summer heat, stock-market corrections, and juniors. What more can one
ask for to soothe the soul? OK, so perhaps writhing would be more
appropriate than soothing. But you know, heat happens every summer, the
stock markets were due for a correction (especially after an 80% move higher
since March 2009), and junior gold stocks will eventually return to favor.
It has no doubt
been frustrating owning gold stocks of recent, especially the juniors.
With gold achieving record highs it is natural to believe the gold stocks
would mount material rallies and achieve records of their own. And
based on their inherent risk, the juniors should have been exhibiting huge
upside leverage. But with gold stocks continuing to lag gold (the HUI/Gold ratio
remains at 2003 levels), the few remaining investors not selling into these
crazy volatile markets have experienced wailing and gnashing of teeth.
While the summer doldrums may
not be the best time to cheer for a rally, as long as gold’s secular
bull remains intact the gold stocks will have their day of reckoning
and juniors will respond in fast and furious fashion. And with
underpinnings as gold investment demand just starting to heat up and ongoing
production woes among the many, there is little arguing that gold’s
bull still has many miles left in the tank.
On the junior
front, these little explorers heavily rely on stock-market capital to fund
operations. But since junior investors are fickle and only have so much
patience when they aren’t being rewarded for the risk, this sector can
melt down in quick fashion. And unfortunately if the capital is not
coming in at a fast-enough pace, these juniors won’t be able to perform
their critical role in the gold supply chain.
But at risk of
further hampering gold’s structural supply problems if this sector
flops, I don’t believe we’ve seen the end of the junior glory
days. In fact, for a variety of reasons which
I’ve outlined in previous essays, the junior gold stocks are likely to
have their best days ahead of them.
Fortunately it is
amidst these sector struggles where the best bargains can be found. But
in order to find these bargains investors need to do a lot of work on the
research front. And for this reason our research house has dedicated
the last 6 months to researching and profiling our favorite junior gold
stocks for our popular reports.
Over the course
of this gold bull the junior landscape has grown increasingly dynamic.
And a key dynamic one must consider is this sector’s size. With
gold demand and hence its price on the rise, more and more juniors are
hitting the markets in search of gold. We came across over 400
junior gold stocks trading in the US and Canada!
With hundreds of
junior gold stocks to choose from, it is more important now than ever before
to skillfully select your portfolio of potential winners. Until the
junior complex mounts a concerted run higher and regains more mainstream
popularity, only an elite group will outperform. And it is this group
that will deliver the outsized rewards that investors should expect in return
for owning these risky stocks.
The only way to
perform unbiased research is to of course scrub the entire pool. And as
you can imagine with such a large population this has been quite an
undertaking. But after various levels of screening and filtering those
elite juniors poised for success do eventually emerge. And with so many
more gold juniors today, and quality ones at that, the bellwethers
don’t quite fit on one page anymore.
And since these
juniors reside in such a wide assortment of stages, from small grassroots
explorationists to large emerging producers, it has become increasingly
important to segregate this sector for better comparative analysis.
market capitalization the juniors stretch across quite an expansive
range. On one side are the classic penny stocks, those juniors trading
at mere pennies per share with market caps well under $10m. And on the
other side you’ll find the mega juniors, some with market caps over
But market caps
don’t necessarily tell you where these juniors are in advancing their
projects. There are sub-$100m companies well-advanced in the
development of their deposits, within just a couple years of commissioning
gold mines. And then there are those companies pushing $1000m that aren’t
even close to producing an ounce of gold.
In most cases
this disparity is simply attributed to deposit size. The near-term
producers on the small side of the spectrum are bringing online smaller gold
mines. These mines will most likely be pulling gold from a reserve base
under 1m ounces, with annual production forecasted at well less than 100k
ounces. And there is nothing wrong with small. Many of these
stocks offer great value and have huge potential to reward shareholders.
On the larger
side of the spectrum there are of course those market-darling emerging
producers about to pour gold at high-volume low-cost long-life mines.
But you also have those juniors still in the early stages of advancing
massive gold deposits. Investors have caught on to the potential of
their discoveries and want to take part in the growth.
market-cap variance doesn’t allow for a clean segregation as far as
advancement goes, I believe the truest way to compare juniors is based on
their project maturity levels. And the simplest categorical distinction
is early stage versus advanced stage.
