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Why Invest in a Precious Metal Junior

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Published : February 01st, 2015
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The Dow on Gold’s terms

The number of ounces of gold it takes to buy one share of the Dow is the Dow/Gold Ratio. For example, at the time of writing this article the Dow was at 17,511 while gold was at US$1,277.40. It requires 13.70 ounces of gold to buy one share of the Dow, 17,511/1,277.40 = 13.7, so the ratio is 13.7.

The historical low point in the Dow/gold ratio was reached in 1980 at 1 to 1.

In 2000, a bull market took the Dow to nearly 42-times (10,900) the price of gold.

The National Inflation Association (NIA) reports that the median Dow/gold ratio over the past 100 plus years is 5.83.

The NIA expects a return to the median Dow/gold ratio in 2015. At the time of their report the Dow was at its new all-time nominal high of 17,138. Making gold’s fair value, based on their long term median Dow/gold ratio of 5.83, almost $3,000.00 oz.

In-situ Inferred Value

Your author believes, based on in-situ inferred value, shares of companies involved in the precious metals sector are undervalued.

In January 2000, with gold at $260 an oz the in situ value companies were willing to pay for inferred gold was 3.55% of the spot price; $8.50oz

In 2005 with gold at $444 companies were buying inferred gold at 7.2% of spot; $34.00 oz.

Today with gold at $1200.00 oz companies are paying just $12-15 for inferred gold; 1 to 1.25%.

Company stage – risk v. reward

Juniors are risky, managing that risk is what investing in the junior resource sector is all about – in a nutshell it’s all about when you invest. Some people invest extremely early because of management, some on the possibility of what a property might host, some people will wait and invest as you start to drill and build resources thus reducing their risk. You pay less because there is more risk or you pay more because there is less risk, only you can decide the level of risk you can tolerate and how much patience you have to sit while developments, the story, plays out.

My favorite stage junior is a junior in the post discovery resource definition stage (also known as brown field stage companies). These companies have all ready found something, the share price has settled back after the initial discovery (never chase a company whose share price has already exploded, the share price has had its run, for now the moneys been made. I try and enter after the excitement has died down and the share price has settled back) and the company is going in to see what they have and hopefully produce a 43-101 compliant resource estimate and build upon it. The risk has been greatly reduced, the waiting time for a discovery non-existent and the reward very nice considering the much lower amount of risk.

For nearer term producers - for those further down the development path towards a mine - you have:

  • Preliminary Economic Assessment (PEA) or scoping studies are done to examine potential mining scenarios and economic parameters - A PEA or scoping study is an important milestone for a mineral project, it’s the first step in a company’s  economic and technical examination of a proposed mine
  • Preliminary feasibility studies or pre-feasibility studies are more detailed than PEA’s and are used to determine whether or not to proceed with a detailed feasibility study. They are also used as a reality check to determine areas within the project that require more attention
  • Feasibility studies will determine definitively whether or not to proceed with the project. A feasibility study or bankable feasibility provides budget figures for the project and will be the basis for raising capital to build the mine

Remember all these different stage studies are only yes/no decisions on whether to move to the next stage. NONE of them mean you are going mining, there’s no mine till every stage is completed, permits approved and the necessary financing has been arranged.

Because these companies are well advanced along the development path a lot of the guesswork about grade, size, costs and metallurgy have been taken out of the equation for us. They have done sufficient work to give investors a certain level of confidence that their project will successfully move towards being a mine. The later stage companies (those doing feasibility, permitting and money raising) can have an excellent entry point for investors - they often enter a quiet period when they are doing the advanced studies and raising money to go into production. They often base (a flat share price) for quite a while through this period - possibly a good time for accumulation of their shares if you believe in the story. After the money is raised for production investors can see they are going mining - cash flow is just over the horizon - and the share price will often break out of its trading range.

With producers you have to look at the balance sheet, consider their plans for the future and judge for yourself the ability to meet those plans. Remember cash flow is king, but can they grow that cash flow? These large well established producers have the least risk and the least upside. But gains could be steady and maybe they pay a dividend.

Conclusion

The number one rule of investing is ‘always buy an asset that is priced below its replacement value.’ The cheaper you can pick up quality assets, knowing the price HAS to rise, the better. When the asset is a financial instrument, such as gold and silver, it’s time to start acquiring it for the long term.

Gold and silver are, in this author’s opinion, extremely undervalued financial instruments. A portion of every investors portfolio needs to be dedicated to holding gold and silver bullion.

