Four high-risk gold explorers for bold investors
By
Dominic Frisby Oct 21, 2009
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More value in laggards
This is a rampant market at the moment.
A number of junior mining charts are rocketing skywards while investors without a position look on in frustrated horror. But there are other companies that, for one reason or another, are not moving, much to the irritation of their shareholders.
There are lots of laggards out there, laggards which could spike at any moment. And in today's Money Morning, I want to hunt out some of them...
There's a pattern to the way the gold market recovers
When gold corrects, it's a horrible feeling to be long. For some reason, gold stocks get absolutely demolished when gold sells off, battered in a way that does not seem to afflict other sectors. I'm sure that's why gold traders are so nervy and prone to jump ship as soon as they feel a wobble. Investors get so beaten up after a sell-off that it can be quite a while before they 'believe again'. Some even resort to blaming dark, underhand forces and evil market manipulators.
But there's a bit of a pattern to the way the gold and precious metals sector recovers. And being aware of where we are in that recovery can help give you an idea of where to invest next.
After a sell-off, the first things to pick themselves off the floor tend to be gold and the larger mining companies. Further down the road, as the move gets confirmed and more people start to believe in it, the midcaps start to take off.
The 'smarter money' that caught the bottom might then move into silver, silver senior producers and some of the better junior gold producers or near-term producers. We see some upside here, in fact quite dramatic upside, as these are small markets and it doesn't take a lot of money moving into the sector to push things up. Silver starts to move more rapidly than gold and catches up the ground it has lost earlier in the move. Eventually, silver moves by much more than gold.
The last things to move are the lesser-known companies, the small caps, those with higher mining costs or in remoter locations, the explorers, those who don't spend on PR, who are starved of cash or who are listed on a poor exchange. But, in a big move, the money will eventually filter down here as it comes looking for bargains. And at the moment, I'm finding more value hunting out laggards than chasing winners.
Four laggards for the brave
I must confess to being surprised by the markets at the moment. I am not saying I'm not enjoying it, but I did not expect to see so much upside so soon. I have even been lightly selling my winners, as much out of instinct and discipline as anything else. I have lived – and slept badly – through gold corrections before, not least 2008, and I don't want to go through another without having taken at least some profit during the good times – even if I know our ultimate destination is a lot higher.
Nevertheless, for the brave, here are four laggards with potential. Bear in mind, these are extremely high-risk, high beta stocks that could, in theory, go to zero. You have been warned. Before you buy, have a look at a chart of each company, work out a price you're happy to pay, offer it and stick to your guns. Don't chase these things up!
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Ascot Mining is listed on the Plus Market in the UK, under the ticker ASMP, and on the Xetra in Frankfurt (AM3.DE). With a tiny market cap of about £10m, Ascot has various projects in Costa Rica which it will be bringing into production over the next few years, starting now. The company made its first gold pour at its Chassoul mine just last week. Rather than spend his capital on unnecessary bureaucracy, PR or expensive lunches to woo investors, maverick CEO David Jackson has instead focused on getting into production as quickly and inexpensively as possible.
This is a cheap and cheerful operation that would benefit from being on a more liquid exchange, but it's doing what so few mining companies ever actually do: produce metal. It's a proper business. If you like the look of this one, don't pay the horrendous market maker spreads (20% I've been quoted, in one instance) – offer a price that you're happy with and let the market maker come to you.
My next three companies are all listed in Canada, which, with its direct, transparent systems, has far better and more successful stock exchanges for small cap stocks. You will need a broker who trades in Canadian stocks, but most of the big players will do this. African Queen (CA:AQ) is one some readers may already own. Hold on to it, for goodness sake. The soil samples from the group's Mozambique project are extremely promising – I overheard one commentator say, 'If King Solomon's mines exist, this is it' - and the company has just signed a deal with Newmont for a million ounce deposit (and potentially more) on Ghana's Ashanti Gold Belt. The market will soon wake up to this one. And the management team's record is excellent.
I also met with the management of Riverside Resources (CA: RRI) last week. The company is an out-and-out explorer in Mexico and North America and I like its strategy: find promising properties and then quickly find joint venture partners to take on the next phase of development costs. This lightens the financial burden on Riverside, lowers the risk to shareholders of dilution and leaves the company nimble and fleet of foot. You can hear an interview with them on my podcast, Frisby's Bulls And Bears.
Finally, consider Eco Metals (CA: EC). This company has been around the block a bit in recent years, but it has new management in place. I recently met with them and was most impressed. As well as some manganese projects that should soon be generating cashflow, they have some other interesting properties – including one potential home run. This is the Rio Zarza project in Ecuador, which is next to Aurelian's now infamous Fruta Del Norte project, now owned by Kinross, one of the discoveries of the decade. Eco's geologists are very excited and believe there could be extensions of Fruta Del Norte's mineralisation. This has suffered a little bit of selling prior to a fundraising, but this should now be over.
Just for full disclosure, I own stock in all of the above companies. And just to repeat my warning from above, don't invest money in these stocks that you can't afford to lose in a worst-case scenario.
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