This 50-bagger proves things are looking up for gold miners
Dominic Frisby Sep 21, 2012
I group mining companies into three major categories.
There are the senior producers - your BHP Billitons, Xstratas and Rio Tintos. These are huge companies worth tens of billions of pounds.
There are the junior and mid-tier producers, companies with one or more producing mines, worth hundreds of millions, sometimes a few billion even.
And then there are the 'explorers and developers'. These companies might have found a bit of metal in the ground, and are drilling further to see if a mine can be built. They might even be building a mine already.
Or, in the case of the really early stage companies, they might have nothing but some staked land, a couple of geologists and some capital. Almost all explorers and developers - no matter how advanced - have no cashflow. They rely on funding.
So when markets get averse to risk, funding dries up quickly. And the sector collapses.
As many junior mining investors know only too well…
The inspirational tale of Goldquest
Between April 2011 and May 2012 the TSX Venture exchange in Canada, which is where so many of the explorers and developers are listed, and thus acts as the benchmark for the sector, fell by about 55%. The benchmark exchange-traded fund (ETF) for the gold explorers and developers (NYSE:GLDX), fell 65% from US$19 to US$6. Many of the tiny-market-cap explorers fell by much more.
It makes you wonder why anyone would ever speculate in such a market again.
Then along comes a company like Goldquest (CVE:GQC). Goldquest – which is not a company, unfortunately, I was invested in - was exploring for gold in the Dominican Republic. In February 2011, it traded as high as C$0.49.
Then, along with the rest of the sector, it began a relentless grind lower. By the end of 2011, it hit C$0.06. It rallied, but by May 2012 had sunk to C$0.04. Like so many 'tiddlers', it had fallen by 90%.
On May 16, some no doubt embittered, frustrated soul sold that stock for C$0.04. Somebody else bought it. By mid-August the stock was trading 50 times higher, at C$2.00!
Most of the excitement came from just three drill holes, whose results were released between May and July. All three showed high-grading gold (ie a lot of gold per tonne of rock) over a long strike length (implying there is a lot of this high-grade rock).
In other words, Goldquest struck gold.
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But its timing was excellent too. The discovery came right at what appears to be the end of the bear market. If the discovery had come six months earlier, would the stock have risen by 50 times? I doubt it, but we'll never know.
However, it just shows why people speculate in exploration. Because for all the false hype, all the failures (over 90% of exploration properties won't produce anything) and all the shenanigans that go on, sometimes somebody gets that lucky strike and makes 50 times their money in three months. A five grand speculation can suddenly become a quarter-of-a-million pot.
Whether it's this discovery, the rising price in metals over the summer or, simply, the fact that all bear markets - even Japanese ones - come to an end eventually, I'm delighted to say some appetite has now returned to the junior exploration sector. My own trend-following system issued a buy signal back in August.
Mining exploration is a lottery
But Goldquest's three magic drill holes are yesterday's lottery numbers. No doubt, you all want to know tomorrow's. Where's the next 50-bagger going to come from?
If only I knew. Mineral exploration really is a lottery. There are thousands of companies to choose from.
Of course, you'll have a better chance if you choose well-structured companies, with plenty of working capital, with managements with a proven track record, who are operating in mining-friendly countries. (A tonne of ore-rich rock is worth more in the ground of Canada or Australia, than it is in Venezuela or the DRC).
But, ultimately, companies or management don't make the rock. Mother Nature has already done that. Companies can only find it. If it isn't there, there's not a lot any of them can do.
But let me give African Queen (CVE:AQ) a plug. It's one whose management has done it before and one that some MoneyWeek readers follow. African Queen is the spin-off from Pan African Resources, which some readers may remember from a few years back. Pan African's Madagascan properties were sold to Asia Thai mining at a hefty premium, while its other African properties were spun into a new company, African Queen.
African Queen has been through the mill a bit this last year - as has virtually every company in the sector. But we should see some results fairly soon from its Kenyan properties (a country in which it has some first-mover advantage), located on an extension of Lake Victoria's greenstone belt (where African Barrick's prolific Bulyanhulu mine operates in Tanzania).
Rock sampling and trenching work at Ugunja has already shown visible gold, with further results expected imminently. Drilling has just been completed this weekend at Odunda, where mineralisation has already been found, with results to follow probably in about 30 days.
There are also other opportunities in the African Queen portfolio, perhaps most notably the joint venture in Ghana with Newmont, which has a historic (ie proven before modern compliance standards) inferred resource of 1.1 million ounces of gold.
With a tiny market cap of below C$12m, African Queen is a high-risk speculation – don’t bet your life savings on it, this is one for money you can afford to lose only. Who knows? Maybe it's the lottery ticket we're looking for. Maybe it isn't. Maybe that lottery ticket is one of the other 1,000-odd companies listed on the Canadian exchanges.
Either way, I own some stock and my fingers are crossed.
And if you are at all interested in investing in the larger companies in the gold mining sector, then take a look at my colleague Simon Popple’s new newsletter, Metals and Mining. It seems we're in a fresh bull run for gold and gold miners, and Simon has some ideas on ways to profit. Find out more here.
• This article is taken from the free investment email Money Morning.
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