HUI index resting before a
large breakout
Juniors at fire sale prices
David Banister
Dec 5, 2007
"My favorite Junior
is Southern Arc Minerals" read
I've seen this movie before
a few times in this gold bull market, and I already know the
ending. For those contrarian investors like me, this,
in my view, is your last chance to buy quality Junior
gold exploration stocks at fire sale prices. Bull markets like
to buck off as many investors as they can along the ride up.
This one has been no different.
Let's start by examining the
HUI index of "unhedged" gold companies. This index
has always served me well by using technical analysis and "Elliott
wave" theory. One thing I like to do is keep it as simple
as I can. The HUI index broke out of its near 18 month base pattern
this fall when it finally crept over the May 2006 highs of 401.
The index rallied to 463 before recently pulling back in the
October-November time window.
This particular pullback looks
eerily like the fall of 2005. The HUI index then had begun to
run off of extreme bottoms, and formed its first pullback. This
is what I call a "wave 2" pullback. Quite simply, the
herd has decided to pull their chips off the table assuming the
run is over. Once again, the end of this movie will show that
herd to be wrong. What we have now is the HUI index coming back
to test the May 2006 levels one more time, and whilst doing so,
the index has become extremely oversold. If you look at the chart
I did here, you will see a strikingly similar pattern to the
fall of 2005 pullback. In fact, I expect the HUI to eventually
run up towards 600 from 405 today, with the intermediate peak
around 525 along the way. The index is going to mimic the April
2005 to May 2006 move, only from much higher levels. Gold will
be heading to about $980 per ounce US at its next pivot top.
There is not a lot of time
left to enter at these fire sale levels. In a recent interview,
John Embry, the Chief Investment Officer of Sprott Asset Management
felt that Juniors are at their cheapest valuation levels since
2000-2001. He believes the fund he manages will return 100% or
more in the next twelve months for the patient investors. The
HUI index back then was at a low of 50, its now 405.
If Embry is right, and the
charts that I have used successfully for this entire gold bull
market are right, well, it's time to look for some Juniors to
invest in at these "fire sale" prices. There are many
that come to mind that are trading at 1% to 3% of inferred in
situ ore valuations. The key is finding those with low capital
costs to build a mine, low labor costs, and economic deposits.
Many of the best Juniors are advanced in their exploration projects,
are well cashed up, and have multiple drill results to review.
The best of them will eventually have the opportunity to be bought
out for anywhere between 10% to 40% of their proven and probable
resources. Now is the time to invest aggressively in this sector
while the inherent discounts to ore value are at extreme lows.
 My favorite Junior is Southern Arc
Minerals. SA has been written up on 321Gold.com in numerous
articles from April through August of this year by Bob Moriarty,
Omar Boulden, and Kevin Graham. Southern Arc has continued to
drill off 600 meter deep drill holes of gold and copper intercepts
all summer long. After six consecutively announced drill holes
averaging 430 meters of gold and copper intercept per hole, they
recently decided to secure a second drill to expand the work
at the Selodong Intrusive Complex in Indonesia. They have identified
fifteen - that's right, fifteen - separate porphyry
style formations in the same 7km x 3km project area at Selodong.
A simple trip to their
website will lay it all out for you, including maps and historical
drill results from Newmont Mining.
Recently, management decided
to take this advanced exploration story on the road to New York,
Boston, London, Zurich, Montreal, and Toronto. John Proust, CEO,
and Hamish Campbell, chief geologist, conducted over thirty meetings.
Following these meetings, Southern Arc announced this week a
$12,000,000 brokered private placement at $1.20 per share with
warrants. The offering book sold out in 48 hours, and from what
I hear, John Proust was trying to find another 2,000,000 shares
to help meet demand from one large fund group.