Now there is no
definitive line that separates these two categories. In fact, in my
research I’ve observed executives across the industry offer
wide-ranging interpretations of stage criteria. All too often juniors
are over-ambitious in marketing themselves, touting their projects as
“advanced stage” when in fact they are nowhere near proving up
reserves and developing gold mines.
Because of these
inconsistencies I’ve drawn my own line. Simply put, and
logically, advanced-stage juniors are closer to producing gold than the
early-stage juniors. To me, project maturity and timeline to production
are the key determining factors as to where junior gold stocks fall within
these categories. Below I’ll touch on some guidelines as to how
these juniors can be separated.
As far as
research goes, our two most recent Zeal reports focus on the opposing sides
of this junior spectrum. And since the advanced-stagers aren’t
likely to remain juniors for as long as the early-stagers, we focused on this
category first. In March we published a research report profiling our
dozen favorites in this category.
stocks are emerging producers, those juniors in the process of constructing
quality mines. Also profiled are juniors with projects in the
pre-development phase. These companies have performed positive economic
studies based on current market conditions, and are either entering into or
are within the final feasibility stage. They are on the cusp of mine
next-generation miners should all be producing gold within the next few
years. Of the 12 stocks profiled in this March report one will be a
producer by the end of 2010, three are on track to commission their mines in 2011,
five are anticipating production in 2012, and three hope to be mining gold by
completion of this advanced-stage report we spent the spring researching,
identifying, and profiling our favorite 12 early-stage junior gold stocks,
with the final product now hot off the presses. Now it is important to
understand that this category does not simply consist of pint-sized juniors
with only a few drill holes under their belts. In actuality some of
these next-next generation gold miners may have already put a lot of
time and capital into defining their deposits.
In general, these
early-stagers are smaller with an average market cap of $167m versus $665m
for the advanced-stagers. But just because they lag in project maturity,
it doesn’t mean an early-stager can’t be larger than an
advanced-stager. And indeed a handful of our favorite early-stagers are
quite a bit larger than some of their advanced-stage counterparts.
While in many
cases this size differential again boils down to potential deposit size,
these early-stagers also vary in size based on their own differing levels of
maturity. On the smaller side we see juniors that are thus far
discoveryless. These companies are leveraging location or perhaps some
promising initial exploration results, but have yet to make a meaningful
find. While a handful of these super-risky juniors may make significant
discoveries and greatly reward the speculators gambling on their stocks, most
will likely fail.
In the mid-range
of this category you’ll find juniors that have made discoveries, but
don’t yet have enough data to define resources and perform advanced
technical studies. In most cases these juniors have captured some
attention from the markets, have raised record amounts of capital relative to
their size, and are performing their most aggressive drilling programs to
date. These companies are motivated to move their projects along and
offer significant news flow to the markets.
On the most
mature side of this category are those juniors that have given the markets a
taste of what their gold deposits are shaping into. Many already have a
round or two of resource estimates and are working on additional definition
drilling in order to upgrade these resources. They are also working on
drilling the open horizons of their mineralized zones, and have likely
expanded their lab work to include metallurgical testing in order to better
understand the complexity of the ore.
In some cases
these mature early-stagers have put together a preliminary project plan that
outlines a timeline to production, but at this point it is more of a guess
than anything. Unless there is existing usable infrastructure that will
allow for fast-track mine development, it is not likely these companies will
deliver on their original targets. Mine development is a huge
undertaking, and it is inevitable that the more advanced technical studies,
permitting, financing, and construction will take longer than
anticipated. This is why in many cases it can be 10 years or more
between discovery and production.
As for deposit
size, there are early-stage juniors advancing discoveries that have the
potential to be in the big leagues. Drill results to date have hinted
at simply massive deposits, and these rare elephants get a whole lot of
attention. And some of these large mineralized zones have yet to see
their first resource estimates.
But we know they
are big, as even in these early stages a combination of regional geology and
drill results allow us to recognize multi-million-ounce potential.
Interestingly the top-performing junior of 2009 watched its market cap soar,
making it one of the largest juniors today, and it has still yet to return a
resource estimate. When it does, it is expected to be enormous.
these early-stagers, regardless of potential deposit size, what I want to see
is progression. What are these explorers doing to advance their
cause? Those that will emerge from the pack of course need to own
quality deposits, but they also need to show initiative by aggressively
gathering data to define and/or upgrade resources. And it is in their
best interest to show investors, and the big miners, that their prospective
undeveloped deposits have what it takes to get to the next level.
