Don't overlook non-precious
metal stocks
Dr Richard
Appel
March 04, 2005
Excerpted from the March
2005 issue of Financial Insights
February
27, 2005 - I
first entered the Canadian junior exploration sector in my desire
to maximize my profit potential. The year was 1993. I had earlier
come to the belief that gold had begun a major secular uptrend
when it broke through strong resistance at $325 an ounce. With
this thought firmly entrenched in my mind I set out to target
the most profitable areas within the precious metals complex
in which to invest. I knew that investing in gold bullion or
bullion coins would offer me a one for one profit potential that
would mirror any rise in gold. I was also aware of the great
leverage that I could achieve if I invested in gold futures or
gold options. However, from my earlier experience during gold's
great 1970's Bull Market, I knew that my ability to "time"
gold price movements was far from precise. On a number of occasions
I believed that "gold had to move higher, and now".
Yet, after suffering innumerable price reversals, traps, and
the passage of time which left many of my options worthless,
I was only left with dashed hopes and dreams and less working
capital. I learned that while I had the ability to readily and
early recognize long-term trends, I was ill prepared and unable
to regularly ascertain short term ones. This ruled out my engaging
in gold trading offered by gold options or on the commodity exchanges.
My thoughts then turned to the major gold producing companies.
I knew that a rising gold price should drop to their bottom lines
and greatly increase their cash flows and profits. It was logical
that by the action of the price-earnings multiplier, the PE Ratio,
a company's share price would benefit from the greater revenue
and profit that would be received for the product that they mined.
If a company had a PE of 30 and their profits doubled, I would
receive a windfall profit of many multiples of its original price.
Unfortunately, I usually felt that most gold producers were vastly
overpriced. Thus, I was reluctant to invest in these companies
for fear that their PE ratios would decline to more reasonable
levels. If this resulted a higher gold price would not significantly
benefit me. Further, from experience, I realized that the underlying
factors that drive gold to higher levels would also act against
those companies that profit from retrieving it from the bowels
of the earth. Just as gold's price is influenced by a depreciation
of the dollar's purchasing power, the dollar mining costs of
the gold producers also rise. The result is that these companies
do not fully benefit in the long-term from gold's price appreciation.
Having run out of the classical fashions in which to invest in
gold I though back to my experience during the gold and silver
Bull Markets of the 1970's. In that era my first gold investments
were in some South African gold mining companies. Later, with
a similar desire to increase my profits, I found the Coeur D'Alene
silver exploration companies. These were basically small companies
that had little hope of finding a mine, and in fact did limited
or no exploration. Further, the sole opportunity that they offered
an investor was their tiny prospects located mostly in the Silver
Mile of Idaho. The hope was that one day they might be coveted
and acquired by a major producer. I knew from investing in this
market during the late1970's, that investors clamored for these
companies and provided their shareholders with enormous profits.
This, despite the fact that not one in ten performed much more
than the required work to maintain their mining permits.
In 1993, and with this knowledge and experience in hand, I began
in search of a new area of gold investments that would offer
me the greatest return on my capital. I read numerous investment
newsletters and attended many gold conferences. I realized that
a number of things had changed since my 1970's experience. In
that decade the junior Canadian exploration industry was in its
infancy. In fact, only a few companies such as Agnico Eagle were
ever mentioned. However, by 1993 a number of changes had occurred.
Not only had a number of countries enacted friendly mining laws
that enticed exploration companies to travel around the globe,
but several technological advances had essentially opened up
the world to aggressive senior and junior exploration teams.
Country after country that were thought or known to possess vast
under-explored and unexploited mineral deposits had now opened
their doors to anyone who was willing to enter and attempt to
unlock their fabulous natural wealth. Further, a host of earlier
uneconomic ore bodies could similarly be exploited. This was
enabled by the new mining techniques and processes that were
far more cost effective than those earlier available.
