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The absolute best time to
buy a mining stock is just prior to the drilling of the 'discovery' drill hole
which makes the nightly news and sends the penny stock soaring to
extraordinary highs! (see Fig 1, Item 1-3, Discovery hole) This is a
difficult task as statistics show that over 600 properties have to be drilled
for each ore body that is discovered and subsequently made into a mine. It
can be a daunting and expensive proposition trying to cover your bets by
speculating in all the penny dreadfuls.
The experience we have
enjoyed over the past 30 years suggests there is a second best time to buy mining
equities. That is when a qualified management team is preparing to
convert/construct a single 'ore body' mining company into a producing mine. A
purchase of mining stocks during this development/construction period has
produced significant gains with a favorable
risk/reward ratio.
Mines are Not Discovered, They are Made!
Ore bodies are usually
"discovered" during an "up-cycle" in metal prices as the
mining industry and the speculative publics enthusiastically spend money on
exploratory drilling. One or two discoveries are made and the enthusiasm
spills over into all the penny exploration companies. It can take two to four
years to fully "prove" a discovery while the short-term
"up-cycles" in metals prices are often as brief as one to three
years. Thus discoveries are often brought into production, made into mines,
in the following (or possibly later) up-cycle in metals prices.
The difference between
the real discoveries and the promotional clones is not always signaled by their price action in the stock market. They
both go up during the general enthusiasm for the shares of any companies
nearby the 'discovery' (Fig 1, Item 2, Anticipatory/discovery rise) and down
when metal prices recede (Fig 1, Item 4, Confirmation/disinterest slide).
 
Figure 1: Model of
Classic Mining Company Share Price Cycle
Companies with bona fide
discoveries (those that will ultimately be 'made' into mines) identify
themselves by continuing to spend money on their property when metal prices
are cyclically weak, (Fig 1, Item 6, Development/construction period) and
when funds are not as readily available from a now less-enthusiastic public,
but rather largely from management and longer-term investors.
Buying discoveries can be
fun and profitable, and is largely speculation. Buying qualified 'mine
making' is investing that can yield significant returns with a favorable risk/reward ratio.
Investing in a 'single'
ore body mining stock when it is being readied to go into production (Fig 1,
Item 6) provides some of the lowest risk/highest reward mining industry
investment opportunities. And results are even better if this period of
pre-production/construction coincides with the trough in a market cycle for
the stocks of the particular metal.
Low metal prices and
disinterest from the speculator community (who often drive the prices of
stocks to excess during the discovery period) combine to produce a very
depressed price for a mining stock during the confirmation/disinterest slide
(Fig 1, Item 4). This is precisely when a good ore body, financed by
knowledgeable long-term investors and operated by qualified management, can
be bought in anticipation of substantial gains during the pre-production and
production period, compounded when metal prices recover from cyclical
weakness.
The Big Payoff
There is significant
capital gain potential as the market begins to anticipate and discount the
production of metal and the consequent earnings (Figure 1, Items 6 through
8). The maximum appreciation is recorded if the mine is being readied for production
during a period of metal prices weakness and begins pouring metal and
generating earnings as prices are trending up again.
In thirty years of
identifying ten such companies, all but one have equaled
or exceeded their discovery highs by more than 100%! The price rises from
their confirmation/disinterest lows to their production/cash flow highs have
produced 300-1000% gains.
Conclusion
One of the best times to
invest in a mining stock is during the construction - pre-production period
when a qualified 'single' ore body mining management team is going about the
work of 'making mines'.
By : Albert J. Matter
Albert J. Matter has over 30 years' experience
founding, financing and building private and public companies, most recently,
Gryphon Gold Corporation and National Gold Corporation, merger partner to
Alamos Gold Inc. Mr. Matter served as Chairman of
the Board from inception of Gryphon Gold in early 2003 to Sept 6, 2007 when
he elected to retire as Chairman remaining a Director. From 1999 to December
2002, he served as President and Chief Executive Officer of National Gold
Corporation.
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