But historically, and perhaps especially so today for all the reasons listed above, the greatest leverage to rising precious metal prices has been owning the shares of junior resource companies focused on acquiring, discovering and developing precious metal deposits.

If you want to own the cheapest gold and silver you can find to reap the maximum coming rewards buy it while it’s still in the ground.

Great Panther Silver Ltd. (GPR:TSX; GPL:NYSE.MKT) is on top of the list of producers that are well positioned to take advantage of an uptick in gold and silver prices.

Kootenay Silver Inc. (KTN:TSX.V) discovered, and is developing, the Promontorio project into an open-pit mine in Sonora, Mexico. The company recently drilled one of its many prospects on its immense project and discovered another significant high-grade silver deposit, La Negra.

New Carolin Gold Corp. (LAD:TSX) is an exciting gold project. The company is working old mines in an underexplored area in southwestern British Columbia. Success here could open up a lot of people's minds about junior mining overall.

CanGold Ltd. (CLD:TSX.V) is working on earning a 100% interest in the Guadalupe de los Reyes gold and silver project in Sinaloa State, Mexico. The next stage of work will involve pre-feasibility stage drilling.

Terraco Gold (TEN:TSX.V) is a gold focused company with assets in the western U.S. that gives investors and shareholders exposure to gold equity ownership through gold royalties and gold in the ground.

NioGold Mining Corp. (NOX:TSX.V) has started a Phase 1, 40,000 meter definition drilling program on its Marban deposit.  

Theia Resources (THH:TSX.V)has the right to earn a undivided 60-per-cent interest in the Fox and 2 X Fred properties located in the Nechako Plateau of central British Columbia

After you’ve made your investment, you need to show some patience and let your chosen management team go to work for you. Watch and wait. If you’ve made the correct decisions, management conducts successful programs and does a creditable promotion job you will reap considerable rewards.

Are there quality post discovery precious metal focused resource definition stage juniors on your radar screen?

If not, there should be.

 

Richard Mills

Richard lives with his family on a 160 acre ranch in northern British Columbia. He invests in the resource and biotechnology/pharmaceutical sectors and is the owner of Aheadoftheherd.com. His articles have been published on over 400 websites, including:

WallStreetJournal, USAToday, NationalPost, Lewrockwell, MontrealGazette, VancouverSun, CBSnews, HuffingtonPost, Beforeitsnews, Londonthenews, Wealthwire, CalgaryHerald, Forbes, Dallasnews, SGTreport, Vantagewire, Indiatimes, Ninemsn, Ibtimes, Businessweek, HongKongHerald, Moneytalks, SeekingAlpha, BusinessInsider, Investing.com, MSN.com and the Association of Mining Analysts.

Please visit  www.aheadoftheherd.com – We’re telling you things everyone else doesn’t already know.

Free highly acclaimed newsletter featuring today’s investable junior resource companies.

If you are interested in sponsoring Richard’s site please contact him for more information, rick@aheadoftheherd.com

 ***

Legal Notice / Disclaimer

This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment.

Richard Mills has based this document on information obtained from sources he believes to be reliable but which has not been independently verified.

Richard Mills makes no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of Richard Mills only and are subject to change without notice. Richard Mills assumes no warranty, liability or guarantee for the current relevance, correctness or completeness of any information provided within this Report and will not be held liable for the consequence of reliance upon any opinion or statement contained herein or any omission.

Furthermore, I, Richard Mills, assume no liability for any direct or indirect loss or damage or, in particular, for lost profit, which you may incur as a result of the use and existence of the information provided within this Report.

Great Panther Silver Ltd. (GPR:TSX; GPL:NYSE.MKT), Kootenay Silver Inc. (KTN:TSX.V), New Carolin Gold Corp. (LAD:TSX), CanGold Ltd. (CLD:TSX.V), Terraco Gold (TEN:TSX.V), NioGold Mining Corp. (NOX:TSX.V) are all paid sponsors of Richard’s site aheadoftheherd.com. Richard owns shares of New Carolin Gold.

This article is not paid for content.

 

Data and Statistics for these countries : Mexico | All
Gold and Silver Prices for these countries : Mexico | All
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Richard is host of www.aheadoftheherd.com and invests in the junior resource sector. His articles have been published on over 60 websites including - Wall Street Journal, 24hGold, Kitco, USAToday, Safehaven, SeekingAlpha, The Gold/Energy Reports, Gold-Eagle and Financial Sense. If you're interested in learning more about the junior resource sector, bio-tech and technology sectors please visit his site at www.aheadoftheherd.com Site membership and our AOTH newsletter are free. No credit card or personal information is asked for.
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