The Sweet Spot of Investing
Sell in May and go away has never been as true as this year. Silver barely made it into the month before collapsing under the weight of a hoard of weak hands and nervous nellies.
Many writers have been warning of a commodity crash. The attention has been on silver but sugar, copper and cotton have gotten whacked as well. All that flowing money from QE II had to go somewhere but it didn’t have to live there on a permanent basis. We have had a dead cat bounce from $34 in silver to $39. I was hoping for more.
Investing is dangerous. Most investors lose money because they want to follow the crowd. That’s a good way to get whacked. When people are coming out of the woodwork touting anything, ignore them. Actually you will do far better doing the opposite.
There is one period in investing in mining stocks that is the sweet spot. I went to see a company a week ago and they are there. The company has a nice gold project in Arizona called Copperstone. American Bonanza has had the project for some 10 years, it was a mine before and they are in the last stages before going into production in about six months. That’s the sweet spot, six months before production begins to six months after production begins. The risk has been removed and investors can see hard numbers for cost and production.
Cash costs look like about $415 over a 6.3 year mine life producing 256,430 ounces of gold. At $1400 gold the Internal Rate of Return (IRR) is a whopping 170%.
My opinion is that especially this year, sell in May and go away is going to be good advice. I personally have taken a lot of cash off the table. In 2008, cash was the very best investment you could make. Here is a link to a real good piece by a survivor of 2008, Dennis Slothower of Stealth Stocks Daily Alert.
But even during down periods in the market, there will be stocks that stand out. I think American Bonanza will be one this year. They are cashed up, they are busy filling in management positions, they have equipment being assembled and on order.
Copperstone was a production mine. Cyprus Mining produced over 500,000 ounces between 1987 and 1993. American Bonanza has drilled deeper under the old pit and found a higher grade structure. At 10+ G/t they have a lot of room between costs and income.
I was most interested in the blue sky potential. Because of 43-101 and steely-eyed regulators, companies have to be careful of what they say. But the boys at BZA understand the structure, they know the structure gets richer as they go down and they are satisfied that with a decent price for gold, and they can expand the resource and extend the mine life.
I liked the story enough that while I was on the project, I bought some shares. There is a big seller in the market dumping shares so I don’t see the price running away. You can pick up shares until the seller runs out and feel safe that there is a floor of sorts under the stock. And in six months or so I expect to see gold being poured.
American Bonanza is an advertiser and we are biased. They have not paid for this piece and as always, do your own due diligence.