which have not adapted to new realities.
With the price of gold still hovering around all-time nominal highs, the miners are continuing to revel in their long season of prosperity. And with gold’s structural fundamentals still wildly bullish, these miners should be delivering their gold at higher prices for a long time to come.
These tidings are of course very enticing for non-producer mining companies looking to capitalize on gold’s fortunes. And for this reason there has been a flurry of activity on the junior front.
Even though the barriers to entry for actually building a gold mine are quite high, the barriers to entry for starting a junior exploration company are quite low. In addition to a little entrepreneurial spirit, all one really needs to start a gold junior is a geologist and a mineral claim. And in today’s market if a junior has a half-interesting name and a prospect with a hint of gold, it might even be able to find investors to support its cause.
As investors, there is certainly no shortage of juniors to choose from. With this ease of entry, brand-new juniors are constantly coming onto the scene. And though it is nearly impossible to keep an accurate tally of the junior gold population on any given day, there is no doubt that this sector has seen incredible growth over the last decade.
At Zeal we maintain a database that tracks this junior population, and the growth we’ve seen in recent years is just staggering. There are now over 500 junior gold stocks with primary listings on the US and Canadian stock exchanges. And as you can imagine, with a pool this large investors are faced with a big challenge if they want to wrap their arms around this sector.
In the early days, when the junior population was much smaller, if an investor knew what he was looking for it was easy to scrub the entire sector in order to find those stocks with the highest probability for success. But with today’s huge populace, it has become increasingly difficult to separate the wheat from the chaff. It may be easy to incorporate a gold exploration company, but it is an entirely different story to set one apart from the rest.
With so many more junior gold stocks in existence today, the competition for capital is fierce. And the only way juniors get this capital is by successfully selling their stories, projects, and ultimately shares to investors. These juniors must be of the mindset that this growing competition has bred higher standards on the investment front.
And as investors, we should indeed hold these juniors to high standards if we are going to entrust them with our hard-earned capital. With this mindset, next comes the daunting task of finding those juniors that will reward us for the risk.
And with 500+ of these little companies to choose from, such an endeavor can seem a bit overwhelming.
Unfortunately blindfolded dart-throwing just won’t work in this sector. As any investor who’s been around junior golds for any period of time will tell you, these stocks are quite capricious. A lot of variables go into the formula that makes for a successful junior. And if any of those variables are missing or disingenuous, failure is just around the corner. And failure in this realm can be catastrophic for one’s bottom line.
The only thing that truly works for identifying the elite juniors is well-orchestrated research. And if this research is executed appropriately, the results will speak for themselves. At Zeal we specialize in researching various sectors of the commodities markets, and junior gold stocks is one of our favorites.
The fruits of our research labor are detailed fundamental reports profiling our top picks. Including our hot-off-the-presses March 2011 report, we’ve published five junior-gold-stock reports over the last two years. And though these reports are purely fundamentally based, the performances of these stocks indeed speak for themselves.
The high-potential stocks that we believe are elite among their peers have so far been performing very well. From the release date of our March 2009 report to this week, the average gain to date of the 12 stocks profiled is 219%. Over this exact-same span, the venerable HUI gold-stock index gained 87% while the S&P 500 Index (SPX) gained 67%.
The average gains of the stocks in the following three reports have also exhibited positive leverage to date to the HUI and SPX. The dozen stocks in our March 2010 report have average gains to date of 58%, to the HUI’s 36% and SPX’s 15%. The stocks in our June 2010 report have average gains to date of 106%, to the HUI’s 22% and SPX’s 19%. And the stocks in our September 2010 report have average gains to date of 42%, to the HUI’s 15% and SPX’s 18%.
Now keep in mind that these gains are not optimized to these stocks’ interim lows and highs, they are based purely on report release dates to current (or in the case of such juniors as Andean Resources, Comaplex Minerals, Brett Resources, Pediment Gold, and others, to their acquisition close dates). Some of these juniors are well off their recent highs.
One of the main reasons for highlighting these gains is to show that positive leverage should be expected when speculating in the junior realm. Where the big producer stocks that comprise the HUI should positively leverage gold, the juniors should positively leverage the HUI. On top of many of the same risks that producers have to deal with, junior risk is taken to another level since most have yet to prove up a gold deposit that is even economically viable.
The cold-hard truth is that most juniors will fail. Gold is the precious metal for a reason. Aside from its monetary and store-of-value attributes, gold is hard to find and there isn’t much of it. Investors who take on the risk of funding a junior explorer ought to be greatly rewarded if a discovery is made, and even more so if it proves to be meaningful and economical.
