Two junior mining stocks for adventurous investors
By
Dominic Frisby Apr 15, 2010
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Back in October last year, as gold was beginning to take off, I was looking for laggards. I tipped four junior mining companies that had fallen behind the market, but had the potential to fly.
A number of you have asked for an update, so I'm going to take a look at two of them in today's Money Morning.
But I warn you: neither of these stocks is for the faint-hearted. Both stories show just how much risk – and reward – there can be in junior mining...
A trader's delight of a stock
Among my four suggestions, there was Ecometals (CA: EC). If there is a more volatile stock in any stock market anywhere, I'd like to know what it is. Since I tipped it, it has tripled, halved, doubled again, come right back to where it started, then sunk.
This stock is a trader's delight – assuming, of course, you're on the right side of the trade – but, boy, has it been a white-knuckle ride, as you can see from the chart below. Its year low is 10c; its year high C$1.34. It currently sits at 28c.
Eco has various properties in South America. As well as several "grass roots" exploration projects, it has a small amount of cash flow from some old stockpiles from a disused manganese mine in Brazil. And in Ecuador, it has a well-drilled gold project – Condor – the sale of which has been agreed, but not completed.
But what lies behind the volatility is Eco's Rio Zarza project in Ecuador.
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Rio Zarza lies next to the renowned Fruta Del Norte property, the gold discovery of the noughties. This multi-million ounce bonanza deposit made fortunes for all involved. It was owned by Aurelian, whose share price rose from below 50c to more than $40. The mineralisation was so rich you could see the gold in the cliff face. It was eventually sold to Kinross, some investors felt too cheaply, during the early stages of the credit crisis.
Understandably, speculators hoped the Fruta Del Norte mineralisation would extend into Eco's property. This hope drove Eco's price up from around 40c to C$1.25, before the drill had even arrived on site. The excitement waned and the stock lost about 25%. The drills began turning and suddenly the stock was trading above C$1.30.
Traders grew impatient waiting for the drill results, and the stock slid by more than half to around 60c. Then the first results were published. These suggested that Eco was onto something. The stock doubled. A few weeks later the next drill results came through. Nothing economic had been found. The stock halved again. And yesterday, after some more disappointing results, the stock sunk another 25%.
That's the rollercoaster ride of mining exploration for you. Some of Eco's shareholders may feel it's game over after the last set of drill results. Possibly, but not necessarily. Many holes were drilled before Aurelian hit the jackpot. It may be the same for Eco. We'll see. But for now my prediction is that the stock needs to ‘do some time' in the 25-30c range. (If you are interested in this company, you'll need a broker who can trade Canadian stocks. One example is TD Waterhouse).
A small miner with big potential
The other company I want to look at is Ascot Mining (Xetra: AM3; UKPlus: ASMP). The share price has not been a success – it's a good 40% lower than it was in October.
Ascot is a small outfit (market cap around £10m) operating in Costa Rica. It has a number of small mines. By the time all the production is aggregated, it should become a good-sized, small cap producer.
Ascot had focused on getting its "La Toyota" project – a joint venture – into production by December-January. It was all on track when a sudden and unexpected legal dispute with the property owner scuppered everything. Given that the company's entire focus at the time was on Toyota, the other projects were now delayed. The plan had been to use cashflow from Toyota to bring its other mines into production. But now there was no cashflow.
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The company was in trouble. But the share price held up, even during the stock market crash of 2008. However, it began to slide in late November. This accelerated with the correction in gold which began in early December, and hasn't stopped, despite gold's rally.
But although it's now trading at all time lows – below the lows of the stock market crash – Ascot seems to be through the worst. The mill is turning at its Chassoul mine. Test production has been successful. A new ball mill is being put in. This will triple the amount of ore that can be processed.
Provisions have been made to transport ore from Ascot's other projects nearby so that production can be ramped up. The company is targeting 1-2,000 ounces of production per month by July at just over $400 per ounce all in. I have visited and inspected the mine myself in recent weeks. Those targets are not unreasonable.
At 1,000 ounces per month – or 12,000 per year, at $1,000 – that would mean around $6m of cashflow. That's equivalent to almost half the company's entire market cap. If it manages to sell 2,000 ounces a month at today's gold prices (c. $1,150), annual income could exceed its market cap.
Meanwhile, Ascot mentioned in a press release this week that it's also moving towards a Canadian listing. This would be good news for the company. Canadians have a much greater appetite for junior resource stocks – their transparent exchanges bring greater liquidity, so we should see a proper valuation for this company.
In the short term, the focus has to be to attaining commercial production. Then the company can get through this lean period and come out smiling. Meanwhile, I would like to see the chart hold up here and make a proper bottom at these levels.
How to buy these stocks
Ascot is listed in Germany on the Xetra under the ticker AM3. It is also listed in the UK on Plus. But on Plus the market makers are offering horrendous spreads between the buy and sell price, as much as 20% sometimes. If you are interested in buying on Plus, only offer the mid-price at most. In fact, that's good advice for both these stocks. They are volatile and with just a little bit of buying, the stock can quickly rush up. Be patient, accumulate on pullbacks and let the price come to you.
And as always with juniors – you've probably got the message by now, but these are high-risk plays. Don't bet money you can't afford to lose.
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