And believe me it
is critical for the big miners to notice, as more often than not these
juniors’ fates lie in their hands. Reason being is it is a rarity
for juniors to reach producerdom on their own. Of the small percentage
that own gold deposits that are economically feasible to mine, the majority
are absorbed into the senior circuit before the first ounce is
produced. In fact, it is a near certainty that several of the 12
advanced-stagers profiled in our March report will pour their first ounce of
gold under the ownership of a mid-tier or senior producer.
advanced-stagers do make for attractive acquisition targets, it is the
early-stagers that are the sweet spot of junior M&A activity. The
larger miners will pay premiums for grabbing these early-stage assets, but
they are a lot cheaper at this stage than they would be once resources are
As is typical
investors aren’t usually privy to the knowledge of larger mining
companies sniffing around the junior realm, which is why we have to assume
these juniors can be taken over at any time. And you can be assured
that if a junior explorer is returning out-of-this-world drill results, the
big boys will be in the neighborhood. Quite often the best geologists on
payroll at these larger mining companies are focused on M&A and not their
own grassroots exploration. Much of their time is spent performing due
diligence at prospective takeover targets.
And most juniors
don’t mind this attention. I’ve found that many of these
companies aren’t even interested in advancing their projects all the
way to production. They actually run business models designed to stick
with their bread-and-butter skills of exploration and discovery. When
they advance their projects far enough they seek out senior joint-venture
partners, or buyers, to shoulder the development burden.
One major reason
for this strategy is skill sets. Just like many miners lack the
exploration skills to renew their own reserves, most junior explorers lack
the operational skills to build a gold mine. Mine development is
inherently risky, and expensive, which is why in most cases it is best left
for the larger deep-pocketed companies.
As an investor I
always like to see a junior advance its project as far as possible on its
own, optimally to production, as this affords the opportunity for maximum
project leverage. Unfortunately this is a rarity, and all you can hope
for is that your junior sells out for a healthy and fair gain. Once a
junior is acquired the leverage on its individual project disappears as it is
lumped in with a larger diversified portfolio.
But thankfully we
don’t need juniors to become producers in order to see share
appreciation. In fact, those juniors skillful and successful as pure
explorationists will greatly reward shareholders. As junior investors
and speculators our challenge, and excitement, is found in identifying those
rare juniors that have projects of high-enough quality that they could
eventually be developed. Once found, we will be rewarded whether the
junior brings a mine to life on its own or pawns it off.
And it is this
early-stage group that offers such excitement. Since these juniors
don’t quite have their arms around the depth and breadth of the gold
mineralization they have at hand, and a lot of work is left to be done, there
is huge potential for upside surprises. And through diligent research
one can find those stocks that have the potential for legendary gains.
brand-new report profiles our dozen favorite early-stage juniors, all of
which have incredible potential to capitalize on this gold bull. Even
though we gravitate towards those juniors that have already made discoveries,
a lot of upside remains, especially since many have yet to define their first
resource estimates. These juniors are in the midst of an exciting
season of news flow in the coming months and years. Buy this report
today to have all 12 detailed fundamental profiles at your
and technicals may not favor the gold stocks right now, this report will give
you a fundamental read so you can put together your list and be ready to go
shopping when the time is right. And of course if you are looking for guidance
on the timing, I encourage you to consider subscriptions to our acclaimed weekly and monthly
newsletters. Our next junior-gold-stock buying campaign will draw from
The bottom line
is even though the spark has been hard to find, the junior-gold-stock flame
will eventually be reignited. A lot of investors have been turned away
from this exciting sector by the way these stocks have lagged gold. But
since it would be fundamentally unfeasible for the juniors to fade into
oblivion, those battle-hardened speculators staying the course are likely to
be greatly rewarded as gold’s bull charges forward.
that you won’t have a more invigorating feeling in these markets than
owning junior gold stocks as part of your speculative holdings. These
modern-day 49ers offer investors a sense of adventure, allowing us to take
ownership in a real-life treasure hunt. The risk is of course on the
high side, but so can be the rewards. It is never too early to put
together your junior-gold shopping list.
So how can you
profit from this information? We publish an acclaimed monthly
newsletter, Zeal Intelligence, that details
exactly what we are doing in terms of actual stock and options trading based
on all the lessons we have learned in our market research as well as provides
in-depth market analysis and commentary. Please consider joining us
each month at … www.zealllc.com/subscribe.htm
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