But finding those juniors that have what it takes to deliver positive leverage is of course easier said than done. And this takes us full circle back to research. Research, research, research is the key ingredient for success here. But though this can be intimidating, especially if you aren’t familiar with the ins and outs of the gold-mining industry, if you put in the time you’ll be rewarded.
When folks ask me how they can perform their own junior-gold-stock research, I give them a few simple guidelines to send them in the right direction. First, before looking at a single stock, learn as much as you can about the gold-mining industry. Educate yourself on the evolution of the latest ounce of gold you bought from your local coin dealer.
You don’t have to be a geologist or mining engineer to gain a general understanding of where and how mining companies explore for gold, how they advance a deposit once a discovery has been made, how they eventually develop it into an operating mine, and how they turn raw mineralized ore into shiny yellow metal. Even just a high-level understanding of these processes, and their economics, can get you a long way.
Provocatively the hit Discovery Channel show Gold Rush Alaska has sparked a viral interest in the process of gold mining. And I was shocked when several friends asked me if what they saw on this show represents how gold is really mined. No! If you do a bit of research you’ll find that there is more of a science to exploration and operation than just randomly digging and washing rocks. While this show has indeed captivated 65 million viewers, including myself, the methodology of the casted greenhorns is a stark contrast from how commercial-scale juniors go about looking for and eventually mining economic gold lodes.
Overall once you gain a grasp of the machinations of the gold-mining industry, you’ll then be ready to look at individual stocks. And in order to get a balanced feel for this sector, it’s prudent to perform peer-level comparative analysis. Interestingly within the junior sector there are many sub-categories. A junior with a single drill and no major discoveries cannot be compared to a junior with proven reserves on the cusp of mine development.
Juniors should only be compared to other juniors within similar stages of the exploration cycle. There are of course other intricacies to consider within these stages, like potential deposit size, but you get the drift. Once you get these companies grouped, you can then fire away at individual-company analysis.
When researching individual stocks it is important to dissect geopolitics, company history, management, project history, resources, technical studies, project economics, and financials. While you might have to do some digging in order to get your hands on some of this information, it’s all readily available to the public.
After scrubbing your selected pool of stocks, there will be an elite group that stands out above the rest. You’ll find that these companies possess high-potential projects, they’ve methodically advanced these projects to whatever stage they may be in, and they’ve got vision in regards to where their projects are going. These companies appear to understand the formula for success, and ultimately their stocks should outperform their peers’.
The process of removing the dross and thus isolating those high-potential companies poised for success is no doubt tedious, yet it is also rewarding. And the fruits of this research ought to bolster your bottom line.
But like most investors, you probably don’t have the bandwidth to dedicate yourself to this type of research. The time and motivation just aren’t there. And as you can imagine, with such a large pool of juniors an effective scrub of the entire universe would likely take hundreds of hours.
But as a prudent investor, you don’t want to miss out on investing in this super-hot sector. You understand that legendary gains can be won if you choose the right stocks to leverage gold’s secular bull. And instead of picking the first stock you see on a website banner ad, you want to increase your probabilities for success in picking the winners.
The good news is you can join the thousands of investors who’ve utilized Zeal’s expert research. A Zeal research report canvasses the entire universe of a given sector, and profiles the stocks that we believe are well-positioned to outperform the rest. Within each report is a detailed fundamental profile of our recent dozen favorites.
Our latest report profiles our newest favorite junior gold stocks. This report updates the research that produced our wildly-popular 2010 reports, and profiles 12 new stocks on top of the 36 profiled last year. These stocks range from early-stage explorationists that have yet to develop a resource, to advanced-stagers that own some of the world’s largest undeveloped gold deposits. Go ahead, leverage our hundreds of hours of research and buy your action-packed 26-page report today! It’s never too early to build your junior-gold-stock shopping list.
And as mentioned above, the publishing of these reports has nothing to do with market timing. These stocks should outperform the sector, but when it comes to actually pulling the trigger and executing a trade, this is a whole other ball game.
You can of course attempt to use your own technical analysis and/or layer in over time, but I suggest using expert guidance from our acclaimed weekly and monthly newsletters. In addition to cutting-edge market analysis, you’ll get real-world trade recommendations. And when we believe the timing is right for trading the juniors, we’ll be pulling from our report favorites. Subscribe today!
The bottom line is junior gold exploration is a vital component of the gold supply chain. And with gold continuing to stay strong, with no signs of letting up anytime soon, juniors are hitting the hills in droves with their sights set on discovering and developing the next-generation gold mines.
But with so many juniors vying for investor capital, how do we keep track of and choose those that are poised to take this gold bull by the horns? The only way is highly-skilled research that scrubs the entire sector. This research will reward you by increasing your knowledge and identifying high-potential stocks.
Copyright 2000 – 2011 Zeal Research (www.ZealLLC.com)
