   |
|||||||||||||
Gold & Juniors - wanted: discoveriesEric Hommelberg Actually, this article is an update on chapter IX of the Gold Drivers Report GOLD & JUNIORS so therefore it's highly recommended to read that chapter as well. This update contents:
Introduction: Since Gold is making headlines again these days due to 18 year highs Junior mining stocks seems to arise from the ashes and (as mentioned above) some are showing remarkable strength... But unfortunately not all juniors are participating in this current bull run. Now why's that and how could you as an investor position yourself in fast appreciating junior stocks? In order to answer that question let's focus again what's drivin' junior stocks in the first place. Here's a recap of chapter IX GOLD & JUNIORS: Highlights chapter IX GDR Gold & Juniors Highlights:
So there it is, juniors making discoveries are phenomenally profitable, an opinion which is shared by John Bridge, a senior gold analyst at J.P. Morgan Chase & Co. The Wall Street Journal quoted him saying:
You think that John Bridge's remarks are exaggerated? Well, please take a peek at the table below which proves beyond any doubt that discoveries do pay off indeed.
A Declining Gold supply, is it getting any better? The reason why new discoveries are so important for the industry is that the major producers simply can't replace their mined reserves. In order to replace those mined reserves they simply have to buy them. That's why major producers are showing more and more interest in junior mining companies. (for a detailed explanation see chapter IX Gold & Juniors). Now many people argue that there's enough time for the senior producers in order to explore for new ore since the estimated world wide reserves approaches 30000 tonnes (gold) . A straight forward calculation therefore says that with a current production rate of approximately 2500 tonnes a year producers could produce for another 10 years before hitting the wall so therefore giving them plenty of time to replace their mined reserves. Sounds simple but I simply disagree. It's the same analogy as to say that at current oil production rates of 82 mio barrels a day we could produce for another 30 years of oil at current rates since planet earth still contains about one trillion barrels of oil. The problem however is that the second half of all oil reserves will be increasinly difficult to produce so a decline in oil production is inevitable. (Oil production follows a so called bell-curve, see chapter VIII Gold & Oil) . The simple fact is that the more reserves you've mined the more difficult it becomes in order to mine the remaining stuff. And yes, in some cases it becomes even so difficult (un-economical) that a company decides to shut the mine and just forget about the remaining ounces left. A good example was the Homestake Mine in South Dakota, which was shut down with a large base of ore 'reserves' still on the books. Now a simple straight forward calculation learns that all major producers (top 5) are pulling about 3.5 to 7 mio ounces a year out of the ground every year. So in order to replace those mined reserves you'll have to find a major world class deposit ( > 5 mio ounces) each year which is highly unlikely. Since 1999 only a very few world class gold have been found and things aren't getty any better soon. Newmont President Pierre Lassonde recently said in an interview with Robert Bishop of GMSR:
Well, new world class gold discoveries over the next 18 months to two years is a long time and even then it still takes another 4 - 7 years in order to build a mine. So with that in mind and South African Gold production falling of a cliff (see chapter IV Gold & Supply) it ain't hard to understand why new discoveries are wanted desperately and why juniors making discoveries are appreciating in price so fast. Investment upon discovery does pay off! Let's first visualize the appreciation curve of a company during the exploration - production phase:  This chart clearly shows that companies in their discovery phase do experience their greatest appreciation, but what this chart shows as well is that only one out of every 1000 projects will make it to a mine (estimates do differ here and there, some argue that even one out of every 2000 projects will make it to a mine).. So here's a dilemma for the investor. Should I invest in juniors which are still in their exploration phase and hoping for a 100 bagger if they make a discovery indeed or should I invest in juniors who already came up with impressive drill results thereby reducing the upward potential. The advantage of the latter is an almost guaranteed profit although it won't be the 100 bagger you may have been dreaming of but a 10 bagger ... But wait, aren't you as an investor too late when purchasing a junior just after the announcement of a potential discovery? Sure, you'll miss the first blow off and thereby missing maybe 20, 30, and 40% profit but as said before even entering one or two days after the press release it still almost guarantees a nice profit... Please take a peek at the examples/charts below which visualizes the statements made above: Example 1 - Virginia Gold -:
 Example 2 - Linear Gold -
 (NOTE: Many more examples will follow in our follow-up articles) So what are those examples telling us? They are telling us that investing in a post-discovery phase could be very rewarding as well indeed. Don't get me wrong, I'm not suggesting here that investors shouldn't invest in exploration plays at all (pre-discovery), in fact I do invest in exploration plays myself as well but investors should realize though that exploration plays could be extremely rewarding but it requires a lot of patience since those companies need the time to do their exploration... Conclusion: Investment upon discovery could be paying off well indeed! Fair enough, those investors who invested already during the exploration phase are better off but again, they had to be very patient. Investors who got in upon discovery didn't do bad at all. In order to give an indication of potential return on investments upon discovery we've analyzed 10 of the great discoveries of recent years. Average return on investment-curve after discovery In the last few years more then ten big discoveries have resulted in individual share gains between 500 and 8000 % for junior exploration companies. (see table 1: successful junior companies 2000 - 2005) Well, to be honest almost no-one is lucky enough to really invest at the bottom of the cycle. But as mentioned before even investing within two days after a discovery announcement could still be very rewarding indeed. And yes, many examples are there whereby an average share gain of more then 1000 % has been realized after the publication of main discoveries. Now why we're so excited by that? Well, simple, the exploration activities have been picking up steam over the last two years since the juniors have been financed pretty well since 2003. That's why we're expecting more exciting drill results coming year(s) than we've had so far. Now knowing what discoveries could do to your bank-account wouldn't you be glad to be notified on these events in order to participate in a possible multi-months up-leg in those post-discovery phases? Indeed all you have to do is to get the right information on discovery news. In order to notify the junior investor on new (potential) discoveries we've developed a discovery-alert service which will be available free of charge until the first of December. Until that time we'll publish a series of detailed case studies on share gains after recent discoveries and investors who're interested can receive these and new discovery-alerts just by registering here. As from the first of December we will start a professional Newsletter 'Gold Discovery Alerts' which will cover extensive Gold/HUI analysis and new discovery-alerts. Readers can track our own portfolio at golddrivers.com as well. More on that in the weeks to come... Highlights:
Comments and feedback are welcome at: ehommelberg@golddrivers.com Sep 27, 2005 NOTE: Readers interested in future GDR updates can drop a mail here.
321gold Inc |
|||||||||||||