Why the interest? The stock
has consolidated heady gains for the past seven months, after
having gone from 20 cents in February to $2.48 in June. Southern
Arc last did a private placement in March of this year at 30
cents. This offering was 400% higher only eight months later,
and six times the value raised. Stocks like to consolidate big
gains for many months at a time, until the volume dries up and
they become "oversold". The timing for investors in
the placement could not have been better, talk about an early
holiday present. After completing six deep drill holes back to
back all summer long, management felt "it is time to tell
the story". Apparently the story was quite well received
and I expect the share price to begin climbing into the new year.
Once this offering officially closes, Southern Arc will have
$11.3 million in the til, [till]
plus current cash on hand of near 3 million, or in the neighborhood
of $14.3 million. They recently added the second deep drill and
now have two turning actively. They are securing a 3rd drill
which will be able to drill down as far as 1,200 meters instead
of the 700 meter limitations of the current drills. The company
is fully cashed up for at least the next twelve to eighteen months
of work at Selodong, let alone several other projects with blue
sky.
Suffice to say that there will
be a lot of news flow coming out of Southern Arc over the next
twelve months as they expand the scope of their Selodong work
and continue to prove up a potentially huge gold and copper resource
deposit. John Proust, the CEO, has been an active buyer of the
stock all summer long in the open markets, purchasing more as
recently as November 29th. It's rare to find a quality junior
with an advanced exploration project with insider buying, thirteen
geologists on staff, and fast assay lab results from each drill
hole. It's even more rare to find a project with the potential
to equal that of the Batu Hijau deposit owned by Newmont Mining,
and some are even putting Grasberg in the same sentence. Although
there is quite a bit more drilling to do, the company trades
at a fully diluted market cap of only about $112,000,000 as of
this writing. Bob Moriarty hypothesized this summer after just
four deep drill holes, that one could infer 270 million tones
of ore already. They had only deep drilled four holes over just
two of the fifteen porphyries identified. 270 million tones at
about $25 per tonne is about 7 billion dollars of gross ore value.
10% of that figure is 700 million, or $8.50 per fully diluted
share.
The stock is selling in the
$1.30-$1.50 ranges of late. This calculation assumes there is
no further blue sky on the project, and also assumes we are not
giving Southern Arc any value for any of their other prospective
properties in the prolific Indonesian arena. If we were to put
a 5% inferred resource valuation on the figures above, the stock
should be trading at $4.30 per fully diluted share today. To
wit, Omar Boulden's piece this past June on 321Gold had a fair
value of about $3.89 per share at the time, after only three
deep drill holes, we now have had seven. Palmajero is good proxy
to compare as well. They were acquired this summer for about
$1.1 billion, or 40% of proven ore value. Southern Arc is currently
trading at about 1.5% of inferred value with a lot of blue sky
on this Selodong project to come.
Although this is certainly
not a complete representation of all of the facts surrounding
Southern Arc, it is but one example of many Juniors that are
trading at severe discounts to potential takeover value. Many
of the Senior Miners have publicly stated they are concerned
about meeting the demand for gold and copper, but also replacing
rapidly depleting reserves. I could list another ten juniors
here, but Im [I'm] biased about Southern Arc and I am
a shareholder. I have invested in some five and 10 baggers several
times in the Junior sector, patience is usually difficult when
the stock drifts for 6-7 months at a time, but when they start
to move, they can really build steam.
With the HUI index ready to
resume its advance, along with gold... now may be a good time
to build your shopping list, but you probably shouldn't wait
for much lower fire sale pricing, it's already here.
Dec 4, 2007
David Banister
email: dbanister@cox.net
David Banister is a Registered Representative with
Investor's Capital Corporation and has a personal position in
Southern Arc Minerals at the time of this writing. David has
written for CBS Marketwatch.com in the past, has been on national
radio, and has written articles for local newspapers on the topics
of investing and economics. Please perform your own due diligence.
All opinions expressed in this article are not the opinions of
Investor's Capital, and should not be relied upon for advice.
321gold Ltd
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