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Juniors ? The Butterflies in the Animal Farm of the investing world ?

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From the Archives : Originally published January 19th, 2009
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With the price of gold having risen from its low of 255 us$/oz in 1999 to its 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



Alan Leishman is now retired in Switzerland following a career in international commerce


 



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Alan Leishman is now retired in Switzerland following a career in international commerce which was prematurely terminated by a globalisation takeover. An interest in Geology, Mineralogy, and Gemmology developed after graduating in Chemistry at Edinburgh University. His collection of minerals, which was on display for 6 years (until 2003) at the National Museums of Scotland in Edinburgh, was put together by visiting mines, mineral fairs and dealers in over 30 countries, over a period of 20 years. He is also a keen naturalist with interests in bird watching, and butterflies.
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Very well written article, Alan. It pictures the volatibility of the junior stocks, that are, indeed, mostly comparable to ''social butterflies'' and moths gathering around the light. Their goal is to reach higher, always, although it is more common to see them reach in the dime bag rather than multiply by the tenfold.

That being said, I'd like to mention that my favorite stock in that Range is Anaconda Mining's (ANX) For many reasons, which are usually in the same range mentioned by you in the last yet certainly not least part of the above. They are Canada based, reinvest in local RND courses and even sign deals with the first nations around so anyone can profit from this.

They had some manager change recently yet the previous one was there for a decade and this was very much instrumental in their efficient and timely rise to fame. I keep this in my portfolio in case of recession, also for long term.


A good friend I have, whose parents own Land and wineyards in South America, was mentioning that big corporations were keen on hedging there rather than minding their own business. That is, of course, what the corporate game is about and I will not mention anyone in particular(it's not a Swiss based company)so

It won't sound as if I was trying to smear or slander anyone.

T

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Very well written article, Alan. It pictures the volatibility of the junior stocks, that are, indeed, mostly comparable to ''social butterflies'' and moths gathering around the light. Their goal is to reach higher, always, although it is more common to s  Read more
stocking up pennies - 10/7/2019 at 6:34 AM GMT
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