Gold and how to buy lottery tickets
Buying Canadian juniors is a lot like buying lottery tickets. I didn't invent the term, several well-respected newsletter writers also call juniors lottery tickets. It's a good description and good way to think. Obviously not all lottery tickets pay off but when they do, there is a lot of money to be made. And you really increase your probability of success by buying a lot of lottery tickets. I can't tell you how many companies I like (and own) that often take years to get traction and start moving.
If you add to the concept of juniors being lottery tickets, the concept of buy-cheap, sell-dear, you really increase your chance of success. $.50 stocks double faster than $5 stocks. As companies grow in market capitalization (and price) they get harder to move. I was buying Newmont in the late 1990s in the $20 area. We had a major lifetime low in gold combined with a chance to buy one of the largest and best run companies in the business at a low price. So what's Newmont today? $48 bucks and change. I've got juniors that go up the same 150% in a month.
Look carefully at the range in price of juniors. It's common to have a yearly high some 400% higher than yearly lows. I see way too much attention paid to specifics, everyone wants to compare drill results. Screw drill results, if you do nothing but buy juniors when they hit a new yearly low and sell when they hit yearly highs, you will make a lot more money than the guys using rulers and mumbo jumbo. Don't take this as being some kind of rocket science, it's not. It's investing based on human foibles.
Buy lots of cheap lottery tickets and you will do well. If they actually have good management and some company making projects, all the better.
I'm just back from another two-week slog through Western Canada and Alaska where I saw some wonderful lottery tickets, pardon me, juniors. One that I liked a lot was a series of related gold projects in Western Ontario where Houston Lake Mining has a 100% interest subject to a small NSR. (Net Smelter Royalties).
Houston Lake Mining began operations in 1995 with a focus on gold and copper projects located in Ontario. The company has three key properties in their portfolio, all of which have company-making potential. Their gold property, which is where I visited in August, is called the West Cedartree Gold Project. They also have a major PGM (Platinum Group Minerals) property located only 15 km west of the Lac des Iles PGM mine operated and owned by North American Palladium.
The Tib Lake PGM project is subject to a 70/30 Joint Venture with Magma Metals of Perth, Australia. Magma has agree to spend $2.6 million in exploration expenses over a five-year period and to pay $400,000 in cash in return for a 70% interest in Tib Lake. Houston Lake would have a 30% carried interest to the completion of a bankable feasibility study. The property is subject to a 2.5% NSR.
And Houston Lake has a rare earths project called the Pakeagama Lake Rare Metals Property located about 170 km north of the Red Lake gold district. Since I know absolutely nothing about rare earths and have no inclination to change that situation, for those readers who hold an inclination to learn more, you should go here and also here. The project is 100% owned by Houston Lake with a 2.5% NSR.
But gold I know and enjoy, so when Houston Lake president and CEO Grayme Anthony invited me up to the West Cedartree property, I told him I would be thrilled. First I flew into Winnipeg and rented a car. A four-hr drive to the East on the TransCanada Highway brought me into the Kenora area of Ontario. The project is located about 15 km southeast of Sioux Narrows, Ontario.
While I'm talking about the Sioux Narrows area, I should spend a little time talking about county and political risk. Investors have learned to their peril just how quickly governments can get greedy. In the past year, Mongolia, Bolivia, Peru and Zimbabwe have each made major changes overnight to taxation rules. I suppose it's a natural side effect to governments seeing the prices of commodities go up 400% in a few years. With their short term memory, they forget the tens of years when no mining company made any money. When they see big chunks of cash flowing into mining they want their share and more. Nothing can kill mining quite as fast as a greedy government.
So when buying your lottery tickets, remember, people emailing you notice of how you won a $15 million dollar lottery in Nigeria are more likely to end up with your money than you are likely to end up with their money. There is no free lunch and the stupidity of governments cannot be overestimated. At least with the American and Canadian governments, we are comfortable with the stupidity level.
In any case, I drove into Sioux Narrows one Friday night late to see the West Cedartree property of Houston Lake. Early the next morning, President Grayme Anthony and Independent Consulting Geologist Dean R. Cutting (that's a real mouthful) briefed me on their primary gold project.
Essentially, HLM has consolidated the district into one giant property and expanded it to 862 hectares (2129 acres) and a strike length of 4.5 km (2.8 miles). There are a series of north/south running structures containing quartz lenses with good gold mineralization. HLM has conducted a regional IP program which seems to pretty much track the primary gold bearing structures. The deposit goes right to the surface.
In early 2006, Houston Lake conducted a bulk sample test of just over 1000 tonnes with a head grade of 5.67 g/mt Au. The reported recovery was about 93% and generated cash flow of $131,000 with a profit of nearly $52,000. Those are impressive numbers. We visited the Angel Hill and McLennan areas of the property and the mineralization is easy to see. The regional faulting crushed the rocks along the fault and gold bearing solution flowed through and precipated out. There is a remarkable color change between the altered and gold bearing rocks and the wall rocks which are not mineralized.
I really like the idea of bulk samples. Grayme Anthony is a production guy and it's his intention to get the Cedartree project into production just as soon as he can. While bulk samples provide a lot of valuable information as to grade and chemical processing requirements, better yet the samples provide cash. I'd guess 80% of juniors have no intention of ever generating cash flow and if the opportunity arose, they would pass. But every dollar generated internally is a dollar you don't have to dilute your shares for. Lots of juniors hate cash flow but I love it.
HLM just announced an application to surface mine gold-bearing rock from the West Cedartree project where they will ship the ore to a third party mill for custom milling. They are going into mining, now. That is a major announcement which the market didn't get. They are going into production, with cash flow and hopefully profit. It's a brilliant move on the part of HLM.
While the 43-101 resource of HLM is at best minor, management has been doing their best to outline sufficient mineralization to support production. Recently they added a 43-101 resource with the addition of the historic resources of the neighboring Dogpaw Lake Gold Property (59,000 tons grading 0.45 oz/t Au.) I expect an expanded 43-101 soon based on this year's drilling program. Six out of the nine holes encountered gold in excess of 7 gpt. But this is another situation where ounces don't count, production does.
I've seen the IP map of the area and HLM has a lot of high potential land to drill. I like the idea of near term production, the cash flow should support their expansion and hopefully construction of their own mill. With a market cap of just over $10 million, it's a cheap lottery ticket with lots of upside and little downside. They have made a smart move in doing a JV on their PGM property where someone else is spending the money yet HLM has a carried interest. Basically, though a tiny company, HLM is doing everything right.
I liked the company enough to buy shares when I got back from my visit. Grayme was kind enough to hire a boat and guide for me to fish on my second day at the gold project but I pinched a nerve in my back and was in screaming pain. I had to leave a day earlier than I had planned and I really missed the fishing. But I suppose I'll just have to make a repeat visit to follow up on progress at Cedartree next year. It's a tough job but somebody has to do it.
Do not be confused with the lack of visibility of Houston Lake Mining. The company has been a sleeper but a year from now a lot of people are going to be looking back and wondering why they didn't see what was so obvious. HLM is a screaming buy.
Written in East End, Grand Cayman on September 9, 2006.
Lake Mining Inc