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
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!
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
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.
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
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.
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
- Cecil Rhodes Consolidated de Beers mine, which bought out from 1871 onwards all
the other claims to the "big hole"
diamond mine at Kimberley,
- 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.
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.
1. good (track
2. no debt
3. well financed
4. unhedged, (ie no forward sales of Gold through futures or
5. good portfolio of properties, (exploration
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.
Leishman is now retired in Switzerland
following a career in international commerce