Monday, May 18, 2009

Gold, Silver, Lithium: Junior Mining Investment Cycle CS. TNR.v, CGH.to, FST.v, CZX.v, SBB.v, SNU.v, FVI.v, OK.v, MGN, ASM.v, RMK.v, JNN.v, RVM.to,

Blue sky is called blue sky because of its unlimitness, but the edge between the TenBagger and worthless dreams is very sharp and hurt a lot of people. First hole drilled with economic mineralisation normally brings excitement and flood of money compare to Junior's market Cap and average volume of trading - nobody really knows how big is that thing in the ground. Before that hole will make its way from our "3 of one Thousand" to boring and relatively safe producing mine, Junior Mining company drilled that hole will experience Investment Cycle we would like to write about today. We have discussed before Junior Mining economics and our Bullish case for the Real Things. There is no question for us that the big money will be made in the sector again, the big question is Where? We have discussed before importance of the Big Trend and its identification for our game against the odds, today we will demonstrate it with a few charts and will give you a simple, but powerful evaluation matrix for Junior Mining stories. As usual we are using Creative Commons approach and if somebody already written it better then we can do, we will use it. We hope that the authors are appreciating additional circulation and traffic brought to their web sites and always ready to take it down should they conclude that we use it in inappropriate way.
Chart above is from Ian Gordon, Long Wave Analyst. It is important to understand the cycle and our place in it at the moment. We will refer all readers to that web site to get a better understanding of The Kondratieiff Cycle and Cycles within the Cycle. We have identified two major trends for us:
1. We are riding the first one for a number of years, to be precise from 2002, and have a good company of FED, Jim Rogers, Jim Sinclair, Mark Faber, Peter Zihlmann, Jim Puplava and others: who are debasing the value of FIAT currencies (FED) or making money out of it (Others) and US Dollar Collapse is a prime example. Gold and Silver are in a Bull market as a Real Money and Real Store of Value here.
2. We have identified a new trend, Next Big Thing and a new Bull market recently and hope to be early into the game:
"Most bull markets have started when there was a significant fundamental displacement and destructive technology has emerged addressing this unsustainable conditions. We have identified for ourselves such a displacement and destructive technology: Peak Oil and Electric Cars. Next bubble to burst - is an unsustainable energy consumption and all western economies are built around it now. Lithium is becoming the matter of energy security and new oil for the next industrial revolution - mobility revolution based on electric cars."
Lithium, Copper, Zinc and Uranuim will be in Bull market here.


From the chart above you can understand recent history of Collapse and Value Dislocation, followed by flight to "safety" and Great Investment Delusion - Treasuries Bubble. Junior Mining stocks get killed and crashed last Fall, when risk perception was severely exaggerated. Those who stayed alive have a generational buying opportunity even now, when "End of the world" is postponed and swine flue can not get guys from Wall Street must be due to inherited immunity. Hedge Funds have received a Global Margin call last Fall and sold liquid positions with profit first, then Gold, then everything they can sell - Juniors where hit on every bid and in December guys like FVI.v were trading at 0.3CAD, TNR.v at 0.03CAD and CGH.to below 0.2CAD. They have doubled and triplied now, but we would like to share, why we think that we have a second chance to come back into Junior Investment Cycle with lower risk due to Mr Market risk averse valuation.

Normally, Junior mining Investment Cycle looks like chart above. Last Fall collapse gave us all generational opportunity if our big trends are still intact: we can get into the Green zone one more time with less risk, but with still all upside left. Valuations of Junior mining companies are so depressed, that Mr Market is giving valuations still with discount of 70-80 % compare to year ago. Brilliant research on Junior Mining valuations is done by Adam Hamilton and can be found here: Junior Resource Prospects.
It is a cherry picking game: not everybody has made it and not everybody will make it. Those with only dreams and without capital will vanish, others will buy out the first ones out or their properties to ride again the green zone. That is why it is so important to go where the Names are going, names when their reputation is more valued then MC of the particular Junior. Check always: who is behind the company, who are major shareholders, what team is in place, what kind of potential property or properties they have, do they have access to the capital? You will find evaluation matrix below, but we would like to add another very important observation: you should not be too much ahead of the time in your investment story, it is nice to be able to accumulate a cheap paper as much as you can in your own Risk/Reward matrix, but Mr Market better pay attention after that - you need to stay solvent at all stages of the game. Stronger stories will come out first from the crash and watching the radar screen you can find them sprinting back. If during the downturn they have managed to develop their properties, acquire other companies, strike new deals, attract new Major investors or even proclaim to be a part of the new Bull - you have a better chances and low entry risk in the potential Green Zone. Chances of us continuing to write about these stories are much higher as well: this is how we chose our stories. You can ride them through valuation matrix below.



(We will use here a Third party valuation matrix from Ian Gordon, so you can always apply it to the companies we are writing about).
If gold is a low risk investment during the Kondratieff winter, should we buy the gold producers or the exploration companies? Let's examine the 'pros' and 'cons' of each of them.
Gold Producing Companies:
Pros:
·Investment grade. Large Market Caps-appropriate for investment funds.
· Cash flow via production.
· Excellent liquidity.
· Share prices generally rise faster than the price of gold itself.
Cons:
· Depleting their resources through production. Difficulty finding sufficient reserves to maintain production at current levels; e.g. Newmont produces 7.2 million ounces each year. Approximately 9 million ounces is required to replace this production.
· Hierarchal management-slow to make decisions.
· Exploration subject to committee review and budgetary constraints.
· Limited exploration since 1998.
· Only a small number of companies to choose from.
Junior Exploration Companies:
Pros:
· Responsible for 70% of discoveries.
· Growing their gold.
· Quick response management.· Innovative geologists; prepared to see the unconventional.
· The onset of the Kondratieff winter suggests the largest bull market in gold in the entire cycle. In that environment share prices rise faster than those of their production counterparts.
· A major discovery positively impacts the share prices of most exploration companies.
· An ability to release regular news in progress.
· Management usually owns a large stake in the company and has a vested interest in achieving positive results on the behalf of all shareholders.
Cons:
· Management not trusted - think Bre-X
· Viewed as very high risk investments.
· Investors don't understand news releases, because they are usually not geologists-and are unable to evaluate a discovery in progress.
· Poor liquidity; small market caps-not suitable for most investment funds.
· Difficulty in raising money; major dilution at low share prices.
Evaluating Juniors:
The key is Management. The Long Wave approach, developed by my team at Bolder Investment Partners is subjective but still useful.

A Simple Evaluation System:
Management: 30 Points· History· Integrity· Technical skills· Management skills· Relationships· Ownership in the company
Properties: 20 Points· Grass roots/discovery/gold in the ground· Access/Power/Water
Blue Sky: 15 Points· How big could this be?
Political Risk: 15 Points · A, B, C, or F · A = Quebec · F = Venezuela, Ecuador Market Capitalization: 15 Points· Comparative values· Value of gold in the ground
Promotion: 5 Points· How well does the company get the word out?· Conservative versus flashy
I much prefer investing in juniors versus seniors in a gold bull market, because:
· There is significantly more upside price potential, because of the leverage.
· Easy to be selective. There are plenty to choose from. Follow the management.
· Exciting to follow progress; discovery-resources-reserves.
· Management is usually dedicated to enhancing shareholder value. It wins, too."
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