By Kishori Krishnan Exclusive To Gold Investing News
It is a nosebleed, the likes of which one has not witnessed in a while.
The only way to stem the flow is to keep your fingers crossed and hope and pray and believe that the US dollar will collapse in value and be replaced as the global reserve currency.
Believe that inflation will return to double digit figures and some global governments collapse under their massive debt burdens.
Believe that some nations default on their payment and some others become insolvent.
A tall order?
For gold to start on its northward trajectory soon, a smart investor needs to pay heed to the headlines: Germany has announced that its deficit would not be as big as expected. Instead of Euro 49 billion, it will be only Euro 39 billion - below 3 per cent of GDP this year.
France says it’s bringing its deficits down too - to less than 3 per cent of GDP by 2013.
The US and the UK, on the other hand, are out of control - with deficits over 12 per cent of GDP and no credible plans for substantial reductions.
Stocks are bound to react and with them, the price of gold.
So, what does one invest in during these troubled times?
Given that the yellow metal has taken on a new importance in many portfolios, junior mining stocks offer a way to play the emerging growth in the industry.
These companies target properties that are believed to have significant potential for finding large mineral deposits and are considered to be companies that could fuel a major source of future mine supply.
So, would this be a good time to start accumulating juniors? Cause investing in risky juniors has its upside - the leverage could be astronomical. And then there is the other part.
But given the increased demand for gold, there is bound to be consolidation ahead for some juniors with big companies buying up juniors, who carry out much of the exploration on single projects. The junior sector has been lagging considerably behind the intermediate and senior producers, because of their negative cash flow, while the others have positive cash flow from their production.
At this point of time however, they are in charge of the large treasuries. Seniors need growth and the juniors are providing it.
Let’s take a step back in history. The gold bull market began in 2001 and in early 2004, there was a small bunch of juniors that came out with good drilling results. The reward was immediate and huge.
Four years later, they had moved to the exact opposite end of the spectrum to extreme undervaluation. Most of the juniors were decimated to penny levels, levels not seen since the beginning of the gold bull market. The junior sector was so depressed that no one wanted to own junior shares anymore.
So what has changed since then? The pendulum has swung again and from late 2008, the junior sector has started to recover, albeit slowly, from its most depressed levels. Today, they are shining forth.
That’s not to say that all’s hunky dory with juniors. One has to be careful to pick the high-quality ones, because “many juniors are not going to survive this dark winter. The problem is money,” argues Gold Drivers Report publisher and Bullion Store proprietor Eric Hommelberg.
“Most junior business models are simple. They raise money and drill it away, then they raise money again and drill it away again. If they’re lucky, they make a discovery and the stock starts moving up. But generally it takes a lot of money to make a discovery if the junior makes a discovery at all,” he adds.
And they are highly volatile.
Three lil’ words
Many firms don’t have hard cash. Added to that is the fact that investors are not keen on early-stage projects.
But there are some juniors that have deep pockets and are either in early stage production or will soon hit the proverbial gold mine.
Don’t get carried away though - check out your companies first, look for experienced geologists and engineers, promising properties with historical mineral findings, clearing all the necessary regulatory and governmental environmental sections, and those who have strong management teams.
The juniors most likely to outperform are the ones with capable management, the ability to raise funds and that have high-potential projects close to production.
And the action has already got underway. Check out what is happening with Major gold miner Goldcorp Inc (TSX:G), which has set the alarm on for any rival who wants to cast a superior bid for Canplats Resources Corp (TSXV: CPQ).
On Thursday last, Goldcorp matched a rival offer equivalent to $254 million for Canplats Resources in a move that has again raised the junior gold and silver mining company’s stock price, along with the ante in a possible bidding war. Should a rival bidder step in at this point of time, Canplats would have to dole out $9.3 million to Goldcorp.
And a bidder stepped right in. On Monday, Minera Penmont trumped Goldcorp’s Canplants bid. Goldcorp has until January 5, to amend the terms of the agreement.
If the earlier deal would had gone through, Goldcorp would have assumed ownership of Canplats’ Camino Rojo project in Mexico. Goldcorp already has three mines and two development projects in Mexico.
Under a friendly takeover agreement with Canplats earlier, Goldcorp had until December 31 to match Minera Penmont’s bid of $4.40 per share, which included $4.20 in cash and a share of a new company with a notional value of 20 cents per share. Goldcorp said that since it had matched the Penmont proposal, Canplats must enter into an agreement with the Vancouver-based company.
“The Penmont proposal is of no further effect because Goldcorp has exercised its right to match,” Goldcorp said in a release on Thursday.
In a matter of less than a week, the tide has turned for this junior.
Nuinsco Resources Ltd (TSX:NWI), a junior mining company focused on gold, uranium, copper and zinc exploration in Canada and Turkey, announced Thursday that it had completed the sale of about 11.1 million flow-through units at 9 cents each to the NineralFields Group, for gross proceeds of just under $1-million.
The idea is to fund exploration on the Diabase Peninsula uranium project in Saskatchewan’s Athabasca Basin and the company’s other projects in Canada.
The firm says it has an agreement in place to sell its Cameron Lake gold project south of Kenora and a gold mill to Coventry Resources Ltd (ASX:CVY) in a cash and stock deal that the company valued at $12 million. Coventry will pay $5.9 million in cash once a definitive agreement is reached, with a deadline of March 5.
Even National Bank Financial has boosted it coverage of precious metal plays by adding a junior gold analyst to its roster. Analyst Tara Hassan has been added to beef up the firm’s research team.
In conclusion, gold has limited upside short term potential from its current base. As for the long term - that is anybody’s guess but there is no shortage of prognosticators who see gold going parabolic.
Adam Hamilton of zealllc.com forecasts a price of over $3,500 by 2010/11.
And, what’s your credible forecast?