When I first learned of the global opportunities available to
the mining industry, my thoughts solely focused to gold. After
all, I was only looking for a fashion in which to best profit
from my belief in far higher prices for the yellow metal. At
the time it seemed logical that if one of my junior companies
was successful in defining an economic gold deposit I would handsomely
profit. If my company was able to discover one million ounces
of gold, it could rise from virtually nothing and suddenly sport
a market capitalization commensurate with others developing a
similar sized gold mine. If they were exceedingly fortunate and
found a two or three million ounce deposit, their market cap
could soar from virtually nothing to heights that approached
$500 million or more. What a rush! However, what I didn't realize
was that in the scheme of things, a one million ounce or even
a three million ounce gold deposit isn't all that huge in the
mining field.
While a $500 million or more market cap is a lot of money, the
odds of finding a gold deposit that can generate such a capitalization
is no more unusual than finding a base metal mine worth a multiple
of that amount. Or, for that matter, a small oil or gas exploration
company can find a massive hydrocarbon deposit worth five or
ten million ounces of gold. And, the result to the investor in
any of these alternative instances can similarly equate to substantially
greater profits. It's simply a question of the magnitude of the
metal or hydrocarbon's value that can be economically produced!
The greater the net present value of the deposit, the more that
the company's shareholders will benefit that find such wealth.
When I first entered the Canadian junior exploration sector I
didn't adequately understand the economics of the industry. While
I was determined to best profit from my gold investments I missed
the greater picture. It was only after I had been involved in
this sector for a while, and witnessed first hand the great profits
that some investors experienced with non-gold exploration successes,
did I fully understand that gold isn't necessarily better. That
is at least in regards to maximizing one's profit in the junior
natural resource industry.
In the mid-1990's, a junior called Diamond Fields was exploring
for diamonds in Labrador. They were unsuccessful in making a
diamond discovery, but instead stumbled upon an enormous multi-billion
dollar nickel deposit. Their shares soared from a few dollars
to over $150 C. Earlier, Aber Diamond Corp.was another exploration
company that traded for pennies before making a major diamond
discovery. It is currently trading at over $40 C. Pennaco Energy
began its life well below $1.00. After beginning the development
of a major coal bed methane play in 1998, it was acquired for
about $20 a share a few years later. I can go on and on! In fact,
the world's major mining and oil and natural gas companies similarly
began as juniors. It didn't matter for what they were exploring.
What was important was that their initial major discoveries led
to their growth and their ultimately becoming household names.
I am confident that not only are gold and silver in secular Bull
Markets, but also are oil and natural gas and all mineral based
commodities. In the past several years we have seen a barrel
of oil rise from $10 to its current $50+ price. Copper rose from
near $0.60 to $1.48 a pound. Molybdenum was at about $2.50 a
pound, iron ore was a few dollars a tonne, and uranium sold for
$8 a pound. They are now selling for $30, $30+ and $22 respectively,
and their potential Bull Market peaks are nowhere in site. Further,
as their Bull Markets mature, numerous known but presently uneconomic
deposits will become profitable to economically exploit.
This offers great opportunity for many juniors. Not only may
their current projects become economic, but they will have the
opportunity to obtain newly economic deposits that are made so
by higher metals prices. In either of these events we will be
presented with the good fortune to invest in many nascent companies
that may one day enter the ranks of the secondary or major producing
companies.
As an investor you must be open minded. You should not rule out
investing in companies that are searching for natural wealth,
or have made important discoveries or acquisitions in metals
or substances other than gold and silver. You will find that
far more money can often be made with companies that meet with
success that target copper, uranium, oil and gas, or even iron
ore or lead. If you limit yourself to solely considering potential
gold or silver stocks you may short change yourself, as I did.
You should also seek companies that scour the world for massive
base metal, hydrocarbon or other wildly economic deposits.
The above was excerpted from
the March 2005 issue of Financial Insights ©February 27,
2005.
Dr Richard
Appel
contact
website: Financial
Insights
Appel Archives.
I publish Financial
Insights. It is a monthly newsletter in which I discuss gold,
the financial markets, as well as various junior resource stocks
that I believe offer great price appreciation potential. Disclaimer.
Please visit
my website www.financialinsights.org where you will be able
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